Initial Public Offering Audit Contingent Fees and Post-Listing Earnings Reversal: Evidence from a Nigerian Emerging Market

Abstract

Initial Public Offering (IPO) is a remarkable period in the life of firms when they transition from private status to public firm status. This paper examines how initial public offering (IPO) audit contingent fees influence post-IPO earnings reversals within the unique institutional environment of Nigeria. We ground this study in agency and institutional theories, and argue that contingent fee arrangements erode auditor independence. Thus, when auditors' independence is compromised, auditors may lack the capacity to sufficiently challenge pre-IPO managerial behavior that could facilitate earnings management that subsequently unwinds in the post-listing period. We analyzed a longitudinal dataset of 50 non-financial firms listed on the Nigerian Exchange from 2010 to 2024, comprising 350 firm-year observations. Our panel regression results indicate that a positive and significant association exists between contingent fees and earnings reversals (β = 1.143, p < 0.01). Further analysis shows that ownership structure moderates this relationship; however, the effect is considerably attenuated among state-owned enterprises (p < 0.10). We attribute this finding to heightened regulatory oversight by the Fiscal Responsibility Commission. Consequently, we recommend that Nigeria's Securities and Exchange Commission and Financial Reporting Council enhance their supervision of IPO audit fee disclosures and prohibit outcome-contingent fee arrangements.