Impact of Audit Committees’ Qualities on Return on Assets of Companies`Listed on the Stock Exchange (2003-2017): A Panel Approach

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Published on International Journal of Economics & Business
Publication Date: April 11, 2019

Olaoye, Clement Olatunji, Olaoye, Festus Oladipupo & Adebayo, Isaac Adesodun
Department of Accounting, Faculty of Management Sciences
Ekiti State University

Journal Full Text PDF: Impact of Audit Committees’ Qualities on Return on Assets of Companies`Listed on the Nigeria Stock Exchange (2003-2017): A Panel Approach.

The paper examined the impact of Audit Committee qualities on the return on asset of companies quoted on the Nigerian Stock Exchange between 2003 and 2017. Data for this study were gathered from secondary sources and collated randomly from a sample of 20 companies’ annual reports out of the 112 non-financial companies listed on the Nigerian Stock Exchange for 15 years. The study made use of panel data analysis as the estimation technique to explore the stated objectives. Hausman test was employed as a post-estimation method to test for the appropriateness of fixed effect or random effect estimator. More so, diagnostic tests such as heteroscedasticity test and Breusch-pagan LM test of Independence were conducted to test for the variance of error and autocorrelation respectively. The results of the Hausman test revealed that the panel fixed effect model is the most appropriate estimator for this study. The findings of the fixed effect of the impact of the audit committee qualities on the return on assets revealed that financial expertise (FEX), audit committee meetings (AUM) and numbers of non-executive director on the audit committee composition (NENAU) have a negative and insignificant relationship with return on assets. The results of the analysis also showed a positive and significant impact of audit committee size (AU_SIZE) and total assets (TA) on the return on assets (ROA) of companies quoted on the Nigerian Stock Exchange. The overall result with the coefficient of determination is (R2=0.46, w-chi2 =8.203 p<0.05) which indicates that explanatory variables have fairly influenced the return on the asset as a measure of companies performance. Based on these findings, the study concluded that audit committee size and total assets are largely sensitive to boost companies’ performance. In line with the findings, it was recommended that management of listed non-financial companies and the supervisory authorities should work hand in hand to review from time to time the expertise clause in the audit committee composition to improve the return on asset of the companies.

Keywords: Audit Committees, Corporate Performance, Corporate Governance, Audit Committee Qualities, Return on Asset and Financial Health.

1. Introduction
The credibility and quality of financial reporting have been solemnly considered in the Sarbanes-Oxley Act of 2002 (SOX Act 2002) as the duties and responsibility of the audit committee in a private corporate structure. The Act establishes some qualities or characteristics for the committee toward ensuring that the supplier of capital (shareholders), manager of capital (Director, Managers) and various stakeholders in the company can be fairly represented. That is, their aims and objectives can be reasonably harmonized towards a specific goal found or entrenched in the overall goals of the company.
The Audit committee roles are not visible or popular amongst the perceived stakeholders whose roles can easily be traced directly to parties that dictate the integrity and quality of financial reporting compared to the notable and popular ones like; accountants and auditors. Scholars in Accounting and related disciplines could be aware of the terms of reference of the audit committee and its roles in issues bordering on financial reporting integrity. This argument has, however, brought about various perceptions on auditors’ independence, audit and non-audit services fees and the executive director’s contractual relationship with the auditing process and arrangement.
In the bid to provide practical and acceptable answers to these, the corporate governance culture has established standards by giving the audit committee directions to work with, which aimed at improving and ensuring reporting integrity, attracts an investor, ensuring compliance with established standards and upholding the culture of auditor’s independence. This study seeks to consider the qualities of the audit committee and how they influence or improve the return on an asset which is one of the corporate performance indicators in the selected non-financial companies in Nigeria.
Investors usually rely on financial reports to make decisions, and it is good to note that financial reports are standardized documents assumed to be free of fraud and manipulation, but news of accounting scandals remain commonplace in the media and these have had adverse effects on financial performance indicators and on the general goodwill which companies enjoy.
It is worrisome to note that the increase rate at which companies get delisted on the Nigeria Stock Exchange (NSE) based on voluntary closure, merger, acquisition, and compulsory closure is alarming. Between 2001 and 2018, (space of 18 years) 93 companies were delisted (NSE, 2018). In 2006, the accounting scandal reported in Cadbury Nigeria Plc was very shocking. The Chief Executive Officer (CEO) and Financial Officer (CFO) allegedly undermined corporate ethical standards by over-representing their company’s worth to mislead interested parties in the financial reporting (Okaro, Okafor, & Oraka 2014). Other scandals were also reported relating to the malfeasance of Chief Executive Officers such as in Doyin Group of Companies; City Express Bank and Societe Generale Bank (Bushmills Communications, 2012). Hence, with all these, one would assume that all these frauds perpetuated and corporate closure happens despite the presence of the audit committee to ensure checks and balances tinted/designed to protect financial reporting quality and integrity which however improves cost minimizations drives of corporate organisations and thereby increases profitability motives.
Mixed results have been a concern in regards to the relationship between corporate governance and financial performance (Abdulazeez, Ndibel & Mercy 2016). The study of Gadi, Emesuanwu, and Shammah (2015) revealed that positive and significant relationships subsist between Corporate Governance and Financial performance of organisations, while Ndungu (2003) found that a weak positive relationship exists between the corporate governance practices and firms’ financial performance. Isaih and Michael (2017); Mugisha, Jaya, Joseph, and Mbabazi (2015) and Matama (2008) found a negative and weak relationship between corporate governance and financial performance.
Furthermore, despite a few pieces of literature on the concept of an audit committee’s qualities and financial performance, there exist mixed results in the literature. Azim (2012), Muhammad, Suleiman and Sani (2017), discovered an insignificant negative relationship between audit committee members and financial performance among Nigeria listed firms. While Cheah, Chew, Kuan, Low and Poon (2016) revealed an insignificant positive relationship between audit committee size and firms performance; Modum, Robinson, and Edith (2013) found a positive relationship between the audit committee size and composition on corporate performance. While, Samoei and Lucy (2016), and Ahmed (2018), revealed an adverse but significant effects of audit committee experience and size on firms’ performance; Aldamen, Duncan, Kelly, McNamara, and Nagel, (2012), Allam, Adel and Sameh (2013), Robin and Noor (2016), Rateb (2017) and Haiyan, Stephen and Anastasia (2018) found that audit committees’ size positively and significantly impacts firms’ performance. However, as regards these mixed results in the literature, it is imperative to examine how audit committee size has impacted the financial performance of listed non-financial firms on the Nigeria Stock Exchange to ascertain the facts.
Previous Studies, like Aldamen, Duncan, Kelly, McNamara, and Nagel (2012) in Netherland; Allam, Adel and Sameh (2013) in Jordan; Jeffey, Udi-Hoitash and Arnold (2014) in the United States; Ojeka, Iyoha and Obigbemi (2014) from Nigeria(focusing on manufacturing companies); Cheah, Chew, Kuan, Low and Poon (2016) in Malaysia; Gabriela (2016) in UK; Samoei and Lucy (2016) in Kenya; Ali and Ali (2016) in Malaysia; Mhammad, Suleiman and Sani (2017), in Nigeria (focusing on food and beverages companies) found that audit committee expertise is positively and significantly related to firms’ performance. While Salau, Okpanachi, Yahaya and Dikki (2017), focusing on consumer goods companies in Nigeria found a positive but insignificant relationship between audit committee expertise and firms performance, Rateb (2017) in a study in Jordan found a negative and insignificant relationship between audit committees’ financial expertise and firms’ performance. From the details of literature, one would notice mixed results; besides, most studies carried out in Nigeria focus mainly on the financial sector. This study, as a result, sought to examine the impact of audit committee qualities on the return on asset of selected non-financial companies listed on the Nigerian stock exchange.

2. Literature Review
2.1 Audit Committee Qualities
The responsibility of monitoring the financial reporting process, the appointment of external auditors, review of companies and internal control processes are enforced in Nigeria by the CAMA Act of 1990 and the Security and Exchange Commission Act 2016. In lieu of previous literature on Audit Committee, four essential elements have been suggested to characterize it, namely; composition, authority, resources, and diligence (Dezoort, Hermanson, Archambeault & Reed, 2002).
The Sarbanes – Oxley Act (SOX Act, 2002), enacted in the United States has brought good initiatives to financial statement credibility and quality tailored towards improving the standards of businesses, as it emphasizes more responsibilities for the Audit Committee following the collapse of Enron in 2001.
The SOX Act’s requirements for Audit Committee include: pre-approval of audit and non-audit services in companies; received and review of auditors’ reports on relevant accounting policies; discussed with the management on preferred or alternative General Accepted Accounting Principle (GAAP) to use; preferences of auditor’s and the communication of materials information (or value) between the auditor and the Audit Committee and overseeing the external auditor engagement (Chan, Liu, & Sun, 2013).
The Act suggested rules for listed companies in the US in order to ensure that corporate collapses are forestalled and improvement on performance is witnessed; emphasizes the needs for the majority of members of the Audit Committee to be made of independent on executive Directors, either entirely independent outside directors or an entirely outside board directors.
As a result, studies like Jensen and Mechline, (1976); Dezoort, (1997); SOX (2002); Holder-Webb, Jeffrey, Leda and David, (2008) and Chan, Liu, and Sun, (2013) have identified some of the qualities of the audit committees to include Audit Committee Meetings, expertise of members of the committee, size of the committee, and non-executive directorship that makes their work to be imperative in the administration of the affairs of corporate entities.

2.2 Audit Committee Meetings
The meetings of the audit committee in public and private organization are generally timed to match the regulatory reporting. Typically, audit committees, are expected to meet three or four times a year (Wei &Thiruvadi 2010; FRCON, 2016). However, there exists a view that the number of meetings of the audit committee members and the duration varies depending on the range and complexity of the committee’s responsibilities. Therefore, for audit committees to undertake their activities properly, it has been suggested that the committee may need to meet at least eight times a year to ensure adequate oversight of the organization’s quality assurance processes (Hamdan, Mushtaha & Al-Sartaw 2013). The Audit Committee meetings provide an avenue for the committee members and auditor to discuss issues bordering on the organisation’s financial statements. The auditor would evaluate not only the compliance of the financial statements with the accounting standards but also express a judgment about the firm’s accounting choice of principles, disclosures, and estimates. This discussion would make directors more aware of issues that might require special attention and that would eventually improve the quality of the financial reports that tend towards improving performance indicators of the firm (Salleh, Stewart & Manson, 2006).

2.3 The expertise of the Audit committee
Audit Committee expertise as used in the study connotes the skills and knowledge of Accounting principles, Accounting practice, internal control and or of law acquired through learning and practices. Generally, findings revealed that there is a positive relationship between the presence of an audit committee and the firm’s financial reporting quality. For example, DeFond and Jiambalvo (1991) documented that overstatement errors in annual earnings are less likely among firms that have an audit committee. Independent studies provide evidence that expertise of the audit committee strengthens the audit function through the hiring of high-quality external auditors and protecting external auditors who issue “going concerns” opinion (Abbott, Parker & Peters, 2000; Carcello & Neal 2003).