Audit Quality and Failure Risks of Listed Deposit Money Banks In Nigeria

Abstract

Abstract The stability of the banking sector is fundamental to economic growth and financial system resilience, particularly in developing economies such as Nigeria. However, and sadly enough, global, recent and recurring failure risks and collapses of banks which have been blamed on poor external audit qualities, are counter-productive to national economic development. Therefore, the broad objective of this study was to study the effect of audit quality on failure risks of listed deposit money banks in Nigeria between the period 2009 and 2024. This study adopted both descriptive and ex-post facto research designs. Using secondary data extracted from audited financial reports of 11 censored (from a population of 11) deposit money banks listed on the Nigerian Exchange Group, (NGX), and analyzing one hundred and seventy-six firm year observations using regression with Driscoll–Kraay standard errors analysis technique, the findings revealed that audit firm size (AUFS) significantly improve bank Z score, [coef. = 0.638 (p-value = 0.005)], audit report timeliness (ARTIME) significantly reduces bank Z score [coef. = −0.400 (p-value = audit committee diligence (ACDI) revealed a positive insignificant effect respectively on Z score of listed deposit money banks in Nigeria during the period under consideration. Based on the above findings, it was concluded that audit quality in the Nigerian banking sector is not uniformly effective, rather, its effect on bank failure risks is selective, with only specific audit mechanisms demonstrating the capacity to significantly enhance financial solvency, thereby suggesting that the effectiveness of external audit as a safeguard against bank failure risks depend not merely on its presence, but likely on factors such as depth, credibility, and functional execution of its key components. this study concluded that audit. Consequently, this study recommended among others, that listed deposit money banks in Nigeria, alongside regulators and external auditors, should prioritize substantive governance quality, auditor competence and independence, rigorous audit execution, timely financial reporting, risk-sensitive audit remuneration, coordinated assurance mechanisms, and proactive internal control systems over mere procedural compliance, in order to strengthen transparency, reinforce market confidence, and enhance long term financial stability in line with Agency theory. Keywords: Audit Quality, Failure Risks of Listed Deposit Money Banks, Bank Z-Score, Agency Theory.