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 of the Study
1.2 Statement of the Problem
1.3 Objectives of the Study
1.4 Research Question
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the Study
1.8 Limitations
of the Study
CHAPTER TWO
REVIEW OF RELATED
LITERATURE
2.0 Introduction
2.1 Conceptual
Framework
2.1.1 Concept
of Audit Quality
2.1.2 Dimensions
of Audit Committee Attributes of the Study
2.1.2.1 Audit
Committee Independence
2.1.2.2 Audit
Committee Meeting
2.1.2.3 Audit
Committee Size
2.1.3 Other
Dimensions of Audit Committee Attributes
2.1.3.1 Audit
Committee Financial Expertise
2.1.3.1 Audit
Committee Diligence
2.1.4 International
Financial Reporting Standards and Accounting Choices
2.2 Theoretical
Framework
2.2.1 Agency
Theory
2.2.2 Resource
Dependence Theory
2.2.3 Stakeholder’s
Theory
2.3 Some
Empirical Studies
2.4 Synthesis
of Empirical Studies
2.5 Gap of
Study
2.6 Conceptual
Model of the Study
CHAPTER THREE
RESEARCH METHODS
3.0 Introduction
3.1 Research
Design
3.2 Study
Population
3.3 Sample
and Sampling Technique
3.4 Method
of Data Collection
3.5 Model
Specification
3.6 Method
of Data Analyses
CHAPTER FOUR
DATA PRESENTATION, ANALYSES AND DISCUSSION OF RESULTS
4.1 Presentation of Data
4.2 Pre-Estimation Analyses
4.2.1 Descriptive Statistics
4.2.2 Correlation Analysis
4.2.3 Other Diagnostic
Tests
4.2.3.1 Result of Multicolinearity Test Using Variance
Inflation Factor (VIF)
4.2.3.2 Result of the Test of Heteroskedasticity
4.3 Test of Hypotheses
4.4 Discussion of Finding
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings
5.2 Conclusion
5.3 Recommendations
5.4 Contribution
to Knowledge
5.5 Suggestions
for Further Study
References
Appendix I: List
of Companies Studied
Appendix II: Detailed Output of Statistical Results
LIST OF TABLES
Table 2.1: Synthesis of Empirical Studies
Table 3.1: Measurement of Variables
Table 4.1: Summary
of Descriptive Statistics of the Variables of the Study
Table 4.2.: Result
of Correlation Analysis
Table 4.3:
Variance Inflator Factor Results for Independent Variables
Table 4.4: Result
for Breusch-Pagan/Cook Weisberg Test
Table 4.5: Results
of Model I and Test of Hypothesis I (ACQUAL and ACS)
Table 4.6: Results
of Model II and Test of Hypothesis II (ACQUAL and ACI)
Table 4.7: Results
of Model III and Test of Hypothesis III (ACQUAL and ACM)
LIST OF FIGURE
Fig. 1: Conceptual Model of the Study
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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