THE EFFECT OF AUDIT COMMITTEE ATTRIBUTES ON FINANCIAL QUALITY OF NON-FINANCE FIRMS IN NIGERIA
ABSTRACT
The study examined the effect of audit committee attributes on Financial quality of non-finance firms in Nigeria. Four of these firms were sampled from 2012-2024. The research analyzed the data generated using the panel regression analysis through the instrumentality of Econometric Views. The study evidenced that, staff trainings and audit fee improved firm performance significantly but staff safety cost did not. Using a sample of 150 non-finance firms listed on the Nigerian Stock Exchange (NSE), we investigate the relationship between audit committee independence, financial expertise, share ownership, and financial reporting quality. Our results show that audit committee financial expertise and share ownership are positively related to financial reporting quality, while audit committee independence has no significant impact. The findings of this study have implications for regulatory bodies, investors, and firms seeking to improve the quality of financial reporting in Nigeria. As such, the study recommends that management of selected firms should not see their staff trainings as a one-off thing instead they should conduct both off and on-the-job trainings on a regular basis. Lastly, management of the targeted firms must ensure that their welfare package include both monetary and non-monetary compensation.
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 - - - - - - 8
1.3 Objective of the Study - - - - - - 10
1.4 Research Questions- - - - - - - 11
1.5 Statement of the Hypothesis - - - - - 12
1.6 Significance of Study - - - - - - 13
1.7 Scope of the Study - - - - - - 14
1.8 Definition of Key Terms - - - - - 15
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction - - - - - - - - 18
2.2 Conceptual Framework - - - - - - 33
2.3 Theoretical Framework - - - - - - 45
2.4 Empirical Review - - - - - - - 50
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Research Design - - - - - - 56
3.2 Population of the Study - - - - - - 57
3.3 Sample Size - - - - - - - - 57
3.4 Sampling Technique - - - - - - 58
3.5 Method of Data Collection - - - - - 58
3.6 Technique for Data Analysis - - - - - 59
3.7 Model Specification and Variable Definition - - 59
3.8 Measurement of Variables - - - - - 59
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation of Data - - - - - - 60
4.2 Discussion of Findings - - - - - - 79
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary - - - - - - - - 80
5.2 Conclusion - - - - - - - 80
5.3 Recommendations - - - - - - - 93
References - - - - - - - - 95
Appendix - - - - - - - - 98
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The issue of audit committee attributes and Financial 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 Financial 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 (2023); these studies perhaps, provide both theoretical and empirical foundation for assessing whether audit committee attributes significantly affect Financial quality .
Financial statements become the basis for evaluating the company's performance. Good quality financial reports can help provide relevant information to decision makers and investors. Financial statement users are interested in the quality of profit, since this information influences decision-making, especially those related to contracts and investments (Johl et al., 2013). Therefore, independent evidence from the financial statements through the management of the company is needed. Managers have a responsibility to provide financial reporting information, but they have possible opportunities to misuse the information.
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 Financial 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 committee is 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 Financial 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 accelerate monitoring 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 committees has increasingly become vital in governance mechanisms of numerous companies, given its fundamental place in enhancing the quality of audit. De-Angelo (1981) provides that Financial 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, Financial quality refers to the ability of an audit to exercise, detect material errors and fraud leading to material misstatements in financial statements where such exist. It is thus reasonably logical to see Financial 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 Financial 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 GAAS principles. Furthermore, Financial 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 Financial quality . Besides, audit committee as it relates to Financial 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 Financial 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 component indicates audit committee independence in disclosing material misstatements in order to ensure Financial quality .
Notwithstanding the two components inter-alia(audit competence and audit independence), prior studies have shown that audit committee size affect Financial 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 Financial 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 Financial 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 Financial 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 Financial quality has not been deeply researched, particularly in the Nigerian context.
Furthermore, prior studies on audit committee attributes and Financial quality had focussed on finance companies without due attentiveness on whether audit committee attributes affect Financial 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 Financial 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 Financial quality of non-finance firms in Nigeria. The specific objectives are:
1. To examine the effect of audit committee size and Financial quality of publicly quoted non-finance firms in Nigeria.
2. To determine the effect of audit committee independence and Financial quality of publicly quoted non-finance firms in Nigeria.
3. To ascertain the effect of audit committee meeting and Financial 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 and Financial quality of publicly quoted non finance firms in Nigeria?
2. To what extent does audit committee and Financial quality of publicly quoted non-finance firms in Nigeria?
3. To what extent does audit committee meeting affect Financial 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 Financial quality .
Hypothesis II
Ho: Audit committee independence has no significant relationship with Financial quality .
Hypothesis III
Ho: There is no significant between audit committee meeting and Financial 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 Financial 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 Financial quality .
Consequently, this study therefore takes a more comprehensive route as it aims to identify the extent to which audit committee attributes affect Financial quality . Finally, for accounting researchers, the outcome of this study will contribute to the accounting literature on audit committee attributes and Financial 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 Financial 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) Financial 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.
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