ABSTRACT
The study focused on audit committee attributes and financial performance of listed commercial banks in Nigeria. Ex-post facto research design was adopted. Data were collected through secondary means from annual financial reports and accounts of the selected commercial banks. The population of the study is made up of all the commercial banks listed on Nigeria Stock Exchange, while the sample size is made up of 10 listed commercial banks after adopting judgmental sampling. Panel data were to analyzed regression analysis. The findings revealed that audit committee attributes have insignificant effect on return on asset and return on equity of listed commercial banks in Nigeria. The findings also revealed that audit committee attributes have a significant effect on earnings per share and profit after tax of listed commercial banks in Nigeria. Based on the findings, the study recommends that commercial banks should ensure that all the relevant audit committee attributes (such as independence, size and meetings) are maintained to avoid any form of mismanagement that could be attributable to inadequate audit committee attributes. This will in turn improve the return on asset of commercial banks. The study also recommends that the return on equity of commercial banks should be improved by maintaining quality audit members who will be independent, ensure that they are up to six in number and ensure that they hold meeting at least four (4) times in a year.
TABLE OF CONTENTS
Title page i
Declaration page ii
Certification iii
Dedication iv
Acknowledgements v
List of tables ix
Abstract x
CHAPTER 1: INTRODUCTION
1.1
Background to the Study 1
1.2 Statement of
the Problem 4
1.3 Objectives of
the Study 5
1.4 Research
Questions 6
1.5 Research
Hypotheses 6
1.6 Significance
of the Study 7
1.7 Scope of the
Study 9
1.8 Limitations
of the study 9
1.9 Operational
Definition of Terms 9
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Framework 11
2.1.1 Audit
committee attributes 11 2.1.2 Audit committee
independence and firm performance 13
2.1.3 Audit
committee meeting frequency and firm performance 17
2.1.4 Audit
committee size and firm performance 18
2.1.5 Audit
quality and firm performance 19
2.1.6 Financial expertise of audit
committee members 19
2.1.7 Concept of corporate
performance 21
2.2 Theoretical Framework 25
2.2.1 Agency theory 26
2.2.2 Theory of inspired
confidence 26
2.2.3 Stewardship theory 27
2.2.4 Stakeholder theory 28
2.3 Empirical Literature 30
2.4 Summary/Gap in
Literature 46
CHAPTER 3: METHODOLOGY
3.1 Research Design 49
3.2 Area of the Study 49
3.3
Population of the Study 49
3.4 Sample size and Sampling Technique 49
3.5
Source of Data 50
3.6
Data analysis Technique 50
3.7
Model Specification 51
3.8
Operationalization of Variables 51
CHAPTER 4: DATA PRESENTATION
AND ANALYSIS
4.1
Data Presentation 55
4.2 Pre-estimation
Tests 55
4.2.1 Descriptive statistics
55
4.2.2 Stationarity/unit
root tests 58
4.3
Data Analysis 59
4.4
Discussion on Results 69
CHAPTER 5: SUMMARY OF FINDINGS, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary of Findings 72
5.2 Conclusion 72
5.3 Recommendations 73
References
Appendices
LIST OF TABLES
3.1 Definition of the variables 57
4.1: Descriptive statistics 61
4.2.
Augmented Dickey Fuller (ADF) Test 61
4.3: Hausman test for hypothesis one 62
4.4: Panel data test for hypothesis one 63
4.5: Hausman test for
hypothesis two 64
4.6: Panel data test for hypothesis two 65
4.7: Hausman test for hypothesis three 67
4.8: Panel data test for hypothesis three 68
4.9: Hausman test for hypothesis four 69
4.10: Panel data test for hypothesis four 70
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Corporate
governance practice is beginning to include the use of tools to monitor top
management, in order to safeguard owners’ wealth and attract more foreign
investments (Abbott, 2014). Previous research such as Aryan (2015) has
indicated that the role of audit committees is a key element in corporate
governance, helping to control and monitor manager’s practice (Aryan, 2015). The audit
committee is regarded as the most important board subcommittee due to its
specific role of protecting the interests of shareholders in relation to
financial oversight and control (Krishnan, 2005). The primary role of the audit
committee is to oversee the firm’s financial reporting process, the review of
financial reports, internal accounting controls, the audit process and more
recently, its risk management practices (Klein, 2012).
Furthermore, audit committees can increase the quality of financial
presentation and decrease audit risk, thereby improving the quality of reported
earnings (Ayub, 2015). Therefore, audit committee play a key role in monitoring
a company’s management, with the aim of safeguarding the interests of
shareholders (Vafeas, 2015). It has been realized that effectiveness of an
audit committee will focus on enhancing the performance of a company and its
competitiveness, more so in a changing business world which is beyond the
control of the company (Wakaba, 2014).
A committed
audit committee is expected to emphasize optimization of shareholders’ wealth
and prevent manager’s maximization of their personal interests (Bansal &
Sharma, 2016). The primary role and responsibility of audit committees is to
make recommendations on the appointment and change of external auditor.It covers
wider areas to include the monitoring of managers and review of the company’s
internal control system (DeZoort & Salterio, 2011). It has been suggested
that knowledgeable audit committees help enhance the company’s performance;
therefore, good characteristics of audit committees are expected to engender good
company performance (Evans, Evans & Loh, 2002 cited in Azam & Wang,
2021). In response to financial crisis, audit committees were established by
the Jordanian government in 2008 as part of a series of accounting reforms to
improve corporate governance practices, restore investors’ confidence in listed
companies and promote stock market reform in the country. The most proper work of an audit committee is
usually seen in terms of directors’ connections; risk management; and quality
of reporting; the quality of audit; and the selection of external auditors (Abbott,
2014). Furthermore, those studies that have examined the effect of the audit
committee on corporate performance in underdeveloped countries have provided
conflicting results.
In case of
the agency theory, the conflict between managers and owners often motivates
managers to act in their own best interest and against those of shareholders,
especially when opportunistic behavior is involved in the process (Jensen &
Meckling, 1976; Issham 2011). Therefore, in an environment without monitoring
tools and effective market regulations, managers are more likely to deviate
from protecting the shareholders’ interests. Thus, the existence of successful
and effective corporate governance practices such as an audit committee is
essentially to reduce such conflicts (Klein, 2012), and to achieve good
performance. Corporate governance literature always argue that audit committee
participates, not only in the process whereby management disseminate
information to the auditors and releasing unbiased information, reducing
information asymmetry between insiders and outsiders; but also play an
important role in ensuring that statutory auditors are not in the influence of
management, therefore audit committees can be used as a mechanism to reduce
agency problems faced by firms (Jensen & Meckling, 1976). The composition
and character of the audit committee play a significant role in influencing
quality of an organization performance (Cadbury, 1992).
In the
midst of recent economic downturn, there has been increased demand for good
corporate governance and accountability (Bonn, 2004). Additional regulations
have also been increased (Bonn, 2004). Several studies and reports have emphasized
that the audit committee characteristics and composition to consist of
independent non-executive directors, who are less likely to be influenced by
the managers to get desired financial performance. Prior studies in developing
countries such as Nigeria have shown the challenge that many audit committee
members do not possess the required skills, education and expertise to act as members of audit committee in order to
perform their roles optimally (Chouchene, 2010). They also showed the existence
of management challenge to an apparent lack of available non-executive
directors (NEDs) with the required business knowledge and accounting background
who are willing to serve on audit committees (Abdullah, 2001). Most previous
studies (Katunde & Samaila, 2015; Madawaki & Amran, 2013) have explored
the relationship between various characteristics on the board and company
performance with no focus on commercial banks which play a critical role in
developing countries. The current study therefore is set to empirically test
the effect of audit committee attributes and financial performance of commercial
banks in Nigeria. These attributes are size, independence and frequency of
audit committee meetings hence providing evidence for the view that performance
is driven by specific audit committee attributes. Thus, the aimed to examine the effect of audit
committee attributes on financial performance of listed commercial banks in
Nigeria.
1.2 STATEMENT OF THE PROBLEM
The corporate
scandals such as Enron, Global Crossing, Tyco, and WorldCom have shaken the
Investors' confidence and made it difficult for companies to raise equity from
the stock market (Agrawal, 2005). Commenting on these scandals, many reports
believed that the board of directors and its committees do not have a good
supervision on the management. Bedard and Gendron (2010), opined that financial
scandals around the world and the recent collapse of major corporate
institutions like Enron, WorldCom, and Satyam have shaken investor’s faith in
the capital markets and the efficacy of existing corporate governance practices
in promoting transparency and accountability. Good corporate governance like
audit characteristics is an important step in building market confidence and
encouraging more stable, long-term international investment flows (Bergstresser
& Philippon, 2006). For example, Enron manipulated its financial statements
through off - position statement financing. Therefore, the board was unable to
disclose the distorted statements because the board lacked the necessary certain
qualifications and independence from senior executives (Deakin &
Konzelmann, 2004).
Moreover, World
Com materially overstated its earnings and finally filed for bankruptcy. The investigation
showed that the audit committee failed to effectively oversee the managers
duties (Weiss, 2005). Consequently, these well-publicized corporate scandals
together with the Nigerian economic recession crisis recently have highlighted
the importance of good corporate governance practices for the long-term
survival of companies (Mustapha, Daud & Muhamad, 2009). There have been
massive fraud and unethical practices within and among a number of
organizations in Nigeria (Mustapha, et al., 2009). The recent insider trading,
massive and prevalent fraud, due to corrupt practices and inefficient rubber
stamped boards have combined to the absence or failure of the existing firm
performance (Mustapha, Daud & Muhamad, 2009). The events have serious
devastating effect on stakeholders in terms of losses in their investment. The
events also resulted in the loss of hundreds of jobs especially in the non
financial sector and drastic drop in the share price of most listed companies
on the Nigerian Exchange Group. The shock to the stakeholders and the public
led to the yet unanswered question of, “how” such event could have happened
when companies were declaring billions of naira in profit. Therefore, the trust
which investors had on the credibility and the quality of financial report
presented by the management of the companies could no longer be sustained as
they were considered misleading. Hence, a higher need to protect stock holders,
interest so as not to have another overwhelming shock becomes imperative. The
importance of an audit committee is increasingly being acknowledged in the
literature, yet very little work has been done on board committees in emerging
economies.
The literature on
effect of audit committee attributes on firm performance in an emerging and recessed
economy like Nigeria is scarce. Thus, it is needful to conduct this study in
the Nigerian context to investigate the role of audit committee attributes as
it relates to the concept of interest, bearing in mind the current economic
recession being experienced in Nigeria where several quoted corporate
organizations are facing cash crush challenges which is adversely affecting
their operations.
1.3 OBJECTIVES OF THE STUDY
The main objective
of the study is to examine the effect of audit committee attributes on
financial performance of listed commercial banks in Nigeria.
The specific
objectives include:
(i)
To examine the effect of audit committee attributes(audit
committee independence, audit committee size and frequency of audit committee
meeting) on return on asset of listed commercial banks in Nigeria.
(ii)
To determine the effect of audit committee attributes(audit
committee independence, audit committee size and frequency of audit committee
meeting) on return on equity of listed commercial banks in Nigeria.
(iii)
To evaluate the effect of audit committee attributes(audit
committee independence, audit committee size and frequency of audit committee
meeting) on earnings per share of listed commercial banks in Nigeria.
(iv)
To examine the effect of audit committee attributes(audit
committee independence, audit committee size and frequency of audit committee
meeting) on profit after tax of listed commercial banks in Nigeria.
1.4 RESEARCH QUESTIONS
The
following questions guided the study
(i)
What is the effect of audit committee attributes(audit
committee independence, audit committee size and frequency of audit committee
meeting) on return on asset of listed commercial banks in Nigeria?
(ii)
To what extent do audit committee attributes (audit committee
independence, audit committee size and frequency of audit committee meeting)
effect return on equity of listed
commercial banks in Nigeria?
(iii)
What is the effect of audit committee attributes(audit
committee independence, audit committee size and frequency of audit committee
meeting) on earnings per share of listed commercial banks in Nigeria?
(iv)
Do audit committee attributes (audit committee independence,
audit committee size and frequency of audit committee meeting) affect profit
after tax listed commercial banks in Nigeria?
1.5 RESEARCH HYPOTHESES
For the purpose
of the study, the following hypotheses were tested
(i) Audit committee
attributes (audit committee independence, audit committee size and frequency of
audit committee meeting) have no significant effect on return on asset of listed
commercial banks in Nigeria.
(ii) Audit committee
attributes (audit committee independence, audit committee size and frequency of
audit committee meeting) have no significant effect on return on equity of
listed commercial banks in Nigeria.
(iii)
Audit committee
attributes(audit committee independence, audit committee size and frequency of
audit committee meeting) have no significant effect on earnings per share of
listed commercial banks in Nigeria.
(iv) Audit committee attributes(audit committee
independence, audit committee size and frequency of audit committee meeting)
have no significant effect on profit after taxof listed commercial banks in
Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The study will be
significant to the following group of people; banks, investors, academicians, scholars
and researchers.
Banks: In the reform platform, audit committees play a vital
role in enhancing corporate governance in commercial banks by providing
oversights over the organizational governance, including the organization’s
system of internal controls. Therefore, an audit committee that operates
effectively is a key feature in a strong corporate governance culture, and can
bring significant benefits to the entity.
The findings and recommendations of this study will also help corporate
organizations to set up rules and regulations that will be guiding audit
committee activities such as number of meetings, level of qualification,
duration in office among others that will help in enhancing financial reporting
quality.
Investors:
Investors
are the stakeholders as well as the shareholders of every corporate
organization. Investors need to be confident before making their decision on
whether to invest in a particular organization or not. However, the quality of
financial reporting is the major determinant of investors decision making.
Also, the determinant of financial reporting quality is based on the audit
committee attributes. However, the findings of this study will enlighten
investors on how audit committee attributes can affect the quality of financial
report. Thereby, making them to rely on audit committee attributes when trying
to ascertain the quality of financial reporting.
Academicians
and Scholars: The study will also provide empirical findings that may be of
importance to researchers and students in the areas of Finance, Accounting and
Audit. These findings may be used to improve understanding of the concept of
audit committees in corporate organization and suggest various ways of
improving their effectiveness in their roles of vetting the quality and
integrity of financial statements of corporations. Additionally, the study may
result in an improved understanding of the relationships between the audit
committee attributes and financial reporting. The study findings will be an
addition to existing literature on audit committees in Nigeria as well as give
comparison to similar past studies conducted
in developed and developing economies on audit particularly for corporate organizations.
1.7 SCOPE OF THE STUDY
The
study centered on audit committee attributes and financial performance of
listed commercial banks in Nigeria. The study covered a ten years period from
2011 to 2020. The period was chosen because of the recent failure of some corporate
organizations in Nigeria which could be attributed to inefficiency of audit
committees. Also, the 2011 is the adoption year of IFRS and companies are
expected to adhere to IFRS standard by reporting their audit committee
attributes. The study focused more on how audit committee independence, audit
committee size, audit and committee meeting affect financial performance of
listed commercial banks in Nigeria.
1.8 LIMITATION OF THE STUDY
The limitation of this study is the unavoidable constraints and problems
encountered in the process.
Non-availability of records: This is one of
the most important limiting factors in the course of the study. This includes
the problems of easily getting the appropriate data due to bureaucracy which
hinders the information flow in the country. In spite of this, the researcher
is poised to making the best use of the available record to get the job
properly done.
1.9 OPERATIONAL DEFINITION OF TERMS
For easy understanding, the
following operational terms are defined below:
Audit committee: Audit committee is an operating committee of the board of directors
charged with oversight of financial reporting and disclosure. The role of audit committees continues to evolve
as a result of the passage of the Sarbanes-Oxley Act (SOX) of 2002.
Board size: For the purpose
of defining the size of boards, the study shows that the
smallest board size had an
average of 10 board directors.
The study defines large boards
as those that have 14 or more board
directors. Of the companies studied, boards
had an average of 11 board
directors overall.
Board Meeting: A board meeting is a
formal periodic gathering of a Board of
Directors. Most of the organizations, being public or private, profit or
non-profit, are ultimately governed by a body commonly known as Board of Directors. The members of
this body cyclically meet to
discuss strategic matters.
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