Auditor Independence and Financial Reporting Quality: New Evidence from Listed Oil and Gas Companies in Nigeria

Abstract

This study examined the effect of auditor independence on the financial reporting quality of listed oil and gas companies in Nigeria. The study addressed the limited sector-specific evidence and inconsistent findings regarding the effects of auditor switching, audit tenure, audit fees, and Big-4 affiliation on financial reporting quality. Anchored in Agency Theory, the study adopted an ex-post facto research design and obtained secondary data from the annual reports of six listed oil and gas companies covering 2012–2021, resulting in 60 firm-year observations. Financial reporting quality was measured using discretionary accruals estimated with the Modified Jones Model, while data were analyzed using descriptive statistics, correlation analysis, and Generalized Least Squares random-effects regression. The results showed that auditor switching and audit fees had positive but statistically insignificant effects on financial reporting quality, while Big-4 affiliation had a negative but insignificant effect. Audit tenure had a positive and statistically significant effect at the 10% level. The random-effects panel model reported an overall panel R² of 80.55%, indicating that the explanatory variables jointly accounted for a substantial proportion of the variation in financial reporting quality across the sampled firms and study period. The findings theoretically support the knowledge-effect perspective within Agency Theory by demonstrating that longer auditor–client relationships can strengthen monitoring through accumulated client- and industry-specific knowledge. Practically, the results suggest that auditor competence, engagement experience, and sector-specific expertise may be more important for financial reporting quality than frequent auditor rotation, audit fees, or audit-firm brand. The study recommends that regulators and corporate management adopt a balanced rotation policy that preserves beneficial auditor knowledge while strengthening partner rotation and safeguards against familiarity threats. The study contributes to the literature by providing sector-specific panel evidence that distinguishes the effects of four dimensions of auditor independence on financial reporting quality in Nigeria’s oil and gas industry.