AUDIT COMMITTEE FUNCTIONS AND THE QUALITY OF FINANCIAL STATEMENT IN NIGERIA: USERS PERCEPTION

CHAPTER ONE

INTRODUCTION

1.1   Background to the Study

In public companies, it is generally the shareholders who ultimately approve the auditor’s appointment, and the auditors are primarily responsible to and overseen by those representing the shareholders’ interests with regards to financial reporting and internal controls. Typically an audit committee (or its equivalent), acting as a largely independent body, will be charged with representing the shareholders’ interests. Companies may not necessarily have an audit committee and this interchange may be dealt with less formally but in an equivalent manner. The audit committee is a sub-committee of those charged with governance, and is typically made up of a majority of non-executive directors who are the shareholders’ representatives in relation to the external audit. They are usually responsible for overseeing the audit and evaluating the independence and performance of the auditors.

An important role of the audit committee is to assess and recommend the appointment or reappointment of the audit firm. The audit committee also provides a forum for the auditors to escalate and discuss any significant concerns they may have about any aspect of the financial statements prepared by management. The chair of the audit committee has a vital role to play in assessing management’s tone from the top with respect to the company’s financial reporting. As well as their public report on the financial statements, the auditors will typically have more detailed communications with the audit committee. These communications may include a description of how the audit was carried out, the audit plan, the auditor’s views about the company’s accounting practices (including accounting policies, estimates and disclosures), how the auditors satisfied themselves on the key issues that arose, and significant difficulties, if any, encountered during the audit. The auditors may also comment to the audit committee on their insights in areas such as the strength of the organization’s internal control systems.

There has always been a curious intention for men since the inception of life to exploit the necessary avenues and opportunities that would make him self reliant being. This gave birth to the hunting and gathering of goods the very days of men. As he developed more skills and tools, he discovered he could adequately provide for himself and have some left over.

This was known as subsistence way of living man’s daily exploit lead to a graduation from this subsistence way of living, paving way for trade as a tool or means through which he will get the things which he desired but did not have. Consequently, there was the birth of trade and sole proprietorship. This is the base of the theory of the firm, which recognizes man (the entrepreneur) as a focal point for effective combination of other factors.

The emergence of sole proprietorship paved way for more efficient markets, there was need for an enlargement of the market, leading to increased capacity utilization. The seeming successful discovery was faced with lack of fund, this was an enormous, and an important factor militating against the average entrepreneur in the industry whose pooling of capital in the form of partnership could not adequately satisfy.

1.2   Statement of Problem

The statement of the problem gives a view, if having a chairman who is a chartered accountant makes the committee to be effective and independence or should audit committee members be separated from equity holders? The involvement of outside directors is having diverse effect on the performance and efficiency of the organization. Thus, the problem of this study is to the engagement of external directors which makes the committee less effective and independent.

1.3   Research Questions

The following are the research questions of the study;

i.      How do audit committee reports strengthen the decision relevance of corporate report?

ii.     How is the information content of audit committee reports relevant to its users?

iii.    To what extent do the users of corporate report rely on audit committee in making decisions?

1.4 Objective of the Study

The broad objective of the study is to analyze the relevance of audit committee functions on the quality of financial statement in Nigeria, the users’ perception. The following are the sub-objectives of the study;

i.      To ascertain if audit committee reports strengthen the decision relevance of corporate report.

ii.     To find out if the information content of audit committee reports is relevant to its users.

iii.    To determine if the users of corporate report rely on audit committee in making decisions.

1.5   Statement of Hypothesis

The following are the hypotheses of the study and are presented in the null and alternative forms;

Hypothesis One

HO:   Audit committee report does not strengthen the decision relevance of corporate report.

HI:    Audit committee reports strengthen the decision relevance of corporate report.

Hypothesis Two

HO:   The scope and information content of audit committee reports is not adequate to its users.

HI:    The scope and information content of audit committee reports is adequate to its users.

Hypothesis Three

HO:   Users of corporate report do not rely on audit committee in making decisions.

HI:    Users of corporate report rely on audit committee in making decisions.

1.6   Significance of the Study

The significance of the study is to reveal the perception of the users of financial audit committee report, and will also:

i.      Enable users of financial statement report to make an evaluation on the relevance of audit committee report.

ii.     It will expose the shortcomings of the audit committee report as it affect users of financial statements and offers suggestions on how those shortcomings can be amended.

iii.    To evaluate users of corporate report to have a better understanding of the general working of the audit committee.

iv.    To the academicians, it will increase the body of their knowledge.

1.7   Scope of the Study

This research work focus on the relevance of audit committee functions on the quality of financial statement in Nigeria. The study will involve assessing the effectiveness of audit committee since introduction. It will assess the relevance of audit committee report to users of financial statements. The geographical location for this study is Benin City, Edo State. Using a time frame of five (5) years, i.e. 2011 to 2015 (both years inclusive), a large sample size of 145 was used for effective survey.        

1.8   Limitations of the Study

It is important to mention that some constrains were experienced. In the course of this study which slightly affected scope and details of the study. These constraints are as follows:

Lack of some current information: Most libraries in the country are shelved with old books which information is out-dated or insufficient coupled with the absence of recent journals publication and research result.

Also the un-co-operative behavior of some library staff i.e. is somebody went there collect project topic due to their behavior to people they will just tell you to copy it there instead of giving it out or even help you to photocopy of for you to pay them but they don’t.

1.9 Definition of Terms

i.      Auditing: Auditing could be defined as a service activities demanding by society (the demand having it not in some things called the agency theory) with the expressed aim of adding to the perceived credibility of the published financial statement of limited liability enterprises.

ii.     Audit committee: This is a standing committee established to enhance the corporate accountability by working with the board and management to improve the financial reporting practices of an entity and ensure proper conduct of corporate affairs.

1. Independence: This implies freedom from include influence. This is imperative if the auditor is to make true and unbiased comments on the financial statement.
2. Audit Programe:- An audit programme is the list of work an auditor does on the occasion of his audit.