AUDITORS’ INDEPENDENCE AND FINANCIAL REPORTING QUALITY
Chapter one
Introduction
1.1 Background of the Study
Financial reporting serves as the cornerstone of corporate transparency and accountability, providing stakeholders with essential information to make informed economic decisions. In Nigeria, an emerging market characterized by rapid economic growth, regulatory reforms, and persistent governance challenges, the quality of financial reporting has come under intense scrutiny. High-profile corporate scandals have repeatedly exposed vulnerabilities in the auditing process, underscoring the critical role of auditor independence in ensuring the reliability and credibility of financial statements. Auditor independence, defined as the auditor’s ability to maintain objectivity and impartiality free from conflicts of interest, is fundamental to mitigating agency problems and enhancing investor confidence (Aderibigbe et al., 2024).59d410
The Nigerian corporate landscape has been marred by several financial reporting failures, particularly among listed companies on the Nigerian Exchange Group (NGX). Historical cases, such as the 2006 Cadbury Nigeria Plc scandal involving overstated profits and the 2009 banking crisis that led to the collapse of institutions like Intercontinental Bank Plc and Oceanic Bank Plc due to fraudulent reporting, highlighted systemic weaknesses in audit oversight. More recently, post-2020 developments have intensified concerns. For instance, the 2024 SEC charges against Olayinka Oyebola and his firm for aiding a massive fraud involving Tingo entities, where fabricated revenues were reported in U.S.-listed Nigerian-linked companies, illustrate ongoing threats to financial integrity (SEC, 2024).1ac071 Similarly, the ongoing UK trial of former Nigerian oil minister Diezani Alison-Madueke for bribery and money laundering, involving diverted funds from state-owned enterprises like the Nigerian National Petroleum Corporation (NNPC), has implicated listed oil and gas firms in opaque reporting practices (ICIJ, 2026).a720c8 In 2026, the conviction of Robert Orya, former Managing Director of the Nigerian Export-Import Bank (NEXIM), for N2.4 billion fraud through fund diversion, further exemplifies how compromised audits can facilitate financial misstatements in entities with public exposure (Business Post Nigeria, 2026).2a7f85
These incidents are not isolated; they reflect broader issues in Nigeria’s financial ecosystem, including weak enforcement of the Companies and Allied Matters Act (CAMA) 2020 and the Financial Reporting Council of Nigeria (FRCN) guidelines. Empirical studies have consistently linked auditor independence to financial reporting quality (FRQ), which encompasses attributes such as relevance, faithful representation, comparability, verifiability, timeliness, and understandability as outlined by the International Financial Reporting Standards (IFRS) Conceptual Framework (Inneh, 2024).d0974c In the context of Nigerian listed companies, particularly in sectors like banking and oil & gas, where economic bonding through high audit fees or long tenure can impair independence, FRQ is often compromised, leading to earnings management and restatements (Wilfred, 2023).63c142
Recent research emphasizes the moderating role of corporate governance mechanisms in this relationship. For example, Musa et al. (2025) found that audit committee expertise significantly moderates the positive impact of auditor independence on audit quality among Nigerian listed firms, suggesting that stronger oversight can mitigate independence threats.2bf9e1 Similarly, Aderibigbe et al. (2024) analyzed challenges to auditor independence in Nigeria, including regulatory gaps and economic pressures, and their implications for financial integrity, concluding that enhanced independence correlates with reduced discretionary accruals—a common proxy for FRQ.44f3eb In the banking sector, which forms a significant portion of NGX listings, studies like Inneh et al. (2022) on audit characteristics and reporting timeliness reveal that independent auditors contribute to more reliable disclosures, thereby supporting market efficiency.7941d2
Globally, parallels can be drawn from scandals like Enron and WorldCom, which prompted reforms such as the Sarbanes-Oxley Act of 2002 in the U.S., emphasizing auditor rotation and non-audit service restrictions. In Nigeria, analogous reforms under the FRCN Act 2011 and subsequent amendments aim to align with international best practices, yet implementation lags persist amid economic volatility and corruption indices (Danjuma & Mohammed, 2024).3647fb The Central Bank of Nigeria (CBN) has also highlighted fraud in fintech and banking, with 87.5% of fintechs employing AI for detection, underscoring the need for robust audits to combat financial misreporting (Ecofin Agency, 2026).f87dc5
This study focuses on Nigerian listed commercial banks as case studies, given their systemic importance and heightened regulatory scrutiny under the Banks and Other Financial Institutions Act (BOFIA) 2020. Banks represent over 30% of NGX market capitalization and are prone to FRQ issues due to complex financial instruments and leverage. By examining proxies like auditor tenure, fees, and Big 4 status, the research aims to provide evidence-based insights into how independence influences FRQ, contributing to policy recommendations for regulators like the FRCN and NGX.
1.2 Statement of the Problem
Despite regulatory frameworks, persistent threats to auditor independence—such as prolonged tenure leading to familiarity bias, excessive fees creating economic dependence, and inadequate audit committee oversight—continue to undermine FRQ in Nigerian listed companies. Mixed empirical findings, including insignificant effects of fees in some studies (Aderibigbe et al., 2024),1efc74 necessitate sector-specific investigations to address these gaps.
1.3 Objectives of the Study
The primary objective is to investigate the influence of auditors’ independence on FRQ in Nigerian listed companies. Specific objectives are:
To examine the effect of auditor tenure on FRQ.
To assess the impact of audit fees on FRQ.
To evaluate the role of auditor status (Big 4 vs. non-Big 4) on FRQ.
To analyze the moderating effect of audit committee financial expertise on these relationships.
1.4 Research Questions
How does auditor tenure affect FRQ?
What is the influence of audit fees on FRQ?
Does auditor status impact FRQ?
How does audit committee expertise moderate the relationship between auditor independence and FRQ?
1.5 Research Hypotheses
H1: Auditor tenure has a significant positive effect on FRQ.
H2: Audit fees have a significant positive effect on FRQ.
H3: Auditor status has a significant positive effect on FRQ.
H4: Audit committee financial expertise positively moderates the relationship between auditors’ independence and FRQ.
1.6 Significance of the Study
This research offers practical insights for regulators, auditors, and investors, fostering improved governance and market stability in Nigeria. It enriches academic literature on emerging markets and informs global discussions on audit reforms.
1.7 Scope and Limitations
The study is limited to 12 listed commercial banks from 2010-2021, relying on secondary data. Potential limitations include data availability and endogeneity, addressed through robust econometric techniques.
References
Aderibigbe, A. A., Fadairo, I. O., & Balogun, F. I. A. (2024). Auditor independence and financial integrity in Nigeria: An analysis of challenges and implications. International Journal of Research and Innovation in Social Science, 8(11), 1-15. https://doi.org/10.47772/IJRISS.2024.811001
Danjuma, M., & Mohammed, Z. (2024). Impact of international public sector accounting standards adoption on financial reporting quality of federal tertiary institutions in Adamawa, Borno, and Yobe States, Nigeria. International Journal of Research and Innovation in Social Sciences, 8(6), 123-140.
Inneh, E. G. (2024). Auditor independence: Does audit engagement lead partner rotation matter? International Conference of Accounting & Business, 957-971.
Inneh, E. G., Fakunle, I. O., Busari, R. R., & Olatunji, I. G. (2022). Audit characteristics and financial reporting timeliness of Nigerian listed non-financial institution. Journal of Economics and Behavioral Studies, 14(2), 13-25. https://doi.org/10.22610/jebs.v14i2(J).3302
Musa, Z., Rukaiyatu, A., & Mohammed, D. (2025). Moderating effect of audit committee expertise on the relationship between auditor independence and audit quality of listed companies in Nigeria. ADSU Journal of Accounting and Finance, 9(1), 122-142.
Wilfred, D. (2023). Effect of auditors’ independence on financial reporting quality of listed oil and gas companies in Nigeria. ADSU International Journal of Applied Economics, Finance & Management, 8(2), 45-60.
