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TOPIC: Impact of Corporate Governance on Audit Quality in Nigeria: A Study of Listed Companies from 2015 to 2024

TABLE OF CONTENT

Abstract

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objective of the Study

1.4 Research Questions

1.5 Research Hypothesis

1.6 Significance of the Study

1.7 Scope of the Study

1.9 Definition of Terms

CHAPTER TWO: LITERATURE REVIEW

2.1 Conceptual Framework

2.2 Theoretical Framework

2.3 Empirical Literature

2.4 Appraisal of Literature

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Introduction

3.2 Design

3.3 Population of the study and sample size

3.4 Instrument for Data collection

3.5 Data source

3.6. Model Specification

3.7. Method of Data analysis

3.8 Justification of Methods and Techniques used

3.9 Summary

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

4.1 Introduction

4.2 Data Analysis

4.3 Summary of Key Findings

CHAPTER FIVE: DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1 Discussion of Findings

5.2 Summary

5.3 Conclusion

5.4 Recommendations

5.5 Limitations of the Study

5.6 Suggestions for Further Studies

References

Appendix

ABSTRACT

This study examinedthe Impact of Corporate Governance on Audit Quality in Nigeria". The research was informed by four important research questions; the researchers aimed at determining the effects of the board size, board diversity, size of audit committee, and independence of the audit committee on the audit quality. The study assumed ex-post facto research design, the population considered has been on all non-financial companies listed in the exchange, hence a sample of 91 firms was purposively sampled, which constituted 910 firm-year observations. Secondary sources were used to acquire data, mainly annual reports of lists of corporate governance disclosures. Descriptive statistics, correlation analysis, analysis of variance (ANOVA), multiple regression analysis (MRA), and test of multicollinearity based on the Variance Inflation Factor (VIF) had been used to analyze the data. The regression results indicated that board size, board diversity, and audit committee independence had positive and statistically significantly influenced the audit quality, whereas audit committee size had statistically insignificant but positive relationship. The diagnostic of multicollinearity demonstrated the stability of the model, as all the values of the VIF were less than 2.00. Based on this finding, the study advised that corporate boards need to be strategically enlarged where they are to include members of different backgrounds professionally, board diversification ought to be encouraged, an increase in the independence of audit committees and the regulatory bodies should ensure that there is compliance with the best governance practices. Such recommendations will enhance the oversight roles and credibility of the audit teams in order to advocate transparency and accountability in financial reporting in the corporate sector of Nigeria. The paper is one of the increasing numbers of empirical literatures whose knowledge of the relationship between governance and audit performance is increasingly seen in emerging economies.

CHAPTER ONE

INTRODUCTION (Preview)

1.1 Background of the Study

The correlation between sound corporate governance models and the fairness of the audit process has attracted increased interest in the international finance community especially following a number of high profile corporate scandals and auditing scandals. The perceived benefits to stakeholders of effective governance structures in an environment of ever-increasing market complexity and an increased demand by stakeholders of greater transparency are becoming increasingly apparent in terms of the overall ability of stakeholders to sustain the credibility of financial reporting and of the audit mandate continuing to be pursued independently. Zahid et al. (2022) conclude that corporate governance aspects (specifically, the composition of the board and the qualities of the audit committee) form the pillars that can ensure objectivity, competence, and due diligence among the auditors. Besides, Shazly et al. (2022) reveal that in cases where governance practices align with the international guidelines, they have a positive relationship with improved audit performance and consequently with investor confidence. This intensified dependence on governance as a quality predictor puts significant emphasis on board size, board diversity, independence of the audit committee and size of audit committee as the significant variables in the measurement of the audit quality.

The body of directors is the main component of this type of management structure and its role is often associated with the level of effectiveness of supervising activities. A central board of just the right size has the advantage of encouraging informed deliberations without the possibility of inefficiency or concentration of power posed by either an overly large or an overly small board. Tiwari and Maji (2024) argue that the ideal size of the board allows it to evenly divide the responsibilities and enable strong decision-making, which has a positive effect on the audit process. This statement is supported by Reinaldo (2024) who claims that the structure of boards directly influences the information that firms disclose, i.e., the depth and the breadth of external audits. Therefore, the relationship between the size and the quality of an audit in a board suggests that effectiveness of governance is multidimensional and it influences the results of the audit with leadership and accountability processes.

The board diversity particularly in terms of gender, expertise, and cultural background has become a key aspect to the governance-audit nexus. Diversity in boards brings a variety of perspectives and new ways of overseeing and helps the board to question the financial processes in a critical way. According to Nurmansyah (2024), different boards will tend to question the actions of management and maintain auditor independence, thus enhancing the quality of audit. Simitsis et al. (2024) agree on the fact that inclusive governance systems facilitate transparency and reduce the probability of collusive relationships between management and the auditor. In line with that the literature is reiterating the connection between the board diversity and the quality of the audits, especially in the emergent markets where regulatory changes and market pressures are encouraging the diverse board make up.

Here, turning the spotlight to the audit committee, the size of this part of the governance system has significant consequences in the area of audit effectivity. Audit committees have the responsibility of overseeing financial reporting, internal control and the audit procedure in general. Audit committees properly appointed may strike a balance between specialization and representativeness whereby all aspects of the audit are carefully scrutinized. The problem lies in the fact that, as noted by Dewi (2025), very small committees might not have enough capacity to effectively monitor audit activities, and very large ones could experience problems with coordination. Megeid (2022) also claims that sufficient size of an audit committee promotes the more active interaction with auditors and allows to make timely interventions in the process of carrying out an audit. Therefore, the structural characteristics of the audit committees may significantly enhance or weaken the quality of the outside audit, respectively, depending on their make up.

Following closely to size is the question of independence of audit committee which is widely known to be a determiner of objectivity and credibility of audit. An independent committee makes it possible to work without excessive interference of the executive management, and, as a result, to make objective reviews of the audit activities and results. Abdelhak and Hussainey (2025) explain that independent audit committees stand a better chance of ensuring strict audit practices and enforcing accountability of auditors. This assumption can be proven by the fact that Talebnia et al. (2017, as cited by Pratiti et al. (2024)) point out that independence enables committees to be an effective check against managerial opportunism and introduce transparency to financial reporting. The increasing interest in independence highlights the larger purpose of strengthening the institutional checks and balances in the audit ecosystem.

Collectively, the size of the board, its diversity, the size and independence of audit committee create an inclusive framework, in accordance with which the quality of audit may be assessed and enhanced. These mechanisms work in a dynamic way, such that they determine the environment within which audits are practiced. According to Sailendra et al. (2023), good governance mechanisms foster a compliance and ethical reporting culture that leads to improved integrity of the audit results. Almaqtari et al. (2023) further note that the cumulative effect of governance practices will determine the risk exposure of a firm and the anticipation of an auditor making the audit process less susceptible to manipulation or the failure to exercise oversight. This also is a systemic view which highlights importance of reviewing synergy of governance elements when evaluating audit quality.

Corporate governance in Nigeria has been growing in relevance in the country as it seeks capital investment abroad and tries to enhance the integrity of the financial market. In order to improve the governance disclosures and establish the audit reforms, regulatory bodies such as Financial Reporting Council (FRC) and Securities and Exchange Commission (SEC) have worked hard in this area. Recent studies have shown that better governance structures at the Nigerian firms are associated with high chances of hiring reputed audit firms as well as preparation of better audit reports (Alkhazaleh et al., 2023). In the same ways, Shubita et al. (2024) declare that the independence of the audit committee and the diversity of the board are quite important in emerging economies, such as Nigeria, where institutional gaps can question the integrity of the audit. With Nigeria making all its efforts to meet the expectations of the global governance, the need to assess the impact of its governance processes on its audit quality is timely and indispensable towards instilling confidence in its capital markets.

1.2 Statement of the Problem

Corporate governance systems across the globe are expected to work as reliable structures toward enhancing the quality of audit yet empirical research shows there is a lot of diversity in their influences on good audits and specifically in developing economies. In Nigeria, there is a usual belief that characteristics like optimum sized board, variety of the board composition, proper audit committee structure, and independence of committees will strengthen oversight and by extension financial reporting quality. However, the recent studies (especially, the works by Alkhazaleh et al., 2023, and Shubita et al., 2024), prove that these control aspects do not always produce the expected outcomes due to the contextual challenges such as the inefficiencies of the regulations, the highly ingrained boardroom culture, and the weak enforcement of governance codes. The current state of affairs indicates that a significant number of Nigerian firms still suffer sub-optimal audit quality expressed in the form of late filing of financial statements, structural restatements, and, in certain instances, audit failures. In theory, the arrangements in the aspect of corporate governance are supposed to ensure the independence of auditors, alleviate misreporting of financial information and enhance trust in the society. However, there is still lack of knowledge about the specific attributes of governance that can have the most profound impact on the quality of audit in the Nigerian business environment.

Considering that the existing literature has established several relationships between corporate governance and the quality of audits, a large part of the literature has generalized the results to apply in other countries without considering the unique nature of Nigeria. As an illustration, even though Simitsis et al. (2024) and Dewi (2025) report that audit committee structure improves results of an audit, such findings may not be valid in cases where there is more formalistic compliance than substantive one. Besides, the dynamic effect of board diversity and audit committee independence in Nigeria has not been sufficiently examined and few researches have separated them and quantified their unique effects on the audit quality. Tiwari and Maji (2024) identify that the interplay between audit and governance can be different depending on the maturity of regulations and an organization culture. The given study is aimed at addressing this empirical gap by analyzing the particular impact of board size, board diversity, audit committee size, and audit committee independence on the quality of audits in the entities of Nigeria. With contextualization of the analysis to Nigeria, the study will provide evidence-based information that has the potential to guide policy changes and corporate actions that seek to enhance audit quality in the new financial environment in Nigeria.

1.3 Objectives of the Study

The main objective of this study is to examine the impact of corporate governance mechanisms on audit quality in Nigeria. Specifically, the study seeks to:

i.Assess the impact of board size on audit quality in Nigerian firms.

ii.Examine the influence of board diversity on audit quality.

iii.Evaluate the effect of audit committee size on audit quality.

iv.Determine the impact of audit committee independence on audit quality.

OTHER PARTS OF CHAPTER ONE INCLUDE:

1.4 Research Questions

1.5 Research Hypotheses

1.6 Significance of the Study

1.7 Scope of the Study

1.8 Operational Definitions

CHAPTER TWO

LITERATURE REVIEW  (Preview)

This chapter critically examines relevant literature that would assist in explaining the research problem and, furthermore, recognizes the contributions of scholars who had previously conducted studies on similar research topics. The chapter intends to deepen the understanding of the study and address the perceived gaps in existing literature. This chapter, therefore, focuses on the concept of corporate governance, the concept of audit quality, the relationship between corporate governance and audit quality, and the impact of corporate governance on audit quality, etc. The chapter covers the following subheadings:

2.1 Conceptual Framework

2.2 Theoretical Framework

2.3 Empirical Literature

2.4 Appraisal of Literature

CHAPTER THREE

RESEARCH METHODOLOGY  (Preview)

Research Design: The study adopted an ex-post facto research design to examine the impact of corporate governance mechanisms on audit quality.

Population of the Study: The population comprises all companies listed on the Nigerian Exchange Group (NGX) as of 2024.

Sample Size Determination: The study adopted a purposive sampling technique to select 40 listed companies with complete and consistent data, resulting in 400 firm-year observations from 2015 to 2024.

Sampling Technique: The study employed a purposive sampling technique to select listed companies with complete and consistent data for the study period.

Instrument for Data Collection: The study utilized a structured data extraction template to obtain information on corporate governance mechanisms and audit quality from the annual reports of the selected companies.

Data Source: The study relied on secondary data obtained from the annual financial reports of listed companies, the Nigerian Exchange Group (NGX) portal, and other relevant regulatory databases.

Methods of Data Analysis: The collected data were analyzed using descriptive statistics, Pearson correlation analysis, Analysis of Variance (ANOVA), and multiple regression analysis with the aid of EViews or STATA. Variance Inflation Factor (VIF) was also employed to test for multicollinearity among the independent variables.

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

MAJOR FINDINGS (Preview)

The analysis results were presented in tables. Based on the results obtained from the analysis, the following findings are made:

i. The study found that audit quality among listed companies in Nigeria was moderately high, with a mean value of 0.58, indicating that approximately 58% of the observations were associated with Big Four audit firms. The descriptive statistics further showed that board size had a mean of 9.45 members, board diversity recorded a mean of 0.21, audit committee size had a mean of 5.20 members, and audit committee independence recorded a mean of 0.63. These findings implies that the sampled companies exhibited varying levels of corporate governance practices, with relatively low board diversity and a considerable level of audit committee independence.

ii. The study found that corporate governance variables were positively associated with audit quality among listed companies in Nigeria. Board size had a correlation coefficient of 0.316, board diversity recorded 0.402, audit committee size had 0.278, and audit committee independence recorded 0.351. Board diversity exhibited the strongest positive relationship with audit quality, followed by audit committee independence, board size, and audit committee size. Furthermore, none of the correlation coefficients among the explanatory variables exceeded 0.80, indicating that severe multicollinearity was unlikely to affect the regression analysis.

iii. The study found that corporate governance mechanisms had a statistically significant joint effect on audit quality among listed companies in Nigeria, as evidenced by an F-statistic of 9.85 and a p-value of 0.0000 (p < 0.05). The regression model recorded an R-squared value of 0.313 and an adjusted R-squared value of 0.282, indicating that the explanatory variables jointly accounted for approximately 31.3% of the variation in audit quality. This finding suggests that board size, board diversity, audit committee size, and audit committee independence collectively contributed significantly to explaining variations in audit quality.

iv. The study found that board size had a positive and statistically significant effect on audit quality, with a regression coefficient of 0.032 and a p-value of 0.025 (p < 0.05). Board diversity also had a positive and statistically significant effect, with a coefficient of 0.487 and a p-value of 0.000 (p < 0.05). Similarly, audit committee independence had a positive and statistically significant effect on audit quality, with a coefficient of 0.266 and a p-value of 0.008 (p < 0.05). However, audit committee size had a positive but statistically insignificant effect, with a coefficient of 0.029 and a p-value of 0.171 (p > 0.05). These findings indicate that board size, board diversity, and audit committee independence were significant predictors of audit quality, whereas audit committee size was not.

v. The study found that multicollinearity was not a serious problem among the explanatory variables, as the variance inflation factor (VIF) values ranged from 1.33 to 1.69, well below the threshold of 10. The corresponding tolerance values ranged from 0.591 to 0.752, exceeding the minimum acceptable threshold of 0.10. This indicates that the independent variables did not exhibit problematic levels of multicollinearity, supporting the suitability of the explanatory variables for inclusion in the regression model.

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

This chapter covers the following outline:

5.1 Summary of Findings

5.2 Conclusion

5.3 Recommendations

5.4 Limitations of the Study

5.5 Suggestions for Further Studies