CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The audit committee is one of statutory committees established by the board of directors in the financial sector, whose major responsibility is to oversee the financial and other reporting process of an organization in order to enhance credibility, integrity and transparency in their operations, including financial reporting. However, massive corporate accounting scandals have sent shock waves down the spines of investors across the world. Various reports on the scandals are of the view that the board of directors and the committees do not have a good supervision on the management. For instance, many of the companies involved in financial scandals manipulated the financial statements through o-balance sheet financing and overstating of their earnings before finally filing for bankruptcy.
Therefore, the boards were unable to disclose the distorted statements because they apparently lacked independence from senior executives (Deakin & Konzelmann, 2011). The investigations often show that the audit committees failed to effectively oversee the managers’ duties (Weiss, 2010). Therefore, the trust which investors had on the credibility and the quality of financial report presented by the management of companies could no longer be sustained as they were reported to be misleading. Hence, a higher need to protect stakeholders’ interest so as not to have another overwhelming shock becomes imperative. The responsibilities bestowed on them due to information asymmetry between the management and the owners of the business was expected to ease the agency problems which would invariably lead to the reduction of agency cost when the substantial interests of the management are aligned with the company’s interests (Yayah, Abdullah, Faudziah & Ebrahim, 2012). However, this objective seems not to have been realized in Nigeria. Constitutionally, consumer goods industries are to put in place an audit committee as specified by the Company and Allied Matters Act (2014) and Code of Corporate Governance (2011) in order to aid good governance. In the light of the foregoing, various authors have come to the conclusion that the audit committee and ownership structure is an instrument of good corporate governance (Owolabi & Dada, 2011; Kumar & Singh, 2012) and that they influence the financial reporting process for better performance.
In their study, Mohiuddin and Karbhari (2010) posited that an audit committee that will influence corporate and financial reporting positively and effectively must possess certain attributes such as independence, financial expertise, membership mix, size and number of meetings. With the sudden failure of some banks in Nigeria however, one may wonder as to the effectiveness of the audit committee of such banks. Financial performance of a firm remains one of the major route of assessing its well-being and to know whether it will be able to meet financial obligation of all interested parties it is also an indication for possible payment of dividend. Firms owe commitment to their principal, which is maximization of wealth, and to other stakeholders who are also concerned with the financial health of firms (Farouk, 2014). The continuous survival, growth and expansion of firm would hardly be met without sound financial performance. Firms strive to achieve higher performance in the face of stiff competition, globalization and technological advancement; competition is fuelled by entry of small and young firms into the market which threatens the market share of large existing organizations (Maness & Zietlow, 2010). Despite these challenges, firms are expected to excel in their financial performance. However, to ensure the continuous performance of firms, corporate governance mechanisms such as audit committee characteristics and ownership structure must meet up with expectation.
One of the mechanisms of corporate governance is the audit committee that play vital roles in ensuring smooth and efficient management and administration of companies. The audit committee is equally challenged by the recent failures in corporate governance in Nigeria and should be compelled to ensure that sound corporate governance exist. The inclusion of this audit committee in the corporate governance mechanism raises the expectations of shareholders and the general public for enhanced corporate governance and by extension increase performance of companies. This raised confidence is predicated on perceived checkmating role of the audit committees in ensuring that the board of directors lives up to their expectation in fulfilling the globally accepted pillars of corporate governance, accountability, fairness, responsibility and transparency. But the rampant failure of corporate governance in Nigeria as manifested in corporate failures throw strong doubt on the effectiveness of audit committees in carrying out this role. Audit committee may be composed of members with varied backgrounds and occupations as well as experience in an area important to the business, such as financial reporting, auditing, industry insight, risk management, or technology. All members should be financially literate and capable of understanding the financial reporting issues and complexities arising from the company’s business activities.
The audit committee members be composed of outsiders who do not participate in the day-to-day running of the business. All this varieties of experience, responsibilities and mixture is expected to have eect on the performance of the firm. This is a basic tenet of corporate governance. It is guaranteed by ensuring that various mechanisms are put in place to ensure seamlessness in accommodating corporate goal (ownership goal) and management goal in an enterprise. Consequently, non-owner managed firms become less efficient than owner-managed firms. The way and manner at which shares are owned in companies may have influence on the performance of such companies. The consumer goods sector of the Nigerian economy is home to many giant multinational companies and a host of domestic players who serve its over 170 million people. As the biggest consumer hub on the continent, the sector has attracted and retained foreign investment over decades. It is to this end that this study tries to establish if corporate governance, which is eect of audit committee characteristics and ownership structure on the financial performance of the listed consumer goods industries in Nigeria.
