DETERMINANTS OF AUDITORS REPUTATION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

Corporate reputation affects the way in which various stakeholders behave towards an organization, influencing, for example employee retention, customer satisfaction and customer loyalty. Not surprisingly, CEOs see corporate reputation as a valuable intangible asset (Institute of Directors 1999). A favourable reputation encourages shareholders to invest in a company; it attracts good staff, retains customers (Markham 1972) and correlates with superior overall returns (Robert and Dowling 1997; Vergin and Qoronfleh 1998). However, many of these claims have been challenged as being anecdotal or based on measures of reputation that are flawed or conceptualizations of reputation that are unclear. There are a number of issues here relevant to academics working in the emerging area of reputation studies. Corporate reputation is still relatively new as an academic subject. It is becoming a paradigm in its own right, a coherent way of looking at organizations and business performance, but it is still dogged by its origins in a number of separate disciplines.

            The reputation mechanism or “reputation effect” refers to the fact that reputation concerns may affect players actions (Weigelt and Camerer 1988). Analytical research demonstrates that the reputation effect may help to reduce agency problems and empirical evidence reveals that reputation concerns affect the behaviour or financial analysis, investment banks, directors, and auditors, motivating these professionals to take actions that provide long-term benefits rather than focusing (exclusively) on actions that favour short-term interest. Recent research addresses the effect of corporate reputation on stakeholder perceptions and links those perceptions to valuation (Filbeck and Preece 2003; Anderson and Smith). Research also addresses the relation between corporate reputation and company’s debt and equity financing activities and costs (Diamond 1991; Siegel 2005). Despite this increasing interest in corporate reputation and the growing body of reputation-related research, we known of no prior research directly addressing the association between corporate reputation and financial reporting quality.

1.2       Statement of Research Problems

Confusion over definition adds to confusion over measurement methods in the reputation literature. A number of measurement approaches are available reflecting the number of possible strategies towards measuring corporate reputation. Respondents can be asked to rate the reputation of a firm from poor to good (Goldberg and Hartwick 1990). However, such one-dimensional measures do not explain why one firm has a better or poorer reputation than another. The researcher can use a qualitative approach or devise scales specific to the empirical situation (Durgee 1988; Hanby 1999), but here it will be difficult to compare one reputation with another or one stakeholder’s view of a firm’s reputation against companies, for focusing on the views of single stakeholder (in other words image or identity), or for simply using single, unidimensional measurement items. Many borrow their approaches from existing scales, from brad equity, corporate image or identity measurement, without the necessary conceptual clarification. The approaches researchers adopt depend on their background (e.g marketing, strategy, organization theory or consultant),. Their school of though or epistemological basis, but the literature has seldom compared different methods of measurement. Existing theories predict that large auditors have more incentive to issue accurate report. Reputation arguments suggest that large auditors suffer a greater loss of rents as a result of inaccurate reporting (DeAngelo, 1981). Moreover, auditors have more incentive to give accurate reports, the greater is the litigation penalty. That is suffered for inaccuracy (Dye, 1993). Since large auditors have deeper pockets than small auditors, they should have more incentive to issue accurate reports. Empirical studies have tested these theories by examining the stock market reaction to different types of auditor switch and by examining the relationship between agency costs and auditor choice. If companies with favourable private information prefer to hire large auditors, the stock market should react more favourable when companies switch to large auditors than to small auditors. The ensuing discussion leads to the following research questions;

1. How does profitability predict or influence a firms’ audit reputation?
2. Will the pricing of equity shares influence a good audit reputation?
3. Can an audit firm size determine audit reputation?

1.3       Research Objective

1. To determine if profitability affects a firms audit reputation

2. To examine the effect of a firms audit reputation on equity share pricing

3. To view the impact of a firm size on audit reputation

1.4       Research Hypotheses

H0:       There is no significant relationship between profitability and a firms’          audit report

H1:       There is a significant relationship between profitability and a firms’            audit report

H1:       There is a significant relationship between profitability and a firms’            audit report

H0:       There is no significant relationship between audit reputation and    equity share pricing

H1:       There is a significant relationship between audit reputation and       equity share pricing

H0:       There is no significant relationship and audit firm size the quality of           audit report

H0:       There is a significant relationship and audit firm size the quality of             audit report

1.5       Significance and Relevance of the Study

            High quality external auditing is a central component of sound corporate governance. Yet relatively little is known about the determinants of audit quality. We study the audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality. An important but largely unresolved issue in both the academic and policy arenas is what determines audit quality. This research work will create significance in he minds o the general public as to the determinant of audit in their investment decisions.

1.6       Research Methodology

            The study will be subjected to statistical analysis; secondary data shall be source from annual report, publications statistical records and other relevant materials for the purpose of he study. In analyzing data obtained regression shall be use to analyze and compare variance on the result of the statistical analysis gathered.

1.7       Scope and Limitation of the Study

            In a bid to keep the study within a manageable spectrum and considering limited time and work entailed, the scope of the study will be limited to five quoted Nigerian Banks due to nearness and availability of such companies around, within the environment and with the financial aim of reducing cost. All area of human endeavour is characterized by some limiting factors of which study is not an exemption. Such limiting factors include finances amongst others. This study is limited to Bank industry and covers a three year period time frame from 2009-2011.