ABSTRACT
The study examined the effect of Audit Committee Characteristics on Financial Reporting Quality of listed Deposit Money Banks in Nigeria (2006-2017). The increased cases of financial reporting manipulation and scandals reported in the Nigerian banking industry have more than ever casts doubts about their financial reporting quality. The effectiveness of the audit committee over the years seems not to be fully actualized owing to some financial scandals being experienced by organizations despite audit committees being in full operations. This study used cross-sectional data sourced from the financial report of selected Deposit Money Banks in Nigeria. A Five-variable model was developed with the variables, Audit Report Lag, Audit committee independence, Audit committee frequency of meeting, Audit committee size and Audit committee financial expertise. Multiple Regression analysis with an Ordinary Least Squares (OLS) estimation technique was employed and the fixed effect model was selected with the aid of the Haussman test. Given the outcome of the empirical analysis, findings revealed that Audit committee independence; Audit committee frequency of meeting, Audit committee size had positive and significant effect on financial reporting quality, while Audit committee financial expertise has a negative and significant effect on financial reporting quality. The study amongst other thing recommended that to effectively improve audit committee independence the regulatory authority should up its monitoring of the banks to ensure that banks Chief Executive Officers do not influence the election/appointment of member of the audit committee, and the regulatory authorities should make efforts to increase the minimum number of meetings to be held by the audit committee
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
List of Table ix
Abstract x
CHAPTER 1: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement
of the Problem 5
1.3 Objectives
of the Study 8
1.4 Research
Questions 9
1.5 Research
Hypotheses 9
1.6 Significance
of the Study 10
1.7 Scope
of the Study 10
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1 Conceptual
Framework 12
2.1.1 Overview
of audit committee 12
2.1.2 Audit committee in Nigeria 13
2.1.3 Functions
of audit committee 15
2.1.3.1 Financial
accuracy 16
2.1.3.2 Risk management 17
2.1.3.3 Control
assessment 17
2.1.3.4 External auditor
oversight 18
2.1.3.5 Effective use of
internal auditing 18
2.1.4 Audit
committee characteristics 20
2.1.4.1 Audit committee independence 20
2.1.4.2 Frequency of audit committee meeting 22
2.1.4.3 Financial expertise of audit committee members
24
2.1.4.4 Audit committee
size 26
2.1.4.5 Experience of the
audit
committee member 27
2.1.5. Deposit money banks
in Nigeria 28
2.1.6 Concept of financial accounting quality 30
2.1.6.1 The objectives of quality financial reporting 31
2.1.6.2 Measurement and
models of financial reporting quality 33
2.1.6.3 Financial
reporting quality in Nigerian deposit money banks 37
2.2 Theoretical
Framework 38
2.2.1 Agency
theory 38
2.2.2 Stewardship
theory 39
2.3 Empirical
Review 40
2.3.1 Summary of empirical review 46
2.3.2. Gap in literature 51
CHAPTER 3: METHODOLOGY
3.1 Research
Design 52
3.2 Study
Area 52
3.3 Type
and sources of Data 53
3.4 Population of the Study 53
3.5 Sample
and Sampling Technique 53
3.6 Method
of Data Analysis 53
3.7 Model Specification 54
3.8 Classifications and
Explanations of Relevant Variables used in the Model 55
CHAPTER 4: DATA PRESENTATION AND RESULTS
4.1 Presentation of Data 59
4.2 Results and Discussion 59
4.2.1 Descriptive
Statistics 59
4.2.2 Presentation of regression results 60 4.3 Test of Hypotheses 63
CHAPTER
5: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 65
5.2 Conclusion 65
5.3 Recommendations 65
5.3.1 Contributions to knowledge 66
5.3.2 Recommendations for Further Studies 67
References 68
Appendices 76
LIST OF TABLES
4.1: Descriptive Statistics 59
4.2: Result of the
fixed effect model of audit committee characteristics
and financial reporting quality model 60
4.3: Result of the random effect model audit
committee characteristics and financial reporting quality model 60
4.4: Result of the Hausman
Test 61
CHAPTER 1
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
All
over the world, a lot of financial reporting scandals have rocked the business
and financial community in the recent years and this had given the indication
that there is an urgent need for an improvement in the process of reporting
financial activities, thus its quality (Jeanjean and Stolowy, 2009). Owing to
an astronomical increase in worldwide corporate scandals, evidence exists that
there has been a significant increase in regulatory demand for accountability
in the world business environment (Dauda,
2015). The quality of financial report occupies a strategic position in
the decision making process of the users of financial statements especially
investors (Dezoort and Salterio, 2001). The aim of such report (financial) is
basically to provide insights on the performance especially financial and the
level of adherence to corporate governance tenets by the organisation, which
has to be available to stakeholders for proper decision making (Al-Mamun, Yasser,
Rahman, Wickramasinghe and Nathan 2014); even as the sanctity of income
statement of corporate organizations in Nigeria and globally has become the
crux of debate among accounting academics and practitioners for a very long
time (Higson, 2003).
Financial
reports are regarded as being of good quality when they reflect the true
financial position and operational performance of the organization. On the
other hand, financial reports characterized by manipulations and lack creative
accounting practices are regarded as being of low quality they symbolize
fraudulent financial reporting (Mbobo
and Nweze, 2015)
When
the financial reports disclose quality information, the decision of the users
of the reports could be well informed (Abubakar, 2011). There is no gain saying
of the view that the quality, acceptability and reliability of a company’s
annual report to a large extent is dependent on the system or procedure put in
place to protect the interest of the shareholders to receive a proper and
correct standing of the organisation (Abdulrahman and Ali, 2006). The concern
for quality financial reporting stems from the fact that financial report is
the medium by which organizations communicate to the owners and the external
society about their operational performance. Thus, financial reports serve as a
means by which the owners can gauge the health status of their organizations (Mbobo and Nweze, 2015).
The
limited access to managerial information makes interested parties and providers
of funds whether equity or debt providers to lean so much on financial
statement.
However,
top management in most cases get involved in manipulating the process of
reporting the financial standing and capacity of the organisation by taking
advantage of loophole in the provisions of accounting standards to the
disadvantage of the users of such financial statement (Klein, 2002; Yusof,
2010). According to Mbobo and Nweze
(2015) fraudulent financial reporting has contributed to the high rate
of business failures in recent times, especially in the banking sector of Nigeria.
These failures, such as those of Oceanic Bank Plc, Afribank Plc and
Intercontinental Bank Plc have left in their trails, dire consequences and
hardship on the shareholders as well as bank depositors. In effect, the providers of funds that is, the investors,
especially in the banking sector, seem to have lost confidence in the capability
of the management to adhere strictly to the tenets of corporate governance
code/mechanism and protecting shareholders’ funds (Ojeka, Fakile, Anijesu and Anijesu, 2016).
In reaction to
cases of fraudulent financial statements and other abuses that influence the
quality of financial reports, corporate governance mechanisms such as audit committee
have come to be emphasized by the regulatory authorities across the globe
(Ormin, Tuta and Shadrach, 2015). This necessitated key players in the
financial system (especially regulatory authorities) to respond quickly with an
approach that would indicate competence and a broad understanding of the causes
as well as an apt appreciation and efficiency of what needed to be done to fix
the system. There was the need and necessity to restore believe on the
financial systems (Ojeka, Iyoha, and Obigbemi, 2014), and it is imperative to
note specifically that origin of audit committee being part of the corporate governance
mechanism/structure stems from the outcry emanating from the abuse of power and
privileges exhibited by management of organisations that has translated or
manifested in various and notable financial scandals, falsification of
financial report and fraudulent and ill advised manipulation of accounting
policies (Kalbers and Fogarty, 1998).
Audit
committee is often seen as having the potentials to address the problem
associated manipulating financial report (Blue Ribbon Committee, 1999). Being a
major determinant for an active and effective mechanism to achieve good
corporate governance control and monitoring system. Corporate organisations all
over the globe is now being expected by their individual corporate regulations
to institute an active audit committee with a mandate to making the sure the
sanctity of financial report and the process of audit by making the external auditor truly objective and
independent, doing a thorough job.
An
active audit committee is expected to ensure a vibrant and strong corporate
governance mechanism for banks (Dauda,
2015). It is obvious today that the effect of the failure of the audit
committee to peruse the financial statement and ensure compliance with the
spirit corporate governance represents has been manifested in a string of
corporate abuses such as management excessiveness, consumption of perquisites,
creative accounting, manipulating records, arbitrarily appreciating
unsatisfactory performance by extending underserved bonus, thereby making
rubbish of the incentive schemes (Adelopo, 2010).
The
Audit committee happens to be a committee of company’s Board of Directors
saddled with the responsibilities of representing the company`s shareholders,
to superintend the process of reporting the company`s financial statement to
ensure to ensure integrity, fair and true view of the statement, the company’s
compliance to statutory demands, ensuring the external auditor’s qualification,
independence, performance and the internal audit functions (Dauda, 2015). Audit committee was
first introduced in the USA following the McKesson and Robbins financial
scandal in 1939 (Markham, 2006). Since
then formation and utilization of the audit committee became a global practice.
The committee to make that the annual report put out by management is correct,
devoid of any manipulation and can be trusted for any purpose intended for use,
ensuring that whatever performance is reported happens to be in line with the
aspiration of the shareholders (Dauda,
2015).
Iyoha
(2012) focusing on Nigeria, documents the concerns about companies’ financial
reporting quality. The concerns regarding financial reporting quality have
raised questions regarding the effectiveness of monitoring mechanisms of
companies like the audit committee. For audit committee to be active and
successful, the Blue Ribbon Committee, (BRC) identified some important Characteristics/qualities
that has to be exhibited by the audit committee for it to be regarded as an
active committee. Such characteristics/qualities comprises: degree of audit
committee independence, committee size, experience of members, frequency of
meetings and financial expertise of members (Hamdan, Mushtaha and Al-Sartawi,
2013). Ofo (2010) noted that the regulatory provision on audit committee in
Nigeria is unique and significantly differs from what obtains in other
countries. This difference particularly relates to audit committee composition
(independence) and activity level (issues of meeting frequency and attendance).
With the increased occurrence of financial report falsification and failures,
Ofo (2010) states that a prompt and concerted effort is needed review the
structure, format and operations of audit committees of public companies in the
country so as to ensure that they are effective and therefore achieve the
purpose for their establishment.
Although
Deposit Money Banks (DMBs), have formed audit committees to meet up with
statutory
demands, effectiveness of the audit committee and the magnitude in which the committee
can enhance quality financial reporting of DMBs is yet to be properly
established, hence it is therefore imperative to investigate if audit committee
characteristics can effectively enhance the quality of financial report and disclosure
especially in Nigeria.
1.2 STATEMENT OF THE PROBLEM
It
is worthy to note specifically whether or not financial information will command
confidence and reliance by users is dependent on the perceived financial reporting
quality. The increased cases of financial reporting manipulation and scandals
reported in the Nigerian banking industry have more than ever casted doubts
about the quality of their financial report. Apart from fraud being
significantly on the rise in the industry, most of the banks have huge problems
of non-performing loans (Mamman
and Ormin, 2012). Banks are faced with the dire and hydra headed problem of
huge non-performing loans. Unfortunately,
these problems more often than not are not reflected in the performance or
disclosed in the financial statement. It is based on the foregoing that
prompted Bello (2009) questioned the mega profits that are usually declared by
banks in comparism to firms in the real sector of the economy. Worried by the
prevailing trend , the regulatory authorities was prompted to develop the code
of corporate governance, together with conditions required for the institution
of the audit committee to make sure that the financial statement produced by
the banks meet the high quality required in the banking industry (Ormin et al., 2015).
They
also outlined some important Characteristics/qualities that have to be
exhibited by the audit committee for it to be regarded as an active committee. Such
characteristics/qualities comprises: degree of audit committee independence,
committee size, experience of members, frequency of meetings and financial
expertise of members (Hamdan et al.,2013).
Ideally,
these qualities/characteristics are key, basic and central to the effectiveness
of the audit committee in achieving the goal of quality financial reporting.
Since the independence of the audit committee is required to ensure that
management influence is reduced and shareholders interest is represented and
protected in preparation of financial reports, audit committee size and
expertise ensures quality and diverse membership with the relevant financial
knowledge, experience and expertise to enhance the quality of financial
statement. Also the audit committee must meet regularly to ensure correctness,
track, reduce the gap time between management and auditors publishing of
financial report and ensure that the statement provides a fair view of the
firms financial standing thereby improving the quality of financial reports.
The much desired effectiveness of the audit committee over the years seems not to
be fully actualized owing to some financial scandals being experienced by
organizations despite audit committees being in full operations.
However,
due to collapse of corporate skyscrapers such as Enron, WorldCom, Satyam and
near collapse of Cadbury, near liquidity crunch of the banking sector, the
regulators have seriously questioned the effectiveness and efficiency of the
role audit committee and external auditors in making that financial reports of
banks are presented fairly reflecting the true state of affairs to reduce
ineffectiveness
(Al-Mamun et al., 2014).
The effect of the failure of the audit
committee to peruse the financial statement and ensure compliance with the
spirit corporate governance represents has been manifested in a string of
corporate abuses such as management excessiveness, consumption of perquisites,
creative accounting, manipulating records, arbitrarily appreciating
unsatisfactory performance by extending underserved bonus, thereby making
rubbish of the incentive schemes (Adelopo, 2010).
But
this has been a question of debate by many researchers, with no conclusive
evidence on how audit committee characteristics affect financial reporting
quality, even as Ormin et al.,(2015), Dechow
and Dichev (2002), Al-Mamun et al.(2014),Owens-Jackson
et al (2009), Martinez and Fuentes
(2007), Carcello and Neal(2003), have all emphasized from their studies that audit committee characteristics
influence financial reporting quality, while Dauda,(2015), Mustafa and Meier
(2006), Hua-Wei and Sheela (2008), Hamdan and Mushtaha, (2011) in their studies
did not establish or support the view that audit committee characteristics have
enhanced the financial reporting quality. The extent to which the existence of
audit committee has resulted in quality financial reporting has yet not been
successfully proven in Nigeria and because there appears to be lack of consensus
among researchers who studied it earlier. This is the lacuna which this work
sets to address.
1.3 OBJECTIVES OF THE STUDY
The
broad objective of the study is to assess the effect of audit committee
characteristics on financial reporting quality of listed Deposit Money Banks in
Nigeria, while the specific objectives are to:
1. ascertain
the effect of audit committee independence on financial reporting quality of
listed Deposit Money Banks in Nigeria.
2. assess the effect of audit committee frequency
of meeting on financial reporting quality of listed Deposit Money Banks in
Nigeria.
3. examine
the effect of audit committee size on financial reporting quality of listed
Deposit Money Banks in Nigeria.
4. ascertain the effect of the financial
expertise of the audit committee members on financial reporting quality of
listed Deposit Money Banks in Nigeria.
1.4
RESEARCH QUESTIONS
The
following research questions were formulated and they include;
1. To
what extent does audit committee independence affect the financial reporting
quality of listed Deposit Money Banks in Nigeria?
2. How
does audit committee frequency of meeting affect financial reporting quality of
listed Deposit Money Banks in Nigeria?
3. To
what extent does audit committee size affect the financial reporting quality of
listed Deposit Money Banks in Nigeria?
4. How does audit committee financial expertise affect
the financial reporting quality of listed Deposit Money Banks in Nigeria?
1.5 RESEARCH HYPOTHESES
In
a bid to guide the research work, the following research hypotheses were
formulated and stated in null form;
1. Audit Committee
Independence has no significant effect on financial reporting quality of listed
Deposit Money Banks in Nigeria.
2. Audit Committee frequency
of Meetings has no significant effect on financial reporting quality of listed
Deposit Money Banks in Nigeria.
3. Audit
Committee size has no significant effect on the financial reporting quality of
listed Deposit Money Banks in Nigeria.
4. Audit
Committee financial expertise has no significant effect on financial reporting
quality of listed Deposit Money Banks in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
The
need to investigate the effect of audit committee characteristics on the financial
reporting quality of listed Deposit Money Banks in Nigeria cannot be
overemphasized, but the extent to which the activities of the audit committee
has improved the quality of financial reporting has not been successfully
proven by scholars, this makes it imperative to fully understand how audit
committee characteristics affects the financial reporting quality of listed
Deposit Money Banks in Nigeria
Policy makers and regulatory agencies:
The result of the study provides the
policy makers and regulatory agencies, regulatory basis to strengthen audit
committee to serve as a monitoring mechanism, therefore, better promote
financial reporting quality of listed deposit money banks in Nigeria.
Stakeholders:
This study also provides vital insights to the stakeholders on the workings and
characteristics of the audit committee so as to enable them insist on its
existence wherever they have interest.
Management of banks:
It also provides management of banks with the required knowledge in order to
guarantee so as to ensure the proper functioning of the audit committee that
will ensure the quality of the financial report
The academia, researchers and
students: This study in no small measure increases the list of
growing literature seeking to explain how audit committee characteristics
affect financial reporting quality on the listed Deposit Money Banks in Nigeria
as a result provide and serve as literature for further research for the
academia, researchers and students.
1.7 Scope of the study
This
study which aims to assess the impact of audit committee characteristics on the
financial reporting quality of listed Deposit Money Banks in Nigeria is limited in scope to the empirical study of the
impact of audit committee characteristics on financial reporting quality on the
listed Deposit Banks in Nigeria, using selected listed Deposit Money Banks in
Nigeria. The period of the study cover 2006 to 2017. The choice of the base
year was predicated on the fact that it is the year CBN Code on Corporate Governance
with emphasis of the functions of audit committees came into existence and was
made mandatory in the banking industry after the bank recapitalization exercise
of 2005.
1.8 LIMITATIONS OF THE STUDY
Conducting
a research in Nigeria has not always been an easy task, and this research work
is no exception. In the course of conducting this research work, the researcher
experienced some limitations such as accessibility of required data and
measurement error. These limitations would not affect the outcome of work
negatively, since the research adopted measures and relied on estimation
techniques used by existing works which had and overcame such limitations.
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