Abstract
This
study examined the effect of audit committee characteristics and audit quality.
The broad objective of this study was to examine the impact of audit committee
features on audit quality of Nigerian listed firms. It made use of thirty (30)
firms quoted on the Nigerian Stock Exchange between 2006 and 2015. Descriptive
statistics, correlation analysis as well as regression techniques were used to
analyze the data used for the study. The study revealed that audit committee
independence, audit committee size and frequency of audit committee meetings
had a significant relationship with audit quality, while financial expertise of
audit committee had an insignificant relationship with audit quality. The study
concludes that effective
corporate governance mechanisms put in place in a firm help guarantees audit
quality by effectively monitoring the activities of auditors.
The study recommends that firms should ensure that the independence of their
audit committee is guaranteed and also should be composed of men and women with
sound knowledge in accounting and audit related matters.
TABLE OF CONTENTS
Title Page i
Certification ii
Dedication iii
Acknowledgments iv
Abstract v
Table of Contents vi
Chapter
One: Introduction
1.1
Background to the Study 1
1.2
Statement of Problem 4
1.3
Research Questions 6
1.4 Objectives of the Study 7
1.5
Statement of Hypotheses 7
1.6 Significance of the Study 9
1.7 Scope
of the Study 10
1.8
Limitations of the Study 10
1.9
Definition of Terms 11
Chapter
Two: Review of Related Literature
2.1 Introduction 12
2.2 Literature
Review 12
2.2.1 Audit
quality 12
2.3 Relationship between Independent Variables
and Dependent Variable 18
2.3.1 Independent directors in audit committee
and audit
quality 8
2.3.2 Presence of financial expertise in audit
committee and audit quality 24
2.3.3 Frequency of audit committee meetings
and audit quality 30
2.3.4 Audit
committee’s size and audit quality 34
2.4 Theoretical
Underpinning for the Study 37
2.4.1 Stakeholder
theory 37
Chapter Three: Research
Methods and Design
3.1
Introduction 41
3.2 Research design 41
3.3
Description of the Population of the
Study 41
3.4 Sample Size 42
3.5
Sampling Techniques 42
3.6
Sources of Data Collection 42
3.7
Method of Data Presentation 43
3.8 Method of Data Analysis 43
Chapter Four: Data Presentation, Analysis and
Hypotheses Testing
4.1
Introduction 45
4.2
Presentation of Data 45
4.3 Data Analysis 47
4.4 Hypothesis Testing 54
Chapter
Five: Summary of Findings, Conclusion
and
Recommendations
5.1
Introduction 57
5.2 Summary of Findings 57
5.3
Conclusion 57
5.4
Recommendations 58
References 60
CHAPTER
ONE
INTRODUCTION
1.1 Background
to the study
The turbulent effects of the global financial crisis
have highlighted the critical importance of credible high quality financial
reporting. Achieving quality financial reporting depends on the role that the
external audit plays in supporting the quality of financial reporting of quoted
companies. Audit quality is one of the most important issues in audit practice
today. Several individuals and groups both internal and external, have interest
in the quality of audited financial information (Hundal,
2013; Antle & Zhou, 2006; Karami & Ahkagar, 2014). The financial
statement audit is a monitoring mechanism that helps reduce information
asymmetry and protect the interests of the various stakeholders by providing
reasonable assurance that the management’s financial
statements are free from material misstatements. The societal
role of auditors should be a key contribution to quality of audit of firms, in
terms of reducing the risks of significant misstatements and by ensuring that
the financial statements are elaborated according to preset rules and
regulations. Lower risks on misstatements increase confidence in capital
markets, which in turn lowers the cost of capital for firms (Karami &
Ahkagar, 2014).
There have been concerns about audit quality in the
present environment, where severe failures have come to light, for example;
Enron scandal of 2001; Parmalat in 2003; Cadbury Nigeria Plc in 2006 and
Afribank Nigeria Plc in 2009 (Ajani, 2012; Miettinen, 2011). These highly
publicized accounting scandals have greatly shaken the investors’ confidence
and the integrity of the corporate financial reporting in the world. In order
to restore the investors’ confidence, a number of efforts have been taken to
reform the corporate governance. The cases of accounting improprieties on those
giant and international companies also indirectly captured the attention of
investors and regulators in other developing countries. The search for
mechanisms to ensure reliable, high quality financial reporting has largely
focused on the structure of audit committees, whose function is to oversee the
financial reporting process as well as the audit of financial statements
(Adeyemi, Okpala & Dabor, 2012). Quite understandably, expectations will be
high on the audit committees to be more active and participative in ensuring
the proper management of the companies. Audit committees are expected to
resolve the agency conflicts and thus enhance the quality audit. Given the
importance of audit committee, listed companies in Nigeria are required to include
in their annual reports, a report on the composition, frequency and attendance
of meeting, terms of reference and summary of activities carried out by the
audit committee and summary of internal audit activities (Abbott & Parker,
2000).
Madawaki and
Amran (2013) reported that lack of effective audit committee practice is a
factor behind rigorous financial problems of companies. A system of good
corporate governance fosters a system of accountability. The essence of the
audit committee is based on two strands of accountability; first, management’s
accountability to the board, second, board’s accountability to the
shareholders. The audit committee’s role stems directly from the board’s
oversight function as it oversees, both, internal as well as external, audit
processes of the firm (Bédard, Chtourou & Courteau, 2004; Lee, Mande, &
Ortman, 2004).
1.2 Statement of Problem
One of the foremost functions of the audit committee is to
review the financial data of the company on continuous basis and strengthen internal
accounting controls, in order to enhance reliability and integrity of financial
reporting. A good system of corporate governance requires a thorough
co-ordination among the three constituents of audit viz. the board, the
internal auditors and the external auditors (Hundal, 2013). The 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 (Hundal, 2013). Therefore audit committees can be used as a
mechanism to reduce agency problems faced by firms. The composition and
functioning of the audit committee play significant role in influencing quality
of audit (Krishnan & Lee, 2009).
Several studies (Karami & Akhgar, 2014; Jaggi &
Leung, 2007; Dopuch, King & Schwartiz, 2001; Mgbame, Eragbha & Osazuwa,
2012; Healey & Kim, 2003) have attempted to analyze some explanatory
variables for the state of audit quality. In view of these studies, audit
committee attributes has become the focus of much debate. Studies on the effect
of audit committee characteristics on audit quality are at divergent. The spate
of audit failure in the world, especially in Nigeria, has brought great
disappointments to the users of financial reports. The bane of the problem has
been linked to lack of effective oversight of audit committee which has also
been linked with creative accounting. In Nigeria audit setting, the challenge
of audit committee and audit quality reporting has not attracted much empirical
studies beyond mere anecdotal opinions (Mgbame, Eragbha & Osazuwa, 2012).
Given
the above scenario, the major problem of this study is to determine whether
audit quality can significantly be influenced by audit committee
characteristics of Nigerian Listed firms. The study attempts to ascertain and
establish whether there are significant relationships between audit committee
characteristics and Audit quality in Nigerian Listed firms.
1.3 Research
Questions
In
light of the above, this study seeks to address the following research
questions.
1. Does
independent director in audit committee have impact on audit quality of
Nigerian Listed Firms?
2. What is
the relationship between audit committee’s size and audit quality of Nigerian
Listed Firms?
3. What is
the relationship between financial expertise of audit committee and audit
quality of Nigerian Listed Firms?
4. Does
frequency of audit committee meetings impact audit quality of Nigerian Listed
Firms?
1.4 Objective of the Study
The broad objective of this study was to examine the
impact of audit committee features on audit quality of Nigerian listed firms.
The specific objectives were to:
1. examine
whether independent directors in audit committee have impact on audit quality
of Nigerian listed firms.
2. ascertain
the relationship between audit committee’s size and audit quality of Nigerian
listed firms.
3. determine
the relationship between financial expertise of audit committee and audit
quality of Nigerian listed firms.
4. evaluate
the impact of the frequency of audit
committee meetings on audit quality of Nigerian Listed Firms.
1.5 Statement of Hypotheses
In carrying out this study, the following hypotheses
were tested and they were stated in a null and alternate forms.
Hypothesis One
HO: Independent director in
audit committee has no significant impact on audit quality of Nigerian Listed
Firms.
HI: Independent director in
audit committee has significant impact on audit quality of Nigerian Listed
Firms.
Hypothesis Two
HO: There is no significant relationship between
audit committee’s size and audit quality of Nigerian Listed Firms.
HI: There is significant relationship between
audit committee’s size and audit quality of Nigerian Listed Firms.
Hypothesis Three
HO: There is no significant relationship between
financial expertise of Audit Committee and audit quality of Nigerian Listed
Firms.
HI: There is significant
relationship between financial expertise of Audit Committee and audit quality
of Nigerian Listed Firms.
Hypothesis
Four
HO: The frequency of audit committee meetings has
no significant impact on audit quality of Nigerian Listed Firms.
HI: The frequency of audit committee meetings
has significant impact on audit quality of Nigerian Listed Firms.
1.6 Significance
of the study
The importance of auditing can be illustrated under
the principal-agent relationship. The demand for external audits is directly
related to the fact that it is the directors (the agents) who prepare the
financial statements, which is primarily based on cost reasons. Therefore, this
study is expected to provide useful insight into improving audit quality. This
study will contributes to the audit literature as it provides additional
empirical evidence on the impact of audit committee on audit quality of Nigerian
listed firms. This study will be useful to stakeholders in the Nigerian Stock
Exchange (NSE) as it provides evidence on the relationship between audit
quality and therefore instituted by them in formulating the Code of Corporate
Governance for listed companies in Nigeria.
1.7 Scope of the Study
The
study is premised on audit committee characteristics and audit quality of
Nigerian listed firms. The study made use of 2006 to 2015 data from the
Nigerian Stock Exchange. Emphasis was placed on all the companies listed on the
first tier market (main market) of the Stock Exchange with data during the
period under review. A sample size of thirty (30) companies
quoted on the Nigeria Stock Exchange was used for effective correlation.
1.8 Limitations
of the study
The major limitation of
the study as it was with several studies in developing economies was data
accessibility and accuracy. Also, there was the challenge of inappropriate
measurement of variables. Another challenge faced in the course of this field
work was time factor and inadequate funds.
1.9 Definition of Terms
1. Audit: This is a
formal examination of an organization or individual’s account or financial
situation.
2. Quality:
A distinctive attribute or characteristic possessed by someone or
something.
3. Finance:
This studies and address the ways in which individuals, businesses and
organizations raise, allocate and uses monetary resources over time, taking
into account the risks entailed in their projects.
4. Committee:
A group of people who are chosen to do a particular job or to make
decisions about something.
5. Company size: This
is the operational scale of a business that determine the organizational
structure that optimizes efficiency and managerial capacity.
6. Auditor
Independence: It refers to the independence of the internal auditor or of
the external auditor from parties that may have a financial interest in the
business being audited.
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