AUDIT COMMITTEE AND FINANCIAL REPORTING QUALITY ON DEPOSIT BANKS IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The past few years have seen several well-known companies with significant international operations become mired in financial scandals. In some of these cases, investors have lost hundreds of millions or even billions of dollars. A number of the companies involved have been forced into bankrupting as a direct or indirect result of the scandals, these financial scandals caused many to be concerned about investors’ confidence in the integrity of companies. As means of reducing the weakness in corporate governance, several mechanisms have been introduced among which is the adoption of audit committee.

Audit committee as a concept has not acquired mass coalesce as a mandatory element of corporate governance code. Instances of corporate and audit figures and heightened concern of investors about the corporate reports of companies in the developed world led to the establishment of tread way commission (1987) in US, Cadbury commission (1992). The aforementioned committee emphasized on the need for the establishment of audit committee as a board sub-committee comprising of independent directors to ensure the credibility of financial statement. Audit committee was promoted on voluntary basis as part of corporate governance reforms (Turley &Zaman, 2004), and gained significant acquaintance with the formation of specialized committees like Blue Ribbon Committees in 1999.

The Lehman brothers, Barings Bank, Merrill Iynch, all State Trust Banks, and the Afribank Nigeria PLC, Cadbury PLC and the Bank credit scam in Nigeria, leading to the sacking of five bank chief executives. Some of these scandals could be traced directly to poor corporate governance. In Nigeria, the scandals were traced to poor corporate governance and faulty accounting and risk management practices as demonstrated by joint audit by securities and exchange commission and the central bank of Nigeria in 2010, globally, corporate governance is believed to be means of importing economic efficiency in a country and that its rule have economically significant impact on a firm’s value. Academic literature also suggest that audit committee effectiveness has significant positive impact in minimizing agency conflicts, protecting stakeholders’ interests and thus, in maximizing firm’s overall value.

This critical role of audit committee is believed to be a means of improving economic efficiency and stakeholders’ confidence in the banks through financial standard compliance. However, to achieve this, audit committee should possess some certain attributes which include independence of the committee, frequency of meetings, the size of the committee and financial knowledge of the committee members. These attributes of the audit committee are significant in addressing the short comings and weaknesses associated with the internal control system of the banks and the errors and limitations associated with external audit function. This is because internal control and internal audit are less independent of the management, while external auditors’ function is limited to the information available to the which is highly influenced by management. However, audit committees are independent of the management and have sufficient authority over the operations, transactions, documents and all the relevant records to perform a true and fair view of the financial performance and position of banks and also enhance the confidence of the investors and other stakeholders. Given that the deposit money banks play a critical role in the financial market, the degree of effectiveness, financial standard compliance and efficiency of the market will determine the extent to which it contribute to the process of growth and development. Like many other jurisdictions, research attention on audit committee in Nigeria, focused on its attributes with less attention to its impact on deposit money banks performance. The financial system is based on trust and public confidence and as such, it is important to assess the influence of components of audit committee (size, independence, meetings and financial expertise) on financial standard compliance, investors’ confidence and performance of deposit money banks in Nigeria which is the paradigm of this study.

1.2 STATEMENT OF THE PROBLEM

The bank credit scam in Nigeria despite the introduction of audit committee brought of the fore the inherent weakness of audit committees and the motivation for a clearer understanding of audit committee’s efficacy. The scam also provided at least evidence to support concerns about the adequacies of monitoring provided by audit committees are functioning to maximize shareholders’ value or increase corporate performance. Furthermore, banks default and distress have hampered their performance significantly and diminished investors’ confidence in the banks thereby casting doubt as to the efficacy of the audit committee functions.

There are divergent views on the relationship between audit committees and performance. Some of the arguments support the link between corporate governance and performance. There is a skew in approach and method on study relating to audit committees and the studies are mostly concentrated on studies conducted in advanced countries with morp matured financial systems compared to the developing countries like Nigeria. Even though there are some studies related to developing countries, little or no evidence exist to the best of the researcher’s knowledge on the extent of the relationship of audit committees as a corporate governance framework and corporate performance. The research results on audit committees produced a mixed grill and inconclusive findings thereby providing a ground to examine the link between audit committee and deposit money banks performance in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The main objective of the study is to examine the impact of audit committees on the financial reporting quality in Nigeria deposit banks. The specific objectives of the study are to;

1. To examine the impact of components of audit committee size, independence, meetings and financial expertise on profitability of deposit banks in Nigeria.
2. To examine the impact of components of audit committee size, independence, meetings and financial expertise on financial standards on deposit banks in Nigeria.

1.4 RESEARCH QUESTIONS

Therefore, based on the above discussions the following research questions were answered in this study;

1. To what extent do components of audit committee size, independence, meetings and financial expertise size on profitability of deposit Banks in Nigeria?
2. How do components of audit committee size, independence, meetingsad financial expertise impact on financial standard compliance of deposit banks in Nigeria?

1.5 RESEARCH HYPOTHESES

Based with the research problem and objectives, the following research hypotheses were formulated and stated in null form.

HO1: Components of audit committee size, independence, meetings and financial expertise do not have any significant effect on profitability of deposit money banks in Nigeria.

HO2: Components of audit committee size, independence, meeting and financial expertise do not have any significant effect on financial standard compliance of deposits banks in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study is expected to contribute towards equipping regulator and supervisory agencies with knowledge of the attributes which greatly influenced the financial reporting quality in the context of Nigeria economy and the banking sector in particular, such knowledge will guide them in future review of the regulatory framework towards addressing the problem of fraudulent reporting in Nigeria.

The findings of this study contributes to the banking public, in that the study examines how audit committee impact on the performance of the banks and the financial standards compliance in Nigeria. Management of the banks could also find this study useful as it investigates the outcome of their stewardship (performance) in relation of their audit committee functions, which shows them some possible areas of additional efforts. Also, regulators such as the corporate affairs commission (CAC) securities and exchange commission (SEC) and central bank of Nigeria (CBN) could also find this study useful as the study analyzes the consequences of their series of intervention in the bank through the mechanism of corporate governance.

Shareholders as owners, who are usually concerned with maximation of their wealth, could also find this study useful because audit committee function will decrease agency cost, improve shareholders value.

Researchers and student would also find this useful because they are usually interested in understanding how the mechanisms of corporate governance affect corporate operations activities and performance. The study therefore provides the academic audience a further opportunity to stimulate and trigger thoughts on further research and by extension increase the frontiers of knowledge.

1.7 SCOPE OF THE STUDY

The study examines the impact of audit committee on financial reporting quality on the performance of deposit banks in Nigeria. However, the study is limited to First City Monument Bank and Unction Bank in Bori. Thus, it is a logical point to assess how the role of audit committee relate with the performance, compliances and investors’ confidence.

Audit committee in the context of  this study was examined through it four basic attributes size, independence, financial expertise, audit committees’ function and frequency of meetings. This is to have specific basis for policy and decision recommendations from the findings. The concept of performance in this study covers both financial and non-financial performance. The financial performance covers profitability while the non- financial performance covers the financial standards compliance.

1.8 LIMITATION OF THE STUDY

Despite the potential strengths of this research, a number of limitations are worth mentioning. First, this study focused on only two (2) money deposit banks in Bori. The choice of the banking sector was informed by it’s peculiarly. However, the sample size of data availability and this may not be representative enough for all the banks in Nigeria. Second, non-banking institutions and micro finance banks were not included in the study. Therefore, it is no possible to generalize the results of this study to the non-banking intuitions or all the banks in Nigeria. Finally, this study relied on annual reports obtained from the bank’s websites for the data used in testing the research hypotheses. It was not possible to visit the banks to obtain the hard copy version of the annual reports, to authenticate the internet versions. This could also act as a hindrance to the generalization of the results of this study.