The Effect Of Audit Committee Attribute On Financial Performance Of Listed Industrial Good Firms In Nigeria

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The Effect Of Audit Committee Attribute On Financial Performance Of Listed Industrial Good Firms In Nigeria


Abstract


The observable weaknesses in corporate governance of companies and the cases of accounting and audit failures have heightened concern of investors about corporate reports. This has led to the need for the establishment of Audit Committees to ensure the credibility of financial statements. This study seeks to evaluate the impact of Audit Committees (AC) on the performance of listed Industrial good firms (DMBs) in Nigeria. The specific objectives of the study are to evaluate the impact of components of Audit Committees (size, independence, meetings and financial expertise) on return on assets, net interest margin, Tobin’s Q, financial standard compliance, and investors’ confidence of Industrial good firms in Nigeria. The study employs qualitative and quantitative research methods using correlation and survey research designs. Panel regression and the Kendall’s coefficient of concordance technique of data analysis were used for the analysis. The population of the study includes all the listed Industrial good firms. The secondary data was analysed using sample size of 16 through census sampling technique. The primary data was analysed using a sample size of 281 from a population of 950 members of registered shareholders’ Associations using Yamane (1968) formula. The study reveals a significant positive relationship between components of audit committee (size, independence, meetings and financial expertise) and the performance of listed industrial good firms in Nigeria, and that audit committee function has significant positive impact on investors’ confidence. Specifically, the findings reveal that financial performance during the period improved with the presence of Audit Committee member who is an expert in accounting and finance, which implies that an increase in the audit committee by one member increases financial performance significantly. Also an increase in the independent non-executive directors in the audit committee membership by one member enhances the financial performance significantly. The findings further suggest that an enhanced frequency of audit committee meetings drives the financial performance significantly, suggesting that the higher meeting frequency of the committee, the higher the financial performance. The study as well reveals that holding excess assets by the firms reduces profitability, and that the opinion of the Audit committees’ discussions enhances the quality of managements’ decision making. It is glaring that the audit committee has taken appropriate steps to ensure internal and external audit cooperate appropriately to ensure the completeness of assurance coverage and compliance with laws. The study therefore, recommends that there should be strategy towards creating enabling environment for improve the sustainability of Audit Committee for enthronement of good corporate governance practices, increase in the number of non executive independent members of the Audit Committee, increase in the frequency of meetings and that Firms should align their philosophies in such a way that Audit Committee members’ education be entrenched to improve the quality of compliance decisions. The independence of audit committee must be deepened, with a true essence of regulation and the right assurance of improving investors’ confidence.


Table of Content


Chapter One:

Introduction

  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Purpose of the Study
  • 1.4 Objectives of the Study
  • 1.5 Research Questions
  • 1.6 Research Hypotheses
  • 1.7 Scope of the Study
  • 1.8 Significance of the Study
  • 1.9 Limitations of Study
  • 1.10 Plan of the Study

Chapter Two:

Review of Related Literature

  • 2.1 Conceptual Review
  • 2.2 Theoretical Review
  • 2.3 Empirical Review
  • 2.4 Summary

Chapter Three:

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 Population and Sample of the Study
  • 3.4 Sources and Method of Data Collection
  • 3.4.1 Instruments for Data Collection
  • 3.5 Technique of Data Analysis
  • 3.6 Variables Measurement and Models Specification
  • 3.7 Reliability of the Study
  • 3.8 Validity of the Study
  • 3.9 Ethical consideration
  • 3.10 Chapter Summary

Chapter Four:

Data Analysis and Result Presentation

  • 4.1 Introduction
  • 4.2 Presentation and analysis of qualitative data
  • 4.3 Presentation and Analysis of qualitative data
  • 4.4 Hypotheses Testing
  • 4.5 Discussion of Major Findings

Chapter Five:

Summary, Conclusion and Recommendations

  • 5.1 Summary
  • 5.2 Conclusions
  • 5.3 Recommendations
  • 5.5 Suggestions for Further Research
  • 5.6 Contributions to Knowledge
  • REFERENCES
  • APPENDIX

Chapter One


Introduction

1.1 Background to 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 bankruptcy as a direct or indirect result of the scandals, International Organization of Securities Commissions (IOSCO, 2005).

Collectively, these financial scandals caused many to be concerned about investors‟ confidence in the integrity of companies. As means of reducing the weaknesses in corporate governance, several mechanisms have been introduced among which is the adoption of Audit Committee 3(AC).

Audit Committee as a concept has now acquired mass coalesce as a mandatory element of corporate governance code (Tricker, 1978). Instances of accounting and audit failures and heightened concern of investors about the corporate reports of companies in the developed world led to the establishment of Treadway Commission (1987) in US, Cadbury Committee (1992) in United Kingdom and McDonald Commission (1987) in Canada (Spira, 2003). The aforementioned committees 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 statements. Audit committee was promoted on voluntary basis as part of corporate governance reforms (Turley and Zaman, 2004), and gained significant acquaintance with the formation of specialized committees like Blue Ribbon committee (BRC) in 1999.
A number of corporate scandals and failures have raised serious questions on the corporate governance practices of organizations and currently drawing attention of the business world particularly, governments, regulators and investors. Examples of Corporate failures include those of Polly Peck, Maxwell, Bank recession in Europe.

This critical role of Audit Committee (AC) is believed to be a means of improving economic efficiency and stakeholders‟ confidence in the firms 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 (SEC, 2003; Mohiuddin & Karbhari, 2010). These attributes of the audit committee are significant in addressing the short comings and weaknesses associated with the internal control system of the firms 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 them 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 their duties. Audit committee functions with these attributes are expected to ascertain a true and fair view of the financial performance and position of firms and also enhance the confidence of the investors and other stakeholders.

Corporate failures have devastating effects on an organization and could result to its death, loss of confidence and reputational damage (Onipakodi, 2010). Governance of companies must therefore be concerned with more than the existing mechanisms because recent failures, fraud, scandals and sharp marketing practices had adversely affected investors‟ confidence with implications on the financial system because there could be a link between the corporations and the Industrial good firms as a financing source . Relative development of and reliance of economic activities on the financial system have been offered as important explanations for the inter relationship between macroeconomic stability and the soundness of the financial system (Adedipe, 2006). Given that the Industrial good firms 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 Industrial good firms 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 listed Industrial good firms in Nigeria which is the paradigm of this study.


1.2 Statement of the Problem

The credit scam in Nigeria despite the introduction of audit committees brought to 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 and provided the concerns that have been expressed on whether audit committees are functioning to maximize shareholders‟ value or increase corporate performance. Furthermore, firms default and distress have hampered their performance significantly and diminished investors‟ confidence in the firms, 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 while others see no 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 more 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 evaluate the link between audit committee and Industrial good firms performance in Nigeria


1.3 Purpose of the Study

The purpose of the study is to assess the the effect of audit commerce attribute on financial performance of listed industrial good firms in Nigeria


1.4 Objectives of the Study

The main objective of the study is to evaluate the impact of audit committees on the performance of listed Industrial good firms in Nigeria. The specific objectives of the study are to:

  1. Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on return on assets of listed Industrial good firms in Nigeria
  2. Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on net Interest Margin of listed Industrial good firms in Nigeria
  3. Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on the Tobin‟s Q of listed Industrial good firms in Nigeria
  4. Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on financial standard compliance of listed industrial good firms in Nigeria
  5. Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on investors‟ confidence of Industrial good firms in Nigeria

1.5 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) impact return on assets of listed Industrial good firms in Nigeria?
  2. How do components of audit committee (size, independence, meetings and financial expertise) impact on net Interest Margin of listed Industrial good firms in Nigeria?
  3. What is the impact of components of audit committee (size, independence, meetings and financial expertise) on the Tobin‟s Q of listed Industrial good firms in Nigeria?
  4. How do components of audit committee (size, independence, meetings and financial expertise) impact on financial standard compliance of listed industrial good firms in Nigeria?
  5. To what extent do components of audit committee (size, independence, meetings and financial expertise) have impact on investors‟ confidence of Industrial good firms in Nigeria?

1.6 Research Hypotheses

Based with the research problem and objectives, the following research hypotheses were formulated;

  • H01: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on return on assets of listed Industrial good firms in Nigeria.
  • H02: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on net Interest Margin of listed Industrial good firms in Nigeria
  • H03: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant impact on the Tobin‟s Q of listed Industrial good firms in Nigeria
  • H04: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on financial standard compliance of listed industrial good firms in Nigeria
  • H05: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on investors‟ confidence of Industrial good firms in Nigeria

1.7 Scope of the Study

This study evaluates the impact of audit committee on the performance of Industrial good firms in Nigeria. However, the study is limited to all industrial good firms listed on the floor of Nigerian Stock Exchange (NSE) Market as at 31st December, 2013. The study therefore, covers a period of seven years (7) years (2007-2013). The choice of this period is informed by the fact that it is the period immediately after the banking sector consolidation and reforms, that is, when the banking sector witnessed intensive regulations and strict supervision including the review of code of best practices on corporate governance. It is also the period that many firms experienced performance crises, thus, 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 its four basic attributes (size, independence, financial expertise/experience, audit committees‟ function and frequency of meetings). This is to have specific basis for policy and decisions recommendations from the findings. The concept of performance in this study covers both financial and non-financial performance. The financial performance covers Return on Assets (ROA), Net Interest Margin (NIM), and the Tobin‟s Q; while the non-financial performance covers the financial standards compliance and Investors‟ confidence.


1.8 Significance of the Study

The critical role firms play in money creation in the economy makes the study of their performance a necessity. This study attempts to provide empirical evidence about the impact of one of the major corporate governance mechanism of firms (audit committee) on performance, financial standard compliances and investors‟ confidence of Industrial good firms thereby generating interesting literature to the regulators of the financial market, other self-regulatory organizations (SROs), Accounting Bodies, Corporate Affairs Commission (CAC), policy makers and the investing public. If an audit committee discharges its statutory duties diligently, firm performance could be enhanced and the probability of default would be less or even zero. Thus, it reveals the ability of the audit committee to monitor and control the management in the routine operations with regard compliance with the rules and standards in achieving the firms’’ objectives, which in turn implies the safety of the banking public and influence their confidence in the firms. Management of the firms could also find this study useful as it investigates the outcome of their stewardship (performance) in relation to the audit committee functions, which points to them some possible areas of additional efforts. Also, regulators such as the Cooperate 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 firms through the mechanisms of corporate governance. Thus, the results of this study provide empirical evidence on the effectiveness or otherwise of the audit committee and its attributes with regard to performance, compliances and confidence of the investors.


1.9 Limitations of Study

Like any other research, the result of this study is subject to some limitations due to some factors. Firstly, all the publicly quoted companies in Nigeria have audit committees, but this study is restricted to industrial good firms. Therefore, the generalization of the findings to non-financial firms is limited. Secondly, there are many measures of firm performance, but the study covers the return on assets, net interest margin and the Tobin‟s Q ratio, increasing the number of performance variables could have given a broader picture of the situation. Lastly, corporate governance has many variables and mechanisms but this study is limited to only four attributes of the audit committee.


1.10 Plan of the Study

The study is organized into five chapters.

  • Chapter one introduces the study by discussing the background to the study, statement of the problem, research questions, objectives of the study, hypothesis, scope significance and plan of the study.
  • Chapter two reviews literature and theoretical framework relevant to the study particularly, the concept of financial standards compliance, concept of investors‟ confidence, concept of firm performance, audit committee attributes and functions and the empirical studies on audit committee and performance. It also discusses the theories of corporate governance with regard to audit committee functions. The essence is to provide insight to the mechanism and framework, see the interaction, thereby providing the underpinning of the current research work.
  • Chapter three, spells out the details in the methods used in conducting the study. It contains research methodology, questionnaire format, population, sample and sampling technique, data collection technique and data analysis tool.
  • Chapter four contains data presentation, data analysis, results and discussions.
  • Chapter five summarizes the entire work, findings, conclusion and limitation of study. The chapter also provides some recommendations and suggestions for further study.

Chapter Five


Summary, Conclusion and Recommendations

5.1 Summary

Audit committee is an integral part of corporate governance that involves the evaluation of the system, processes, procedures and rules governing the operations and reporting the state of affairs to the stakeholders. Therefore, the code of corporate governance mandated an effective and efficient audit committee in the board of every bank. It is required that all the members of the audit committee should be non-executive directors and ordinary shareholders appointed at the annual general meeting. This study evaluates the impact of audit committee on the performance of listed industrial good firms in Nigeria. The specific objectives of the study are to evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on return on assets of listed Industrial good firms in Nigeria, evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on net Interest Margin of listed Industrial good firms in Nigeria, evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on the Tobin‟s Q of listed Industrial good firms in Nigeria, evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on financial standard compliance of listed industrial good firms in Nigeria and evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on investors‟ confidence of Industrial good firms in Nigeria.

The study covers all the industrial good firms listed on the floor of Nigerian Stock Exchange (NSE) Market as at 31st December, 2013 using data for period of seven years (7) years (20072013). The study employs mixed research method, that is, qualitative and quantitative research methods. The study adopts correlation research design for the quantitative aspect, while descriptive survey research design was used for the qualitative aspect. Panel regression technique of data analysis and the Kendall‟s coefficient of concordance were used in the analysis of the data collected. The study found that audit committee has significant positive relationship with the performance of industrial good firms in Nigeria during the period under review. Specifically, the study found that after controlling for bank size, institutional ownership and corporate board, the audit committee independence has significant positive impact on the financial performance (returns on assets, net interest margin and Tobin‟s Q ratio) of the firms. This suggests that the independence of the audit committee significantly improves the financial performance of the industrial good firms during the period of the study. The study also found that the size of the audit committee has significant positive impact on the financial performance (returns on assets, net interest margin and Tobin‟s Q ratio) of the sample firms, suggesting that, the size of the audit committee significantly improves the financial performance of the industrial good firms during the period of the study.

The study also found that audit committee financial expertise has significant positive impact on the financial performance (returns on assets, net interest margin and Tobin‟s Q ratio) of the sample firms, suggesting that, the presence of members with financial expertise in the audit committee significantly improves the financial performance of the industrial good firms during the period of the study. Similarly, the findings show that audit committee meetings have significant positive impact on the financial performance (returns on assets, net interest margin and Tobin‟s Q ratio) of the sample firms, suggesting that, the frequency of meetings of the audit committee significantly improves the financial performance of the industrial good firms during the period of the study. The study also found that audit committees‟ functions have significant impact on the financial standards compliance of listed industrial good firms in Nigeria. That is, audit committees‟ functions have significantly influenced the financial standard compliance of industrial good firms in Nigeria during the period under review. The study found that audit committees‟ functions have significant impact on the investors‟ confidence of listed industrial good firms in Nigeria that audit committees‟ functions have significantly impact the investors‟ confidence of industrial good firms in Nigeria.


5.2 Conclusions

The study concludes that there is a significant positive relationship between the components of audit committees (size, independence, meetings and financial expertise) and return on assets, Net Interest, Tobin‟s Q of listed Industrial good firms in Nigeria. In particular, the study concludes that the independence of the audit committee has significant positive impact on the financial performances of firms in Nigeria. The study also concludes that the size of the audit committees has significant positive impact on the financial performance of industrial good firms in Nigeria. Expertise of the audit committee has significant positive impact on the financial performance of industrial good firms in Nigeria during the period of the study. Also, the study concludes that the meeting frequency of the audit committee has significant positive impact on the financial performance of the industrial good firms during the period. The study concludes that the audit committees‟ functions have significant impact on the financial standard compliance of industrial good firms in Nigeria and audit committees‟ functions have significant impact on investors‟ confidence of industrial good firms in Nigeria.


5.3 Recommendations

The researcher recommends that:

  1. Efforts should be made in creating environment that would improve the sustainability of audit committee not only in publicly quoted companies but be extended to private companies for enthronement of good corporate governance practices ii. Regulatory bodies should provide guidelines on minimum requirement for Board size, number of experts, number and timing of meetings as well as empowering the share holder Associations to be active and report compliance. The regulatory bodies should strengthen their enforcement and compliance mechanisms, demonstrate that the code are truly effective and not mere appendages grafted on the administrative system so as to give effect to investor protection and confidence.
  2. Good corporate governance is critical to the global market place. Indeed audit committee of Industrial good firms in Nigeria must demonstrate, transparency in processes and trustworthiness in order to fully share in the benefit of globalization, development, investor‟s confidence and good governance.
  3. Companies should align their philosophies in such a way that investor and market operators‟ education be entrenched to improve the quality of compliance decisions.
  4. The independence of audit committee must be deepened, with a true essence of regulation and the right assurance of protection of investors. The entrenchment of effective audit committee would help build and retain investors‟ confidence and reduce systemic risk and improve corporate governance.

5.5 Suggestions for Further Research

The following areas are recommended for further research:

  1. Future researchers in this direction should concentrate on the non-financial sectors of the economy, especially manufacturing companies.
  2. Future researches should replicate the same research by bringing in other performance variables like risk assets quality, earnings per share, return on capital employed and liquidity.
  3. Future studies should also use other attributes of the audit committee such as industry knowledge, age and connections.

5.6 Contributions to Knowledge

This study contributes to knowledge in many ways; for instance, the study provides evidence on the effect of audit committees on the performance of industrial good firms in Nigeria using multivariate analysis (three models), which to the best of the researcher‟s knowledge, no such study in Nigeria has done that. Specifically, this study is unique in that it used quantitative and qualitative research methods in the analysis of the effectiveness of audit committees of the Nigerian firms, which is also very rare in the literature. Furthermore, most of the studies on audit committees concentrate only on the audit committees and financial reporting quality or earnings management while there are other dimensions with regards to audit committees‟ duties and responsibilities. This study contributes by relating audit committees with the performance of the Industrial good firms in Nigeria. Specifically the study shows there is positive relationship between the components of audit committee (size, independence, meetings and financial expertise) on return on assets, net Interest Margin ,Tobin‟s Q ,financial standard compliance and investors‟ confidence of industrial goods firms in Nigeria.


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