AUDIT QUALITY AS A MODERATOR BETWEEN BOARD CHARACTERISTICS AND EARNINGS MANAGEMENT: EVIDENCE FROM LISTED BANKS IN NIGERIA

Abstract

This research investigates the moderating influence of audit quality on the correlation between board characteristics and earnings management within publicly traded banking institutions in Nigeria. The impetus for this study arose from ongoing financial reporting discrepancies, despite the implementation of corporate governance reforms. Utilizing secondary data from 34 listed banks for the period 2012 to 2022, panel regression analyses were conducted employing the Modified Jones and Kothari methodologies, with discretionary accruals (DA) utilized as an indicator of earnings management. The primary explanatory variables included board size, independence, diligence, gender diversity, and ownership, whereas audit quality was represented by audit firm size and audit fees. The empirical findings indicate that board size (β = 0.048, p < 0.05) and board ownership (β = 0.017, p < 0.05) exert significant negative influences on earnings management, suggesting that boards that are larger and possess greater ownership stakes effectively mitigate opportunistic financial reporting. Conversely, board independence, diligence, and gender diversity did not demonstrate statistically significant impacts on earnings quality, indicating a limited role in this context. The moderating analysis further illustrates that both audit firm size (AFS) and audit fees (AF) substantially enhance the relationship between board mechanisms and earnings management. In particular, the interactions AFS × BD (β = 0.107, p < 0.05) and AF × BS (β = −0.074, p < 0.05) reveal that high audit quality amplifies the efficacy of diligent and sizable boards in counteracting earnings manipulation. This study concludes that the interplay between robust board structures and rigorous audit mechanisms is essential for reducing earnings management within Nigeria's banking sector. It advocates for regulatory bodies to prioritize auditor independence and encourage engagements with Big 4 audit firms to bolster the integrity of financial reporting.

Keywords: Board Characteristics, Audit Quality, Earnings Management, Discretionary Accruals, Nigerian Banks