HomeDLSU Business & Economics Reviewvol. 26 no. 1 (2016)

Audit Fees, Corporate Governance Mechanisms, and Financial Reporting Quality in Nigeria

Salau O. Abdulmalik | Ayoib Che Ahmad



This study examines whether audit fees impair the independence of auditors in Nigeria and also examines the effects of independent non-executive foreign directors, foreign institutional ownership, and local institutional ownership on the quality of financial reporting. This study employs the Generalized Methods of Moment (GMM) estimation to control the presence of unobserved heterogeneity effects and endogeneity issues in our auditors’ independent model. The data was obtained from the annual reports of 89 listed companies in the Nigerian Stock Exchange (NSE) for the years 2008 to 2013. Our findings revealed that abnormal audit fees charged by Nigerian auditors do not impair their independence, but rather they might reflect additional efforts undertaken during the course of the audit. Likewise, the study found that the presence of independent non-executive foreign directors on a board improved the quality of financial reporting and an increased in the percentage of share ownership of foreign institutional shareholders also improved the quality of financial reports. However, percentage of local institutional ownership is not significant.  The first limitation of this study is that audit fees and non-audit fees were lumped together as auditor remuneration in the annual reports. Thus, this summation did not permit the testing of individual components of auditor remuneration, as had been done in several previous studies. The second limitation is that accrual earnings management was used as the metric for financial reporting quality. Due to data limitations, real earning management, which is another proxy of earning management, was not tested. The study’s findings provide significant implications for auditors, regulators, and preparers.  First, any attempt to reduce the remuneration of auditors in Nigeria might also result in the reduction of the quality of financial reporting; however, regulators must redouble their efforts to regulate audit fees. Second, evidence of weak monitoring by local institutional investors suggests a possible weakness in shareholder activism.  This paper provides additional insights into the quality of financial reporting, the impairment of auditor’s independence, and the expropriation of minority shareholders’ interests from a less-studied environment characterized by a weak institutional framework. Our findings are robust with respect to the issues of unobserved heterogeneity and endogeneity, which previous studies had failed to consider.