AUDIT COMMITTEE AND THE QUALITY OF FINANCIAL REPORTING IN FOOD COMPANIES, A CASE STUDY OF HONEYWELL FLOUR MILLS PLC.

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CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND STUDY

The audit committee has been defined by Robinson and Owen – Jackson (2009) as selected members of companies who take an active role in overseeing the companies accounting and financial reporting quality policies and practices. In order to promote good corporate governance and enhance the integrity of financial reporting, audit committee as an integral part of corporate governance structure and one of the mandatory committees of the board of directors is established to provide support to the board by offering objective advice on issues concerning risk, control and governance of the organization. Traditionally, the primary role of audit committee has been to monitor the integrity of the financial statements produced by management. In recent times, this major role has been expanded beyond the annual financial statements to encompass the quarterly financial reports. Owing to this, audit committees are becoming more involved in the oversight of corporate reporting matters as contrasted with financial reporting. According to Owolabi and Dada (2011), considering the quantum of corporate collapses and failure, it is imperative that audit committee is taken more seriously in every corporate organization. The primary objective of financial reporting is to provide high-quality financial reporting information concerning economic entities, primarily financial in nature, useful for economic decision making (FASB, 1999; IASB, 2008). Providing high quality financial reporting information is important because it will positively influence capital providers and other stakeholders in making investment, credit, and similar resource allocation decisions enhancing overall market eiciency (IASB, 2006; IASB, 2008).

Although both the FASB and IASB stress the importance of high-quality financial reports, one of the key problems found in prior literature is how to operationalize and measure this quality. Because of its context-specificity, an empirical assessment of financial reporting quality inevitably includes preferences among a myriad of constituents (Dechow and Dichev, 2002; Schipper and Vincent, 2003; Botosan, 2004; Daske and Gebhardt, 2006). Since different user groups will have dissimilar preferences, perceived quality will deviate among constituents. In addition, the users within a user group may also perceive the usefulness of similar information differently given its context. As a result of this context and user-specificity, measuring quality directly seems problematic (Botosan, 2004). Consequently, many researchers measure the quality of financial reporting indirectly by focusing on attributes that are believed to influence quality of financial reports, such as earnings management, financial restatements, and timeliness (e.g. Barth et al., 2008; Schipper & Vincent, 2003; Cohen et al., 2004). Financial reports quality increases with the presence of accounting experts in audit committee, which highlights the important role that expertise plays in board monitoring and governance. In addition, we further decompose audit committee with accounting experts into several other components: those with accounting experts only; those with accounting and finance experts only; those with accounting and supervisory experts only; and those with all the three expertise.

1.2 STATEMENT OF THE PROBLEM

The quality of financial reporting in organization would determine the ability of the audit committee to monitor the financial position of the company. It is important to know if an organization is making profit or loss, this can only be done by the determining the company’s income and expenditure which an only be know through a financial report. The attributes of quality financial reports are relevance, understandability, comparability, reliability and timeliness. It has been observed that the financial reporting in most organizations is not usually submitted on time as requested by the audit committee and this act slows down the work of the audit committee. Some financial reporting submitted by the most organization cannot be used by the audit committee to compare across time and among other companies in the same period. The comparability of such financial reporting is very low. this affects the monitoring of the financial position of the organization. When a financial report is not relevant then it cannot be useful for the task of the audit committee. These reasons influence the researcher to carry out this study on audit committee and the quality of financial reporting in food companies.

1.3 OBJECTIVES OF THE STUDY

The general objective of this study is to examine the audit committee and the quality of financial reporting in food companies. The specific objectives are: 1. To ascertain the relevance of the financial reporting in Food companies. 2. To find out the reliability of the financial reporting in Food companies. 3. To determine the comparability of the financial reporting in Food companies. 4. To examine the understandability of the financial reporting in Food companies. 5. To know the timeliness of the financial reporting in Food companies.

AUDIT COMMITTEE AND THE QUALITY OF FINANCIAL REPORTING IN FOOD COMPANIES, A CASE STUDY OF HONEYWELL FLOUR MILLS PLC.