European Journal of Accounting, Auditing and Finance Research Vol.5 No.4, pp.1-11, April 2017 Published by European Centre for Research Training and Development UK (www.eajournals.org) 1 ISSN 2053-4086(Print), ISSN 2053-4094(Online) THE ASSOCIATION BETWEEN AUDIT QUALITY AND EARNINGS MANAGEMENT BY LISTED FIRMS IN NIGERIA Clement C. M. Ajekwe *1 and Adzor Ibiamke 1 1 Department of Accounting Benue State University Makurdi ABSTRACT: This study examines the association between audit quality and earnings management by listed firms in Nigeria. The study measures audit quality by audit firm size and earnings management by the absolute abnormal discretionary accruals using the modified Jones model. The study was carried out in two parts, the first part is the comparative study using independent sample t-test and the Wilcoxon signed ranked test. The second part is the multivariate analysis where the association between audit quality and earnings management was examined. Based on our analysis, we found that auditor size has restrained earnings management but the decrease is not statistically significant. The implication of this finding is that users should not blindly assume that high audit quality proxy by the big 4 auditor is a symbol of earnings quality. KEYWORDS: Audit quality, auditor size, earnings management, Nigeria INTRODUCTION Firms manage accounting numbers to increase, reduce or smooth earnings relative to their “unmanaged” levels when they have incentives to do so. Firms manage earnings to meet the market earnings expectations (Graham, Harvey & Rajgopal, 2005; Levitt, 1998); increase stock prices of firms (Burgstahler & Eames, 1998); escape from political scrutiny (Deegan & Unerman, 2008; Mulford & Comiskey, 2002); increase the bonus pay of firm managers (Jiang, Petroni &Wang, 2010; Armstrong, Jagolinzer & Larcker, 2010); increase the value of their stock options (Levitt, 1998) or simply to enhance firm reputations (Wasley & Wu, 2006). Plausible as these incentives to manage earnings might appear, it is generally assumed that earnings management is conducted to the detriment of investors because of the implied reduction in the transparency and reliability of financial reports (Scott, 1997; Beneish, 2001). Therefore, financial statement users consider earnings management to be unethical; and its occurrence should necessarily be prevented, by for example, relying on well defined accounting standards, such as the International Financial Reporting Standards (IFRS) and the firm’s internal governance structure (Dechow, Sloan & Sweeney, 1996). This paper focuses on the role of the external auditors, particularly the quality of external auditors, as an aspect of the firm’s internal governance structure. Auditors provide a critical role to capital markets through the delivery of statutory assurance to users of general purpose financial statements. Auditing reduces information asymmetries that exist between managers and firm stakeholders by allowing outsiders the opportunity to verify the validity of financial statements. The effectiveness of auditing, and its ability to constrain the management of earnings, is expected to vary with the quality of the auditor. In the literature, auditor size (dichotomous Big x – non-Big x) has been the proxy for audit quality