EMMANUEL Huleji Dauda and EDOGBANYA,Adejoh Ph.D.
daudupress@gmail.com and adejoh17@yahoo.com.
Abstract
The primary role of the audit committee is to supervise the internal process of preparing financial reports and ensure that the conflict of interest between management and shareholders is minimized by instituting internal control mechanisms so as to enhance overall performance of the firms. A function that is critical for the survival of every business. Against this background, this study examines the Moderating effect of Big4 on Audit Committee and Financial Performance of Quoted Nigerian Industrial Goods Companies in Nigeria from 2011-2020. Audit Committee was proxied by Audit Committee Diligence, Audit Committee Financial Expertise, and Audit Committee Gender Diversity.
Financial Performance was measured by Return on Asset. The population and the sample size are the same Twenty-One Industrial Goods Companies Quoted on the Nigerian Exchange as at 31st December, 2020. The data were sourced from the financial statements of the companies. Descriptive statistics, Pearson Correlation, Shapiro-Wilk data normality test and Heteroskedasticy test were the diagnostic tests conducted. The analysis was by Pooled Ordinary Least Square multiple regression method. It was recommended that there is significant relationship between audit committee characteristics and financial performances, companies should ensures expertise are seriously considered in formation of audit committee of any corporation.
Keywords: Audit Committee, Financial Performance, Return on Assets, Moderating Variable.
Introduction
Audit committee is a central element of one of such reforms engendered by corporate governance practice that can improve the quality of financial reporting through an open and candid communication and a good working relationship with a company’s board of directors, internal auditors and external auditors (Mustafa, 2012). The existence of an appropriately constituted audit committee is now a necessity for all listed companies in Nigeria. According to CAMA (2020) Section 359 (4) as amended,(2020) the make-up of the statutory audit committee shall consist of an equal number of directors and representatives of the shareholders of the company subject to a maximum number of six members (Eriabie & Izedonmi, 2016). For the purpose of this study, audit committee referred to is the statutory audit committee.
Audit committee is an important corporate governance mechanism designed to ensure that a company produces relevant, adequate and credible information that investors as well as independent observers can use to assess company performance with high reliability (Bansal & Sharma, 2016).
The Audit committee’s establishment comes as a solution to the corporate scandal that was rocking numerous companies across the globe. For instance, in Nigeria, Chief Executives of Oceanic, Afribank and Intercontinental Banks were found guilty of high level fraud running into billions of Naira and money laundering cases while, the CEO of Cadbury Plc and Lever Brothers (now Unilever Plc), an Anglo-Dutch company were accused of doctoring their financial statements (Afolabi & Amupitan, 2015; Chukwunedu et al. 2013). These crises arose despite the fact that their books of accounts were certified to be true and fair representation of their financial position by external auditors.
The most important roles of the audit committee include overseeing the financial reporting process and monitoring the management since management intends to manipulate figures for their own interest (Al-Mamun et al., 2014). The Audit Committee could be either Board audit committee or statutory audit committee electable only by the Annual General Meetings (AGM). Audit committee is a central element of one of such reforms engendered by corporate governance practice that can improve the Profitability by ensuring strict internal control and fostering a good working relationship with a company’s board of directors, internal auditors and external auditors (Mustafa, 2012).
The existence of an appropriately constituted audit committee is now a necessity for all listed companies in Nigeria. According to CAMA (2004) as amended in 2020, Section 359 (4) the make-up of the statutory audit committee shall consist of an equal number of directors and representatives of the shareholders of the company subject to a maximum number of six members (Eriabie & Izedonmi, 2016). For the purpose of this study, audit committee referred to is the statutory audit committee.
Audit Committee Diligence refers to the level of commitment exercised by the members of the audit committee can be measured by the number of meeting they hold in an accounting year. The Nigerian Code of Corporate Governance (2018) states in Section 11.4.5 that the committee should meet at least once every quarter and in Section 11.4.8 added that at least, once in a year, the committee should hold a discussion with the head of the internal audit function and the external auditors without the presence of management, to facilitate an exchange of views and concerns that may not be appropriate for open discussion. Common sense dictates that the more regularly the members of an audit committee meet, the better for the company as issues demanding their attention would not pile up or remain unattended to for a long time thereby assisting the internal control system as a whole to function effective, thereby remain a factor that affects financial performance.
Audit Committee Financial Expertise refers to the proportion of the committee members with a good knowledge of accounting and finance. Financial experts inclusion in audit committee was first recognized under Section 359 (3) and (4) of CAMA 2004 (as amended) and was further reflected in the SEC code of 2011 mandating that at least one of the audit committee members should have sound knowledge in financial and accounting matters (Osemene & Fakile, 2018). Section 11.4.2 of the Nigerian Code of Corporate Governance (2018) puts it succinctly clear that all members of the audit committee should be financially literate and should be able to read and understand financial statements and that at least one member of the committee should be a financial expert in accounting and financial management and be able to interpret financial statements.
Audit Committee Gender Diversity refers to the differences in the number of male and female members of the audit committee of companies. There has been a steady demand for female representation on corporate boards and hence audit committees since the Benjing declaration in 1995 where it was argued that women have not been given their rightful place in corporate governance (Omotoye et al., 2021). This call finds support in the Resource dependency theory which aligns with the view that inclusion of women on the board would afford the firm different ideas, views and experience. Audit committee gender diversity which is concerned with the presence of women on audit committee has the potential of influencing financial performance since it has been argued according to Wakaba (2014), that women are more likely to be through and vigilant in their statutory responsibilities and therefore detect misstatements and fraud easily.
The main objective of this study will be to examine the Moderating effect of Audit Firm Type on Audit Committee and Financial Performance of quoted Industrial Goods Companies in Nigeria, while the specific objectives are to:
I. Establish the effect of Audit Committee Diligence and Financial Performance of Quoted Industrial Goods Companies in Nigeria.
II. Determine the effect of Audit Committee Financial Expertise on Financial Performance of Quoted Industrial Goods Companies in Nigeria.
I. Investigate the Audit Committee Gender Diversity on Financial Performance of Quoted Industrial Goods Companies in Nigeria.
In order to achieve the stated objectives of this study, the following null hypotheses were developed:
I. Audit Committee Diligence does not have significant effect on Financial Performance of Industrial Goods Companies in Nigeria;
II. Audit Committee Financial Expertise has no significant effect on Financial Performance of Industrial Goods Companies in Nigeria;
III. Audit Committee Gender Diversity shows no significant effect on Financial Performance of Industrial Goods Companies in Nigeria;
2 Conceptual Review of the Study
The conceptual framework of this study is made up of the independent variable (Audit Committee) proxied by Audit Committee Diligence (ACD), Audit Committee Financial Expertise (ACFE), and Audit Committee Gender Diversity (ACGD), the dependent variable Financial Performance measured by Return on Asset (ROA).
Concept Audit Committee
Qeshta et al. (2021) refer to an Audit Committees as a supervisory body on behalf of all stakeholders that is mandated to ensure financial information’s trustworthiness by creating a management-free environment where external auditors can certify the company’s accounts and financial statements, adding that an audit committee must have the competence and be empowered to perform its role as a catalyst for implementing, observing and maintaining acceptable corporate governance practices to benefit all stakeholders and management. Olayinka (2019) reports that Audit Committees establish checks and balances in the internal control system through the association of internal auditors and external auditors to ensure that the management comply with the laid down rules. Salloum et al. (2014) maintain that Audit Committee is to assist the board of directors in effective management monitoring with the aim of protecting the interest of the shareholders.
Samoei and Rono (2016) note that Audit committees have a significant impact on the financial performance of a firm because they act as watchdogs and can prevent fraudulent financial reporting by ensuring that the financial statement reflects the actual state of affairs on the ground.
Audit committees play an important role in supervising and monitoring the management of the company in order to protect the interests of the owners (Oroud, 2019). The audit committee, in the opinion of Arshad et al. (2011) is a critical link between a firm’s financial reporting function and its external shareholders, noting that when this link is compromised, it can lead to even larger corporate governance failures. Olayinka (2019) also affirms that firms with high-quality audit committees are less likely to have internal control weaknesses which will adversely affect financial performance than firms with low-quality audit committees. For the purpose of this study, Audit Committee characteristics are Audit Committee Size, Audit Committee Independence, Audit Committee Financial Expertise and Audit Committee Gender Diversity
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