EFFECT OF AUDIT COMMITTEE CHARACTERISTICS AND OWNERSHIP STRUCTURE ON FINANCIAL PERFORMANCE OF LISTED CONSUMER GOODS INDUSTRY

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The audit committee is one of statutory committees established by the board of directors in the financial sector, whose major responsibility is to oversee the financial and other reporting process of an organization in order to enhance credibility, integrity and transparency in their operations, including financial reporting.

However, massive corporate accounting scandals have sent shock waves down the spines of investors across the world. Various reports on the scandals are of the view that the board of directors and the committees do not have a good supervision on the management.

For instance, many of the companies involved in financial scandals manipulated the financial statements through off-balance sheet financing and overstating of their earnings before finally filing for bankruptcy.

Therefore, the boards were unable to disclose the distorted statements because they apparently lacked independence from senior executives (Deakin & Konzelmann, 2011). The investigations often show that the audit committees failed to effectively oversee the managers’ duties (Weiss, 2010).

Therefore, the trust which investors had on the credibility and the quality of financial report presented by the management of companies could no longer be sustained as they were reported to be misleading. Hence, a higher need to protect stakeholders’ interest so as not to have another overwhelming shock becomes imperative.

The responsibilities bestowed on them due to information asymmetry between the management and the owners of the business was expected to ease the agency problems which would invariably lead to the reduction of agency cost when the substantial interests of the management are aligned with the company’s interests (Yayah, Abdullah, Faudziah & Ebrahim, 2012).

However, this objective seems not to have been realized in Nigeria. Constitutionally, consumer goods industries are to put in place an audit committee as specified by the Company and Allied Matters Act (2014) and Code of Corporate Governance (2011) in order to aid good governance.

In the light of the foregoing, various authors have come to the conclusion that the audit committee and ownership structure is an instrument of good corporate governance (Owolabi & Dada, 2011; Kumar & Singh, 2012) and that they influence the financial reporting process for better performance.

In their study, Mohiuddin and Karbhari (2010) posited that an audit committee that will influence corporate and financial reporting positively and effectively must possess certain attributes such as independence, financial expertise, membership mix, size and number of meetings.

With the sudden failure of some banks in Nigeria however, one may wonder as to the effectiveness of the audit committee of such banks. Financial performance of a firm remains one of the major route of assessing its wellbeing and to know whether it will be able to meet financial obligation of all interested parties it is also an indication for possible payment of dividend.

Firms owe commitment to their principal, which is maximization of wealth, and to other stakeholders who are also concerned with the financial health of firms (Farouk, 2014). The continuous survival, growth and expansion of firm would hardly be met without sound financial performance.

Firms strive to achieve higher performance in the face of stiff competition, globalization and technological advancement; competition is fuelled by entry of small and young firms into the market which threatens the market share of large existing organizations (Maness & Zietlow, 2010).

Despite these challenges, firms are expected to excel in their financial performance. However, to ensure the continuous performance of firms, corporate governance mechanisms such as audit committee characteristics and ownership structure must meet up with expectation.

One of the mechanisms of corporate governance is the audit committee that play vital roles in ensuring smooth and efficient management and administration of companies. The audit committee is equally challenged by the recent failures in corporate governance in Nigeria and should be compelled to ensure that sound corporate governance exist.

The inclusion of this audit committee in the corporate governance mechanism raises the expectations of shareholders and the general public for enhanced corporate governance and by extension increase performance of companies.

This raised confidence is predicated on perceived checkmating role of the audit committees in ensuring that the board of directors lives up to their expectation in fulfilling the globally accepted pillars of corporate governance, accountability, fairness, responsibility and transparency.

But the rampant failure of corporate governance in Nigeria as manifested in corporate failures throw strong doubt on the effectiveness of audit committees in carrying out this role. Audit committee may be composed of members with varied backgrounds and occupations as well as experience in an area important to the business, such as financial reporting, auditing, industry insight, risk management, or technology.

All members should be financially literate and capable of understanding the financial reporting issues and complexities arising from the company’s business activities. The audit committee members be composed of outsiders who do not participate in the day-to-day running of the business.

All this varieties of experience, responsibilities and mixture is expected to have effect on the performance of the firm. This is a basic tenet of corporate governance. It is guaranteed by ensuring that various mechanisms are put in place to ensure seamlessness in accommodating corporate goal (ownership goal) and management goal in an enterprise. Consequently, non-owner managed firms become less efficient than owner-managed firms.

The way and manner at which shares are owned in companies may have influence on the performance of such companies. The consumer goods sector of the Nigerian economy is home to many giant multinational companies and a host of domestic players who serve its over 170 million people.

As the biggest consumer hub on the continent, the sector has attracted and retained foreign investment over decades. It is to this end that this study tries to establish if corporate governance, which is effect of audit committee characteristics and ownership structure on the financial performance of the listed consumer goods industries in Nigeria.

1.2. STATEMENT OF THE PROBLEM

The corporate governance culture in Nigeria has consistently failed to be responsible and accountable to the stakeholders and has no deep-rooted mechanism to maintain a balance among the major players such as board of directors, shareholders and management which have resulted in poor financial reporting quality (Bello, 2010).

The challenges of corporate governance in Nigeria stems from the culture of corruption and lack of institutional capacity to implement the codes of conduct governing corporate governance because company executives enjoy an atmosphere of lack of checks and balances in the system to engage in gross misconducts since investors are not included in the governing structure (Shehu, 2012).

Audit committee appears to be bedeviled with a great deal of challenges in Nigeria most especially in the area of implementation; though there has been good structure or laid down rules by the Securities and Exchange Commission for public companies and that of Central Bank of Nigeria for Banks.

The non-satisfactory performance remains paradox despites the adoption of corporate governance by public companies. Financial Performance of corporate bodies is of paramount value to stakeholders in general and shareholders in particular as, on one hand it is a key source for financing the current economic activities,

thus helping to maintain a going concern and increase the value of the business, and on the other hand it is the basis for distributing dividends, which in turn may attract investors (and their funds).

Thus, it is necessary to examine the effect of audit committee characteristics and ownership structure on financial performance of listed consumer goods industry.

1.3. OBJECTIVES OF THE STUDY

The general objective of this work therefore is to examine the effect of audit committee characteristics and ownership structure on financial performance of listed consumer goods industry. The specific objectives of the study are:

1. 1. To examine the effect of audit committee size on financial performance of listed consumer goods industries in Nigeria.

1. 1. To examine the audit committee composition and financial performance of listed consumer goods industries in Nigeria.

1. 1. To examine the effect of audit committee meetings on financial performance of listed consumer goods industries in Nigeria.

1. 1. To assess the impact of audit committee financial expertise on financial performance of listed consumer goods industries in Nigeria.

1. 1. To examine the relationship between audit committee characteristics and ownership structure on financial performance of listed consumer goods industry

1. 1. To examine the impact of managerial ownership on financial performance of listed consumer goods industries in Nigeria.

1.4 Research questions                               

1. 1. What is the effect of audit committee size on financial performance of listed consumer goods industries in Nigeria?

1. 1. What is the audit committee composition and financial performance of listed consumer goods industries in Nigeria?

1. 1. What is the effect of audit committee meetings on financial performance of listed consumer goods industries in Nigeria?

1. 1. What is the impact of audit committee financial expertise on financial performance of listed consumer goods industries in Nigeria?

1. 1. What is the relationship between audit committee characteristics and ownership structure on financial performance of listed consumer goods industry?

1. 1. What is the impact of managerial ownership on financial performance of listed consumer goods industries in Nigeria?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: There is no significant effect of audit committee meetings on financial performance of listed consumer goods industries in Nigeria.

H1: There is a significant effect of audit committee meetings on financial performance of listed consumer goods industries in Nigeria.

Hypothesis 2

H0: There is no significant relationship between audit committee characteristics and ownership structure on financial performance of listed consumer goods industry.

H1: There is a significant relationship between audit committee characteristics and ownership structure on financial performance of listed consumer goods industry.

1. 1. Significance of the study

The study would have contribution to literature owing to the six Corporate Governance Structure proxy used i.e. Audit committee financial expertise, Audit committee size, Audit Committee Composition, Audit Committee Meeting, Managerial Ownership, and Institutional Ownership.

This will make available to greater extent proof on the interconnected nature of Audit committee characteristics, ownership structure and Performance. It would also prepare ground for interested researcher who might wish to conduct further research in related areas and could contribute to the existing literature.

1.7 SCOPE AND LIMITATION OF THE STUDY

The study is restricted to the effect of audit committee characteristics and ownership structure on financial performance of listed consumer goods industry.

LIMITATION OF THE STUDY

Financial constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview)

Time constraint: The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1. 1. DEFINITION OF TERMS

Audit: is an official inspection of an organization’s accounts, typically by an independent body.