Effect of Audit Committee Characteristics on Corporate Financial Reporting Quality in Listed Manufacturing Company in Kano
Chapter One
Objectives of the Study
The general objective of the study is to investigate the effect of audit committee characteristics on corporate financial reporting in Nigeria consumer goods sectors. However, the specific objectives are;
- To determine the effect of audit committee size on financial reporting quality in Nigeria consumer goods sector.
- To examine the impact between audit committee independence and corporate financial reporting quality in Nigerian consumer goods sector.
- To evaluate the influence of audit committee gender on corporate financial reporting quality in Nigerian consumer goods sector.
- To investigate the link between audit committee meeting affects and corporate financial reporting quality in listed Manufacturing company in Kano.
CHAPTER TWO
LITERATURE REVIEW
Preamble
This chapter covers conceptual, theoretical and empirical reviews. Concepts underpinning the study were critically examined to arrive at suitable variables for the study.
Contending theories were also reviewed to provide a suitable theoretical framework for the study. Previous empirical studies were also reviewed to arrive at gaps in literature and provide basis for discussing the outcome of this study.
Conceptual Review
Concepts reviewed includes financial reporting quality, audit committee independence, audit committee size, audit committee expertise and audit committee meeting.
Financial Reporting Quality
Financial reporting quality is defined as the faithfulness of the information conveyed by the financial reporting process (Martinez Ferrero, 2015). The word faithfulness is characterized by relevance, reliability, transparency and clarity (Jonas & Blanchet, 2000). Relevant information means that the financial statement should contain enough information useful to different users of the financial statements in assisting their decision-making process and that the information is provided in a timely fashion when they are still “news”. Reliability is what assures that the information is reasonably free from error or bias and that it truly represents what it is intended to represent. Information in a financial report will be reliable to the extent that users can depend on it to judge the economic conditions or events that it purports to represent (Shehu, 2013). Transparency means that the figures truly reflect the economic activities of the enterprise during the period. Clarity is focused on how the figures are presented. The format and language of presentation is also very important. Financial reporting should therefore provide information to help investors, creditors, and other users to project the amounts and timing of future cash flows to the enterprise (Waweru & Riro, 2013).
Audit Committee
Smii (2016) describes audit committee as one of the controllable mechanisms put in place to ensure the relevance and consistency of the accounting policies adopted for the preparation of the financial statements for the organizations. The researcher adds that the presence of audit committee within the firm will help improve the transparency of the information disclosure and limit the degree of the manager’s involvement in the process of the management result. Ancella (2011) sees audit committee as a committee established by the board of commissioners in order to assist the board of commissioners in carrying out their duties and functions. The researcher adds that the objective of the audit committee formation in the corporate governance structure is to increase the company’s accountability and transparency to its stakeholders by providing a more relevant and reliable financial information. Ilaboya (2012) defines audit committee as the governance body that is charge with oversight of the organization’s audit and control function. The researcher adds that it is a committee of the board of directors whose sole aim typically focuses on aspects of financial reporting on the entity’s processes to manage business and financial risk, and for compliance with significant applicable legal, ethical and regulatory requirements.
Audit Committee Characteristics
Committees such as the Audit committee are set up to achieve quality financial reporting by enriching financial practices within the company thereby increase earnings (Moses, Ofurum & Egbe, 2016; Ramsay, 2001). Audit committee is a statutorily corporate governance mechanism introduced to curb financial reporting manipulation therefore enhanced the quality of financial reports. However, the effectiveness of the audit committee is dependent on its attributes (Ormin, Tuta &Shadrach, 2015). The effectiveness of audit committees in overseeing the financial reporting process is found to be largely determined by several audit committee characteristics, including audit committee independence, financial and accounting expertise (Klein 2002; Bronson 2009; Carcello & Neal 2003; Abbott, Parker and Peters 2004; Feng 2014). Audit committee as a committee of the board of directors which assumes some of the board’s responsibilities is a statutory committee vested with the responsibility of performing oversight function on the financial reporting process of companies with a view to ensure financial reporting quality. (Menon & Williams, 1996; Ormin, Tuta & Shadrach, 2015) (Ormin, Tuta & Shadrach, 2015) state that “Audit committee” activity level also known as audit committee diligence has two components namely audit committee meeting frequency and attendance at meetings. Audit committee meeting frequency is concern with the number of meetings held by the committee during the year. Audit committee performance is associated with its meeting frequency. These were measures used to determine Audit committee characteristics. Previous works done by Xie, Davidson & Dadalt (2003) and Vefeas (2005) as cited by Ormin, Tuta & Shadrach, (2015) show that audit committees which meet more frequently are associated with not only lower discretionary accruals but there is also a likelihood of reporting smaller earnings increase by the firms. In the case of financial reporting restatements reporting restatements, Abbott et al. (2004) found that higher levels of audit committee activity proxy by the committee holding a minimum of four meetings in a year is positively and significantly associated with lower incidence (Ormin, Tuta & Shadrach, 2015).
CHAPTER THREE
METHODOLOGY
Preamble
This sction deals with the procedures used in data collection in line with the objectives of the study. It shows the research design adopted for the study as well as the population, sampling technique and sample size, method of data collection, research instrument and method of data analysis, model specification and measurement of variables.
Research Design
This study adopts ex-post facto research design to investigate the effect of the audit committee characteristics on financial reporting quality among listed companies in the listed Manufacturing company in Kano. This design is chosen because of its effectiveness in assessing the relationships and the effects of two or more variables the independent variable on the dependent variable. Thus, the design is consistent with the goal of this research.
Population and Sample
The population of the research include 34 listed companies in listed Manufacturing company in Kano as at the 2013 to 2020. The sample sizes that would be used for the research is 13 companies out of the 34 companies in listed Manufacturing company in Kano. However, so as to acquire sufficient panel data for logistic regression analysis,13 companies were selected by simple sampling techniques for this study.
Data collection
Secondary data was explored in this study. The sources of the data include the financial statements (statement of comprehensive income, statement of financial position, statement of cash flows and non-financial information) of the sampled listed companies in listed Manufacturing company in Kano from 2013-2020. The data was collected for the 13 listed companies for 8 years. This gives 104 firm year observations which are sufficient for data analysis.
CHAPTER FOUR
PRESENTATION OF RESULTS AND DATA ANALYSIS
Preamble
Chapter four covers presentation of results and data analysis. The data collected were subjected to descriptive and inferential statistical analyses. Means and standard deviations were computed for all the variables of the study. The results of this study consist of descriptive statistics, correlation analysis results and logistic regression results.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
Preamble
This chapter consist of the summary of the work done and summary of findings, conclusion from the findings of the study, recommendations that follows from the conclusion as well as suggestions for further studies.
Summary of the Work Done and Summary of Findings
This study centered on the relationship between audit committee characteristics and corporate financial reporting quality in Nigerian consumer goods sector. Chapter one consists of background to the study, statement of the problem, objectives of the study, Research questions, research hypotheses, Scope of the study and definition of terms. Chapter two focused conceptual, theoretical and empirical reviews.
Variable examined in the study include audit committee independence, audit committee gender, audit committee meeting, audit committee size and financial reporting quality. From the empirical review, gap in literature were identified. These gaps include geographical gap, methodological gap (research design, sample size, sampling techniques, method of statistics analyses and sector) and variable exclusion (audit committee gender which is not well researched) and a new proxy for financial reporting quality, faithful representation of financial statement operationalized by Nice, (2009) which this study proceeded to fill.
Chapter three focused on research design, population of the study, sampling techniques and data collection. To obtain sufficient panel data for regression analysis, 13 companies from the consumer goods sector were selected from the various consumer goods sector as at 31st December, 2020 by sample random sampling techniques. Secondary data were collected from the annual reports of the sampled companies in the consumer goods sector from 2013 to 2020.
In chapter four, the secondary data obtained from annual reports were subjected to descriptive and inferential statistics. The descriptive statistics includes means and standard deviation while the inferential statistics include correlation and logistic regression analyses.
The current chapter comprised summary of work done and summary of findings, conclusion, recommendations and suggestions for further studies. Major findings were outlined while policy implications of these findings were also highlighted. Summary of findings in this study,
The influence of audit characteristics on financial reporting quality of companies in Nigerian consumer goods sector was investigated in this study. This research work shows that audit committee size has a positive and significant effect on financial reporting quality among listed companies in listed Manufacturing company in Kano Further findings shows that audit committee independence has no significant impact on financial reporting quality among listed companies in listed Manufacturing company in Kano. Another result of this work shows that audit committee gender has no significant influence on financial reporting quality among listed companies in listed Manufacturing company in Kano. The last result shows that audit committee meeting has no significant link with financial reporting quality among listed companies in listed Manufacturing company in Kano. It can therefore be concluded that the audit committee size of the listed companies in listed Manufacturing company in Kano have important impact on the quality of the reporting of among listed companies in Nigerian consumer goods sector sampled for this research, whereas the audit committee independence, audit committee gender and audit committee meeting does not.
Conclusion
The influence of audit committee characteristics on financial reporting quality of companies in Nigerian consumer goods sector was investigated in this study. This research work shows that audit committee size has a positive and significant effect on financial reporting quality among listed companies in listed Manufacturing company in Kano Further findings shows that audit committee independence has no significant impact on financial reporting quality among listed companies in listed Manufacturing company in Kano. Another result of this work shows that audit committee gender has no significant influence on financial reporting quality among listed companies in listed Manufacturing company in Kano. The last result shows that audit committee meeting has no significant link with financial reporting quality among listed companies in listed Manufacturing company in Kano. It can therefore be concluded that the audit committee size of the listed companies in listed Manufacturing company in Kano have important impact on the quality of the reporting of among listed companies in Nigerian consumer goods sector sampled for this research, whereas the audit committee independence, audit committee gender and audit committee meeting does not.
Recommendations
Based on the conclusion of this study, the following recommendations were drawn:
The study recommended that more non-executive directors should be included in the audit committee to improve the independence of the committee. The study also recommends that more females should be included in the audit committee to improve the audit gender diversity of the committee. The study also recommends that the committee should meet more during the year.
Suggestion for Further Studies
Limitations of the study include limited data source and manageable size of variables. This study concentrated on consumer goods sector. Other sectors like Agriculture, conglomerates, financial services, health care, ICT, natural resource, oil and gas and service sectors were excluded.
Further studies may focus on other sector like Agriculture, conglomerates, financial services, health care, ICT, natural resource, oil and gas and service sectors of the economy. The variables explored to represent audit committee characteristics in this research work were limited to audit committee size, audit committee independence, audit committee gender, audit committee meeting. Audit committee is part of corporate governance other variable in corporate governance are board committee characteristics, the finance, Audit & risk management committee characteristics and Remuneration/governance committee characteristics may be considered in further studies.
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