Effect Of Audit Committee Attribute On Financial Performance Of Listed Industrial Good Firms In Nigeria

Introduction

1.1 Background to the Study

The past few years have seen several well-known companies with significant international operations become mired in financial scandals. In some of these cases, investors have lost hundreds of millions or even billions of dollars. A number of the companies involved have been forced into bankruptcy as a direct or indirect result of the scandals, International Organization of Securities Commissions (IOSCO, 2005).

Collectively, these financial scandals caused many to be concerned about investors‟ confidence in the integrity of companies. As means of reducing the weaknesses in corporate governance, several mechanisms have been introduced among which is the adoption of Audit Committee 3(AC).

Audit Committee as a concept has now acquired mass coalesce as a mandatory element of corporate governance code (Tricker, 1978). Instances of accounting and audit failures and heightened concern of investors about the corporate reports of companies in the developed world led to the establishment of Treadway Commission (1987) in US, Cadbury Committee (1992) in United Kingdom and McDonald Commission (1987) in Canada (Spira, 2003). The aforementioned committees emphasized on the need for the establishment of audit committee as a board sub-committee comprising of independent directors to ensure the credibility of financial statements. Audit committee was promoted on voluntary basis as part of corporate governance reforms (Turley and Zaman, 2004), and gained significant acquaintance with the formation of specialized committees like Blue Ribbon committee (BRC) in 1999.
A number of corporate scandals and failures have raised serious questions on the corporate governance practices of organizations and currently drawing attention of the business world particularly, governments, regulators and investors. Examples of Corporate failures include those of Polly Peck, Maxwell, Bank recession in Europe.

This critical role of Audit Committee (AC) is believed to be a means of improving economic efficiency and stakeholders‟ confidence in the firms through financial standard compliance. However, to achieve this, audit committee should possess some certain attributes which include independence of the committee, frequency of meetings, the size of the committee and financial knowledge of the committee members (SEC, 2003; Mohiuddin & Karbhari, 2010). These attributes of the audit committee are significant in addressing the short comings and weaknesses associated with the internal control system of the firms and the errors and limitations associated with external audit function. This is because internal control and internal audit are less independent of the management, while external auditors‟ function is limited to the information available to them which is highly influenced by management. However, audit committees are independent of the management and have sufficient authority over the operations, transactions, documents and all the relevant records to perform their duties. Audit committee functions with these attributes are expected to ascertain a true and fair view of the financial performance and position of firms and also enhance the confidence of the investors and other stakeholders.

Corporate failures have devastating effects on an organization and could result to its death, loss of confidence and reputational damage (Onipakodi, 2010). Governance of companies must therefore be concerned with more than the existing mechanisms because recent failures, fraud, scandals and sharp marketing practices had adversely affected investors‟ confidence with implications on the financial system because there could be a link between the corporations and the Industrial good firms as a financing source . Relative development of and reliance of economic activities on the financial system have been offered as important explanations for the inter relationship between macroeconomic stability and the soundness of the financial system (Adedipe, 2006). Given that the Industrial good firms play a critical role in the financial market, the degree of effectiveness, financial standard compliance and efficiency of the market will determine the extent to which it contribute to the process of growth and development. Like many other jurisdictions, research attention on audit committee in Nigeria, focused on its attributes with less attention to its impact on Industrial good firms performance. The financial system is based on trust and public confidence and as such, it is important to assess the influence of components of audit committee (size, independence, meetings and financial expertise) on financial standard compliance, investors‟ confidence and performance of listed Industrial good firms in Nigeria which is the paradigm of this study.

1.2 Statement of the Problem

The credit scam in Nigeria despite the introduction of audit committees brought to the fore the inherent weakness of audit committees and the motivation for a clearer understanding of audit committee‟s efficacy. The scam also provided at least evidence to support concerns about the adequacies of monitoring provided by audit committees and provided the concerns that have been expressed on whether audit committees are functioning to maximize shareholders‟ value or increase corporate performance. Furthermore, firms default and distress have hampered their performance significantly and diminished investors‟ confidence in the firms, thereby casting doubt as to the efficacy of the audit committee functions.

There are divergent views on the relationship between Audit Committees and performance. Some of the arguments support the link between Corporate Governance and performance while others see no link between Corporate Governance and performance. There is a skew in approach and method on study relating to Audit Committees and the studies are mostly concentrated on studies conducted in advanced countries with more matured financial systems compared to the developing countries like Nigeria. Even though there are some studies related to developing countries, little or no evidence exist to the best of the researcher‟s knowledge on the extent of the relationship of Audit Committees as a corporate governance framework and corporate performance. The research results on Audit Committees produced a mixed grill and inconclusive findings thereby providing a ground to evaluate the link between audit committee and Industrial good firms performance in Nigeria

1.3 Purpose of the Study

The purpose of the study is to assess the the effect of audit commerce attribute on financial performance of listed industrial good firms in Nigeria

1.4 Objectives of the Study

The main objective of the study is to evaluate the impact of audit committees on the performance of listed Industrial good firms in Nigeria. The specific objectives of the study are to:

Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on return on assets of listed Industrial good firms in Nigeria

Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on net Interest Margin of listed Industrial good firms in Nigeria

Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on the Tobin‟s Q of listed Industrial good firms in Nigeria

Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on financial standard compliance of listed industrial good firms in Nigeria

Evaluate the impact of components of audit committee (size, independence, meetings and financial expertise) on investors‟ confidence of Industrial good firms in Nigeria

1.5 Research Questions

Therefore, based on the above discussions the following research questions were answered in this study.

To what extent do components of audit committee (size, independence, meetings and financial expertise) impact return on assets of listed Industrial good firms in Nigeria?

How do components of audit committee (size, independence, meetings and financial expertise) impact on net Interest Margin of listed Industrial good firms in Nigeria?

What is the impact of components of audit committee (size, independence, meetings and financial expertise) on the Tobin‟s Q of listed Industrial good firms in Nigeria?

How do components of audit committee (size, independence, meetings and financial expertise) impact on financial standard compliance of listed industrial good firms in Nigeria?

To what extent do components of audit committee (size, independence, meetings and financial expertise) have impact on investors‟ confidence of Industrial good firms in Nigeria?

1.6 Research Hypotheses

Based with the research problem and objectives, the following research hypotheses were formulated;

H01: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on return on assets of listed Industrial good firms in Nigeria.

H02: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on net Interest Margin of listed Industrial good firms in Nigeria

H03: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant impact on the Tobin‟s Q of listed Industrial good firms in Nigeria

H04: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on financial standard compliance of listed industrial good firms in Nigeria

H05: Components of audit committee (size, independence, meetings and financial expertise) do not have any significant influence on investors‟ confidence of Industrial good firms in Nigeria

1.7 Scope of the Study

This study evaluates the impact of audit committee on the performance of Industrial good firms in Nigeria. However, the study is limited to all industrial good firms listed on the floor of Nigerian Stock Exchange (NSE) Market as at 31st December, 2013. The study therefore, covers a period of seven years (7) years (2007-2013). The choice of this period is informed by the fact that it is the period immediately after the banking sector consolidation and reforms, that is, when the banking sector witnessed intensive regulations and strict supervision including the review of code of best practices on corporate governance. It is also the period that many firms experienced performance crises, thus, a logical point to assess how the role of audit committee relate with the performance, compliances and investors‟ confidence.

Audit committee in the context of this study was examined through its four basic attributes (size, independence, financial expertise/experience, audit committees‟ function and frequency of meetings). This is to have specific basis for policy and decisions recommendations from the findings. The concept of performance in this study covers both financial and non-financial performance. The financial performance covers Return on Assets (ROA), Net Interest Margin (NIM), and the Tobin‟s Q; while the non-financial performance covers the financial standards compliance and Investors‟ confidence.

1.8 Significance of the Study

The critical role firms play in money creation in the economy makes the study of their performance a necessity. This study attempts to provide empirical evidence about the impact of one of the major corporate governance mechanism of firms (audit committee) on performance, financial standard compliances and investors‟ confidence of Industrial good firms thereby generating interesting literature to the regulators of the financial market, other self-regulatory organizations (SROs), Accounting Bodies, Corporate Affairs Commission (CAC), policy makers and the investing public. If an audit committee discharges its statutory duties diligently, firm performance could be enhanced and the probability of default would be less or even zero. Thus, it reveals the ability of the audit committee to monitor and control the management in the routine operations with regard compliance with the rules and standards in achieving the firms’’ objectives, which in turn implies the safety of the banking public and influence their confidence in the firms. Management of the firms could also find this study useful as it investigates the outcome of their stewardship (performance) in relation to the audit committee functions, which points to them some possible areas of additional efforts. Also, regulators such as the Cooperate Affairs Commission (CAC), Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN) could also find this study useful as the study analyzes the consequences of their series of intervention in the firms through the mechanisms of corporate governance. Thus, the results of this study provide empirical evidence on the effectiveness or otherwise of the audit committee and its attributes with regard to performance, compliances and confidence of the investors.

1.9 Limitations of Study

Like any other research, the result of this study is subject to some limitations due to some factors. Firstly, all the publicly quoted companies in Nigeria have audit committees, but this study is restricted to industrial good firms. Therefore, the generalization of the findings to non-financial firms is limited. Secondly, there are many measures of firm performance, but the study covers the return on assets, net interest margin and the Tobin‟s Q ratio, increasing the number of performance variables could have given a broader picture of the situation. Lastly, corporate governance has many variables and mechanisms but this study is limited to only four attributes of the audit committee.

1.10 Plan of the Study

The study is organized into five chapters.

Chapter one introduces the study by discussing the background to the study, statement of the problem, research questions, objectives of the study, hypothesis, scope significance and plan of the study.

Chapter two reviews literature and theoretical framework relevant to the study particularly, the concept of financial standards compliance, concept of investors‟ confidence, concept of firm performance, audit committee attributes and functions and the empirical studies on audit committee and performance. It also discusses the theories of corporate governance with regard to audit committee functions. The essence is to provide insight to the mechanism and framework, see the interaction, thereby providing the underpinning of the current research work.

Chapter three, spells out the details in the methods used in conducting the study. It contains research methodology, questionnaire format, population, sample and sampling technique, data collection technique and data analysis tool.

Chapter four contains data presentation, data analysis, results and discussions.

Chapter five summarizes the entire work, findings, conclusion and limitation of study. The chapter also provides some recommendations and suggestions for further study.