Audit Quality and Income Smoothing Among Listed Deposit Money Banks in Nigeria

Document Type : Review article

Authors

1 Department of Accounting, Faculty of Management Sciences, Osun State University, Osogbo.

2 Department of Accounting , osun state University, Osogbo, Nigeria

3 Department of Accounting, Faculty of Management Sciences, Osun state University, Osogbo

4 Accounting, Faculty of Management Sciences, Osun State University

5 Department of Economics, Faculty of Social Sciences, University of Ilorin, Nigeria,

10.22067/ijaaf.2025.45230.1441

Abstract

The study examined how audit quality impacted income smoothing practices among listed Nigerian deposit money banks (DMBs). While audit quality (AQ) was represented by audit fees (AF), audit firm size (AFS), and audit tenure (AT), income smoothing (IS) was represented by binary variables obtained from the Eckel index of income smoothing. Data were obtained from eleven (11) listed banks from 2013 to 2021. Binary logistic regression was employed. The results indicated that AF is positively associated with IS. In addition, the impact of AFS represented by Big 4 on income smoothing was negative, while that of audit tenure was positive but not significant. The results were similar when the accrual measure of income smoothing was used. The study concluded that the quality of audits determines the tendency for income smoothing among Nigerian listed banks. Therefore, regulators and the management of listed DMBs in Nigeria should emphasize and employ the services of large, reputable audit firms (BIG 4), as it appears to be negatively related to income smoothing. In addition, auditors should be well remunerated to ensure that they exert significant effort to mitigate the incidence of income smoothing.

Keywords

Main Subjects

References

  1. Abedalqader Al‐Thuneibat, A., Tawfiq Ibrahim Al Issa, R., and Ata Baker, R. A. (2011). Do audit tenure and firm size contribute to audit quality? Empirical evidence from Jordan. Managerial Auditing Journal, 26(4), pp. 317-334. https://doi.org/10.1108/02686901111124648
  2. Abogun, S., Adigbole, E. A. and Olorede, T. E. (2021). Income smoothing and firm value in a regulated market: the moderating effect of market risk. Asian Journal of Accounting Research, 6(3), pp. 296-308. https://doi.org/10.1108/AJAR-08-2020-0072
  3. Ajekwe, C. M. and Ibiamke, A. (2017). The association between audit quality and earnings management by listed firms in Nigeria. European Journal of Accounting, Auditing and Finance Research, 5(4), pp. 1-11.
  4. Akhoondnejad, J., Garkaz, M. and Shoorvazi, M. (2013). Political Costs Factors Affecting Income Smoothing Evidence From Tehran Stock Exchange (Tse). Interdisciplinary Journal of Contemporary Research in Business, 5(2), pp.341-350.
  5. Alhadab, M. and Clacher, I. (2018). The impact of audit quality on real and accrual earnings management around IPOs. The British Accounting Review, 50(4), pp. 442-461. https://doi.org/10.1016/j.bar.2017.12.003
  6. Aliyu, M. D., Musa, A. U. and Zachariah, P. (2015). Impact of audit quality on earnings management of listed deposit money banks in Nigeria. Journal of Accounting and Financial Management, 1(8), pp. 31-46.
  7. Alzoubi, E. S. S. (2018). Audit quality, debt financing, and earnings management: Evidence from Jordan. Journal of International Accounting, Auditing and Taxation, 30, pp. 69-84. https://doi.org/10.1016/j.intaccaudtax.2017.12.001
  8. Baik, B., Choi, S. and Farber, D. B. (2020). Managerial ability and income smoothing. The Accounting Review, 95(4), pp. 1-22. https://doi.org/10.2308/accr-52600
  9. Bora, J. and Saha, A. (2016). Investigation on the Presence of Income Smoothing Among NSE-Listed Companies. IUP Journal of Accounting Research & Audit Practices, 15(1), pp. 55-72.
  10. Chang, H., Ho, L. J., Liu, Z. and Ouyang, B. (2021). Income smoothing and audit fees. Advances in accounting, 54, A. 100547. https://doi.org/10.1016/j.adiac.2021.100547
  11. Chinedu, E. F. and Chidoziem, A. M. F. (2017). Audit firm report and financial performance of money deposit banks in Nigeria. The Nigerian Accountant Journal, 3, pp. 25-39.
  12. Davis, L. R., Ricchiute, D. N. and Trompeter, G. (1993). Audit effort, audit fees, and the provision of nonaudit services to audit clients. Accounting Review, 68(1), 135-150.
  13. DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), pp. 183-199. https://doi.org/10.1016/0165-4101(81)90002-1
  14. Demerjian, P., Donovan, J. and Lewis‐Western, M. F. (2020). Income smoothing and the usefulness of earnings for monitoring in debt contracting. Contemporary Accounting Research, 37(2), pp. 857-884. https://doi.org/10.1111/1911-3846.12544
  15. Dickson, R. K. (2021). Antecedents of Corporate Income Smoothing of Financially Distress Likelihood Quoted Companies in Nigeria. International Journal of Research and Scientific Innovation, 8(5), pp. 142-150.
  16. Eckel, N. (1981). The income smoothing hypothesis revisited. Abacus, 17(1), 28–40. https://doi.org/10.1111/j.1467-6281.1981.tb00099.x
  17. EL Deeb, M. S. and Ramadan, M. S. (2020). The impact of financial distress, firm size, and audit quality on earnings' management evidence from companies listed in the Egyptian Stock Exchange, Alexandria Journal of Accounting Research, 4, 1-48.
  18. Ghosh, A. and Moon, D. (2005). Auditor tenure and perceptions of audit quality. The accounting review, 80(2), pp. 585-612. https://doi.org/10.2308/accr.2005.80.2.585
  19. Gul, F. A., Fung, S. Y. K. and Jaggi, B. (2009). Earnings quality: Some evidence on the role of auditor tenure and auditors' industry expertise. Journal of Accounting and Economics, 47(3), pp. 265-287. https://doi.org/10.1016/j.jacceco.2009.03.001
  20. Holinata, W. J. and Yanti. (2020). Factors Affecting Income Smoothing. Advances in Social Science, Education and Humanities Research, 478, 313-321. https://doi.org/10.2991/assehr.k.201209.046
  21. Indrawan, V., Agoes, S., Pangaribuan, H. and Popoola, O. M. J. (2018). The impact of audit committee, firm size, profitability, and leverage on income smoothing. Indian-Pacific Journal of Accounting and Finance, 2(1), pp. 61-74. https://doi.org/10.52962/ipjaf.2018.2.1.42
  22. Jayeola, O., Agbatogun Taofeek, O. and Toluwalase, A. (2017). Audit quality and earnings management among Nigerian listed deposit money banks. International Journal of Accounting Research, 5(2), pp. 1-5.
  23. Jensen, M. C. and Meckling, W. H. (2019). Theory of the firm: Managerial behavior, agency costs and ownership structure. In Corporate governance, 3, pp. 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
  24. Khalil, U. F. (2022). Auditor choice and its impact on financial reporting quality: A case of banking industry of Pakistan. Asia Pacific Management Review, 27(4), pp. 292-302. https://doi.org/10.1016/j.apmrv.2021.12.001
  25. Kustono, A. S., Roziq, A. and Nanggala, A. Y. A. (2021). Earnings quality and income smoothing motives: evidence from Indonesia. The Journal of Asian Finance, Economics and Business, 8(2), pp. 821-832. https://doi.org/10.13106/jafeb.2021.vol8.no2.0821
  26. Lawrence, A., Minutti-Meza, M. and Zhang, P. (2011). Can Big 4 versus non-Big 4 differences in audit-quality proxies be attributed to client characteristics?. The accounting review, 86(1), pp. 259-286. https://doi.org/10.2308/accr.00000009
  27. Megarani, N., Warno, and Fauzi, M. (2019). The effect of tax planning, company value, and leverage on income smoothing practices in companies listed on Jakarta Islamic Index. Journal of Islamic Accounting and Finance Research, 1(1), pp. 139–162.
  28. Myers, J. N., Myers, L. A., Palmrose, Z. V. and Scholz, S. (2004). Mandatory auditor rotation: Evidence from restatements. In Proceedings of the mid-year meeting of the auditing section of the American Accounting Association: Clearwater, University of Illinois Urbana-Champaign, Champaign, IL, United States
  29. Okaro, S. C. and Okafor, G. O. (2013). Drivers of audit failure in Nigeria: Evidence from Cadbury (Nigeria) PLC. Research Journal of Finance and Accounting, 4(6), pp. 1686-1697.
  30. Ozili, P. K. (2022). Big 4 auditors, bank earnings management and financial crisis in Africa. Journal of Financial Reporting and Accounting, 20(2), pp. 215-232. https://doi.org/10.1108/JFRA-10-2020-0306
  31. Palmrose, Z. V. (1988). 1987 competitive manuscript co-winner: An analysis of auditor litigation and audit service quality. Accounting review, 63, pp. 55-73.
  32. Paramita, R. W. D. (2017). The Window Information For Investor On Accounting Profit Forecasting. Jurnal Terapan Manajemen dan Bisnis, 3(2), pp. 193-204.
  33. Park, S. Y. (2016). The effect of short-term debt on accrual based earnings management and real earnings management. Journal of Applied Business Research (JABR), 32(4), pp. 1287-1300.
  34. Piot, C. and Janin, R. (2007). External auditors, audit committees and earnings management in France. European accounting review, 16(2), pp. 429-454. https://doi.org/10.1080/09638180701391030
  35. Rusmin, R. (2010). Auditor quality and earnings management: Singaporean evidence. Managerial auditing journal, 25(7), pp. 618-638. https://doi.org/10.1108/02686901011061324
  36. Saeidi, P. (2012). The relationship between income smoothing and income tax and profitability ratios in the Iran stock market. Asian Journal of Finance & Accounting, 4(1), p. 46.
  37. Sumiadji, S., Chandrarin, G. and Subiyantoro, E. (2019). Effect of audit quality on earnings quality: Evidence from Indonesia stock exchange. International Journal of Financial Research., 10(1), pp. 86-97.
  38. Susanto, Y. K. and Pradipta, A. (2019). Firm value, firm size and income smoothing. Journal of Finance and Banking Review, 4(1), pp. 01-07.
  39. Thoharo, A., Priyadi, M. P. and Wahidahwati, W. (2021). The management’ s motives of income smoothing and its implications to the market reaction. Jurnal Dinamika Akuntansi, 13(1), pp. 72-92. http://dx.doi.org/10.15294/jda.v13i1.26890.
  40. Thu, P.A., and Khuong, N.V. (2020). Investigating income smoothing: Empirical evidence from Vietnam's listed companies. City Open University Journal of Science, 7(2), pp. 82-95.
  41. Tyokoso, G.M., and Tsegba, I.N. (2015). Audit Quality and Earnings Management of Listed Oil Marketing Companies in Nigeria. European Journal of Business and Management, 7, 34-42.
  42. Walker, M. (2013). How far can we trust earnings numbers? What research tells us about earnings management. Accounting and business research, 43(4), pp. 445-481. https://doi.org/10.1080/00014788.2013.785823
  43. Yasser, S. and Soliman, M. (2018). The effect of audit quality on earnings management in developing countries: The case of Egypt. International Research Journal of Applied Finance, 9(4), pp. 216-231.
Send comment about this article
CAPTCHA Image

Files

Share

How to cite

Statistics