AUDITORS TENURE AND INDEPENDENCE
ABSTRACT
The objective of this study is to investigate the impact of audit tenure on audit quality in Nigeria. The study adopted the three widely used binary regression models. The difference in this model is based on the type of probability distribution they assume.Logistic binary regression follows a cumulative logistic probability distribution, binary probit assume cumulative normal distribution while Gompit binary regression follows a generalized extreme value distribution. Audit tenure and firm size had a significant negative impact on audit quality, while audit fee, board independence and audit committee activity had a significant positive impact on audit quality.Data were analysed using regression techniques. This study revealed that Audit quality helps to minimize the negative consequences of earnings management by constraining the level and extent of companies’ manipulations and the factors that influence audit quality has been an intense and inconclusive area of research and an interesting issue of discourse. The study recommends that Financial Reporting Council should implement or formulate a maximum amount of audit fees that audit firm should be paid. This will not only conducive the improvement of audit quality but also help to checkmate the economic bonding between the auditors and their client and also enhanced the strength of the Nigeria accounting industry to compete with international accounting firms. There is a need for companies to ensure that they include a sufficient number of independent directors as part of the audit committee. The study finding provides evidence that the independent non-executive directors do improve audit quality. This may be expected because independent non-executive directors usually have no personal financial interest, no potential conflict of interests arising from day-to-day involvement in running the business. They thus can exercise an impartial judgment over the fairness of executive self-dealings.The study also recommends that the audit committees must be able to meet more often as to be more effective. Specifically, companies should adopt the international standard which recommends that the audit committee should meet at least four times a year in order to be effective in doing its duties as companies are required to produce quarterly financial reports. In addition, it is also recommended that members of audit committees should be restricted from holding directorship positions in other companies so as to be able to devote adequate time and effort in monitoring.
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
1.1    Background of the Study         -    -    -    -    
1.2    Statement of the Research Problem     -    -    -    -    -    
1.3    Objectives of the Study    -    -    -    -    -    -    -
1.4    Research Hypotheses        -    -    -    -    -    -    
1.5    Scope of the Study         -    -    -    -    -    -    
1.6    Significance of the Study         -    -    -    -    -
1.7    Limitations of the Study        -    -    -    -    -
1.8    Definition of terms        -    -    -    -    -
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction         -    -    -    -    -    -
2.2    Conceptual Framework     -    -    -    -    -    -
2.2.1    Concept of Audit Quality     -    -    -    -    -    -
2.3    Empirical Framework    -    -    -    -    -    -    -    
2.3.1    Audit Tenure and Audit Quality    -    -    -    -    -    -
2.3.2    Auditor Fees and Audit Quality    -    -    -    -    -
2.3.3    Audit Committee Activity and Audit Quality        -    -    -
2.3.4    Firm Size and Audit Quality        -    -    -    -    -
2.3.5    Board Independence and Audit Quality        -    -    -
2.4    Theoretical Framework    -    -    -    -    -    -
2.4.1    Policeman Theory    -    -    -    -    -    -    -
2.4.2    Agency Theory    -    -    -    -    -    -    
2.4.3    Audit Quality Theory    -    -    -    -    -    -    -
2.4.4    Stewardship Theory    -    -    -    -    -    -    -    
2.4.5    Stakeholder Theory    -    -    -    -    -    -    -
CHAPTER THREE: RESEARCH METHODOLOGY
3.1    Introduction         -    -    -    -    -    -    
3.2    Research Design     -    -    -    -    -    -    -    
3.3    Population of the study    -    -    -    -    -    -    
3.4    Sampling Size and Sampling Technique    -    -    -    
3.5    Sources of Data     -    -    -    -    -    -    
3.6    Model Specification and Data Analysis Plan        -    -    -
3.6.1    Model Specification    -    -    -    -    -    -    -    
3.6.2    Method of Data Collection     -    -    -    -    -    -
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1    Introduction     -    -    -    -    -    -    -    -
4.2    Binary Regression Results    -    -    -    -    -    -
4.3     Analysis of Regression Results     -    -    -    -
4.4    Discussion of the Result    -    -    -    -    -    
4.4.1    Auditor Tenure and Audit Quality     -    -    -    -    
4.4.2    Auditor’s Fee and Audit Quality        -    -    -    -
4.4.3    Audit Committee Activity and Audit Quality        -    -    -    
4.4.4    Firm Size and Audit Quality        -    -    -    -    -
4.4.5    Board Independence and Audit Quality     -    -    -    -    
CHAPTER FIVE: SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1    Introduction        -    -    -    -    -    -    -
5.2    Summary of findings        -    -    -    -    -    -
5.3    Conclusion     -    -    -    -    -    -    -    
5.4    Recommendations        -    -    -    -    -    -
References        -    -    -    -    -    -    -    -
CHAPTER ONE
INTRODUCTION
BACKGROUND TO THE STUDY
The quality of the audit services rendered by the auditor and the audit report issued are to a great extent affected by the independence of the auditor. Auditors independence is a cornerstone of the auditing profession, a crucial element in the statutory corporate reporting process and a key prerequisite for adding value to an audited financial statement (Mautz&Sharaf, 1961). The agency relationship that exists between the owners, shareholders and the managers of the company necessitate the use of the services of an auditor; whose report in order to be useful/ valuable to users of the financial report has to be an unbiased and impartial view of the company’s financial activities.
The recent scandals associated with the accounting profession involving corporations such as Enron in the United States of America and Cadbury Nigerian PLC in Nigeria have reopened questions about the independence of the auditor and the confidence of the financial statement users in the quality of the report issued by auditors. The probability that the auditor will uncover a breach and disclose such discovery is what DeAngelo (1981) describes as audit quality. If the auditor’s independence of mind and in appearance is compromised then the auditor is less likely to report the irregularities and this would result in the impairment of the audit quality.
In light of the ever present importance of the independence of auditors and in the aftermath of the global economic crises, several international bodies proposed new requirements to enhance audit quality as well as address market concentration of audit tends including revising auditors independence. In recent times, the length of the audit tenure has become a cause for concern in relation to impairment of the auditor’s independence.
In Nigeria, auditors play an important role to shareholders and the general public by attesting to the accuracy of a company’s financial statements, the auditor lends his credibility to that company and its financial health as he expresses a professional opinion on whether the financial statements give true and fair view and are properly prepared in accordance with Company and Allied Matters Act 2004 (as amended). The question of auditor independence has received increased attention from regulators, academics and practitioners around the world in recent years due to highly publicised audit failures (Hope &Langli, 2009). This is not surprising since the fact that auditors receive their fees from their client firms clearly creates the potential for an independence problem. The impact of a lack of auditor independence can be detrimental to the audit process; thereby affecting thequality of the audit (Abdullah, 2003). Several countries moved swiftly to pass legislations to curtail or eliminate many auditor-provided non-audit services and imposed compulsory auditor rotations. Gul, Basioudis and Ng (2011) argue that such legislations have, in effect, reduced the auditor-client relationship, although it may potentially raise the cost to an auditor of expressing an independent opinion. It is a general regulatory belief that non-audit services provided by auditors to their audit clients compromise audit quality and audit independence.
STATEMENT OF THE RESEARCH PROBLEM
Several studies such as Arrunada and Paz-Ares, (1997); Healey and Kim (2003); Brody andMoscove (1998), have attempted to analyse some explanatory variables for the state of audit quality. In view of these studies, auditor tenure and auditor quality have become the focus of much debate. Should a firm replace its auditors on a regular basis, or should the auditor be allowed to build a long-term relationship with the client? Studies on the effect of auditor tenure on audit quality are at divergence. The crux of the debate rests on how tenure affect audit quality. Proponents of mandatory auditor rotation claim that lengthy auditor tenure erodes quality, which in turn impairs audit quality. Other argue that independence and audit quality increase with longer tenure because of improved auditor expertise from superior client-specific knowledge.  Since independence is not observable, regulators, practitioners, and academics often rely on the appearance dimension to define auditor independence (Kinney, 1999&Dopuche, 2003).
A considerable number of these studies such as Healy and Kim(2003), AICPA(1992),Carcelloand Nagy(2004), consider tenure of audit firms as a way of strengthening the independence of the auditor and of improving audit quality. This is because familiarity with the client has the effect of reducing the fresh point of view auditors have in the early years of engagement. The Sarbanes-Oxley Act of 2002 consolidates this view as it requires rotation of the lead audit partner every five years so that the engagement can be viewed “with fresh and sceptical eyes.” The argument basically is that longer auditor tenure tends to result in an opportunity cost of auditor independence. Conversely, other studies such as Ghosyand Moon (2005), Defondand Francis (2005), Jenkins andVelury(2008) argue that longer auditor tenure improves audit quality as auditors may need time to gain expertise in the business they audit and acquire client-specific knowledge over time. This implies that audit quality is lower during the early years of the auditor-client relationship, and audit quality increases with length of auditor-tenure due to the reduction in information asymmetry between auditor and its client (Azizkhani, Monroe & Shailer, 2006).
However, in the Nigeria audit setting, the challenge of auditor tenure on auditors’ independence and client relationship though still budding has not attracted much analytical attention and empirical studies beyond mere subjected opinions. Consequently, there has been a dearth of research in this area and adequate empirical evidence from Nigeria. Hence the study attempts to analyse the significance of the interactive effects of the auditor tenure, auditor independence and audit quality using a study sample from Nigeria. This is the gap we are intending to cover in this research work.
Based on the foregoing, the following research questions are raised for the study:
What is the relationship between auditors’ tenure and audit quality in Nigerian quoted firms?
Is there a relationship between auditors fee and audit quality in Nigerian quoted firms?
To what extent does the frequency of audit committee activity affect audit quality in Nigerian quoted firms?
What is the relationship between firm size and audit quality in Nigerian quoted firms?
Is there a relationship between board independence and audit quality in Nigerian quoted firms?
1.3    OBJECTIVES OF THE STUDY
Thebroad objective of this study is to investigate the effect of auditor tenure on audit quality in Nigerian quoted companies and the specific objectives are to:
Examine the relationship between auditors’ tenure and audit quality in Nigerian quoted firms.
Ascertain the relationship between auditorsfee and audit quality in Nigerian quoted firms.
Determine the relationship between the frequency ofaudit committee activityand audit quality in Nigerian quoted firms.
Analyse the relationship between firm size and audit quality in Nigerian quoted firms.
Evaluate the relationship between board independenceand audit quality in Nigerian quoted firms.
1.4      RESEARCH HYPOTHESES
    The formulated null hypotheses in this study are as follows;
Ho1:    Auditor tenure does not significantly influence audit quality in Nigerian quoted     companies.
Ho2:    Auditors’ fee does not have significant influence on auditquality in Nigerian quoted companies.
Ho3:    Audit committee activity does not have significant effect on audit quality in Nigerian quoted companies.
Ho4:    Firm size does not significantly influence audit quality in Nigerian quoted     companies.
Ho5:    Board independence does not have significant influence on audit quality in Nigerian quoted companies.
1.5     SCOPE OF THE STUDY
This research is delimited to studying auditors’ tenureand audit quality in Nigeria.A study of this nature entails the sample of all Nigerian quoted companies that are subjected to the practices of audit in one form or the other. However, this study examines the companies listed on the NigerianStock Exchange (NSE) as at 31stDecember, 2014. The study covers a time frame of (7) years from 2008 to 2014 and examined the total numbers of 30 quoted companies in Nigeria stock Exchange. The time scope for this study is limited to this period because disclosure of audit report indicators in most annual report in Nigeria for 2015 is yet to be released.    
1.6     SIGNIFICANCE OF THE STUDY
This research work is expected to provide useful contribution to the academic work already done by other researchers on related subjects who may be also interested in this subject area, this study is expected to be useful to financial institutions so as to understand the difficulties in the implementation of audit quality.
It would stimulate other researchers to work on this area as well as to create awareness on the issue of quality audit in Nigerian companies and it will help the researcher evaluate challenges and prospects facing companies with regard to quality auditing. The results from this study will be useful to the users of audited financial statement and regulators and serve as a feedback to enhance audit quality in Nigeria. It would broaden extant literature on audit quality in Nigeria and assist policy makers in formulating and administering pragmatic policies to improve audit quality in Nigeria audit setting.
1.7    LIMITATIONS OF THE STUDY
This research cannot be regarded as perfect and hitch free as some difficulties were encountered during the course of this work.It is interesting to emphasize that the findings of this empirical research are not to be generalized for some industry, since the study is limited to a number of selected companies, the inability to obtain a completely random sample and imprecise measurement of variables also hindered the progress of the research.
1.8    DEFINITION OF TERMS
Auditors’ Tenure:is defined as the length of auditor-client relationship.
Auditors Independence: refers to the independence of the internal auditor or of the external auditor from parties that may have a financial interest in the business being audited.
Auditors’ fees:The amount payable to an auditor for an audit; this has to be approved at the annual general meeting of a company. or is a sum of money paid to an auditor for carrying out auditing assignment.
Auditors’ rotation:The practices of appointing an audit firm for a set period, such as five years, after which it must give up the position.