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;
- How does profitability predict or influence a firms’ audit reputation?
- Will the pricing of equity shares influence a good audit reputation?
- 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.