EFFECT OF AUDIT PERFORMANCE OF LISTED CONSUMER GOODS FIRMS IN

NIGERIA

BY

MUKTAR SALIM

U18AC2004

SUBMITTED TO

DR. ABUBAKAR ABDU

JULY, 2024
 CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Financial reports are essential tools for decision-making. They play a vital role in guiding

managerial decisions. The quality of financial reporting, which reflects a firm's operational

performance and aids in forecasting future cash flows, is universally significant. However,

the reliability and validity of financial reporting are often questioned due to potential earnings

manipulations that can distort the information presented. Given the critical importance of

financial reporting quality, the International Federation of Accountants (IFAC) and its

auditing arm, the International Auditing and Assurance Standards Board (IAASB), emphasize

that audit services provide assurance that financial statements are true, fair, and free from

both intentional and unintentional errors, conforming to relevant regulations (Ajape, Adeleye,

Salawu & Ogunleye, 2023).

High-quality reporting supports global financial stability, which can be achieved through

rigorous audits that foster trust in financial reporting. Audit quality is vital for all

stakeholders in the financial reporting supply chain. The quality of financial reports is a

significant concern, as it affects economic decisions with substantial impacts. Managerial

opportunism and unethical accounting practices are major challenges to the quality of

accounting earnings and financial reporting (Mubaraq, Abdulrasaq & Saidu, 2019). These

practices have led to numerous corporate scandals and failures, such as those involving

Wirecard, Carillion, and Patisserie Valerie, where CEOs and managers engaged in earnings

management through artificial transactions with related parties, adversely affecting financial

reporting (Jo, Hsu, Llanos-Popolizio & Vergara-Vega, 2021).

Earnings management, considered unethical, impairs the quality of earnings by exploiting

managerial judgment and regulatory gaps (Cug & Cugova, 2021). Faster Capital (2024)

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posits that high-quality financial reporting requires full disclosure and transparency, with

corporate transparency involving the availability of relevant and reliable performance

information free from errors and misstatements. Therefore, promoting transparency and

delivering high-quality annual reports through comprehensive disclosure is essential (Faster

Capital, 2024). Regulators, financial statement analysts, and auditors must ensure that

financial statements are accurate, fair, and free from opportunistic and unethical judgments

that compromise the quality of financial reporting.

The Nigerian corporate firms are faced with numerous issues regarding the credibility and

quality of financial reporting, leading to accounting scandals and corporate failures. Notable

examples include Oceanic Bank, Diamond Bank, Bank PHB, Cadbury Nigeria Plc.,

Intercontinental Bank, and African Petroleum. These failures are often attributed to

inadequate disclosure, lack of transparency, and manipulative accounting practices

(Ojomolade & Adejuwon, 2020). This study is motivated by the potential for unethical and

opportunistic behaviors stemming from the flexibility within accounting standards, which

allows preparers to choose accounting methods, policies, and estimates that may distort

financial information for self-serving purposes, rather than reflecting the firm's economic

reality (Adeyemi, 2023). Such corporate failures negatively impact stakeholders, particularly

shareholders.

One critical role of auditors is to assure financial statement users of the reported information's

reliability. Since the industrial revolution, when ownership separated from management,

audit services have been vital to financial reporting quality. The ability of auditors or audit

firms to provide high-quality audits that result in high-quality financial reporting is attributed

to certain audit committee characteristics, including independence, size, expertise, and

meeting frequency.

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Noticeably, perpetrators of fraud often exploit the high reliance placed on audited reports by

diverse stakeholders to conceal misappropriations or financial scandals. This behavior

negatively impacts firms' operational results and can significantly diminish companies'

overall outcomes and financial reporting quality (FRQ) (Ajape, Adeleye, Salawu, &

Ogunleye, 2023). Specifically, reduced audit quality is frequently driven by the dependence

on substantial fee income from client companies, leading to economic ties between auditors

and client management. This relationship may pressure auditors to yield to management's

demands, thus compromising their independence (Olaoye, 2019, & Akinleye, 2020).

Although recent provisions of the Nigeria Code of Corporate Governance (NCCG, 2018)

empower audit committees to closely monitor the financial reporting process of enterprises,

there is often a discrepancy between compliance and what is reported. Instances of collusion

among accountants, company management, and directors to window-dress financial

statements have been documented, largely due to the accommodating stance of external

auditors (Akhidime, 2019; Oboh & Ajibolade, 2018).

Recent studies further underline the importance of these audit committee characteristics. For

instance, Qaderi, Ali, Qasem, & Waked (2023) found that audit committee independence

significantly enhances financial reporting quality. Similarly, Bawuah (2024) highlighted the

positive impact of audit committee expertise on reducing earnings management. Moreover,

research by Broye and Johannes (2021) suggests that larger audit committees are more

effective in overseeing financial reporting processes. Finally, Sharawi (2022) demonstrated

that frequent audit committee meetings correlate with higher financial reporting quality,

emphasizing the need for regular and rigorous oversight. In light of these findings, it is

therefore important to investigate the effect of Audit committee characteristics on financial

performance of listed consumer Goods firms in Nigeria

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1.2 Statement of the Problem

Financial reports are intended to provide pertinent information to an organization's external

stakeholders. It is important that these reports present truthful and accurate financial

information to enable shareholders and other interested parties to make informed decisions.

The primary issue identified is the lack of accurate financial reporting quality in the consumer

goods firms. Inaccurate financial reporting can lead shareholders and potential investors to

make poor judgments about an organization. The significant reliance on accounting numbers,

which indicate the business entity's direction and inform decisions by various users of

accounting information (Dichev et al., 2019; DeFond & Zhang, 2020), has incentivized

managers to manipulate earnings for personal gain. Such manipulations, which should be

detected and corrected by auditors, have frequently led to the collapse of firms of varying

sizes and have raised questions about the integrity of auditors and the characteristics of audit

firms.

Several studies, such as those by Ajape et al. (2023), Musa et al. (2020), and Godwin et al.

(2019), have utilized data from the emerging consumer goods firms in Nigeria. However,

there has been limited research on the impact of audit committee characteristics on financial

reporting quality among listed consumer firmss in Nigeria. Notably, Ghazaleh and Garkaz

(2021) conducted a study on this topic using data from the Tehran Stock Exchange,

highlighting a geographical gap as the current study focuses on the Nigerian Stock Exchange.

1.3 Objectives of the Study

The primary aim of this study is to examine the effect of audit committee characteristics on

corporate financial reporting in Nigeria's consumer goods firmss. The specific objectives are

as follows:

i. To ascertain the effect of audit committee size on financial reporting quality in

Nigeria's consumer goods firms.

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 ii. To investigate the impact of audit committee independence on corporate financial

reporting quality in Nigeria's consumer goods firms.

iii. To assess the influence of audit committee gender on corporate financial reporting

quality in Nigeria's consumer goods firms.

iv. To explore the relationship between audit committee meetings and corporate financial

reporting quality in Nigeria's consumer goods firms.

1.4 Research Questions

To achieve the above objectives, the following research questions are formulated:

i. What is the effect of audit committee size on financial reporting quality in Nigeria's

consumer goods firmss?

ii. What is the impact of audit committee independence on financial reporting quality in

Nigeria's consumer goods firms?

iii. How does audit committee gender influence financial reporting quality in Nigeria's

consumer goods firms?

iv. What is the relationship between audit committee meetings and financial reporting

quality in Nigeria's consumer goods firms?

1.5 Research Hypotheses

In line with the study's objectives, the following null hypotheses are proposed:

H01: Audit committee size has no significant effect on financial reporting quality in Nigeria's

consumer goods firms.

H02: Audit committee independence has no significant impact on financial reporting quality

in Nigeria's consumer goods firms.

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H03: Audit committee gender has no significant influence on financial reporting quality in

Nigeria's consumer goods firms.

H04: Audit committee meetings have no significant relationship with financial reporting

quality in Nigeria's consumer goods firms.

1.6 Scope of the Study

This study focuses on the effects of audit committee characteristics on the quality of financial

reporting in the Nigerian consumer goods firms. The quality of financial reporting is assessed

using absolute discretionary accruals. Although there are over 150 companies listed on the

Nigerian Stock Exchange (NSE) as of January 2024, the study specifically selects a sample of

twenty-one (21) companies from the consumer goods firms to ensure a manageable and

relevant dataset. The study spans a ten-year period from 2014 to 2024. The audit committee

characteristics examined include audit committee independence, audit committee size, audit

committee gender, and audit committee meeting frequency. The study relies exclusively on

secondary data sources.

1.7 Significance of the Study

This study is significant as it addresses financial reporting quality issues that threaten the

survival of audit firms of all sizes and the going concern of corporate entities. Ensuring the

credibility of financial statement information is considered necessary not only to prevent

corporate scandals but also to sustain the accounting and audit profession and promote

healthy financial and capital markets. The study is valuable to auditors, regulators, managers,

professional accounting bodies, existing and potential shareholders, and researchers.

Specifically, the study is of great importance to government, shareholders, creditors,

employees, management, and the general public. Shareholders are concerned with the

profitability, strength, and financial position of the company, while workers are interested in

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their employment security. The government needs accounting information to formulate fiscal

policies. Management is responsible for managing the business affairs on behalf of the

owners. Creditors need to assess the company's ability to pay for supplied goods. The general

public is interested in the financial statements of companies to determine suitable investment

opportunities and support research.

The findings of this study is useful in educating existing and potential shareholders of

companies in Nigeria's consumer goods firms on the audit committee characteristics that

enhance financial reporting quality. The study is also useful in providing empirical evidence

on the relationship between audit committee characteristics and financial reporting quality,

which is valuable for researchers.

1.8 Definition of Terms

Audit Committee Characteristics: Features of the audit committee that may significantly

affect the quality of financial reports. These include audit committee independence, meeting

frequency, size, and expertise.

Audit Committee Gender: Refers to the ratio of female to male members in the audit

committee.

Audit Committee Independence: The total number of non-executive director members on

the committee.

Audit Committee Meeting: Meetings intended to ensure that the audit committee's

performance meets the desired goals.

Audit Committee Size: The number of members in the audit committee.

Financial Reporting Quality: Depicted by the firm years' absolute discretionary accruals.

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