The Relevance Of Audit Committee Functions On The Quality Of Financial Statement In Nigeria: Users Perception

Project and Seminar Material for Accountancy / Accounting

The Relevance Of Audit Committee Functions On The Quality Of Financial Statement In Nigeria: Users Perception


Abstract


This project analyzes the relevance of audit committee functions on the quality of financial statement in Nigeria, the users’ perception. The broad objective of the study is to ascertain if audit committee reports strengthen the decision relevance of corporate report and also to find out if the information content of audit committee reports relevant to its users. The primary source of data was used where questionnaires were distributed to gather information. The simple random sampling technique was used to select a sample size of 145 and the chi-square statistical tool was used to test the stated hypotheses. The findings revealed that that audit committee reports is very imperative to the users of corporate or published financials. It was concluded that the extent to which audit committee function has been achieved and is quite encouraging. The study recommends among others that audit committee of companies should meet regularly as the situation demands, as this impact positively on the shareholders investment.


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;

  1. How do audit committee reports strengthen the decision relevance of corporate report?
  2. How is the information content of audit committee reports relevant to its users?
  3. 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;

  1. To ascertain if audit committee reports strengthen the decision relevance of corporate report.
  2. To find out if the information content of audit committee reports is relevant to its users.
  3. 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:

  1. Enable users of financial statement report to make an evaluation on the relevance of audit committee report.
  2. 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.
  3. To evaluate users of corporate report to have a better understanding of the general working of the audit committee.
  4. 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.

iii. Independence:

This implies freedom from include influence. This is imperative if the auditor is to make true and unbiased comments on the financial statement.

iv. Audit Programme:

An audit programme is the list of work an auditor does on the occasion of his audit.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 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


5.2 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


5.3 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.


5.4 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


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