Sustainability Costs, Audit Tenure and Financial Performance of Deposit Money Banks in Nigeria

Abstract

This study examined the effect of sustainability costs and audit tenure on the financial performance of deposit money banks (DMBs) in Nigeria. Deposit money banks occupy the centre of Nigeria's financial architecture, yet the two decisions through which they increasingly manage cost and governance pressure, namely how much to commit to sustainability-related expenditure and how long to retain the same external auditor, remain empirically contested. Most existing Nigerian studies proxy sustainability by disclosure indices constructed through content analysis, capturing what banks report rather than what they actually spend, and the audit tenure evidence for Nigerian banks is directionally contradictory. Specifically, the study investigated the effect of sustainability costs on financial performance, assessed the effect of audit tenure on financial performance, and ascertained the joint effect of sustainability costs and audit tenure on the financial performance of deposit money banks in Nigeria. The study was anchored on the Stakeholder Theory and adopted an ex-post facto research design using a quantitative panel-data approach. Secondary data were obtained from the audited annual reports and financial statements of twelve purposively selected deposit money banks for the period 2014 to 2025, yielding 143 bank-year observations. Sustainability cost was measured through employee social welfare cost (ESWC) and environmental maintenance cost (EVMC) and combined into a composite sustainability cost (SUC) measure, while audit tenure (AUT) was measured as the number of consecutive years the same external audit firm held the engagement. Financial performance was measured using return on assets (ROA), return on equity (ROE) and net interest margin (NIM), with bank size, leverage and bank age as control variables. Following correlation, cross-sectional dependence and Im-Pesaran-Shin panel unit root tests, the three models were estimated using Panel Generalized Least Squares and tested at the 5% level of significance. Employee social welfare cost had a positive and statistically significant effect on ROA, ROE and NIM (β = 0.008, 0.003 and 0.005 respectively, p < 0.01), and environmental maintenance cost exerted its strongest effect on ROA (β = 0.152, p < 0.01), with the model jointly significant across all three measures (Wald χ² = 429.43, 165.94 and 940.29, p < 0.01). Audit tenure had a positive and significant effect on ROA, ROE and NIM (β = 0.003, 0.008 and 0.0005 respectively, p < 0.01; Wald χ² = 9616.06, 2168.37 and 675.94, p < 0.01), its largest standalone effect being on ROE. In the joint model, composite sustainability cost (β = 0.005, 0.004 and 0.004) consistently exceeded audit tenure (β = 0.003, 0.0007 and 0.0005) across all three performance measures, with the models remaining jointly significant (Wald χ² = 1888.87, 427.04 and 1599.91, p < 0.01). Bank size was consistently positive and leverage consistently negative. Consequently, all three null hypotheses were rejected. The study concludes that sustainability spending functions as a value-adding investment rather than a cost drag on profitability, that the knowledge effect of accumulated auditor familiarity outweighs the independence-impairment concern within the regulatory tenure ceiling, and that the operational expenditure channel carries greater weight than the governance oversight channel in driving reported performance. The study recommends that deposit money banks sustain and institutionalise employee welfare and environmental maintenance spending within their core operating budgets rather than treating such spending as discretionary, that bank boards and audit committees avoid premature changes of external audit firm and manage engagements within the tenure limits set by the Central Bank of Nigeria, and that banks moderate their reliance on debt financing given its consistently negative effect on performance.