EFFECT OF AUDIT
COMMITTEE INDEPENDENCE ON EARNING QUALITY OF NIGERIA DEPOSITS MONEY BANKS
ABSTRACT
The study investigated the effect
of audit committee characteristics on the financial reporting quality
of Deposit Money
Banks (DMBs) in Nigeria.
The study used correlational research design. The source of data was secondary data which
were collected from the published annual financial reports of the studied DMBs
in Nigeria. The population/sample size was 14 DMBs in Nigeria. A period of eleven
years was covered from 2012
to 2024. The
secondary data collected
were analyzed using multiple regression analysis which was
carried out using STATA software.
Findings from the analysis show that frequency of audit committee
meeting and audit committee female gender have positive and significant effect
on the financial reporting quality of DMBs in Nigeria while audit committee
financial expertise has significant negative effect on the financial reporting
quality of DMBs in Nigeria. However, it was reported that audit committee
independence has no significant effect on the financial reporting quality of
DMBs in Nigeria. Based on the above findings, the study recommends that
banks should sustain
frequency of audit
committee meetings, audit
committee members should be well motivated so that they will not derail
from their traditional roles of evaluating
authenticity of financial
reports prepared by
management, and that more
female audit committee
members should be encouraged to
make up the composition of audit committees of DMBs
in Nigeria.
TABLE
OF CONTENTS
TITLE PAGE - - - - - - - ii
DECLARATION - - - - - - - - iii
CERTIFICATION - - - - - - - - iv
DEDICATION - - - - - - - - v
ACKNOWLEDGEMENTS - - - - - - vi
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 Definition
of Key Terms - - - - - 7
CHAPTER
TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - - - 8
2.2
Conceptual Framework - - - - - - 8
2.3
Theoretical Framework - - - - - - 30
2.4
Empirical Review - - - - - - - 38
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Research Design - - - - - - 45
3.2 Population of
the Study - - - - - - 45
3.3 Sample Size - - - - - - - - 45
3.4Sampling
Technique - - - - - - 46
3.5
Method of Data Collection - - - - - 46
3.6 Technique for
Data Analysis - - - - - 46
3.7 Model Specification and Variable Definition - - 46
3.8 Measurement of Variables - - - - - 48
CHAPTER
FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation
of Data - - - - - - 39
4.2 Discussion
of Findings - - - - - - 44
CHAPTER
FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary
- - - - - - - - 46
5.2 Conclusion
- - - - - - - 48
5.3 Recommendations - - - - - - - 49
References - - - - - - -
- 52
Appendix - - - - -
- - - 57
CHAPTER
ONE
INTRODUCTION
1.1 Background of the
Study
Banks and other financial
institutions across the globe is adjusting to changes in economic realities and
its impact on financial market leading to: declines in consumer discretionary
spending, causing major restructuring activities, deteriorating credit and book
debts and business liquidity concerns, Amidst these phenomena and other
emerging challenges, many resilient banks intensify efforts to survive the
tides and are forced to explore other business models which continue to shift
from their core functions of granting loans and accepting deposits from the
public to fee-based services such as digitalization, agency, mobile, online and
internet financial services. However, the thrust of all Deposit Money Banks
(DMBs) was and is still primarily financial intermediation, that is, to accept
deposit from surplus sector and deploy to deficit sector by creating optimal mix
of assets-returns trade off.
Bank earnings quality is a measure
of how reliable a company's earnings are for assessing a company's current and
future performance. Earnings quality, in accounting, refers to the ability of
reported earnings on the face of financial statement to predict a company's
future earnings and guarantee sustainability. It is an assessment criterion for
how "repeatable, controllable and bankable a firm's earnings are, amongst
other factors, and has variously been viewed as the degree to which earnings
reflect underlying economic effects; of better estimates of cash flows,
conservatism, or predictability.
The concept of earning
quality has involved several researchers over the years given its significance
to the accountancy profession generally and corporate reporting in particular
(Ebiaghan 2020, Nelson & Shukeri, 2011; Abbott, Parker & Peters, 2015;
Ika & Ghazali, 2015; and Sultana, Singh & Van der Zahn, 2015).
According to International Accounting Standard Board (IASB), (2008), earning
quality is conceivable to be critical to investors, stakeholders in investment
and similar decision. Accounting earnings is a significant and important
variable of financial report which can be utilize as a yardstick of financial
reporting quality.
As enshrined in the revised notional framework for financial
reporting quality, thereby enhancing qualitative characteristics involving
accounting information suggests that companies' financial statements and their
relevant audit reports is expected to dispense a reliable input to potential
investors, shareholders, creditors, employees, management, financial analysts,
regulators and other stakeholders such that they don’t lose their potentials of
influencing the decisions of financial statements' users. Financial reports in
general has been acknowledged as an pivotal area in accounting.
As a result, the measurement of earning quality might be
exploited. Earning quality measurements, according to Daifei & Okafor, (2015), allows for
creative manipulation of data, such as undervaluing liabilities, provision for
losses, and increased asset valuations. Corporate executives are in control of
the firm's activities, which includes wealth creation and, most crucially, the
drafting of financial reports.
The board's structure is critical for ensuring that investors
receive the desired value, which has an influence on the objectives application
of the earning quality measurement approach (Ian, 2010). Corporate governances
is a laid down financial and legal tools aimed at reducing issues of interest
in top executives and stakeholders (Vafeas, 2015).
It protects stakeholders from managers' opportunistic actions
(Kyereboah et. al., 2018). Corporate governance also touch on the methods and structures used to manage and
direct the affairs of institutions to increase shareholder value by improving
corporate performance and accountability while also addressing the concern of
other stakeholders.
Audit committee can also be very effective not just in carrying
out their objective supervision of the financial reports on the organization,
but it also gives helping hands for it to set an ethical “tone at the top”
(Locatelli,2019; Stein, 2020) for corporate entities. Traditionally, the major
importance of audit committees has always been to examine and evaluate the
rectitude of financials report produced
by managers.
In recent times, this major role has extended beyond the annual
financials to encompass the quarterly financial reports. Owing to this, audit
committees are now becoming more concerned on matters regarding to corporate
reporting as contrasted with financial reporting. Owolabi and Dada (2011), said
that considering the total numbers of corporate failures and collapses, it is
very important that audit committees are taken with more seriousness among
corporate organizations.
The audit committee could be an intermediary between the external
auditor and the group of directors; also it aids and facilitates the monitoring
process by reducing information asymmetry among the external auditor and the
board. In addition, Blue Ribbon Committee (2019) noted that as a paramount
mechanism of corporate governance audit committee which is held responsible for
the appointment of external-auditors and oversees the audit process to ensure quality
financial reporting.
Therefore, an auditor's independence and the earning quality of
the financials are usually set on proper functionality of audit committees.
Assessing the agitations to re-review the structures of corporates governance
as in Nigeria and considering the significance attached to the institution of
effective corporate governance, the Federal Government of Nigeria, through her
regulatory agencies which came up with institutional arrangements to protect
investors in Nigeria (Kajola, 2008).
In this light, as contained in Company and Allied Matters Act
(CAMA) CAP, C20, Law of Federal Republic of Nigeria (LFN) 2016 Sec was the
first attempt to provide for audit committee potency. While, the second attempt
was contained in the Code of Corporate Governance best practices emanate by the
Securities and Exchange Commission (SEC) in November, 2011.
The two provisions listed above failed to help address the matter
of audit committees with regards to financial expertise, hence failed to ensure
quality of the financials. The failure was because of the constant reports that
surrounded the misappropriations of the financials which led to the CEOs in
some Nigerian banks being removed (Ojeka, Owolabi and Kanu 2023). As at 2019 a
new code for corporate governance was issued with the hope of filling the gaps
identified with previous codes.
Efficiency is the ability to turn
assets into high revenue yield by reducing the level of relevant cost and
expenses. Efficiency can be seen as a production of a given output with fewer
inputs or utilizing a given set of inputs to produce greater output (Dalley
& Matthews, 2009). Efficiency could be “Technical or operational” but often
assessed either in terms of the economic principle with the comparison of two
factors mainly resource deployment and productivity. Bank Efficiency is thus
the tactical deployment of resources to maintain a safe balance between cost
and productivity or minimum combination of inputs (assets and liabilities)
necessary to produce maximum level of outputs (income) in banking operations.
Hence, this study reviews Bank efficiency regarding its operations, activities
and transactions over the period. A bank’s efficiency ratio tells you how
profitable and how prudent the bank assets are utilized to guarantee the level
of productivity, which indicates its level of financial soundness and
stability. Deposit Money Banks income can generally be divided into interest
and non-interest income. A bank that earn more interest from its assets than it
pays out on its liabilities among others could be viewed on the one part as
more profitable and efficient. However, bank efficiency broadly encompasses
financial, managerial, credit compliance and operational efficiency. Bank
efficiency is the most important area of bank performance measurement, as such,
an in-depth look into the efficiency of deposit money banks have become
inevitable.
1.2 Statement of the
Research Problem
Despite regulatory
frameworks like the Corporate Governance Code and guidelines from the Central Bank of Nigeria
(CBN) requiring the establishment of audit committees in
deposit money banks, concerns persist over the quality
of financial reporting in the Nigerian banking sector. Issues
such as earnings manipulation, creative accounting, and financial
statement fraud continue
to surface, undermining public trust and investor confidence.
The core research problem arises from a gap between regulatory
expectations and actual practice. While audit committees are established, their effectiveness—especially
in terms of independence—remains questionable. Many audit committee members may have
close ties with management or lack the professional expertise to detect
earnings management practices.
Thus, the study
seeks to investigate whether audit committee independence truly contributes to enhancing the quality of reported earnings, and whether it can serve as an
effective mechanism for financial accountability and governance
in Nigerian banks. (Jeroh, 2022). No doubt, the
dependability of financial information are vital to the growth of any economy.
Auditors on their part are anticipated to be objective and independence in the
discharge of their responsibilities (Adelaja, 2019), consequent on the take
that auditors provides key assurance in the protection of the varying
stakeholders interests (Gallegos, 2016).
However, studies have traced one out of the annoying problems in
our financial world today to the roles which audit committees in firms could
play, to support the job of external- auditors (O'Connor, 2021; Beatties &
Fearnley, 2019). The oversight function of audit committees are therefore
placed under scrutiny when businesses whose financial statements once showed no
indication of any failure suddenly become bankrupt. Prior studies (De Angelo,
2015; Jones, 2023; Dechow, Sloan, & Sweeney, 2022; Ashbaugh, et al ., 2020; Semiu & Kehinde,
2011; Semiu & Johnson, 2015; Umar, 2015) have been conducted to scrutinize
how audit firm characteristics may possibly affect the quality of financial
reports. Although, these studies are largely based on information from the US
and European nations, thereby reflecting trends and patterns in advanced
economies; it is pertinent to note that empirical evidence on the effects of audit committee characteristics on
the earning quality which have remained scarce especially as it relates to
Nigerian evidence.
In this light, this study utilize three measures of audit
committee characteristics to investigate their effects on the quality of
financial reports of companies listed in Nigeria. Equally, Researchers have
recently focused their emphasis on corporate governance on developing economies
(see for example, Agoraki et al .,
2010; McConnell et al ., 2008; Lin et al ., 2021; Smallman et al ., 2005).
However, in emerging nations, studies on audit committee
characteristics (expertise, independence, size, and frequency of meetings) and earning
quality have received little attention.
As a result, the study inspects the significant between the audit committee
characteristics (size, frequency in meetings, expertise and independence) and
the choice of the earning quality (level
3 input) among Nigeria's publicly traded commercial banks.
As a result, the goal of this is to cross check the relationship
between the audit committee characteristics.
1.3 Objectives of the
Study
With regards to the foregoing therefore, the overall objectives of
the study is to examine the relationship between the effect of audit committee
independence and the earning quality of deposit money bank listed in Nigeria.
The main objectives are to:
i.
Examine the extent at which audit committees
financial expertise significantly influence earning quality of deposit money
banks in Nigeria.
ii.
Discover the extent to which audit committee size influences earning
quality of listed deposit money banks in
Nigeria
iii.
Ascertain the effect of audit committee meetings
on earning quality of listed deposit money banks in Nigeria.
iv.
Investigate the effect of independent audit
committee members on earning quality of listed deposit money banks in Nigeria
1.4 Research Questions
Bearing in mind the aforementioned research problems and the main
objectives of this study the following the research questions were raised:
1. Does audit committee
financial expertise has significant influence on earning quality of deposit
money banks in Nigeria?
2. How does Audit committee
size significantly influence earning quality of deposit money banks in Nigeria?
3. How does the frequency
of audit committee meetings significantly impact earning quality of deposit
money banks in Nigeria?
4. Does independent audit
committee members influences earning quality of deposit money banks in Nigeria?
1.5 Hypothesis of the
Study
In line with the objectives of this study, the following
hypotheses were formulated in null form;
H01: Audit committees
financial expertise has no significant impact on earning quality of deposit
money bank in Nigeria.
H02: Audit committee size
has no significant impact on the earning quality of deposit money banks listed in Nigeria.
H03: Audit committee meetings
has no significant impact on the earning quality of deposit money banks listed
in Nigeria.
HO4: Independent audit
committee members has no significant impact on the earning quality of listed
deposit money banks in Nigeria.
1.6 Scope of the Study
This study focuses on the relationship in between effect of audit
committee independence and earning quality of firms listed in Nigeria within
the context on deposit money banks in Nigeria. The study covers all the period
after the issuance of the code of good corporate governance for the deposit
money bank, from 2012-2025 .
This study examines the relationship in between audit committee independable
(expertise, sizes, regularity of
meetings, and independence) and the choice of the earning value among Nigeria's publicly traded deposit money
banks. As a result, the goal of this research is to evaluate the relationship
between audit committee characteristics (expertise, size, meeting frequency,
and composition) and earning quality of the deposit money banks listed in
Nigeria.
This study did not increase its scope to 2025 .
1.7 Significance of the
Study
Financial reports is primarily designed to offer shareholders and
the generality of users the needed information that guides the decision-making
process. This study is significant with regards to the recent search by
regulators for measures that could protect and cause improvement on the quality
of the financials in the corporate world. It is also a response to the current
call by the IAASB's Framework for Audit Quality which, include raising the
awareness of the key attributes of audit quality; encouraging shareholders to
explore different procedures on how to make an improvement on audit quality;
and facilitating greater discourse between key shareholders on this particular
topic (IAASB, 2013).
Moreover, the IAASB framework for the audit quality ascribed the
major duties for performing quality audits to the auditors, and also emphasized
that audit quality can be best obtained in a particular environment where other
participants in the financial reporting supply chain gives their full support.
Hence, this study is an effort towards such direction.
The study is also significant as it focused on issues related to
characteristics of the audit committees that are threatening the survival of
audit committees of all sizes, on one hand and the going concern of corporate
entities on other hand. Therefore, the study is of importance in ensuring the
dependability of financial information’s not only for the aim of pointing the
tendencies of corporate scandals, but most importantly the survival of their
audit and accounting profession and developing the financial health and capital
market.
This study is of tremendous value to managers, auditors,
regulators, professional accounting bodies, the existing and the potential
stakeholders and researchers. In contributing to existing literature and to
fill some identified knowledge gap, the study is designed to analyze the
connection between the audit committee characteristics (internal and external)
and the quality financial reporting of companies listed in Nigeria, the study
prove to provide good and reliability to auditors.
The end result of the study will therefore be useful to several
stakeholders which include regulators and policy makers, companies' management
generally, corporate boards, researchers, professional accounting bodies among
others. The findings from the study could educate both potential and existing
stakeholders of selected and firms listed in Nigeria on the audit committee
characteristics that enhance the quality of financial reports (with respect to
audit committee characteristics) to know more about auditor regulations.
The study is also of great importance to researchers, as it brings
the empirical evidence on the relationships between the audit committee
characteristics and the quality of financial reporting on companies listed in
Nigeria. This study also adds to the existing body of literature on the audit
committee characteristics and the earning quality among companies listed in
Nigeria such that future researchers will thus find this study useful as its
outcome will serve as guide to further related researches.
1.8 Limitation of the
Study
This study relied basically on secondary data which was obtained
from 26 listed deposit money banks in Nigeria. Also, banks that were not having
consistent data set for all variables in the study period 2012-2025 were excluded and not added in this study
sample. The generalization made therefore, might not be applicable on all the
deposit money banks in Nigeria. However, the above doesn’t affect the end
result of the study because the listed banks cut across major industrial
categories in the Nigerian Stock Exchange and include firms drawn from sector
like conglomerate, consumer's stables, energy, financial services, industrial
goods and materials.
1.9 Operational
Definition of Terms
The terms below have been defined in accordance with the context
of their utility in this study. ·
Audit: This is a self
examination that is carried out by qualified independent persons on financial
statements or records of an entity to review the adequacy of the internal
control in accordance with the rules of the boards or commission for the aim of
expressing the opinion on accuracy and completeness of such statements.
Audit Committee: These are group of
persons appointed by the company for the aim of supervising the accounting and
processes of the financials and stands as an intermediary between the board of
managers and the external auditors. ·
Fair value: Earning quality is
described as "the amount at which an asset is switched or a liability is
settled between informed parties in arm's length transaction.
As a result, the fair values might be described as the estimated
price in which another party is willing to buy an asset or settle a liability.
· Financial statement: can be construed as a formal documentation of all
financial related business activities and financial performance of a company,
or any other entity.
1.10 Organization of the Study
This
research work is organized in five chapters, for easy understanding, as follows
Chapter one is concern with the introduction, which consist of the
(overview, of the study), historical background, statement of problem,
objectives of the study, research hypotheses, significance of the study, scope
and limitation of the study, definition of terms and historical background of
the study. Chapter two highlights the theoretical framework on which the study
is based, thus the review of related literature. Chapter three deals on the
research design and methodology adopted in the study. Chapter four concentrate
on the data collection and analysis and presentation of finding. Chapter five
gives summary, conclusion, and recommendations made of the study.
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