The Relevance of Audit Committee Functions on the Quality of Financial Statements in Nigeria User’s Perception
Chapter One
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;
- To ascertain if audit committee reports strengthen the decision relevance of corporate report.
- To find out if the information content of audit committee reports is relevant to its users.
- To determine if the users of corporate report rely on audit committee in making decisions.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
INTRODUCTION
This section presents the conceptual framework, empirical review and theoretical literature on the effect of audit committee tenure on financial reporting quality. The earliest evidence of the use of audit committees was in the United States in the late 1930s when the New York Stock Exchange advised corporations to set up audit committees (Armitage & Bradley, 1994). By 1978, the establishment of audit committees had become mandatory for all companies listed in the New York Stock Exchange (Williams, 1977). According to the Sarbanes-Oxley Act 2002, an audit committee refers to: A committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and if no such committee exists with respect to an issuer, the entire board of directors of the issuer. Ayinde (2002) opines that the audit committee is a standing committee established to enhance corporate accountability by working with the internal auditors and management to improve and strengthen the financial reporting practices of an entity and ensure proper conduct of corporate affairs in accordance with generally accepted ethical and legal standards. Leong, Wang, Suward and Kusnadi (2015) define audit committee tenure as the tenure of audit committee directors on the board is another important factor in determining the effectiveness of audit committees in performing their monitoring role. The tenure refers to the length of time the audit committee member has served on the board. There are several views on the impact of tenure length of audit committee members on their ability to fulfill their duties competently and effectively. The theory of inspired confidence underpins the study because it offers a linkage between the users’ requirement for credible financial reports and the capacity of the audit processes to meet those needs. Developed by the LimpergInstitute in Netherlands in 1985, the theory of inspired confidence posits that the auditor, as a confidential agent, derives his broad function from the need for expert and independent assessment plus the need for an expert and independent judgement supported by evidence. Minimizing the risk of undetected material misstatements implies that the auditor is under a duty to conduct his work in a manner that does not betray the confidence which he commands before the rational person even if the auditor may not produce what is greater than the expectation of the public. The import of the theory of inspired confidence is that the duties of the auditors derive from the confidence that are bestowed by the public on the success of the audit process and the assurance which the opinion of the accountant conveys. Since this confidence determines the existence of the process, a betrayal of the confidence logically means a termination of the process or function. Carmichael (2004) discusses the social significance of the audit and asserted that when the confidence that society has in the effectiveness of the audit process and the audit report is misplaced, the value relevance of that audit is destroyed. Audit provides assurance to the owners, management, investors and stakeholders of a company as well as provides confidence in financial reporting, corporate governance and the capital markets. Empirically, a number of studies have examined the effect of audit committee tenure on the financial reporting quality of listed deposit money banks in Nigeria. Therefore, Dopuch, King and Schwartz (2001) examine the impact of auditor committee tenure on financial reporting quality. The result is consistent with the hypothesis that the auditor compromises his independence most often in a long term auditor contract and suggests that after all auditor tenure may have significant effect on the audit quality. Geiger and Raghunandan (2002) posit that the effect of audit committee tenure on the credibility of financial statements can be seen from two views; regulators and economic view. In the point of regulatory view, long association between a client and an audit firm may lead to impair their independence. For example, in the United States, the Metcalf Committee report argues that long association between a corporation and an accounting firm may lead to such close identification of the accounting firm with the interests of its client’s management that truly independent action by the accounting firm becomes difficult. Therefore, the report suggest a mandatory auditor rotation as a way for the accounting profession to bolster their independence from clients. Myers, Myers and Omer (2003) find that auditor committee tenure reduces abnormal accruals whether positive or negative. Taken as a whole, these US studies run counter to the assumption that the quality of audit deteriorates as the length of auditor-client relationships increases. In France, auditors are chosen for six financial years. As a result, their mandate (and to some extent their tenure) enjoys a strong legal protection, initially enforced to limit opinion-shopping opportunities. However, this legal protection may have adverse effects. If this is so, the capacity of the auditor to resist managerial pressure is likely to deteriorate over time.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study sought to the relevance of audit committee functions on the quality of financial statement in Nigeria user’s perception
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
Population of the study
Population of a study is a group of persons or aggregate items, things the researcher is interested in getting information the relevance of audit committee functions on the quality of financial statement in Nigeria user’s perception. 200 staff of Benin City local government of Edo state was selected randomly by the researcher as the population of the study.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the relevance of audit committee functions on the quality of financial statement in Nigeria user’s perception
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenge of the relevance of audit committee functions on the quality of financial statement in Nigeria user’s perception
Summary
This study was on the relevance of audit committee functions on the quality of financial statement in Nigeria user’s perception. Three objectives were raised which included: To ascertain if audit committee reports strengthen the decision relevance of corporate report, to find out if the information content of audit committee reports is relevant to its users, to determine if the users of corporate report rely on audit committee in making decisions. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of Benin city local government, Edo state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up cashiers, directors, senior staff and junior staff was used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
We have examined users’ perception of the relevance of the audit committee report in the financial statement. In the first section, we stated the research problems, objectives, as well as hypotheses to be tested. Next, we reviewed relevant literature on the subject matter. Furthermore, our research methodology, design, presentation, and analysis of results were highlighted. Users’ perception of a subject matter is highly subjective, however, from the work done, it is safe to say that the audit committee report in itself is relevant but to include it as a compulsory report may not be quite necessary, as most financial statement users do believe that it does not significantly affect the quality of financial reporting.
Recommendation
In light of the foregoing discussions, it is our opinion and recommendation that the following should be put in place. Since the audit committee report is seen as to not significantly affect the quality of financial reporting, it should not be a compulsory report so as to reduce cost, waste and make the financial statement brief yet weighty and relevant. The law is silent on the issue of remuneration of audit committee members. However, to motivate members of this group, which in turn will help improve their reporting quality, moderate allowances should be given. It must however be stated that this allowance given should be fixed and paid by the shareholders not management so as not to puncture the independence of the committee. Furthermore, to safe guard independence, the enabling law can fix a remuneration amount for audit committees as against individual companies fixing diverse amounts. To improve users’ perception of the credibility of audit committee reports, the law should categorically state the qualification requirements for its member just as it did for external auditors
REFERENCES
- Abbott, L. J., & Parker, S. (2000). Auditor Selection and audit committee characteristics, Auditing: A Journal of Practice and Theory, 19(2), 47–66.
- Anyaduba, J. O. (2006) .The impact of audit committee on corporate governance practices in Nigeria, Benin Journal of Social Sciences, 87-98
- Armitage, J. L., & Bradley, R. J. (1994). Audit committees: The Nigerian Accountant.
- McMullen, D. A. (1996). Audit Committee Performance: An Investigation of the Consequences Associated with Audit Committee. Auditing: A Journal of Practice & Theory, 15, 87-103.
- Blue Ribbon Committee [BRC] (1999). Report and Recommendations of the Blue Ribbon Commission on Improving the Effectiveness of Corporate Audit Committees. Stamford, CT.