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Audit Quality And Firm Financial Performance

Author

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  • Henry K. FASUA

    (Department of Accounting, Management Science, University of Benin, Benin City, Edo State, Nigeria)

Abstract

The study examines the relationship between audit quality and firm financial performance. The study focuses on two financial performance measures, namely return on assets (ROA) and earnings per share (EPS). It employed Auto Regressive Distributed Lag (ARDL) and Dynamic Ordinary Least Square (DOLS) techniques for analysis of data. The research utilizes secondary time series data covering the period from 1981 to 2021. In Model 1, which explores the effect of audit quality on return on assets, the findings reveal both short-run and long-run effects between audit quality and ROA. The study indicates that audit independence has a positive but insignificant impact on ROA. On the other hand, auditor tenure has a negative effect on ROA, though it is also statistically insignificant. Audit firm size demonstrates a statistically significant negative effect on ROA. In Model 2, which examines the effect of audit quality on earnings per share, the results show that audit independence has a negative but insignificant impact on EPS. Surprisingly, auditor tenure has a positive effect on EPS. However, this effect is statistically insignificant. Similar to Model 1, audit firm size has a statistically significant positive effect on EPS. In summary, the study reveals a significant short-run and long-run effect of audit quality on return on assets (ROA) in Nigeria. However, audit quality does not have a lasting impact on earnings per share (EPS) over the long term. These findings suggest that companies with higher audit quality experience improved profitability (ROA) in the short and long term, while EPS is not significantly affected by audit quality in the long run.

Suggested Citation

  • Henry K. FASUA, 2023. "Audit Quality And Firm Financial Performance," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 8(4), pages 33-45.
    • Handle: RePEc:brc:brccej:v:8:y:2023:i:4:p:33-45
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    References listed on IDEAS

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    1. Keith A. Houghton & Michael Kend & Christine Jubb, 2013. "The CLERP 9 Audit Reforms: Benefits and Costs Through the Eyes of Regulators, Standard Setters and Audit Service Suppliers," Abacus, Accounting Foundation, University of Sydney, vol. 49(2), pages 139-160, June.
    2. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    3. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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