Effect of Audit Committee Characteristics on Financial Reporting Quality of Listed Deposit Money Banks in Nigeria
Chapter One
Objectives of the Study
The following are the objectives of the study:
- To examine the effect of audit committee independence on financial reporting quality of listed Nigerian DMBs.
- To investigate the effect of frequency of audit committee meeting on financial reporting quality listed Nigerian
- To assess the effect of accounting expertise in audit committee on financial reporting quality of listed Nigerian DMBs
- To determine the effect of female membership in audit committee on financial reporting quality of listed Nigerian DMBs
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter reviewed relevant literature on the subject matter of study. It examines audit committee characteristics and financial reporting quality. The operational measures for these variables employed in prior studies were discussed. The common audit committee attributes used in the literature are audit committee independence, audit committee expertise, frequency of audit committee meeting, and audit committee gender. A review of previous empirical works was carried out and the theoretical framework upon which the study is situated was also provided.
The Concept of Corporate Governance
The idea of corporate governance has been developed due to the need for regulation of companies. This is necessitated by the prevalence of information asymmetry. There are several definitions of corporate governance as briefly discussed below. The Organization for Economic Cooperation and Developments Principles of Corporate Governance (1999) defines corporate governance as a set of relationships that exist between a companys management, its board, shareholders and other stakeholders.
This definition implies that corporate governance is a chain that harmonizes the owners of a company with managers, employees, customers and the society generally. The concept of corporate governance can also be explained as a system of making directors accountable to shareholders for effective management of the company in the best interest of the company and the shareholders along with concern for ethics and values. This definition utilizes three concepts, which are important to corporate governance, namely, direction, control and ethics. However, the definition limits corporate governance to the relationship that subsists between the company and its shareholders, which in practical terms, all stakeholders matter in the discourse of corporate governance.
Furthermore, the Central Bank of Nigeria (CBN), in its Code of Corporate Governance (2006), defines corporate governance as a system by which corporations are governed and controlled with the aim of increasing shareholder value and meeting the expectations of the other stakeholders (Afolabi & Dare, 2015). This definition is insightful in that it contains salient issues conventional corporate governance including ownership, control, corporate social responsibility as well as value creation. This study therefore adopts the definition.
The CBN Code of Corporate Governance
The CBN code of corporate governance that is relevant is the Code of Corporate Governance for Banks in Nigeria Post Consolidation which was developed in 2006 (Afolabi & Dare, 2015). This code was developed to complement the earlier codes and enhance their effectiveness for the Nigerian banking industry due to the weakness identified in the existing Corporate Governance Code for banks in Nigeria. Some of the weaknesses include, but are not limited to, disagreements between the board and management giving rise to Board squabbles, ineffective board oversight, fraudulent and self-serving practices among members of the board, management and staff (Sanusi, 2010).
The code also gives more emphasis on board of directors and its audit committee. It stipulates a maximum of 20 directors, most of whom should be non-executive directors with at least two of the non-executive directors serving as independent directors. Such non-executive directors are allowed to hold office continuously for a maximum of 12 years comprising of 3 terms of 4 years each. The compensation for the non-executive directors is limited to sitting allowance, directors‟ fee and reimbursement for travel and hotel expenses. The code provides, as a minimum, existing of number of board committees such as risk management committee, audit committee and the credit committee.
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CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter presents and discusses the methodology for the study. It explains the research design, the population of the study, sample size and sampling techniques, sources of data, study variables and their measurements and techniques of data analysis to be used for the study.
Research Design
In order to ensure that evidence obtained adequately addresses the research, the study uses correlational research in a bid to analyze the relationship between the dependent and independent variables. The choice of this research design is predicated on the ground that it provides basis for testing of expected relationships between audit committee characteristic and financial reporting quality of listed Deposit Money Banks in Nigeria and the making of predictions regarding such relationships. The research design hinges on positivism which emphasizes a more scientific, objective and systematic approach to research, through use of quantitative method (Saunders, Lewis & Thornhill, 2007).
Population of the Study
The population of the study comprises all the listed Deposit Money Banks (DMBs) in Nigeria as at 31st December 2015. There were fifteen (15) listed banks on the Nigeria stock exchange as at 31st December, 2015. These include Access Bank, Diamond Bank, Ecobank, Fidelity Bank First Bank First City Monument Bank, Guaranty Trust Bank, Skye Bank, Stanbic IBTC Bank, Sterling Bank, Union Bank, United Bank for Africa, Unity Bank, Wema Bank and Zenith Bank.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
Introduction
The focus of this chapter is to present empirical results from analysis performed using data collected for the sampled firms from 2007-2014. The overall aim is to examine whether audit committee independence, audit committee meeting, audit committee gender, audit committee financial expertise, and firm size affect financial reporting quality of listed Deposit Money Banks in Nigeria. The chapter contains analysis of descriptive statistics, correlation matrix, robustness test, Hausman specification test, regression results, test of hypotheses, discussion of findings and policy implications.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Summary
The study examined the effect of audit committee characteristics on financial reporting quality of DMBs in Nigeria. Chapter one addressed the background to the study which centered on issues regarding corporate governance and audit committee characteristics in Nigeria. It also highlighted the sparse literature as well as increasing level of poor oversight roles of the audit committee which leads to poor financial reporting quality. There are sparse literatures on the effect of audit committee characteristics on financial reporting quality. To investigate the effect of audit committee characteristics on financial basic research questions, research objectives and hypotheses, were raised. The scope of the study is from 2007 to 2014. The chapter also highlighted the significance of the study within the context of various stakeholders.
Chapter two which dwelt on literature, covering conceptual framework, review of empirical studies and theoretical framework. The basic concepts that underlie the study, concepts of corporate governance, board of directors, audit committee, financial reporting quality, audit committee independence, frequency of audit committee meeting, audit committee financial expertise, and audit committee female gender were explained. The agency theory was used to underpin the study.
Chapter three centered on the research methodology used by the study. The chapter suggests that correlational research designed is most appropriate for the examination of effect of audit committee characteristics on financial reporting quality of DMBs in Nigeria. The population/sample size of the study as revealed by the chapter is fifteen (15) deposit money banks in Nigeria. The variables used by the study were explained and modeled based on multiple regression analysis.
Chapter four focused on data presentation and analysis. Descriptive statistics of the variables were explained. The correlations among the variables were explained. Further robustness tests were carried out. The regression result, based on random effect which was suggested by Hausman specification test was used. The results indicated that the all the predictor variables account for 21.23% of variation in the dependent variable, financial reporting quality.
Conclusions
Arising from the result of the analysis that was carried out in chapter four, the following conclusions can be made:
Frequency of audit committee meeting has positive and significant relationship with the financial reporting quality of DMBs in Nigeria. The more frequent the audit committee members meet, the higher the tendency for them to meticulously scrutinise all elements of financial reports.
The study also concludes that audit committee financial expertise has negative and significant influence on the financial reporting quality of DMBs in Nigeria. The presence of audit committee members with financial expertise will have profound influence on the financial reporting quality of DMBs in Nigeria.
Finally, the study concludes that existence of female audit committee members positively and significantly affects financial reporting quality of DMBs in Nigeria. Thus, existence of female audit committee members will help mitigate financial reports‟ misstatements.
Recommendations
The following recommendations have become necessary in view of the findings of the study:
- Banks should sustain frequency of audit committee meetings. This has become necessary in view of the fact that frequent meetings will avail the audit committee members to opportunity to scrutinize the financial reports carefully.
- Audit committee members should be well motivated so that they will not derail from theirtraditional roles of evaluating authenticity of financial reports prepared by management. Such motivation is necessary so that they will not be easily lured into manipulation of financial statements to gain monetary
- More female audit committee members should be encouraged to make composition of audit committees of DMBs in Nigeria. Female audit committee members are proven to have some positive influence on the financial reporting quality of Deposit Money Banks in Nigeria.
Limitationsto the study
Although the findings of this study can be relied upon, caution should be taken on the following limitations:
- The economic circumstances of banks keep on changing so also are their Therefore, the application of the finding of the study might only be suitable in the current era.
- Some variables of audit committee characteristics were not included, the prominent ofthese is foreign diversity. Therefore, cognizance should be taken on the fact that other variables of audit committee characteristics might have varying relationship with financial reporting quality of DMBs in Nigeria.
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