The Role of External Auditors in Corporate Governance

The Role of External Auditors in Corporate Governance

The Role of External Auditors in Corporate Governance

 

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Chapter One of The Role of External Auditors in Corporate Governance

INTRODUCTION

BACKGROUND TO THE STUDY

The role of audit committee is of much interest to regulators and the general public. Earlier, the role of the audit committee was to oversee companies financial reporting and discourse for such quoted companies. However nowadays the role of audit Committee has became very pronounced party due to the numerous economic events that have affected the stability of the financial markets and investors confidence at large.
Section 334 (1) requires corporate directors to prepare the annual financial statement in line with extant laws. This is usually affirmed by the statutory auditors who audit the books of account. The credibility of such auditors report is enhanced through the audit committee of such corporate organizations. According to Lindsell (1992), the audit committee is a Mechanism of corporate governance to check the quality, credibility and objectivity of financial reporting it performs an oversight function in the financial reporting process and communicates to users through a report in the financial statement.
Given the vital roles of audit committee, listed companies required to include in their annual reports a summary of activities carried out by their audit committees (Madawaki, 2013). For audit committee to perform its role, the members must be independent, have good financial knowledge; expertise enough and amongst others. In terms of independence, Davidson, Godwin-stewart and Kent (2005) specifically noted that independent audit committee members are more objective and likely to handle possible deficiencies in the manipulation of financial reports.  They noted further, that financial reporting quality improved greatly in the year audit committee is farmed. It suggests that the role of audit committees is integral to quality financial reporting. Companies establish audit committee to help improve quality of financial reporting practices and earnings (Ramsay, 2001).
Several studies have examined the relevance of audit committee in corporate financial  reporting  in Nigeria (Okoye and Cletus, 2010, Owolabi and Ogbechia, 2010). Madawaki (2013) noted that none explored the association between the role audit committee in relation to financial reporting. In filling this research gap, this study attempts to make a key contribution to the current literature on the role of audit committee to financial reporting quality specifically. In other words, this study makes a bold attempt to critically examine the role of audit committee in financial reporting in Nigeria.

STATEMENT OF THE RESEARCH PROBLEM

Nigeria is currently experiencing a paucity of research in this direction of the role of audit committee in financial reporting (Madawaki, 2013). Abbott and Parker (2000), Krishsnan (2005) assert that audit committees have been in existence for decades. However, there are criticisms of the practices and roles of audit committees and their relevance in financial reporting (Enofe, Aronmwan and Abadua, 2013). They suggest that the inclusion of the role of audit committee and the reports of the external auditors lead to information overloads. Given these deficiencies, a question worth answering is   audit committees still have a major role to play in ensuring quality financial reporting. This again, is in addition of the persistent collapse of firms.
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 in terms of quality financial reporting. Also, were the managing director is a very influential member in the board and succeeds in hijacking authority from others, the audit committees would have no choice but to dance to this tune, given the composition of the audit committees of equal number of directors and representatives of the shareholders of the company subject to a maximum of six (6) members, thus implying audit committee will not effectively and positively impact on financial reporting. From the view point of prior researchers, this makes the appointment of the committee unnecessary (Klein, 2002). In view of the above, the study intends to find answers to the following questions:
Does the financial literacy of audit committee members enhance financial reporting in Nigeria?
How does the frequency of meetings and audit committee members enhance financial reporting in Nigeria?
What is the effect of multiple directorships of audit committee on financial reporting in Nigeria?

Read Also:  Impact of Auditing in Government Parastatals

Objectives of the Study

The basic objective of this stud among others is to evaluate audit committees and financial reporting in Nigeria. The objectives of this study are divided into two, general and specific objectives. The general objective is the evaluation of the impact of audit committee on the quality of financial reporting in Nigeria. However, the specific objectives are:
To examine if the financial literacy of audit committee members enhance financial reporting in Nigeria.
To ascertain if the frequency of meetings of audit committee enhance financial reporting in Nigeria.
To determine the effect of multiple directorships on financial reporting in Nigeria.

Hypotheses of the Study

The following hypotheses have been formulated to serve as a base for this research:
H1:    Financial literacy of audit committee members does not enhance financial reporting in Nigeria.
H2:    Frequency of meetings of audit committee members does not enhance financial reporting in Nigeria.
H3:    Multiple directorships do not have an effect on financial reporting in Nigeria.

Scope of Study

This research work is an empirical study on audit committee and financial reporting in Nigeria for the period 2012 cut across fifty (50) quoted firms from varying industries on a cross sectional basis.

SIGNIFICANCE OF THE STUDY.

One major questions remains unanswered empirically in research, and that is does the inclusion of the report of audit committee in the financial report have any effect on the decisions users would makes? Answering this question informed the justification of this study. The importance attached to a study of this nature is that it seeks to examine the role of audit committee in financial reporting in Nigeria.
The study will indeed contribute to the existing debate on the importance or otherwise of including the audit committee report in financial reports. The management team of companies stands to benefit from this study as this work will reveal if the role of audit committee report in the financial statement add value to decision making or is just an item of more cost.
Future researchers are expected to benefit largely from the outcome of the study.
The result of this study will be very useful not only to other researchers in this area of study but also to corporate bodies in Nigeria as it will help them understand the role that audit committees play in improving and ensuring an effective internal control system, corporate governance and ultimately, a sound and reliable financial reporting framework.

Limitations of the Study

The limitation encountered in the course of the study includes:
Inadequate empirical research materials extensively dealing on the subject matter in Nigeria is relatively scanty to afford the researcher an adequate insight.
The problem of smallest of the sample size where the data where extracted from posed a major limitation.
There is problem generalizing the outcome of the study to what may have happened in terms of effectiveness of the audit committee of the selected companies on financial reporting in Nigeria in prior years since this study is majorly a cross-sectional one.

 

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