Auditor Independence, Financial Reporting Quality and Financial Performance of Quoted Deposit Money Banks in Nigeria

Abstract

This study examined the effect of auditor independence on the financial reporting quality and financial performance of quoted deposit money banks in Nigeria over the period 2010 to 2024. Two concerns motivated the enquiry. The first is that recurring banking crises and financial misstatements in Nigeria have raised persistent questions about whether the external audit function genuinely safeguards the credibility of published financial statements. The second is that the empirical literature has generally examined auditor independence, reporting quality and financial performance in isolation rather than testing whether reporting quality mediates the independence–performance relationship. Anchored on Agency Theory and Information Asymmetry Theory, the study pursued two objectives: to examine the effect of auditor independence on financial reporting quality, and to determine its effect on financial performance with reporting quality tested as a mediating channel. Four regression models operationalised these objectives. Auditor independence was proxied by audit fees, audit tenure and audit firm size; financial reporting quality was measured using discretionary accruals from the Modified Jones Model; and financial performance was measured using return on assets and return on equity. All thirteen listed deposit money banks were observed over fifteen years, yielding a balanced panel of 195 bank-year observations drawn from audited annual reports. Data were analysed using descriptive statistics, Pearson correlation and panel regression, with the Hausman test used to select between the fixed and random effects estimators. On the first objective, audit fees and Big Four membership significantly reduced discretionary accruals while audit tenure significantly increased them, establishing that auditor independence affects reporting quality. On the second objective, auditor independence significantly affected both return on assets and return on equity; when financial reporting quality was introduced into the performance equation, the effect of audit tenure on performance disappeared and the audit fee coefficient declined, establishing financial reporting quality as a mediating channel. The combined model accounted for 74.8 per cent of the variation in return on assets and 68.3 per cent of the variation in return on equity. The study concludes that auditor independence influences financial performance both directly and indirectly through its effect on reporting quality, and recommends that regulators enforce mandatory audit firm rotation, that banks ensure audit fees adequately reflect engagement scope, and that investors treat audit quality indicators as material signals of bank credibility.