THE ROLES, RESPONSIBILITIES AND CHARACTERISTICS OF AUDIT COMMITTEE AS AN AID TO FINANCIAL REPORTING IN NIGERIA
This study analyzed the roles, responsibilities and characteristics of audit committee as an aid to financial reporting in Nigeria. The study objectively analyze the relationship between audit committee and financial reporting in Nigeria, investigated the impact of audit committee roles on financial reporting, examine the effect of audit committee responsibilities on financial reporting and determine the impact of audit committee characteristics on financial reporting in Nigeria. The study made use of secondary data sourced with the use of CBN statistical bulletin and datas from other relevant sources. Data collated were analyzed using descriptive statistical methods of analysis including unit root test, ordinary least square (OLS) in analyzing the roles, responsibilities and characteristics of Audit committee as it affects financial reporting in Nigeria. From the analyses conducted it was discovered that the ACGD, ACS, BSIZE and CEO have a negative relationship with the fp. While BT and NOIA have a significant relationship with the FP. BT and NOIA are significant at 5% level of significance. The t-test revealed that the overall model is statistically significant in the explanation of the subject matter.
The Durbin Watson test shows that there is absence of autocorrelation in the model adopted for the study. Judging by the fact that the only statistically significant explanatory variable in the study is BT and NOIA, it will therefore be used as a basis for the conclusion and recommendation in the study. Thus, it is generally concluded that the audit committee in one way or the other affect financial reporting in Nigeria. The study recommended that the audit committee members should be independent, and that there should be a large size of the audit committee so as to enhance detailed and truthful financial reporting in Nigeria.
TABLE OF CONTENTS
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1 Background to the study
1.2 Statement of the Problem
1.3 Objectives of the study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Significance of the Study
1.7 Scope of the study
1.8 limitations of the study
1.9 Definition of Terms
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual Framework
2.1.1 Attributes of Audit committee members
2.1.2 Qualification of Audit committee
2.1.3 Multiple directorship of Audit committee members
2.1.4 The performance of Audit committees
2.1.5 Audit committee report
2.1.6 Determinants of firms performance
2.2 Empirical review
2.3 Theoretical framework
2.3.1 Agency Theory
2.3.2 The institutional theory
2.4 Definitions of Terms
CHAPTER THREE: METHODOLOGY
3.1 Research design
3.2 The targeted population
3.3 Sample Design
3.4 Data collection
3.5 Data analysis
CHAPTER FOUR: RESULTS AND DISCUSSION
4.1 Presentation of data
4.2 Presentation of descriptive statistics results
4.3 Unit root test
4.4 Ordinary least square (OLS)
4.5 Granger causality test
CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
APPENDIX I: CBN STATISTICAL BULLETIN
APPENDIX II: RESULT OF DATA ANALYSIS
- BACKGROUND OF STUDY
The growth of the audit and the accountancy profession both in status and in members have been greatly accelerated by the ever increasing complexity of the commercial and the industrial sector. Every private and public limited company must by law have an annual audit. While no legal compulsion is placed on the proprietors of partnership or on sole traders to engage the services of professional Auditors, an increasing number of individuals and enterprises are realizing the benefits to be obtained from a periodic Audit.
Over the decades, financial statements have grown increasingly in size and importance, following the constantly changing socio-political and economic environment. Such statements include, the balance sheet now called statement of financial position, the profit and loss account now called statement of comprehensive income, value added statement, cash flow statement, five year financial summary and a host of others, and they are prepared and presented in accordance with certain Generally accepted principles, rules, procedures etc., which apply globally (Anyaduba 1996).. The financial statements has prepared by company directors is a statutory report, conveying both qualitative and quantitative information in making informed decisions.
As a statement that serves multiplicity of users, the financial statements meet the general needs of users (EnofeAronmwan and Abadua,2013). Prior to companies and Allied matters Acts, 1900, there were no statutory provisions for the compulsory Audit of a company’s financial statements. As many companies, realizing the necessity for protecting the interest of the investing public, they inserted a clause in their Article of Association for the preparation of Annual audit by an independent person. In view of this, auditing can be defined as: “The independent critical examination of and an expression of opinion on the financial statement and underlying records of an enterprise by an appointed Auditor. In pursuance of the audit objective, the preparation of the financial statements is the responsibility of the management. The responsibility of the auditor is to report on the financial statements as presented by the management.
It is however noteworthy that the audit committee in a company should include the independent and non-executive directors that shall form at least three committee members. The board also clarifies to the audit committee regarding their roles and authority by providing to the committee the term of reference. An independent audit committee member that is appointed by the board is someone who has no personal or financial relationship with the company and its top executives. The organizations that have fully independent audit are able to reduce the manipulations of earnings. The independent audit committee ethically conducts their duties in order to prevent any misconduct by the top executives in the organization. The independent audit committee with financial expertise enhances and improves the quality of financial disclosure. In addition to all of these, audit committees are also required to frequently carry out meetings with external auditors.
Audit committee larger firms tend to hold meetings more frequently than smaller firms. The major roles that audit committee plays and their responsibilities are; to make recommendations on the appointment and change of external auditors, to supervise the internal audit system and its implementation, to coordinate the communication between internal and external auditor and to review corporate accounting information and disclosure.
Audit committee reports can serve as important tools to boost investors’ confidence in good corporate governance, to improve the trust in financial reporting processes and lend more credibility to the audited financial statements (Abbott-Parker and S,Peters, 2000).
1.2 Statement of the Problem
Audit committees have been in existence since the year 1959 (Armitage and Bradley, 2005). However, there have being a couple of criticisms as to how important is audit committee in enhancing financial reporting in Nigeria. For any financial statements to be useful for effective decision making, it must present a true and fair view of the company’s statements of financial position and performance. One can only achieve this through regular and periodic audit of the company’s financial statements as prepared by the auditors. However the independent audit of these auditors has been checkmated by an independent committee called the audit committee. Audit committee’s definition according to company and allied matters Act 2004 section 359 subsection 4 states that “ Audit committee shall consist of an equal number of directors and representatives of the shareholders of the company (subject to maximum number of six members) and shall examine the report of the Auditor and make proper recommendations thereof on the Annual general meetings it may think fit, provided however, that such, member of the audit committee shall not be entitled to remuneration and shall be subject to re-election annually.
This study aims at investigating the roles, responsibilities and characteristics of audit committees as an aid to financial reporting in Nigeria in relation to quantification of committee members, compositions and multiple audit committee directorships.
1.3 Objectives of the Study.
The general objective of the study is to examine the roles, responsibilities and characteristics of audit committees as an aid to financial reporting in Nigeria.
However, the specific objectives are as follows:
- To examine the extent to which the inclusion of the audit committees report in the financial statement significantly affects the quality of financial reporting.
- To examine the extent to which the qualification of audit committee members affects its report
- To examine the extent at which audit committee multiple directorships affects the function of the committee.
1.4 Research Questions
The research project aims at answering the following questions:
- To what extent does the inclusion of the audit committee report in the financial statement affect the quality of financial reporting significantly?
- To what extent does the qualification of audit committee members affect its report?
- To what extent does audit committee multiple directorship affects the function of the committee.
1.5 Research Hypothesis
Ho1: Inclusion of the audit committee report in the financial statement does not affect the quality of financial reporting significantly.
Ho2: The qualification of audit committee members does not affect its report.
Ho3: Audit committee multiple directorships does not affect the function of the committee.
1.6 Significance of the Study
One major question remains unanswered empirically in research, and that is does the inclusion of the report of audit committee in the financial report have any effect on the decisions users would make? Answering this question informed the justification of this study. The importance attached to a study of this nature is that it seeks to examine the role, responsibilities and characteristics of audit committee as an aid to financial reporting in Nigeria.
The study will indeed contribute to the existing debate on the importance, or otherwise of or including the audit committee report in financial reports. The management team of companies stands to benefit from this study, as this work will reveal if the role of audit committee report in the financial statement add value to decision making or is just an item of cost. Future researchers are expected to benefit largely from the outcome of this study. The result of this study will be very useful, not only to other researchers in this area of study, but also to corporate bodies in Nigeria as it will help them understand the role that audit committee plays in improving and ensuring an effective internal control system, corporate governance and consequently, a sound and reliable financial reporting framework.
1.7 Scope of the Study.
The scope of the study is to properly analyze the role, responsibilities and characteristics of audit committee as an aid to financial reporting in Nigeria. To this end, this study was based on some selected Auditing firms operating within Nigeria.
1.8 Limitations of the Study
The limitation encountered during the course of this study is that of getting access to detailed research materials that affects this research work, and there is also the problem of financial constraint which to a large extent affected the research work.
1.9 Definition of Terms
AUDIT: This is an official inspection of organizations accounts, typically by an independent body.
AUDIT COMMITTEE: This is a subcommittee in governing body that will make arrangement for internal audit and facilitate the completion of external audit. Audit committee tries to enhance the ability of the board to fulfill its legal responsibilities and ensure the credibility and objectivity of the financial reports.
FINANCIAL REPORTING: this is the process of producing statements that disclose an organization’s financial status to management, investors and the government.
INDEPENDENCE: this implies freedom from outside control or support; the state of being independent.
AUDIT COMMITTEE INDEPENDENCE: this means that the members of the audit committee team who are to perform the audit work must be free from external control or support. They mustn’t be accountable to anyone.
AUDIT EVIDENCE: Information obtained by the auditor which enables him to arrive at the conclusions necessary for his opinion on the financial statements.
GOING CONCERN: A business is treated as a going concern, if it is reasonably expected to continue trading for the foreseeable future.
TRUE AND FAIR VIEW: Section 359 of CAMA 1990 requires an auditor to form an opinion on whether the financial statements present a true and fair view. It refers in practice to both the figures themselves and the way in which they are presented.
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