Project Topic:
IMPACT OF AUDIT COMMITTEE EXPERTISE ON AUDIT QUALITY OF MANUFACTURING FIRMS IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Audit committees are regarded as contributing to auditing process since they are established to assist in improving audit quality. Audit committee’s primary duties are to oversee the financial reporting, auditing processes and monitor management tendencies to manipulate earnings and other accounting malpractices. Part of the audit committee’s attributes to facilitate monitoring activities over the auditor and to ensure greater audit quality are expertise of members and regular meetings of audit committee. Section 359 of Companies and Allied Matters Act of 1990 made it mandatory for public companies in Nigeria to establish audit committees. Audit Committees play very important roles in financial aspects of corporate governance as they help ensure audit quality while at the same time protecting the interest of investors (Okaro & Okafor 2010). However, in recent times a lot of corporate collapses and related frauds have taken place in Nigeria including the distress saga in Nigerian Banks and the Cadbury (Nig)Plc. accounting scandal(Otusanya & Lauwo, 2010); (Madawaki & Amran, 2013); (Okaro & Okafor 2013)These have cast aspersions on the credibility of corporate governance in Nigeria. In particular, the effectiveness of audit committees has being called into question. The composition of audit committees in Nigeria has been criticized as being skewed in favour of management thus reducing the visible independence of the body. This in turn tends to compromise the quality of their work believes that audit committees in Nigeria still need a lot of mileage to move closer to the global trend that have seen audit committees in recent times becoming more and more accountable and responsible. In the case of Cadbury (Nig.) Plc, the audit committee of the company was heavily indicted by the Nigerian SEC report on the accounting scandal in that company. The Audit committee was found guilty of complete dereliction of Five vital characteristics identified by the Blue ribbon committee in the US for effective audit committees are independence, financial expertise, commitment to duties and responsibilities, firm specific knowledge and governance expertise Financial reporting is one of the primary responsibilities of management which enables them give account of their stewardship. Managers of firms are expected to prepare and present annual financial reports to shareholders, who are owners of the firm and other interested users such as creditors, analysts, government, and the general public to enable them assess the performance and financial position of the reporting entity. The main objective of financial reporting therefore is the provision of information on the financial performance and position of the reporting entity that is useful to different users, to enable them assess the stewardship of management and make informed economic decisions (International Accounting Standards Board. This means that published financial reports that fail to meet the information needs of its users do not achieve their intended purpose. In order to achieve this objective, information contained in financial statements has to meet basic
Qualitative attributes of relevance and faithful representation in addition to quantitative attributes. Relevance of financial statements information is associated with the extent to which published financial information is able to influence the decision of the users. Faithful representation on the other hand entails that published financial statements information should be verifiable, neutral and complete.
1.2 STATEMENT OF THE PROBLEM
Audit committee expertise is an important attribute in fulfilling its oversight functions and protects shareholders’ interests. It is imperative for all members in the audit committee to have some expertise (accounting, finance and supervisory) knowledge in order to understand the challenges of auditing practices. Accounting, finance and supervisory expertise of the members is the ability to contribute to auditing process in order to improve audit quality. Also, audit committees that meet frequently are always up to date on auditing challenges being faced by the auditor, proactive in discharging their oversight responsibilities and ensuring the expected audit quality.
Audit quality is the outcome of an audit conducted in accordance with generally accepted auditing standards to provide reasonable assurance that the audited annual financial statements and related disclosures are presented in accordance with generally accepted accounting principles. It is also an indication that these statements are not materially misstated whether due to errors or frauds.
1.3 OBJECTIVE OF THE STUDY
The objective of the study is intended to answer the following questions;
1. Does audit committee expertise influences audit quality of listed consumer-goods listed manufacturing company in Nigeria?
2. Does audit committee meeting affects audit quality of listed consumer-goods companies in Nigeria? Other specific objectives are;
The specific objectives of the study are to:
1. Examine the effect of audit committee expertise on audit quality of listed manufacturing firms in Nigeria; and
2. Assess the effect of audit committee meeting on audit quality of listed manufacturing firms in Nigeria.
1.4 RESEARCH QUESTIONS
1. Do you think audit committee expertise affect audit quality in listed manufacturing firms in Nigeria?
2. What is your opinion as to whether financial expertises of audit committee members affect the audit quality in listed manufacturing firms in Nigeria?
3. Is it possible that the business of audit committee members affect audit quality of listed manufacturing firms in Nigeria?
1.5 STATEMENT OF HYPOTHESIS
However it has been observed that most of these audit committees do not have the expertise they are suppose to have. Others may have it but are so busy that they can not meet regularly as it is expected to be and so find it diffult to use their expertise to affect the quality of the audit. Hence the need for this study.
Ho1: Audit committee expertise has no significant effect on audit
quality of listed manufacturing companies in Nigeria; and
Ho2: Audit committee meeting has no significant effect on audit quality of listed manufacturing companies in Nigeria.
1.6 SIGNIFICANCE OF THE STUDY
Firstly, the study is significant in providing management and board of directors of listed manufacturing firm’s opportunities to understand the role of audit committee expertise and meeting in enhancing audit quality. Secondly, the outcome of the study is expected to increase existing knowledge in auditing and show how audit committee expertise and meeting affects audit quality of listed manufacturing firms in Nigeria. The outcome of the study shall assist in audit committee policy framework in Nigeria.
1.7 SCOPE OF THE STUDY
The study focuses on the issues of audit committee expertise and audit quality in listed manufacturing firms in Nigeria. Though it was quite difficult for the researcher to narrow his areas of study because of the problem of manufacturing firms in Nigeria. Therefore, the study has been design to elicit response from accessible population from the staff and management of manufacturing firms in Nigeria.
1.8 DEFINITION OF TERMS
Audit committee expertise
Is an important attribute in fulfilling its oversight functions and protects shareholders’ interests. Audit committee members with previous experiences and knowledge in finance and accounting are more likely to make expert judgments and ensure audit quality.
Audit committee
Audit committee is a group of persons selected from the members of board of directors and among shareholders also who are responsible for ensuring audit quality of external auditors.
Audit quality
Audit quality is the outcome of an audit conducted in accordance with generally accepted auditing standards to provide reasonable assurance that the audited annual financial statements and related disclosures are presented in accordance with generally accepted accounting principles.
FINANCIAL REPORTS:
Quality increases with the presence of accounting experts in audit committee, which highlight the important role that expertise plays in board monitoring and governance.
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