Do audit firms and audit committees enhance earnings quality?

Abstract

This study examines whether audit firms and audit committees contribute to enhancing earnings quality in publicly listed companies. It investigates how the index of audit firms (derived from size, opinion, independence, tenure, quality, and rotation) and audit committees (derived from independence, financial expertise, size, meetings, and gender) impact the accuracy and reliability of reported earnings. An empirical approach is employed using a sample of publicly listed companies over five years. The study utilizes a quantitative methodology, conducting regression analyses to evaluate the relationship between audit firm quality, audit committee characteristics, and earnings quality, as measured by accruals-based metrics and earnings restatements. The results suggest that higher-quality audit firms, particularly the Big 4, and more independent and financially expert audit committees are associated with improved earnings quality. The findings show that these factors reduce earnings manipulation, enhance transparency, and foster higher levels of financial reporting reliability. The study is limited by its focus on publicly listed companies, which may not generalize to private firms or those in non-regulated markets. Additionally, the study is restricted to a specific geographical region, limiting crosscountry comparisons. For practitioners, the results highlight the importance of choosing reputable audit firms and ensuring audit committees are composed of independent, financially knowledgeable members to enhance financial reporting quality. The research contributes to greater trust in financial markets by demonstrating that robust governance mechanisms, such as high-quality audits and audit committees, play a vital role in protecting investors' interests and promoting corporate transparency. The study provides evidence that supports strengthening regulatory policies concerning audit firm qualifications and the composition of audit committees to improve corporate governance and protect shareholders. This paper adds value to the existing literature by providing empirical evidence on the combined effect of audit firms and audit committees on earnings quality, offering insights into their complementary roles in enhancing the integrity of financial reporting.

Keywords: audit committee, audit firm, earnings quality, Nigeria JEL Codes: C23, C58, C87, M21, M24, M48