RELEVANCE OF AUDIT COMMITTEE ON CORPORATE REPORTING ABSTRACT Out of the worries ignited by the incessant occurrence of corporate failure and liquidation in Nigeria, even with the presence of audit committees in these corporate entities, this project topic was born. A topic aimed at evaluating audit committee relevance to corporate financial reporting Nigeria. In carrying out this investigation, the likert-scale questionnaire was drawn to extract correct and direct data from respondents in some randomly selected firms. Data extracted were presented, analyzed and interpreted. Hypothesis were tested using chi-square with five percent (5%) level of significance, indicating ninety five percent (95%) assurance or confidence on the accuracy reliability and validity of the data collected and information gathered therefrom. After rigorous research and study, it was revealed that audit committees have contributed immensely to the financial reporting in Nigeria, though at some point they just exist without making any considerable impact in the financial reporting system in the firm they are established. It was recommended that it is not enough for companies to establish audit committees because the law, CAMD 1990, says so but that the company and its board of directors must show full commitment to corporate accountability by providing a conducive environment in which their audit committees can discharge their responsibilities effectively and efficiently. TABLE OF CONTENTS CHAPTER ONE Background of Study Statement of the Research Problem Objectives of Study Hypothesis of the Study Scope of Study Significance of the Study Limitations of the Study CHAPTER TWO: LITERATURE REVIEW Historical Background Of Audit Committees: The History and Conceptual Benefits Of Audit Committees Functions and Practices of Audit Committees in Nigeria Composition Of Audit Committees in Nigeria and the Ambiguity in the Provision of CAMD ’90 (Now CAMA 2004) Qualification of Audit Committee Members Quality of Audit Committees Audit Effectiveness and its Relevance to Financial Reporting Audit Committee Independence Audit Committee Relationship with Management, Internal Auditor and External Auditors Audit Committees and the Independence of External Auditors Audit Committees and Corporate Financial reporting: Audit Committee Characteristics and Financial Reporting Quality Corporate Reporting Form and Content of Financial Statements Types of Financial Statement CHAPTER THREE: RESEARCH METHODOLOGY Introduction Research Design Population of the Study Sample and Sampling Technique Sources of Data Instrument Of Data Collection Actual Field Work Data Collection Method Data Analysis Method Justification for the Use of Chi-Square Test Decision Rule CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION Introduction Data Presentation Data Analysis and Interpretation Test of Hypothesis CHAPTER FIVE: FINDINGS, RECOMMENDATIONS AND CONCLUSION 5.0 Introduction Findings Recommendations Conclusion Bibliography Appendix CHAPTER ONE INTRODUCTION One mechanism that has been widely used in worldwide corporate organizations to monitor the financial reporting process and corporate governance is the establishment of an audit committee comprising a majority of independent directors. The existence of an audit committee could improve the monitoring of corporate financial reporting and internal control. This could be done by bridging the communication gap between the auditors and corporate management and through strengthening the role of the internal auditors. Although audit committees have been in existence for decades, there are criticisms of the practices of audit committees and a large amount of research have been undertaken to identify an ideal audit committee that would act in the interest of shareholders (Abbott and Parker, 2000; Krishnan, 2005). Audit committees serve as a bridge in the communication network between internal and external auditors and the board of directors, and their activities include review of nominated auditors, overall scope of the audit, results of the audit, internal financial controls and financial information for publication (FCCG, 1999). Indeed, the existence of an audit committee in a company would provide a critical oversight of the company’s financial reporting and auditing processes (FCCG, 1999; Walker, 2004). Audit committee could also enhance auditor independence. Knapp (1987) discovered that an audit committee is more likely to support the auditor rather than management in audit disputes and the level of support is consistent across members of the committee, regardless of whether the member is in a full-time or part-time position, such as corporate managers, academicians and retired partners. In addition, audit committees could play a role in selecting auditors, determining their remuneration and in the dismissal/retention of auditors. Goldman and Barlev (1974) pointed out that audit committees could observe the financial reporting process and provide recommendations in the selection of auditors, negotiation of fees and termination of external auditors, which would ultimately diminish management’s power over the auditor. An audit committee is anticipated to ensure that a business organization has sufficient internal controls, proper accounting policies, and independent external auditors that will prevent the incidence of fraud and promote high quality and timely financial statements. STATEMENT OF RESEARCH PROBLEM Audit committees are by reference to relevant Sections of CAMA 1990 expected to bridge the expectation gap in providing a means by which the opinion expressed by auditors on a firm’s financial statement can be seen to be unbiased and independent. It is argued that the presence of Audit Committees is likely to lead to unnecessary rift between shareholders and directors as well as management and auditors. Also, were the managing director is a very influential member in the board and succeeds in hijacking authority from others, the audit committee would have no choice but to dance to his tune, given the composition of the audit committee of equal number of directors and representatives of the shareholders of the company subject to a maximum of six (6) members. This makes the appointment of the committee unnecessary. In view of the above, the study intends to find answers to the following questions: How relevant is the establishment of audit committee to the financial reporting of corporate bodies in Nigeria? Does the frequency of audit committee meetings in a given financial reporting year determine to a large extent, the effectiveness of that audit committee? How effective are audit committee composition of equal number of directors and representative of shareholders? OBJECTIVES OF THE STUDY The basic objective of this study among others is to evaluate the relevance of audit committees to financial reporting in contemporary Nigeria. Moreso, for the purpose of clarity, simplicity and avoidance of ambiguity, this study intends to; Find out the relevant of the establishment of audit committee to the financial reporting of corporate bodies in Nigeria. Examine whether the frequency of audit committee meetings in a given financial reporting year determine to a large extent, the effectiveness of that audit committee. Verify how effective are audit committee composition of equal number of directors and representative of shareholders. RESEARCH HYPOTHESIS The following hypotheses have been formulated to serve as a base for this research; Hypothesis I Ho: The establishment of audit committee is not relevant to financial reporting of corporate bodies in Nigeria. H1: The establishment of audit committee is relevant to financial reporting of corporate bodies in Nigeria. Hypothesis II Ho: The frequency of audit committee meetings in a given financial reporting year does not determine to a large extent, the effectiveness of that audit committee. H1: The frequency of audit committee meetings in a given financial reporting year determines to a large extent, the effectiveness of that audit committee. Hypothesis III Ho: There is no significant relationship between audit committee composition of equal number of directors and representative of shareholders. H1: There is a significant relationship between audit committee composition of equal number of directors and representative of shareholders. SCOPE OF THE STUDY This research work is an empirical study of audit committees to financial reporting in Nigeria. The population of the study is Nigeria, while the sample is some selected corporate companies in Benin City, Edo State. This study will involve assessing the effectiveness of audit committees and financial reporting in Nigeria. It will also look at the performance of audit committees in Nigeria. SIGNIFICANCE OF THE STUDY This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs. Beneficiaries Stakeholders: This study will be important and beneficial to stakeholders of corporate bodies to know the essence of the audit committee and financial reporting in Nigeria. The Government: It will acquaint the government of the importance of audit committee and financial reporting and how it should be properly managed. The public: This study will help to restore the lost confidence of the public as regard audit committee and financial reporting in Nigeria. Academic/future researcher: Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research. LIMITATION OF THE STUDY The main constraints of this research work are: Time: The study was done within a short period of time and this affected the scope of the study. Availability of Data: The study will be feasible within the context of available information that could reach the researcher. Finance: This is an essential tool of research study. Money was another strong constraint since most materials were gotten from the Internet. It was so much expensive to browse the net through the night and print materials so found. Simple Size: This is limited to the available respondents who are knowledgeable on the subject matter. REFERENCES Abbott, L. J. and Parker, S. (2000)’Auditor selection and audit committee characteristics’, Auditing: A Journal of Practice & Theory, vol. 19, no. 2, pp. 47-66. Finance Committee on Corporate Governance (FCCG) (1999) Report on Corporate Governance, Malaysia: Ministry of Finance. Goldman, A. and Barlev, B. (1974), ‘The auditor-firm conflict of interests: its implications for independence’, The Accounting Review, October, pp. 707-718. Knapp, M. C. (1987)’An empirical study of audit committee support for auditors involved in technical disputes with client management’, The Accounting Review, vol. 62, no. 3, pp. 578- 588 Krishnan, G. V. (2005)’Did Houston clients of Arthur Andersen recognize publicly available bad news in a timely fashion?’, Contemporary Accounting Research, vol. 22 no. 1, pp. 165-193. Walker, R. G. (2004)’Gaps in guidelines on audit committees’, Abacus, vol. 40, no. 2, pp. 157-192.
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