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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