CHAPTER ONE

1.1         INTRODUCTION

One mechanism that has been widely used in worldwide organizations to monitor the financial reporting process is the establishment of an audit committee comprising a majority of independent directors. The existence of an audit committee could improve the monitoring of financial reporting and internal control. This could be done by bridging the communication gap between the auditors and 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 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,

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proper accounting policies, and independent external auditors that will prevent the incidence of fraud and promote high quality and timely financial statements.

1.2 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:

1.      How relevant is the establishment of audit committee to the financial reporting of organisations in Nigeria?

2.      Does the frequency of audit committee meetings in a given financial reporting year determine to a large extent, the effectiveness of that audit committee?

3.      How effective are audit committee composition of equal number of directors and representative of shareholders?

1.3   OBJECTIVES OF THE STUDY

The basic objective of this study among others is to evaluate audit committees to financial reporting in contemporary Nigeria. More so, for the purpose of clarity, simplicity and avoidance of ambiguity, this study intends to;

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1.      Find out the relevant of the establishment of audit committee to the financial reporting of organisations in Nigeria.

2.      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.

3.      Verify how effective are audit committee composition of equal number of directors and representative of shareholders.

1.4 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 organisations in Nigeria.

H1: The establishment of audit committee is relevant to financial reporting of organisations 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