This study investigates the relation between audit
committee quality, auditor independence and the internal control weakness after
the enactment of the Sarbanes-Oxley Act. The main aim of this study is to
investigate the relationship between audit committee roles and the quality of
financial reporting in Nigeria.
The primary source of data collection was used in gathering data from
respondents. A structure questionnaire was designed by the researcher and
validity by two experts from the statistics department was used to obtain data
Chi-Square (X2) was used to test hypotheses formulated. It was
discovered that that audit committee is associated with the quality of internal
control in Nigeria
business environment. The study concludes that the financial statement is
majorly the responsibility of the management and that the external auditor
expresses a detached judgment. It was recommended among others that audit
committee should be reformed and its members should be well equipped with
adequate accounting knowledge, skills and proficiency and also be independent
TABLE OF CONTENTS
Background to the Study
Statement of Problems
Objectives of the Study
Statement of Hypothesis(es)
Significance of the Study
Scope of the Study
Limitation of the Study
Definition of Terms
Two: Review of Related
2.2 The Board
2.3 Audit Committee
Audit from other Services
2.8 The Audit
Committee as Catalyst for Effective Financial Reporting
Responsibility for Outside Auditor’s
Three: Research Method and Design
Description of Population of the Study
Sources of Data Collection
Method of Data Presentation
Method of Data Analysis
Four: Data Presentation, Analysis and Interpretation
4.2 Data Presentation
4.3 Data Analysis
4.4 Hypothesis Testing
Five: Summary of Findings, Conclusion and Recommendations
5.2 Summary of Findings
Background to the Study
the financial reporting process to be more effective, auditors’ independence
must be vigorously monitored, and one potential mechanism that could aid
auditors’ independence is for external auditors and audit committees to work
more closely together (Levitt, 2000). The Sarbanes Oxley Act (hereafter SOX) of
2002 and the Securities and Exchange Commission (SEC) rules introduced to carry
out the directions of the Act indicate that improving corporate internal
control is an important policy initiative (U.S. House of Representatives 2002).
The SEC now requires Chief Executive Officers (CEOs) and Chief Financial
Officers (CFOs) to certify annually and quarterly about the effectiveness of
their corporate internal control (SEC, 2002). Further, the SEC has announced
rules for the implementation of Section 404 of the Sarbanes-Oxley Act,
requiring every registrant to include an internal control report in its annual
report, and its independent auditor to issue an “attestation report on
management’s assessment of the company’s internal control over financial
reporting” (SEC 2003).
to the IIA, objectivity is an unbiased mental attitude that allows internal
auditors to perform engagements in such a manner that they believe in their
work product and that no quality compromises are made. Objectivity requires
that internal auditors do not subordinate their judgment on audit matters to
others. Threats to objectivity must be managed at the individual auditor,
engagement, functional, and organizational levels. Thus, due to lack of
independence and objectivity, Nigerian Banks have been known with so much
corruption that the Chief Internal Auditors doctor the internal audit reports
to appease the MD/CEO and deceive the regulatory authorities (e.g., CBN, SEC
and NDIC). The recent shame currently going-on in the industry is rooted in the
lack of independence and objectivity by both the internal and external
emphasis on good internal control of course arises because it is considered to
be an important factor in achieving good quality financial reporting. Among the
numerous criticisms leveled at Enron Corporation regarding its financial
reporting was the charge of a failure in its internal control (Verschoor 2002).
It is therefore important to examine monitoring mechanisms corporations can use
to ensure the effectiveness of their internal control. Establishing and
maintaining proper internal control is the responsibility of management. One
monitor of an entity’s internal control is its audit committee. Although not
mandated by SEC rules, the accounting profession and policy makers have
maintained that a primary function of the audit committee should be the
oversight of internal control. Anecdotal evidence (e.g., disclosures in proxy
filings) and academic research suggest audit committee do view monitoring
internal controls as one of their functions.
and Neal (2002) report that 91 percent of a random sample of corporate audit
committee charters list reviews of internal controls as of the duties of the
audit committee. Recently, the SEC (2003) has mandated that all material
written communications between a company’s accountant and management be
provided to the entity’s audit committee, and this includes “reports on
observations and recommendations on internal controls.” The
implication is that an entity’s internal controls should be under the purview
of its committee. Because the audit committee is expected to monitor the
entity’s internal control, we posit a positive association between audit
committee and internal control quality. What constitutes a good audit committee
however is not clear. In 1999, the major exchanges introduced new requirements
for the size, independence and expertise of corporate audit committees with a
view to improving financial reporting. In its endorsement of the exchanges,
proposals to revise audit committee requirements, the SEC quoted the Blue
Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit
Committees (BRC) to argue that, under the new requirements, audit committee
directors would be “more likely to objectively evaluate the property of
management’s accounting, internal control, and financial reporting practices”
(SEC 1999) (emphasis added). However, given the skepticism about the
effectiveness of audit committee independence following recent disclosures
about the composition of Enron’s audit committee (which was independent as
defined by the SEC), and concerns about the adequacy of the audit committee
expertise requirement (Whitehead, 2002), it is an open question whether the
audit committee independence and expertise requirements can favourably effect
the monitoring of internal control.
and McVay (2005),
Ashbaugh-Skaife, Collins and Kinney (2006), show that audit committee quality,
characterized on having more financial expertise, or more specifically having
more accounting financial expertise and non-accounting financial expertise, is
an important determinant of internal control weaknesses. In addition, we find
that auditor independence calculated as the ratio of audit fee to total fee, is
also a determinant of internal control weaknesses.
Statement of Problem
are current debate on management manipulation of earnings resulting in
corporate fraud, corporate failure in the globe at large and in Nigeria in
particular, examples are Cadbury (Nig) Plc, African Petroleum (Nig) plc etc
WorldCom. The researcher is to carry out an investigation in order to find out
the possible causes of this corporate fraudulent act exhibit by management
which have resultant into corporate failure and proffered possible way-out.
1.3 Research Questions
The following are the questions required in order to
achieve the objectives of the study.
there any relationship between audit committee roles and the quality of
financial reporting in Nigeria?
ii. Is the
quality of audit committee associated with the quality of internal control in
Nigeria business environment?
there any relationship between effectiveness of audit committee and their
ability to help auditors in the quest to maintain true independence in Nigeria?
iv. Is there
any significant relationship between audit committee quality, auditor
independence and disclosure of internal control in Nigeria?
1.4 Objective of the Study
aim of this research work is to determine audit committee quality, audit
independence and internal control weakness in the Nigeria context. This
can be achieved by the following objectives below:
to investigate the relationship
between audit committee roles and the quality of financial reporting in Nigeria.
to ascertain whether the quality of
the audit committee is associated with the quality of internal control in Nigeria
to verify the relationship between the
effectiveness of audit committee and their ability to help auditors in their
quest to maintain true independence in Nigeria economic climate.
to determine the relationship between
audit committee quality, auditor independence and disclosure of internal
control in Nigeria.
Statement of Hypotheses
following hypotheses listed below will be used to test the acceptance or
rejection of our data. They are stated in null (HO) and in alternate
HO: There is no relationship between audit
committee roles and the quality of financial report in Nigeria.
is a relationship between audit committee roles and the quality of financial
report in Nigeria.
The quality of audit committee is not positively associated with the quality of
internal control in Nigeria business environment.
The quality of audit committee is positively associated with the quality of
internal control in Nigeria business environment
The relationship between the
effectiveness of audit committee and their ability does not assist auditors in
their quest to maintain true independence in Nigeria economic climate.
The relationship between the
effectiveness of audit committee and their ability do assist auditors in their
quest to maintain true independence in Nigeria economic climate.
There is no positive relationship
between audit committee quality, auditors’ independence and disclosure of
internal control weakness in Nigeria.
There is positive relationship between
audit committee quality, auditors’ independence and disclosure of internal
control weakness in Nigeria.
1.6 Significance of the Study
information that will be provided after this study will be of relevance to
government/regulators, shareholders, investors and the public in general in the
Nigeria business environment as it attempts to provide an insight whether the
quality of the audit committee is associated with the quality of internal
accountants in the country will also benefit from the findings of the study because
it will reveal the state and quality of the accounting and audit services they
render to audit firms in Nigeria.
study is of significance to the Nigerian government and institutionalized financial
regulators in the country because it will show where legislations needs to be
made or modified to provide for more effective regulation of the business
activities in the country.
1.7 Scope of the Study
study examines the audit committee, auditor independence and internal control
weakness in Nigeria
with Benin Electricity Distribution Company (BEDC), more emphasis on good audit
committee and reduction in internal control weakness because it is considered
an important factor in achieving good quality financial reporting. The study
will illustrate audit committee quality in Benin Electricity Distribution
Company (BEDC) between 2008 and 2013. The research work was mainly carried out
in Benin City using a sample size of 50 for effective result.
Limitations of the Study
The study is faced with some constraints
which may likely affect the generalization of findings; the constraints include
the following below:
Coverage: Factor that may likely affect the work is the issue
of investigating all accounting firms in the country. Due to the spread of
accounting firms all over major cities in the country, the researcher could not
be able to cover the whole areas.
of sourcing for material: The research was faced with
problems of getting current materials, textbooks, journals, seminar papers in
relation with this research topic. In the final analysis most interviewed and
investigated could not give some vital information that would have acted as
ingredients in the work.
The problem of retrieving the questionnaire: Some questionnaires issued to respondents were lost
during the attitudes of the respondents to disclose their personal information.
1.9 Definition of Terms
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 (CICA, 1996). It can be regarded as a standing committee
of the board and shareholders with equal representation of three (3) members
each vested with the oversight function of accounting related activities and
working with external and internal auditors to ensure effectiveness of internal
control system and minimizing internal control weaknesses.
Quality: It is defined as at least one member of the audit
committee having accounting or financial expertise. BRC’s (1999).
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.
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. Internal Control: Is
defined as a process effected by an entity’s board of directors, management and
other personnel designed to provide reasonable assurance regarding the
achievement of objectives according to the “COSO framework”.
Internal Control Weakness:
It’s defined as a significant deficiency or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statement will not be prevented
or detected. Auditing Standard (hereafter AS) No. 2.
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