Concept of Audit Committee Diligence and Financial Performance
Audit Committee Diligence refers to the commitment of the members of the committee demonstrated by the frequency of their meetings which will afford them ample opportunity to resolve issues inimical to the firm’s performance. Garas and ElMassah (2018) note that more regular meetings could help ensure that the agency’s problem is reduced and eliminate asymmetric information that improves information dissemination and boost financial performance. Bhuiyan and D’Costa, 2020) argue that meeting may ensure that shareholders and all investors can get accurate and timely data to make informed financial decisions to the advantage of the firms. Juhmani (2017a) assets that the interest of shareholders can be protected by firms that ensure that a regular audit meeting is carried out which encourages investment and improve financial performance as the level of efficiency and accountability tends to improve. Al Farooque et al. 2019) increasing of number of committee meetings might influence the mechanism of monitoring and that will encourage executives to well perform in their duties which will directly affects and improves the financial performance for the corporation and protecting the shareholders’ wealth.
Concept of Audit Committee Financial Expertise and Profitability
Audit Committee Expertise may be defined as the ratio of members of an audit committee that have sound knowledge of accounting and finance relative to the total number of members of the committee. Oudat et al. (2021) define Audit Committee Financial Expertise as the ability to assess and examine the financial statements, understand applicable principles accounting of the financial statements of the corporation other duties that related to accounting and finance field which will enhance the corporation performance and profitability. Weber (2020) opines that audit committee must comprise persons who have some background in finance and accounting to quickly understand and interpret figures presented in the financial statement. Qeshtaa and Ali (2020) aver that these financial experts must be able to easily assess the Statement of Financial Position quality, statement of cash flow and financial statement and detect inconsistencies that may aggravate audit risk. Mardnly et al, (2018) opine that audit committee financial expertise helps to ensure that the auditing tasks are carried out effectively, leading to higher financial performance. Gurusamy (2017) argues that having the right people with the required financial expertise would significantly improve the firm’s financial performance.
Concept of Audit Committee Gender Diversity and Profitability
Audit Committee Gender Diversity is the inclusion of female directors on the audit committee for the purpose of diversifying resources. Ibrahim and Alharasees (2019) establish that the audit committee gender diversity and the involvement of a female members in committees has a significant effect on the corporation’s decisions and hence it’s overall performance, adding that female audit members are capable of improving firm governance structure through their conservative and ethical qualities. Osemene and Fakile (2018) suggest that greater gender diversity produces more viewpoints and critical issues which can lead to obstacles within the company, possible discrimination, increase in the likelihood of conflict, and reduction in cooperation, satisfaction and engagement thereby adversely affecting performance.
Aldamen et al. (2018) show that company teams with an equal gender representation perform significantly better when it comes to both sales and profits than male-dominated teams. Luckerath-Rovers (2013) observe that the percentage of women on the board and its committees is positively and significantly related to company performance. Carter et al. (2010) report that the presence of women in the audit committee is considered as an improvement to the organizational value and performance as it provides new insights and perspectives in the performance of its oversight functions which would likely result in enhanced performance. Gender advocates argue that women should sit on the monitoring committees such as the audit committee because they are good monitors and can consequently exert positive influence on the profitability of firms (Kaplan et al., 2009). Campbell and Mínguez-Vera (2008) find out that gender diversity has a positive effect on company’s performance. Miller and Triana (2009) reveal that board diversity leads to enhance company’s performance.
Concept of Financial Performance
Nuryaman (2012) defines performance as a description of level of achievement of the implementation of an activities / programs / policies in realizing the goals, purpose, mission and vision of the establishments as stated in the formulation and long term schemes (strategic planning) of an institution, can generally be said that the performance is the achievement which can be achieved by firms in a particular period. Khanchel (2008) posits that the measurement performance can be explained as a process of measuring the efficacy measures. This measurement is tailored towards identifying weakness of any firm and performance of the companies. The effectiveness and efficiency of any organization activities could be viewed as performance measurement of companies or firm performance.
Gitman & Vandenberg, (2000) Nuryaman (2012, p. 12) defined “performance as a description of level of achievement of the implementation of an activities / programs / policies in realizing the goals, purpose, mission and vision of the establishments as stated in the formulation and long term schemes (strategic planning) of an institution, can generally be said that the performance is the achievement which can be achieved by firms in a particular period”. Kald and Nilsson (2000) and Khanchel (2008) posit that the measurement performance can be explained as a process of measuring the efficacy measures. This measurement is tailored towards identifying weakness of any firm and performance of the companies. The effectiveness and efficiency of any organization activities could be viewed as performance measurement of companies or firm performance (Nanka-Bruce, 2011).
2.2 Theoretical Review
This study is anchored on Gender Socialization theory and Contingency theory of leadership. The Gender Socialization theory underpins this study in that in support of theory advocacy for inclusion of substantial number female members on audit committee, this study finds out that more female members on audit committee brings a positive significant effect on Financial Performance. The Contingency theory of leadership also underpins this study as the study found out that increasing the number of people with sound knowledge of accounting and finance on audit committee does not automatically translate to improved financial performance, but as the Contingency theory advocates, appointment financial experts on the audit committee should by based on the particular situation on the ground facing management.
2.3 Empirical Review
Omotoye et al. (2021) investigate audit committee and financial performance of listed deposit money banks in Nigeria. They specifically studied the influence of audit committee size, gender diversity, expertise on performance (measured by Tobin Q). Panel data were gathered from twelve (12) banks listed on the Nigerian Stock Exchange from 2013 to 2017. The study used fixed and random regression analysis. The results indicate that the association between audit committee size and Tobin Q was negatively significant. There was a positively significant impact of audit committee gender diversity and audit committee expertise on Tobin Q. The results imply that weakness in governance structures might lead to lower performance. This study recommends that firms should ensure that appointment criteria prioritize knowledge and competence, and that regulatory bodies are also encouraged to track the compliance of listed firms with corporate governance regulations. They used appropriate analytical tool in analysing the panel data but using 2017 dataset as the latest in a 2021 study engenders currency problems on their findings.
Ara and Hashim (2021) study the effect of audit committee features on Financial Performance of the listed pharmaceutical companies in Bangladesh. Applying purposive sampling method, the study has used a sample of 5 (five) listed pharmaceutical companies of Bangladesh to perform the empirical investigation. The data were assembled over a period of 4 (four) years from 2016 to 2019 from the annual reports of the sample firms. Audit Committee Size and Audit Committee Independence have been used as the features of Audit Committee, while, return on assets was the proxy that measure the profitability of the sample companies. Adopting multiple regression analysis technique on the collected data, the study has observed that Audit Committee Size has positive significant effect on financial performance, while, Audit Committee Independence has an insignificant positive association towards financial performance of the sample firms. They offer no specific recommendation. The inclusion of 2019 data in the 2021 study helps in improving the currency of their findings but, the mere mention of multiple regression analysis technique with any specificity was not proper.
Haddad et al. (2021) evaluate the impacts of the audit committee on the financial performance of Islamic and conventional banks between 2010 and 2019. The financial performance measures and audit committee of the conventional and Islamic banks considered 112 banks of each type. The collected data were collected from four continents: America, Asia, Africa and Europe. Impacts were compared by using the Generalized Least Squares analysis. The results show that the audit committee reduced the profitability of two bank types. Moreover, it harmed the conventional banks’ efficiency but reported an unclear effect within Islamic banks. The study also find that audit committee had a positive impact on the conventional banks’ liquidity, while the same effect was apparently ambiguous for the Islamic banks’ liquidity. For solvency, the audit committee positively influenced conventional banks while it negatively affected that of Islamic banks. They recommend that future studies should open a new research axis that would compares the importance of a female presence in the ACs of conventional and Islamic banks on their FPs in terms of staff, added value, impact type and degree of influence. Appropriate tools for analysis were employed and the currency of their finding did not suffer as their data included those of 2019 in their 2021 study.
Oudat et al. (2021) investigate the effect of audit committee characteristics and financial performance among services sector corporation-listed in Bahrain Stock Exchange for the period from 2012 to 2019. The Panel Least Square regression method was employed. Audit committee characteristics was represented by expertise, independence, size and frequency of meetings as the independent variables, while, return on asset, return on equity and earning per share are proxies of financial performance. Corporation’s size, leverage and age are examined as control variables. The results show that there is significant relationship between Audit Committee Independence, Audit Committee Meetings and the performance (ROA, ROE and EPS) and there is no statistical significance effect of Audit Committee Financial Expertise and Audit Committee Size on performance (ROA, ROE and EPS). They recommend that future studies should take into account a range of other factors, such as foreign audit committee representatives and AC chairman independence and AC diligence, which may have a major role to play in enhancing firm performance. They used appropriate statistical tool and multi-model analysis which is very distinctively proper and the inclusion of 2019 data in the 2021 data enhanced the currency of their findings.
Qeshta et al. (2021) examine the impact of the Audit Committee’s characteristics on the performance of the five insurance companies listed on the Bahrain Burse over the period from 2012 to 2019. The study uses the size of the audit committee, independence of the audit committee, frequency of meetings of the audit committee and expertise of the audit committee. The study used company size and firm age as control variables. Three-panel models used with a different dependent variable for each one were used in this study. The results of the study show a statistically significant negative relationship between meetings of the audit committee and performance. The size of the audit committee, the independence of the audit committee and the experience of the audit committee have no significant association with the performance of the insurance companies listed on the Bahrain Stock Exchange. They recommend that, other Audit Committee features outside those used in the study such as Committee tenure and financial experience should be examined in future studies for comparative findings. They failed to specify the three panel models used and did not declare results based on the multiple models but gave a generalization.
Alzeban (2020) explores the role played by audit committees as a facilitator of the achievement of firm performance. Data were gathered from survey questionnaires directed to chief internal auditors and from the annual reports of 119 listed companies in Saudi Arabia (SA) and the United Arab Emirates (UAE). Ordinary least squares (OLS) regression and mediation tests were used to assess the study’s hypotheses. The findings indicate that the independence of the audit committee and having members with accounting and auditing expertise have significant effect on firm performance. The study recommends for future studies to include more economies for comparative conclusions. The use of questionnaires for data assemblage was improper because of inherent reliability problem and the failure to disclose the period cover by the study was not proper.
Commey et al. (2020) examine the effect of Audit Committee Size on Financial Performance of some selected firms in Accra, Ghana. The data were obtained through a field survey while the linear regression model were developed for analysis. In terms of audit committee size, the result shows a negative relationship with ROA, but significant. The audit committee independence has a negative significant effect on return on asset (ROA). Audit Committee Meeting has an insignificant effect on ROA. The study recommends that in order to reduce financial distress in a company, there is need to increase the number of independent directors because they are independent and without influence from the directors and that future studies should consider more factors like, committee gender diversity, audit committee financial expertise, audit committee tenure and other variables such as audit committee composition that can influence firm’s financial performance. They used primary data which a washed with reliability problem and failed to specify which of the linear multiple regression they adopted.
- Methodology
This study will adopt the ex-post facto research design as it relies entirely on historical data as the events under investigation have taken place. The population of this study comprises the 21 Industrial Goods companies in Nigeria that were quoted on the Nigerian stock exchange as at 31st December, 2021. The sample size of this study was 21 Industrial Goods Companies in Nigeria. This number forms a good representation of the population. This study adopts the Census Sampling Technique which employed when all the population of the study is sampled for study. The data for the study was sourced from the financial reports of the various sampled Insurance Companies from 2012-2021.- The data for this study were diagnosed using Descriptive Statistics for Means and standard deviations, Shapiro-Wilk data normality test to find the distribution pattern of the data, Pearson Correlation matrix to ascertain the presence or otherwise of multicollinearity among the independent variables and heteroskedasticy test to ascertain the stability of the residual variance. The analysis was conducted by Robust Multiple Regression for testing the formulated null hypotheses in both models.
Model Specification
For the purpose of clear presentation and interpretation, this study adopts a Two-model approach because of the distinctive effect of a moderating variable incorporated. The specified models of this study are designated as Model I and Model II.
For Model I which captures the direct interaction between the independent variable and the dependent variable without interference of the moderating variable is specified in a functional linear equation as follows:
ROA = f(ACD + ACFE+ ACGD + AFS) Econometrically, the above functional relationship is presented as:
ROAit = β0 + β1ACDit + β2ACFEit + β3ACGDit + AFS + €it…………..
Where:
ROA = a predictor for Return on Assets (Proxy for dependent variable);
f = denotes functional relationship;
β0 = Coefficient of the constant;
;β1 – 4 = Coefficients of the proxies of independent variable;
β5– β8 = Coefficients of the Audit Firm Type-moderated proxies of independent variable;
ACD = a predictor for Audit Committee Diligence;
ACFE= a predictor for Audit Committee Financial Expertise;
ACGD = a predictor for Audit Committee Gender Diversity;
Variable Measurement and Justification
Variable Type Measurement Justification
Return on Asset Dependent Net profit divided by the total Ara and Hashim (2021); Oudat et al. (2021);
(ROA) asset Ibrahim et al. (2019) and Ojeka et al. (2014).
Audit committee Independent Number of meetings held by Ahmad et al. (2018); Akinleye and Aduwo
Diligence (ACD) the Audit Committee in an (2019).
accounting year.
Audit Committee Independent Proportion of Members with Omotoye et al. (2021); Olayinka (2019),
Financial Expertise sound knowledge of Finance Balogobei and Velnampy (2018) and
(ACFE) and Accounting. Aryan (2015).
Audit Committee Independent Proportion of Members that are Osemene and Fakile (2018); Alqatamin
Gender Diversity Females. (2018) and Wakaba (2014).
(ACGD)
Big4 Moderating Audited by the Big4 designated Yasser and Soliman (2018);
(AFS) (Binary) as 1 otherwise 0 Laleh, and Alireza (2016).
Source: Researcher’s Compilation, 2022
4 Results and Discussion
Descriptive Statistics
Table 2 below shows the descriptive statistics of the variables used in this study which summarises the distributional patters of the model.
Table 2 Descriptive Statistics
variable | Obs Mean Std. Dev. Min Max
ROA 210 0.0413 0.2794 -0.18 0.219
ACD 210 3.7333 0.8558 2 6
ACFE 210 0.4101 0.1051 0.17 0.67
ACGD 210 0.2818 0.1673 0 0.67
Source: STATA 13 software output, 2023.
Table 4.2 above reveals that Return on Asset (ROA) has a value of 0.0413 indicating that the average ROA for the companies examined over the period from 2011-2020 was approximately 0.04, implying that most of the companies performed very poorly in terms of profitability. ROA also has a negative minimum value of -0.18 and a maximum value of 0.219 with First Aluminum in 2016. All the variable except ROA and AFS have standard deviation that are lower than their means indicating that they has a slow growth, while, ROA have standard deviation higher than their means signifying that they has a faster growth rate. Audit Committee Diligence (ACD) has a mean that is approximately 4 meaning that the average number of meeting held was 4, the minimum stipulated by law with a minimum of 2 times and maximum of 6. Audit Committee Financial Expertise (ACFE) has a mean value of 0.4101, connoting that about 40% of audit committee members of the examined companies have sound knowledge of accounting and finance. Audit Committee Gender Diversity (ACGD) has a mean of 0.281 which mean an average of about 3 members of the audit committee were women with a minimum of zero where they did not exist and maximum of 67% where they form two-third of the committee. All the variables were evenly spread as their means lie within the range of their minimum and maximum values.
Analysis of Model II conducted with the aid of Pooled Ordinary Least Square Regression. Result from this model was used to test hypotheses five to eight which shows the moderating effects.
According to Baron and Kenny (1986), to test for moderating variable, three regression need to be conducted, these are (1) regress the moderator on the dependent variables, (2) regress the dependent variables on the independent variables and (3) regress the dependent variables on both independent variables and moderator when controlling the independent variables. “The moderator function as a third variables which partition a focal independent variables into subgroup that establish it domain of maximal effectiveness in regards to a given dependent variables (Baron & Kenny, 1986:1173)”. The moderator effect are indicated by significant effect of moderating variables while the independent and moderator are controlled (Andersson & Nielsen, 2014; Baron & Kenny, 1986).
Table 4.5 Model II regression Analysis
ROA Coef. Std. Err. t P>|t|
ACD .0462 .0265 1.74 0.083
ACFE -.0052 .0044 -1.17 0.212
ACGD .0118 .0047 2.51 0.011**
ACDB4 .0362 .0265 1.74 0.083 ACFEB4 -.0002 .0044 -1.17 0.212
ACGDB4 .0128 .0047 2.52 0.011*
_cons -.0776 .2405 -0.39 0.716
R-squared = 0.8257
Adj R-squared = 0.7652
F –statistics = 31.06
Prob>F = O.0015
Note: *** = 1% and ** = 5% significance levels.
Source: STATA 13 output (2022).
Table 8 present the moderating effect of big4 on the relationship audit committee characteristics and financial performance in Nigeria. The dependent variable is plotted on the Y axis and independent variable on the X axis. The result indicates that the big4 is found not to moderates the relationship between audit committee expertize and ROA. The result is found not to be significantly associated in all the steps. This suggests that the interaction of the big4 lead to lower financial performance.
Furthermore, the result indicates that the big4 is found to moderates the relationship between audit committee gender diversity and ROA. The result is found to be significantly associated in all the steps. This suggests that the interaction of the big4 lead to higher financial performance.
More so, the result indicates that the big4 is found to moderates the relationship between audit committee size and ROA. The result is found to be significantly associated in all the steps. This suggests that the interaction of the big4 lead to robust financial performance.
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