AUDIT COMMITTEE ATTRIBUTES AS DETERMINANTS OF AUDIT QUALITY: EVIDENCE FROM NON-FINANCE SECTOR IN NIGERIA
ABSTRACT
The audit committee (AC) is considered an important subcommittee of the board responsible for ensuring quality financial reporting and compliance with regulatory provisions. The objective of this study was to analyze the determinants of audit quality in the Nigerian business environment. The research empirically examined the relationship between audit quality, engagement and firm related characteristics such as audit tenure, audit firm size, board independence and ownership structure. A regression model was used to analyze the existence of significant relationships between audit quality and the firm/audit related characteristics. Audit firm size, board independence and ownership structure were found to be positively related to audit quality; however, only board independence exhibited a significant relationship with audit quality. Audit tenure exhibited a negative relationship with audit quality which was also not significant. The study recommends the sustenance and possible improvements on the non-executive board composition of organizations.
TABLE OF CONTENTS
TITLE PAGE - - - - - - - ii
DECLARATION - - - - - - - - iii
CERTIFICATION - - - - - - - - iv
DEDICATION - - - - - - - - v
ACKNOWLEDGEMENTS - - - - - - vi
ABSTRACTS - - - - - - - - ix
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study - - - - - - 1
1.2 Statement of Problem - - - - - - 4
1.3 Objective of the Study - - - - - - 4
1.4 Research Questions- - - - - - - - 5
1.5 Statement of the Hypothesis - - - - - 5
1.6 Significance of Study - - - - - - 6
1.7 Scope of the Study - - - - - - - 6
1.8 Limitations of the study - - - - - - - 7
1.9 Operational definition of Key Terms - - - - 7
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Review - - - - - - - 8
2.1.1 Audit committee Attributes - - - - - - 9
2.1.2 Concept of Fair value- - - - - - 14
2.2 Theoretical Review - - - - - - - 20
2.3 Empirical Review - - - - - - - 22
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design - - - - - - - 27
3.2 Population of the Study - - - - - - - 27
3.3 Sample Size - - - - - - - - 27
3.4Sampling Technique - - - - - - - 27
3.5 Method of Data Collection - - - - - - 28
3.6 Technique for Data Analysis - - - - - - 28
3.7 Model Specification and Variable Definition - - - - 29
3.8 Measurement of Variables - - - - - - 29
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation of Data - - - - - - - 31
4.2 Discussion of Findings - - - - - - 43
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary - - - - - - - - 46
5.2 Conclusion - - - - - - - 47
5.3 Recommendations - - - - - - - 48
References - - - - - - - - 50
Appendix - - - - - - - - 53
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The issue of audit committee attributes and audit quality of corporations has attracted robust debates in accounting literature. This issue stems from the contention that attributes of audit committee drive quality of audit in Nigeria, the world over. Notwithstanding the above, the relationships between audit committee attributes and audit quality has been supported by prior studies conducted by Kibiyaa, Ahmada and Amran (2016); Ghafran and O'Sullivan (2017); Asiriuwa, Aronmwan, Uwuigbe and Uwuigbe (2018); Sukma and Bernawati (2019); and Akpan and Nsentip(2020); these studies perhaps, provide both theoretical and empirical foundation for assessing whether audit committee attributes significantly affect audit quality.
Broadly speaking, the term audit refers to a systematic and independent investigation of the books, accounts, statutory records, documents and vouchers of corporations with a view to ascertaining the true and fair view of the financial position maintained by management.Noteworthy is the fact that in order to ascertain the true and fair view of financial position of companies, committees of audit (otherwise referred to as audit committee) is established. Conventionally, the foremost role of the audit committee has been to monitor the integrity of financial statements produced by management.
In the views of Mohammed, Joshua, Yahaya and Dikki (2017), audit committee primary duties are to oversee financial reporting, auditing process as well as monitoring management tendencies to tweak reported earnings and other accounting numbers in financial statements.In fact, audit committees are envisaged as contributing to the auditing process since they are established to assist in improving audit quality (Said, Zainuddin&Haron, 2009). Similarly, Robinson and Owen-Jackson(2009) see audit committee as selected members of companies who take an active role in overseeing the accounting and financial reporting activities of the company.
Haron, Jantan and Pheng (2005) assert that audit committeeis a standing committee setup by the board with objective of contributing to effective corporate governance and ensuring reliable and quality financial statements disclosure. Again, audit committee facilitates the monitoring activities of businesses; ensure greater audit quality expertise of members and regular meetings of audit committee. Thus, audit committee serve as liaison between the external auditor and the board of directors; the purpose according to Samuel, Madzamir and Mohammed (2012) of which is to acceleratemonitoring process of accounting information so as to decrease information asymmetry between the external auditor and the board of directors.
In recent times, the role of audit committeeshas increasingly becomevital in governance mechanisms of numerous companies, given its fundamental place in enhancing the quality of audit. De-Angelo (1981) provides that audit quality is an assessment by the market of the combined likelihood that an auditor will concurrently discover abnormalities or significant irregularities in clients’ accounting system and publish such abnormalities and irregularities.Notably, audit quality refers to the ability of an audit to exercise, detect material errorsand fraud leading to material misstatements in financial statements where such exist. It is thus reasonably logical to see audit quality in the light of assurance in view of the fact that audit provides assurance on the financial statements and quality of audit
Mohammed, et al (2017) opined that audit quality is the outcome of an audit conducted in accordance with the Generally Accepted Auditing Standards (GAASs) aimed at providing reasonable assurance that the audited financial statement and related disclosures are presented in accordance with GAASprinciples. Furthermore, audit quality is an indication that financial statements are not misstated whether due to errors or fraud by management. To this effect, one of the imperative issues of the auditing profession has been attaining audit quality. Besides, audit committee as it relates to audit quality has two (2) components - audit competence and audit independence.
According to De-Angelo (1981), the two components inter-alia must be present in order for audit quality to be attained or established. First, auditors must be competent in terms of exercising diligence and due care in audit process; this component implies audit committee expertise in disclosing material misstatements towards ensuring the quality of audit;second, auditors must show some high level of integrity and objectivity such that they are capable of not being influenced by management of companies; this componentindicates audit committee independence in disclosing material misstatements in order to ensure audit quality.
Notwithstanding the two components inter-alia(audit competence and audit independence), prior studies have shown that audit committee size affectaudit quality (see Mohammed, et al, 2017; Samuel, et al, 2012; and Said, et al, 2009). Given the viewpoints of prior studies, this study adopts selected audit committee attributes (audit committee size, audit committee independence and audit committee meeting) so as to see if the attributes of audit committee significantly affect audit quality of selected non-finance companies publicly quoted on the floor of the Nigerian Stock Exchange.
1.2 Statement of the Problem
While there are robust empirical evidences on the relationship between audit committee attributes and audit quality in developed countries; to the researcher’s knowledge, there are scanty empirical studies in developed countries like Nigeria. More worrisome is the fact that few empirical studies that examined audit committee attributes and audit quality in Nigeria had used several metrics of audit committee attributes like audit committee independence, committee size and audit committee expertise. Moreover, other attributes such as audit committee meeting and the moderating role of firm size in relation to their effects on audit quality has not been deeply researched, particularly in the Nigerian context.
Furthermore, prior studies on audit committee attributes and audit quality had focussed on finance companies without due attentiveness on whether audit committee attributes affect audit quality of non-finance companies in Nigeria. Consequent upon the above, there is limited consensus in accounting literature as to whether audit committee attributes such as audit committee independence, audit committee size and audit committee meeting will affect audit quality of non-finance companies in Nigeria; this requires empirical inquiry, which this study attempts to satisfy.
1.3 Objectives of the Study
The broad objective of this study is to investigate the effect of audit committee attributes on audit quality of non-finance firms in Nigeria. The specific objectives are:
1. To examine the effect of audit committee size on audit quality of publicly quoted non-finance firms in Nigeria.
2. To determine the effect of audit committee independence on audit quality of publicly quoted non-finance firms in Nigeria.
3. To ascertain the effect of audit committee meetingon audit quality of publicly quoted non-finance firms in Nigeria.
1.4 Research Question
In view of the specific objective of the study, the following research questions were raised to guide the investigation:
1. What effect does audit committee size have on audit quality of publicly quoted non finance firms in Nigeria?
2. To what extent does audit committee independence affect audit quality of publicly quoted non-finance firms in Nigeria?
3. To what extent does audit committee meetingaffectaudit quality of publicly quoted non-finance firms in Nigeria?
1.5 Research Hypotheses
Correspondingly, the following research hypotheses were formulated and validated at 0.05% level of significance:
Hypothesis I
Ho: There is no significant relationship between audit committee size and audit quality.
Hypothesis II
Ho: Audit committee independence has no significant relationship with audit quality.
Hypothesis III
Ho: There is no significant link audit committee meetingand audit quality.
1.6 Significance of the Study
The findings of this study will be of immense importance to all shareholders, management and accounting researchers alike. First, for stakeholders, this study will augment the understanding or depth of knowledge on how audit committee attributes affect audit quality.Second, for management, this study will enlighten them on the implication of audit committee attributes as well as the adverse effect it may have on audit quality.
Consequently, this study therefore takes a more comprehensive route as it aims to identify the extent to which audit committee attributes affect audit quality. Finally, for accounting researchers, the outcome of this study will contribute to the accounting literature on audit committee attributes and audit quality as well as a secondary source to researchers in the field of accountancy; the results will also provide useful evidence to Nigeria, the world over.
1.7 Scope of the Study
This study seeks to investigate the nexus between audit committee attributes and audit quality in Nigeria. However, the study is delimited in scope to publicly quoted non-finance companies and the study period spans 2012– 2019 (i.e. a period of 7years). The choice of the period under investigation is based on the fact that this period witnessed improvements in financial reporting as a result of adoption and implementation of International Financial Reporting Accounting Standards (IFRS) across the globe coupled with the high demands for quality audit in most capital markets of the world, including Nigeria.
Furthermore, data of audit committee attributes (measured by audit committee size, audit committee independence, audit committee meeting) audit quality (dummy variable of one (1) if the company auditor is a Big-4 and Zero (0) if otherwise), controlled by firm size (the natural log of total assets) were obtained from the annual reports and accounts of selected publicly quoted non-finance firms in Nigeria.
1.8 Limitations of the Study
This study is constrained in the area of unavailability and consistent data set for all the firms publicly quoted on the floor of the Nigerian Stock Exchange, hence the study was limited to fifty-seven (57) non-finance firms. The identified limitations were surmounted by ensuring that all firms were duly represented in the study sample for purpose of generalization. Regardless of the limitations of the study, the outcome of the study was not hampered.
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