Audit Quality and Earnings management of Listed Consumer Goods Companies on the Nigeria Exchange Group.

Abstract

This study, anchored on Stewardship Theory and Stakeholder Theory, examined audit quality and earnings management of listed consumer goods companies in Nigeria. Audit quality was measured by Audit Firm Size (AFS), Audit Firm Tenure (AFT), Audit Fees (AF), Auditor Industry Specialization (AIS) and Audit Committee Independence (ACI), while earnings management was measured by discretionary accruals (DA). Firm age and profitability were included as control variables. The study adopted an ex-post facto research design, and data were obtained from the audited annual reports of 18 listed consumer goods companies for a period of 10 years (2015-2024). Panel regression analysis was used to analyze the data, and diagnostic tests for multicollinearity (Variance Inflation Factor), heteroskedasticity (Breusch–Pagan test), and model specification errors (Ramsey RESET test) were conducted. The Hausman test was further employed to determine the appropriate panel estimation technique, with the results favouring the fixed effects estimator over the random effects estimator; hence, the fixed effects model was adopted. The results indicated that AFS and AFT have a significant negative effect on earnings management, while ACI also has a significant negative effect on earnings management, indicating that audit committee independence restrains earnings management. Findings also revealed that AF has a negative insignificant effect on earnings management, while AIS has an insignificant positive effect on earnings management. The study concluded that AFS, AFT and ACI restrain earnings management, while AF and AIS do not significantly affect earnings management. The study recommended that Management should strengthen the effectiveness of audit committees beyond formal independence by ensuring members have strong financial expertise, clear authority, and access to timely information. Regular training, performance evaluations, and stricter enforcement of governance codes are also recommended to enhance oversight and reduce opportunities for earnings management and regulatory authorities should come up with policies that will formally encourage audit firms to create departments within their firms that specialize in auditing specific industries.