AUDIT COMMITTEE AND FINANCIAL REPORTING QUALITY: EVIDENCE FROM NIGERIA


Content

Abstract

The research work tends to cover the relationship between corporate governance and external auditor’s report as it is important to non-financial institution. Improper accounting records, frauds and other internal factors are some of the factors that lead to lack of returns on investment in an organization. Hence, the broad objective of the study is to ascertain the relationship between auditing reporting and corporate governance and also to find out if auditing and corporate governance serve as a tool of control used by management to ensure achievement of organizational goals. The primary source of data collection was used where stratified questionnaires were distributed to respondents. The judgmental sampling technique was used to select a sample size of 100. The chi-square statistical tool was used to test the stated hypotheses and the findings revealed that there is significant relationship between audit quality and good corporate governance. The study concludes that there is a strong unbreakable chain connection between corporate governance and auditing regarding committing to values, ethical business conduct, transparency and accountability. The study recommends among others that the directors and auditors should be effective in carrying out the organization responsibilities and enhance effective corporate governance in the organization.


TABLE OF CONTENTS

Title Page                                                                                 i

Certification                                                                            ii

Dedication                                                                              iii      

Acknowledgements                                                                iv      

Abstract                                                                                  v       

Table of Contents                                                                   vi      

          Chapter One: Introduction                                                1

1.1       Background to the Study                                                      1

1.2       Statement of Problem                                                            5

1.3       Research Questions                                                               5      

1.4       Objectives of the Study                                                6

1.5       Statement of Hypotheses                                                       6

1.6       Significance of the Study                                                       7      

1.7       Scope of the Study                                                                 8

1.8       Limitations of the Study                                                        9      

1.9       Definition of Terms                                                                10    

 

Chapter Two: Review of Related Literature         12   

2.1       Introduction                                                                           12    

2.2   Corporate Reporting                                                         14

2.3   Qualitative Characteristics of Financial Information        17

2.4    The Four Links in a Financial Reporting Quality Chain      22

2.5   The Value of Financial Reporting Quality                        26

2.6   The Agency Problems in Corporate Entities             31

2.7   The Nature of Audit Committee                                33

2.8   History and Evolution of Audit Committee               34

2.9   Factors that Contributed to the Establishment and Development of Audit Committee                              41

2.10 Objectives of Audit Committee                                         45

2.11  Statutory Provisions and Functions of Audit Committee    48

2.12 The Existence of Audit Committee                           53

2.13 Determinants of Audit Committee Effectiveness      56

2.14  Audit Committee’s Relationship with other Stakeholders   72

2.15 Audit Committee’s Accountability and Report          78

2.16 Benefits of Having an Audit Committee                   80

2.17 Drawbacks to Audit Committee                               82

2.18 Effective vs Ineffective Audit Committee                   84

 

Chapter Three: Research Method and Design             87

3.1       Introduction                                                                           87

3.2       Research Design                                                                     88

3.3       Description of Population of the Study                                 88    

3.4       Sample Size                                                                            88    

3.5       Sampling Techniques                                                             89    

3.6       Sources of Data Collection                                                    89    

3.7       Method of Data Presentation                                                90    

3.8       Method of Data Analysis                                                       91    

Chapter Four: Data Presentation, Analysis and

Hypotheses Testing                                                  92   

4.1       Introduction                                                                           92    

4.2       Presentation of Data                                                              92    

4.3       Data Analysis                                                                         93    

4.4       Hypotheses Testing                                                                106  


Chapter Five: Summary of Findings, Conclusion

and Recommendations                                              114

5.1       Introduction                                                                           114  

5.2       Summary of Findings                                                             114

5.3       Conclusion                                                                             114

5.4       Recommendations                                                                  116

References                                                                 118

Appendix I                                                                              120  

Appendix II                                                                             121            

 


CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

The separation of ownership from control is a common feature of public limited companies. This is as a result of the complexity of modem day business organizations, in terms of the capital outlay and expertise required in their management. These capital resources are pooled together from various sources and because these contributors cannot all be involved in the day-to-day running of the business, people with the required expertise are engaged to act as stewards over these resources.

These stewards are expected to manage these resources committed unto them with utmost good faith, and report to the contributors of resources (shareholders) who are owners. They are expected to act at all times in the interest of these owners of resources, and produce a report that shows a “true and fair” view of their operations. A report that those who use financial information can confidently rely upon in making their various decisions.

But, this separation of ownership from control can create conflict in that; the Directors will often be forced to choose between the shareholder’s welfare and their own. This conflict of interest has caused a lot of problems, not just in Nigeria but globally, overtime, Managements have engaged in sharp practices to benefit themselves at the expenses of the shareholders, investors and the public at large. They engage in painting rosy pictures of their operations, thereby misleading shareholders, investors and other unsuspecting users of financial information. This ugly trend has led to the sudden collapse of large corporations without notice and public confidence in financial reporting, gradually has eroded to a record low.

The collapse of large corporations such as Enron and WorldCom telecomm in the USA, and the crises experienced in the banking industry in Nigeria at least before the re-capitalization exercise call for a great concern. In all these cases mismanagement and fraud was a common feature.

Another feature of these collapses was that, while shareholders, investors and the public at large were counting their losses; the Directors of these corporations unethically smile to their banks.

Fraud, litigations and distrust such as it is now were some of the major factors that led to the conception of the idea, Audit Committee, in early 1940s in the USA. The committee, which is a committee of Directors and shareholders’ representatives (non executive. Directors), have the responsibility to review the annual financial statement before submission to the board of Directors and its activities may include the review of nomination of Auditors, overall scope of audit, result of the audit; internal financial controls and financial information for publication. In a nutshell, this committee is to carry out an oversight (monitoring) function, to ensure that shareholders are protected, investors and public confidence in financial reporting is restored.

In Nigeria however, this concept is significantly, a new development in corporate accountability. Interest in the idea is growing and its uses being gradually accepted. Following the promulgation of the Companies and allied Matters Act (CAMA) 2014, most public limited companies have duly established their Audit Committee in accordance with the law.

However, it is not enough just to form an audit committee because the law said so. These companies should go beyond satisfying the letters of the Decree and ensure that Audit committees are in fact, useful instrument in corporate governance. This committee must be equipped with the necessary resources to enable them perform their duly in a manner that will restore public confidence in financial reporting, protect investors and shareholders’ interests. This committee must comprise of the right kind of people who can effectively carry out its oversight functions so that the committee will not be a “Rubber stamp” committee in the hands of the Directors.

Investors and shareholders will be protected and public confidence restored, if and only if the people elected to serve on the Audit committee carry out their oversight functions effectively.

1.2   Statement of Problem

In order to ensure corporate accountability, several steps have been taken. One of these steps is the introduction of Audit committees into public limited companies. The promulgation of the CAMA 2014, in Nigeria, serves to give this committee statutory backing in carrying out its duties. An analysis of the provisions of CAMA 2014, with respect of Audit committee, raises some anxieties. A problem is recognized when a doubt is raised, difficulty is created or dissatisfaction occurs and a solution is needed.

1.3   Research Questions

The following are the research questions of the study;

i.      How is an audit committee with high level of financial literacy is likely to have financial report problem?

ii.     How does audit committee holding directorship position in other companies to effect on their performance?

iii.    How does the size of the audit committee determine the quality of financial reporting?

1.4   Objective of the Study

The broad objective of this study is to examine the effectiveness of audit committee and the quality of financial reporting. However, the sub-objectives are to:

i.      ascertain if audit committee with high level of financial literacy have financial report problem,

ii.     examine if audit committee holding directorship position in other companies has positive effect on their performance,

iii.    ascertain if the size of audit committee determines the quality of financial reporting.

 1.5  Statement of Hypothesis

In undertaking this study, certain, hypotheses were formulated. They include:

Hypothesis One

HO:   An Audit committee with higher level of financial literacy is not likely to have financial reporting problem.

HI:    An audit committee with high level of financial literacy is likely to have financial report problem.

Hypothesis Two

HO:   Audit committee holding directorship position in other companies has negative effect on their performance.

HI:    Audit committee holding directorship position in other companies has positive effect on their performance.

Hypothesis Three

HO:   The size of the audit committee does not determine the quality of financial reporting.

HI:    The size of the audit committee determines the quality of financial reporting.

1.6   Significance of the Study

Government in its effort to improve on practices in various sectors of the economy, always make laws and amend existing ones. These actions are normally borne out of findings and revelations by studies carried out, such as this. In a nutshell, it is hoped that this study will be of relevance to:

1.     Shareholders, in deciding on what qualities should be possessed by those going to represent them as Audit committee members.

2.     Audit committee members, in knowing what their responsibilities really are, and how best they can carry out their functions without interfering into Management functions.

3.     Directors, in effectively formulating a clear definition of the committee’s responsibilities and authority.

4.     External Auditors, on how best they can work with the Audit committees in order to enhance their effectiveness and independence.

5.     Government, in its effort to appraise how effective its provisions concerning Audit committee have been and when considering amendment where necessary.

6.     Researchers, who may want some information as relate to any aspect of this study.

1.7   Scope of the Study

The study deals mainly with the assessment of the effectiveness of Audit committee in monitoring financial reporting. It also examines those factors or qualities whose presence/absence could further enhance/ undermine the effectiveness of Audit committee in performing its monitoring function.

In carrying out the above task, focus was on the banking industry. The study was further narrowed down to some selected banks in Benin. These banks were studies over the period of ten years starting from 2006 and ended in 2015 (i.e. 2006 to 2015 both years included).

1.8   Limitations of the Study

In every research work, there are usually certain factors that impose some sort of constraints on its successful completion. This study being concerned with the assessment of how well the Audit committee have been performing since, its introduction into Nigerian Public Companies, would have been coloured by the following factors:

Firstly, the fact that this study is restricted to the banking industry only, with few banks selected for the study, due to resource constraints. This may have led to our studying a sample that may not be fully representative of what really obtains in Nigeria.

Also, getting materials for the second chapter of this study was not a very easy job as not much has been written about Audit committee in Nigeria.

Lastly, the method of data analysis may not have been the best that could be used to analyze the data. Especially, the method used to derive our dependent variable. But this was the best the researcher could lay his hands on.

1.9   Definition of Terms

1.     Audit Committee: It has been defined as a committee of directors of a company whose specific responsibility is to review the annual financial statement before submission to the board of directors.

2.     Audit Committee Quality: It is defined as at least one member of the audit committee having accounting or financial expertise.

3.     Auditor: An auditor is an independent person appointed to investigate the organization, its records, and the financial statement prepared by them, thus form an opinion on the accuracy and correctness of the financial statements.

4.     Auditors Independence: This means that auditors should be free to reveal any fact discovered in the examination of the books, he should be free in the expression of recommendation. It is measured in this study as the percentage of revenue from each client to the auditor’s total revenue.

5.     Investors: A person or an organization that invest money into business or something that will yield more income.

 

 


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