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Open AccessThe Impact of Financial Literacy and Frequency of Meetings of Members of Audit Committe on Financial Reporting Quality in Nigerian Quoted Companies
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The main objective of this study was to evaluate the impact of Financial Literacy (FL) and Frequency of Meetings (FM) of members of Audit Committee on financial reporting quality in Nigerian quoted companies. Data for the study were derived from annual reports of one hundred and thirty one (131) companies quoted on the Nigerian Stock Exchange over the period of 2006 to 2012. The data were analyzed using descriptive, correlation and Ordinary Least Square (OLS). The multivariate regression technique was utilized to estimate our model. The findings showed that audit committee financial literacy and audit committee frequency of meetings had a positive significant influence on financial reporting quality. Based on these findings, some recommendations were made, prominent amongst them, was that, in order to strengthen the impact of financial literacy on financial reporting quality, regulatory authorities such as SEC, CBN and NDIC, should give special attention to audit committee members with high status with a view to making it mandatory for all companies to comply with it. Status, in this context, implies an aspect of personal power reflecting the ability to influence outcomes based on perceived skills, qualities and personal attributes.
1. Introduction
The major publicized cases of corporate financial frauds, accounting improprieties, scandals and failures in companies such as Cadbury Nigeria Plc in 2006, Afribank Nigeria Plc in 2009 and Intercontinental Bank Plc in 2009 have raised doubts about the credibility of the financial reporting quality of quoted companies in Nigeria. Issues of corporate insolvency in the financial sector immediately after the publication of unqualified financial statements by directors have recently attracted a lot of concern as to the real duties of directors and auditors. These developments have focused attention on the quality of reported financial statements and encouraged regulators and researchers to seek ways of improving the integrity and quality of the financial reporting process.
The Audit Committee (AC) is a central element of one of such reforms that can enhance the quality of financial reporting through an open and candid communication and a good working relationship with a company’s board of directors, internal auditors and external auditors (Mustafa, 2012). Undeniably, the existence of an appropriately constituted audit committee is now a necessity for all listed companies in the United Kingdom and United States (The UK Corporate Governance Code, 2010; Sarbanes-Oxley, 2002) with corporate governance regulation placing significant importance on the role of AC. In Nigeria, the Security and Exchange Commission (SEC) issued a code of Best Practices of Corporate Governance in S.11(a), which provides for the establishment of an audit committee in public companies in Nigeria. Therefore, there is a profound need to explore the features of an audit committee in the Nigerian context, the changing nature of its attributes and association of these attributes with the financial reporting process.
In Nigeria, the creation and establishment of an audit committee is made mandatory by the Companies and Allied Matters Act (CAMA) of 2004. Section 359 (3) states, inter alia “The auditor shall in the case of a public company also make a report to an audit committee which shall be established by the public company”. According to CAMA Section359 (4), the make-up of the audit committee “shall consist of an equal number of directors and representatives of the shareholders of the company (subject to a maximum number of six members). The members are not entitled to any remuneration and shall be subject to re-election annually”.
Besides the make-up of an audit committee, two attributes were adopted in this study to measure its impact on the financial reporting quality. They are: audit committee financial literacy and audit committee frequency of meetings. As a result of mixed results associated with prior studies in developed countries, the aforementioned attributes were adopted with a view to finding out what the results would be if this study is carried out in Nigeria.
A small number of studies existing in this area of research are output of developed countries which do not have similar regulative framework and government mechanisms to those of Nigeria. A few of them are the studies of Zhang and Zhou (2007), Bedard, Chtourou and Courtteay (2004), Defond, Hann and Hu (2005), Lin, Li and Yang (2006) and Yang and Krishnan (2005) whose results were mixed. For example, Zhang and Zhou (2007) used the number of meetings to measure whether the frequency influences financial reporting quality and they found a positive correlation while Bedard, Chtourou and Courtteay (2004) did not find any positive association between the frequency of audit committee meetings and quality of financial reporting. Defond, Hann and Hu (2005) found a positive relationship between financial literacy and financial reporting quality while Lin, Li and Yang (2006) and Yang and Krishnan (2005) did not find any significant association among accounting, financial experts and financial reporting quality. Besides, these studies documented inconclusive evidence which call for an investigation into the Nigerian scenario. This provides the justification and impetus for this study. The rest of this paper is structured as follows: Section 2 discusses the literature review and hypotheses development, Section 3 looks at the methodology, Section 4 focuses on the data presentation and analysis of results while Section 5 addresses conclusion and recommendations.
The broad objective of the study was to determine the impact of Financial Literacy and Frequency of Meetings of members of Audit Committee on financial reporting quality. The specific objectives were to:
i. Ascertain the effect of financial literacy of audit committee members on financial reporting quality in Nigerian companies;
ii. Determine the influence of frequency of audit committee meetings on financial reporting quality in Nigerian companies.
2. Literature Review and Hypotheses Development
S.334 (2) of CAMA 2004 spelt out among others two basic financial statements, namely: Statement of Financial Position and Statement of Comprehensive Income. Also relevant are: Statement of Changes in Equity and Statement of Cash Flow. It is on the basis of the aforementioned statements that stakeholders are expected to make informed economic decisions. Financial statements can be adequately relied upon by their users where a structure of review and authorization are put in place to enhance the integrity of such a report (Okpala, 2012). The Institute of Chartered Accountants of Nigeria (ICAN) stated that the structure should include a process that ensures the independence and competence of the external auditors and the audit committee that reviews and considers the financial statements, to enable the provision of confidence, reduction in uncertainty and risk and addition to value. The reliability and credibility of financial reports lie squarely on the shoulders of the board and its audit committee whose duty it is to ensure that internal control measures; accounting policies; and external auditors are in place in order to assure that financial statements are free from fraud. This becomes necessary, given the fact that there are proofs to indicate that the quality of financial reports has diminished over time (Lev & Zarowin, 1999).
In order to ensure high quality financial reporting, the International Accounting Standards Board (IASB) identified in its framework for the preparation and presentation of financial statements four principal qualitative characteristics, namely: understandability, relevance, reliability and comparability.
Users of financial statements include creditors, suppliers, customers, shareholders, lenders, employees, government agencies. These users have varying information needs.
The quality of financial statements is of relevance to the needs for making reliable and informed decisions. Financial reporting embodies two types of information, namely: quantitative and non-quantifiable information. Both types of information are of immense importance to users of financial statements for decision making. It is to be noted that financial reporting quality and quality of financial reporting are used interchangeably.
Several definitions of the term, financial reporting quality, have been expressed. For instance, financial reporting quality is defined as the exact manner by which it shows information as regards a business activity as it relates to its anticipated cash flows, with the aim of informing shareholders about a company’s operations (Verdi, 2006). Tang,
Chen and Zhijun (2008) defined financial reporting quality as the degree to which financial statements provide us with information that is fair and authentic about the financial position and performance of an enterprise. However, a commonly accepted definition is provided by Jonas and Blaurchet (2000) who asserted that quality of financial reporting is complete and unambiguous information that is not designed to misinform users. IASB (2006, 2008) opined that “the objective of financial reporting is to provide financial information about the reporting entity that is useful to present to potential equity investors, lenders and other creditors in making decisions in their capacity as capital providers” (p.5).
Compliance with the objectives and qualitative attributes of financial reporting information as stated by the International Accounting Standard Board (IASB,2006) will no doubt enhance financial reporting quality. The basic qualitative attributes of financial information are relevance and faithful representation (IASB, 2008). This study measured financial reporting quality using discretionary accruals derived from modified-Jones 1991 model bearing in mind that financial reporting comprises both financial and non-financial information. Previous research revealed that Jones Model is frequently used to measure discretionary accruals as a proxy for financial reporting quality (Balsam, Krishnan & Yang, 2003; Chen & Lin, 2008; Chung and Kallapur, 2003; Jackson, Moldrich & Roeback, 2008; Johnson, Khurana & Reynolds, 2002; and Myers & Omer, 2003). This model is shown in the section for methodology. The benefits of using discretionary accruals as a proxy for financial reporting quality are: it can be computed based on the financial information in the annual report and it is possible to evaluate the impact of company’s attributes on financial reporting quality (Healy&Wahlen,1999; Dechow, Sloan & Sweeney,1995). In addition, its use is consistent with empirical findings in prior research using other quality assessment tools (Beest, Braam & Boelens,2009). In a nut shell, in a situation where managers use judgement in financial reporting to alter financial reports to mislead stakeholders, thereby negatively affecting the quality of financial reporting, discretionary accruals model as a measurement tool for financial reporting quality becomes desirable (Healy &Wahlem,1999).
Regulators and others have expressed a strong preference for an audit committee that meets frequently. Audit committee meetings imply the number of times an audit committee member meets. This is quite different from attendance at meetings. Frequent audit committee meetings allow for better communication between audit committee members and auditors (both external and internal) and enable the audit committee to be more effective [The Public Oversight Board ,1993, the Securities and Exchange Commission Chairman, Levitt ,1999 & the Blue Ribbon Committee, 1999].
The number of audit committee meetings is considered to be an important attribute for monitoring effectiveness (Lin, Li & Yang, 2006). As a result, the audit committee that meets more frequently with the internal auditors is considered better informed about auditing and accounting issues. An audit committee that meets frequently can reduce the possibility of financial fraud (Abbott, Parker & Peters, 2004; Raghunadan, Rama & Scarbrough, 1998). Bryan, Liu and Tiras (2004) posited that audit committees that meet regularly are often expected to be able to perform monitoring tasks more effectively than others that do not meet regularly. Zhang and Zhou (2007) used the number of meetings to measure whether the frequency influences quality of financial reporting and they found a positive correlation. Inactive audit committees with less number of meetings are unlikely to supervise management effectively (Menon & Williams, 1994). Beasley, Carcello, Hermanson and Lapides (2000) found that fraudulent firms with earnings misstatements have fewer audit committee meetings than non-fraud firms. Hsu (2007) found that there is a positive relationship between audit committee meetings and a firm’s financial performance. When audit committees meet often, discretionary accruals are less and there is the possibility of a firm reporting more earnings, which shows a better financial reporting quality (Xie, et al, 2003 & Vafeas, 2005).
However, empirical evidence on the impact of frequency of audit committee meeting on financial reporting quality differs. Bedard, Chtourou and Courtteay (2004) and Lin et al. (2006) did not find any positive association between the frequency of audit committee meetings and financial reporting quality.
It follows therefore, an active audit committee with more meetings has more time to oversee the financial reporting process, identify management risk and monitor internal controls. Consequently, the quality of financial reporting tends to increase with an audit committee activity. Arising from the above, the following hypothesis is formulated:
H1: Frequency of audit committee meetings does not have significant influence on financial reporting quality.
Financial Literacy is typically demonstrated by employment, experience or certification in accounting or finance (Price Water House Coopers/11A, 2000). The experience and knowledge in accounting and auditing related issues are considered as an important dimension for an audit committee. This advantage can help the audit committee members to be more conversant with financial and operational reports that will enable them to execute their oversight duties effectively (Matlain & Mazlina, 2005).
It is generally accepted that the key duty of the audit committee is to review the financial reporting process to ensure the best quality. Thus, the availability of accounting and auditing expertise in the audit committee increases the efficiency of the audit committee’s performance. Regulators from various countries realize the importance of financial literacy in improving the audit committee’s effectiveness. They believe that the relevant experience or technical knowledge is crucial to effective accounting oversight (Kalbers & Fogarty, 1993). For instance, the Sarbanes-Oxley Act (2002) mandates that at least one member of the audit committee must be a financial expert.
In the United Kingdom, the South Report (2003) echoed the views of the Sarbanes-Oxley Act and specified that at least one audit committee member must have significant, recent and relevant financial expertise. In Nigeria, the Companies & Allied Matters Acts of 2004 is silent as regards financial expertise. A number of studies have documented a negative association between the financial accounting literacy in the audit committee and earnings management (Bedard, Chtourou & Courtteau, 2004). Yang and Krishnan (2005) and Lin , Li, and Yang (2006) did not find any significant relationship between financial literacy and financial reporting quality.
Defond, Hann and Hu (2005) and Samuel (2012) found a positive relationship between financial literacy/financial expertise and financial reporting quality. Carcello, Hollingsworth, Klein and Neal (2006) asserted that there is a correlation between financial literacy and financial reporting quality. Dhahival, Naiker and Navissi (2010) also observed a positive association between the financial literacy of audit committees and financial reporting quality. Xie et al (2003) found that audit committee members with accounting and financial knowledge are associated with companies that have smaller discretionary current accruals for financial reporting quality.
Audit committees that have financial literacy have greater interaction with their internal auditors (Raghunadam, Read & Rama, 2004). Emeni (2009) evaluated the impact of audit committee characteristics on financial reporting quality and found that there is a positive relationship between the financial reporting quality and financial literacy. In a nut shell, financially knowledgeable audit committee members who possess accounting qualifications are more likely to prevent and detect financial frauds. This necessitates the formation of the following hypothesis:
H2: Financial literacy of audit committee members has no significant effect on financial reporting quality.
The theoretical basis for this study is the agency theory which emanates from the relationship between the principal (owners) and the agent (managers). Audit committees primarily align the interests of owners with the management’s interest. The establishment of audit committees is regarded as a reaction to information asymmetrics between the owners of a company and its management (Herzig & Watrin, 1995). Demsetz and Lehn (1985) asserted that the primary objective of an audit committee is to resolve agency problems by monitoring management’s behaviour and inspecting the quality of financial reporting. Consequently, enhancing audit committees will lead to an improved financial reporting quality. Emanating from this agency theory, independent variables were considered with a view to examining the impact of these explanatory variables (Audit committee financial literacy and Audit committee frequency of meetings) on financial reporting quality.
3. Methodology
The study used the cross-sectional data design of companies listed in the Nigerian Stock Exchange over the period of 2006 to 2012 for the purpose of testing the hypotheses.
A total of one hundred and ninety four (194) quoted companies constitute the population. The sample size consists of one hundred and thirty one (131) companies using Yaro Yamane formula. The choice of companies was based on availability of data in respect of companies in operation for seven consecutive years taking cognizance of sectoral representation of eleven (11) sectors of companies quoted on the Nigerian Stock Exchange. The study used secondary data derived from annual reports of one hundred and thirty one companies quoted on the Nigerian Stock Exchange.
Emanating from the extant literature, frequency of audit committee meetings is observed to have effect on the financial reporting quality (Zhang & Zhou,2000; Hsu,2007). Hence, the relationship between frequency of audit committee meetings and quality of financial reporting is expressed as:
In like manner, audit committee financial literacy was observed to impact on financial reporting quality (Defond, Hann & Hu, 2005; Samuel, 2012). As a result, the relationship between financial literacy and financial reporting quality is shown as:
Combining the two equations, we have
Introducing two control variables of board diligence (BDDIL) and board size (BDSIZE), we have:
In econometric form:
where:
DACC---------------------- Discretionary Accruals (proxy for Financial Reporting Quality)
ACFM--------------------- Frequency of Audit Committee Meetings
ACFL---------------------- Audit Committee Financial Literacy
BDDIL------------------- Board Diligence
BDSIZE------------------- Board Size
µit------------------------- Error term
∂1---∂4------------------- Unknown coefficients of the variables. It is expected as
∂1------- ∂4 < 0
DACC (Discretionary Accruals) adopted from modified-Jones (1991) model is determined as the residual (difference) between TAC and NDAC shown as follows:
where:
TACi,t = TACi,t |/Ai, t - 1 = Total accrual of company i in year t;
$\Delta\operatorname{Rev.}_\operatorname{i,t}$ = Change in Revenues of company i between year t and t – 1;
Ai, t-1 = Total assets of company i at the end of year t – 1;
PPEi,t = Each company’s gross values of Property, Plant and equipment in year t – 1;
CFO = Cash Flow from operations for company i in year t;
ei,t = Error term;
NDACi,t = Non-discretionary accrual for company i at time t;
$\Delta\operatorname{Rec}_\operatorname{i,t}$ = Change in account receivables (debtors) of company i, between year t and t – 1;
The variables in the model are measured in Table 1 as follows:
S/N | Variables | Definition | Type | Measureme nt | Authors |
1. | FRQ | Financial Reporting Quality | Dependent | Discretionar y Accruals | Modified Jones, 1991model. |
2. | ACFM | Audit Committee Frequency of Meetings | Independent | No. of Times Audit Committee meets in a Year | Zhang & Zhou,2007; Lin, Li & Yang, 2006. |
3. | ACFL | Audit Committee Financial Literacy | Independent | No. of Audit Committee Members | Kalters & Forgartry, 1993 |
4. | BDDILI | Board Diligence | Independent (Contro l) | No. of meetings held by the Board | Xie, Davidson & Dadalt, 2003. |
5. | BDSIZE | Board Size | Independent (Contro l) | No. of Directors on the Board | Thinggard & Kiertzner, 2008. |
For one hundred and thirty one companies (131) observed, the variables were measured in relation to each company, covering a period of seven years (2006 to 2012).
4. Data Analysis and Presentation
This section presents in detail, descriptive statistics, pearson correlation and ordinary least square regression.
Table 2 presents the result of the descriptive statistics of the variables as follows:
| DACC | ACFL | ACFM | BDDIL | BDSIZE |
Mean | 2.64E-07 | 1.4 | 3.4971 | 4.3853 | 9.5794 |
Median | -3.19E-05 | 1 | 4 | 4 | 10 |
Max | 0.004968 | 4 | 12 | 9 | 18 |
Min | -0.00026 | 0 | 1 | 2 | 5 |
Std. Dev. | 0.000304 | 1.149 | 1.0348 | 0.8999 | 2.4391 |
Jarque-Bera | 660154.2 | 27.58 | 2483 | 242.55 | 16.918 |
Probability | 0.00 | 0.00 | 0.00 | 0.00 | 0.0002 |
where,
DACC= Discretionary accruals ACFL= Audit committee financial literacy
ACFM= Audit committee frequency of meetings BDDIL=Board Diligence
BDSIZE=Board size
As observed in Table II, DACC had a mean value of 2.64E-07 which suggested minimal DACC value for sample with maximum and minimum values of 0.00496 and -0.003 respectively and this is similar to results obtained by Okolie (2013). The standard deviation suggested that the DACC values across the companies exhibited considerable clustering around the mean. The Jacque-Bera statistic of 660154.2 alongside its p-value (p=0.00<0.05) indicated that the data satisfied normality and as well as the unlikelihood of outliers in the series. ACFL was observed to have a mean value of 1.4 with maximum and minimum values of 4 and 0 respectively. The standard deviation of 1.149 suggested a considerable cluster around the mean for the sample. The Jacque-Bera statistic of 27.58 alongside its p-value (p=0.00<0.05) indicated that the data satisfied normality as well as the unlikelihood of outliers in the series. The mean for ACFM is 3.497 with maximum and minimum values of 12 and 1 respectively. The standard deviation of 1.035 suggested a considerable cluster around the average. The Jacque-Bera statistic of 2483 alongside its p-value (p=0.00<0.05) indicated that the data satisfied normality. The statistics is higher than that of Saudi quoted firms (mean=2.9 min=2, max=7), for New-Zealand (mean=2.44, min=0.00, max=12) (Rani, 2011) and lower in maximum values for Australian quoted firms (mean=3 min=0, max=15) (Al-Lehaidan 2006). The mean for BDDIL measured by the number of board meetings is 4.385 with maximum and minimum values of 9 and 2 respectively. The standard deviation of 0.899 with a Jacque-Bera statistic of 242.55 alongside its p-value (0.00) indicated that the data satisfied normality. BDSIZE had a mean value of 9.5794 with maximum and minimum values of 18 and 5 respectively. The spread of the data around the mean is 2.4391 which suggested a considerable cluster around the average. The Jacque-Bera statistic of 16.918 alongside its p-value (p=0.0002 < 0.05) indicated that the data satisfied normality.
Table 3 examines the correlation coefficients of the variables.
| DACC | ACFL | ACFM | BDDIL | BDSIZE |
DACC |
|
|
|
|
|
ACFL | -0.03 | 1 |
|
|
|
ACFM | 0.017 | -0.108 | 1 |
|
|
BDDIL | -0.053 | -0.189 | 0.1263 | 1 |
|
BDSIZE | 0.001 | -0.126 | 0.1287 | 0.131 8 | 1 |
As observed in Table 3, a negative correlation existed between DACC and ACFL(r=-0.03). Though the coefficient was weak, the direction of association suggested that audit committee financial literacy tended to decrease the DACC and hence improve financial reporting quality. A similar observation was identified by Baxter (2007) for Australian quoted companies with a coefficient (r=-0.020) though quite different from that found by Sherliza and Nuru (2012) (r=0.093) for Malaysian quoted companies. A positive correlation was also observed between DACC and ACFM (r=0.017). Though weak, the correlation suggested that ACFM might not be associated with a decline in DACC. DACC appeared to correlate positively with BDSIZE (r=0.001) and negatively with BDDIL (r=- 0.053).
Table 4 shows the regression assumptions test for the model.
Multicollinearity Test: Variance Inflation Factor | ||
Variable | Coefficient Variance | Centered VIF |
C | 473.1977 | NA |
ACFL | 3.78785 | 1.279933 |
ACFM | 3.771958 | 1.319219 |
BDDIL | 4.130693 | 1.162812 |
BDSIZE | 0.74157 | 1.754793 |
Heteroskedasticity Test: ARCH | ||
F-statistic = 0.12504 | Prob. F(1,45) | 0.7253 |
Obs*R-squared = 1302 | Prob.Chi- Square(1) |
0.7182 |
Breusch-Godfrey Serial Correlation LM Test: | ||
F-statistic = 0.12504 | Prob. F(2,34) | 0.3939 |
Obs*R-squared=2.559647 | Prob. Chi- Square(2) |
0.2781 |
Ramsey Reset Test | ||
t- statistics=1.2948 | Df= 92 | 0.1986 |
f-statistics =1.676 | Prob. F(1,92) | 0.1986 |
As observed in Table 4, the variance inflation factor (VIF) shows how much of the variance of a coefficient estimate of a regressor has been inflated due to collinearity with the other regressors. Basically, VIFs above 10 are seen as a cause for concern (Landau and Everitt, 2003). As observed, none of the variables had VIF’s values exceeding 10 and hence none gave a serious indication of multicollinearity. The ARCH test for heteroscedasticity was performed on the residuals as a precaution. The results showed probabilities in excess of 0.05, which led one to reject the presence of heteroscedasticity in the residuals. The Lagrange Multiplier (LM) test for higher order autocorrelation revealed that the hypotheses of zero autocorrelation in the residuals were not rejected. This was because the probabilities (Prob. F, Prob. Chi-Square) were greater than 0.05. The LM test did not, therefore, reveal serial correlation problems for the model. The performance of the Ramsey RESET test showed high probability values that were greater than 0.05, meaning that there was no significant evidence of miss-specification.
Regression Result
Table 5 shows the empirical result of the effect of audit committee financial literacy and audit committee frequency of meetings on quality of financial reporting.
2006 | 2006 | 2006 | 2007 | 2007 | 2007 | 2008 | 2008 | 2008 | |
C | 0.725 | -0.625 | - 49.691 | 0.167 | -1.978 | -16.047 | 0.002 | -0.625 | -0.030 |
(1.927) | (1.927) | (22.749) | (0.711) | (0.699) | (8.418) | (0.064) | (6.233) | (0.788) | |
{0.708} | {0.921} | {0.035} | {0.815} | {0.399} | {0.065} | {0.972} | {0.921} | {0.983} | |
ACFL | -1.450 | -2.3888 | -0.3422 | -0.115 | -0.002 | -0.002 | |||
(1.723) | (1.685) | (0.643) | (0.768) | (0.066) | (0.073) | ||||
{0.034} | {0.165} | {0.041} | {0.032} | {0.049} | {0.984} | ||||
ACFM | -0.1886 | -0.8728 | -0.595 | 0.774 | -0.0252 | 0.0259 | |||
(0.181) | (1.804) | (2.804) | (0.754) | (0.079) | (0.090) | ||||
{0.017} | {0.631} | {0.023} | {0.042} | {0.034} | {0.775} | ||||
BDSIZ | -2.266 | 0.385 | -0.002 | ||||||
(1.285) | (0.338) | (0.066) | |||||||
{0.085} | {0.263} | {0.973} | |||||||
BDDIL | -2.266 | -1.935 | -0.002 | ||||||
(1.285) | (0.827) | (0.066) | |||||||
{0.085} | {0.026} | {0.973} | |||||||
R2 | 0.5 | 0.523 | 0.542 | 0.530 | 0.514 | 0.562 | 0.570 | 0.554 | 0.570 |
F-Stat | 3.708 | 2.017 | 4.744 | 3.708 | 2.621 | 2.039 | 2.621 | 2.174 | 0.585 |
P(f-stat) | 0.034 | 0.017 | 0.00 | 0.031 | 0.034 | 0.057 | 0.042 | 0.044 | 0.821 |
D.W | 1.9 | 2..00 | 2..00 | 1.9 | 1.91 | 2.00 | 1.91 | 2.00 | 1.99 |
2009 | 2009 | 2009 | 2010 | 2010 | 2010 | 2011 | 2011 | 2011 | |
C | 0.725 | -0.448 | -0.503 | -1.643 | -0.093 | 1.849 | 0.035 | -0.599 | 19.951 |
9.064 | (1.333) | (0.574) | (3.702) | (0.702) | (4.527) | (0.351) | (1.394) | (6.275) | |
{1.927) | {0.002} | {0.386} | (0.659) | {0.895} | {0.685} | {0.920} | {0.631} | {0.003} | |
ACFL | -1.450 | -0.0452 | -0.189 | -0.165 | -0.058 | -0.090 | |||
(1.723) | (0.042) | (0.262) | (0.288) | (0.372) | (0.343) | ||||
{0.044} | {0.290} | {0.039} | {0.571} | {0.045} | {0.794} | ||||
ACFM | -0.129 | -0.138 | -0.026 | 0.0221 | -0.1919 | 0.600 | |||
(0.036) | (0.042) | (0.178) | (0.196) | (0.039) | (1.304) | ||||
{0.000} | {0.000} | {0.032} | {0.910} | {0.043} | {0.000} | ||||
BDSIZ | -0.0172 | -0.0826 | 0.0172 | ||||||
(0.018) | (0.1851) | (0.018) | |||||||
{0.368} | {0.6579} | {0.368} | |||||||
BDDIL | -0.1618 | -0.3169 | -0.1618 | ||||||
(0.058) | (0.4163) | (0.039) | |||||||
{0.009} | {0.4514} | {0.522} | |||||||
R2 | 0.580 | 0.590 | 0.574 | 0.510 | 0.540 | 0.56 | 0.521 | 0.53 | 0.57 |
F-Stat | 2.198 | 4.61 | 2.199 | 3.708 | 2.021 | 0.706 | 2.422 | 2.561 | 5.199 |
P(f-stat) | 0.044 | 0.003 | 0.033 | 0.026 | 0.041 | 0.591 | 0.038 | 0.031 | 0.003 |
D.W | 2.1 | 2.1 | 1.8 | 1.9 | 2.00 | 2.03 | 2.0 | 2.00 | 2.00 |
2012 | 2012 | 2012 | |||||||
C | 0.0389 | -3.846 | -48.350 | ||||||
(2.150) | (7.627) | (53.847) | |||||||
{0.857} | {0.601} | {0.185} | |||||||
ACFL | -0.763 | -0.1029 | |||||||
(0.193) | (2.160) | ||||||||
{0.024} | {0.636} | ||||||||
AUDFM | -1.073 | -1.2522 | |||||||
(0.526) | (2.126) | ||||||||
{0.014} | {0.636} | ||||||||
BDSIZ | 0.0172 | ||||||||
(0.0188) | |||||||||
{0.368} | |||||||||
BDDIL | -0.1618 | ||||||||
(0.058) | |||||||||
{0.009} | |||||||||
R2 | 0.552 | 0.542 | 0.58 | ||||||
F-Stat | 2.156 | 6.61 | 2.199 | ||||||
P(f-stat) | 0.042 | 0.00 | 0.033 | ||||||
D.W | 2.1 | 2.0 | 2.03 |
For 2006, evaluating the individual effect of the variables, we observed that Audit Committee Financial Literacy (ACFL) explained about 50% of systematic changes in quality of financial reporting. The coefficient was negative (-1.450) in line with the predicted sign and significant (p=0.034) at 10% level. The F-stat (3.708) and p-value (0.034) indicated that the null hypothesis which states that Audit committee financial literacy has no significant influence on quality of financial reporting was rejected at 10% level while the D. W statistics of 1.9 indicated the absence of serial correlation of the residuals in the model. The negative coefficient of -1.450 implies that there was an increase in audit committee financial literacy which resulted in a decline in discretionary accruals and thus improved (i.e. increase) the quality of financial reporting. Audit committee frequency of meetings accounted for about 52% of systematic changes in quality of financial reporting. The coefficient was negative (-0.1886) and significant (p=0.017) at 5% level. The F-stat (2.017) and p-value (0.017) did not support the null hypothesis of no significant influence of Audit committee frequency of meetings on quality of financial reporting while the D. W statistics of 2.0 indicated the absence of serial correlation of the residuals in the model. The implication of the negative coefficient of - 0.1886 is that there was an increase in audit committee frequency of meetings which resulted in a decline in discretionary accruals and thus an increase in the quality of financial reporting. For 2007, Audit Committee Financial Literacy (ACFL) explained about 53% of systematic changes in quality of financial reporting. The coefficient was negative (-0.342) but significant (p=0.041) at 5% level. The F-stat (3.708) and p-value (0.031) indicated that the null hypothesis of no significant effect of ACFL on quality of financial reporting was rejected at 5% level while the D. W statistics of 1.9 indicated the absence of serial correlation of the residuals in the model. Audit Committee Frequency of Meetings (ACFM) accounted for an impressive 51% of systematic changes in quality of financial reporting. The coefficient was negative (-0.595) and significant (p=0.023) at 5% level. The F-stat (2.621) and p-value (0.034) did not support the null hypothesis of no significant influence of ACFM on quality of financial reporting at 5% level while the D. W statistics of
1.9 indicated the absence of serial correlation of the residuals in the model. For 2008, Audit Committee Financial Literacy (ACFL) explained about 57% of systematic changes in quality of financial reporting as against 50% and 53% observed in 2006 and 2007 respectively. The coefficient was negative (-0.002) but significant (p=0.049) at 5% level. The F-stat (2.621) and p-value (0.042) did not support the hypothesis of no significant effect of ACFL on quality of financial reporting at 5% level while the D. W statistics of 2.00 indicated the absence of serial correlation of the residuals in the model. Audit Committee Frequency of Meetings (ACFM) accounted for an impressive 57% of systematic changes in quality of financial reporting. The coefficient was negative (-0.025) and significant (p=0.034) at 5% level. The F-stat (2.174) and p-value (0.044) did not support the null hypothesis of no significant linear relationship at 5% level while the D. W statistics of 2.00 indicated the absence of serial correlation of the residuals in the model. For 2009, Audit Committee Financial Literacy (ACFL) explained about 58% of systematic changes in quality of financial reporting as against 57% in 2008 and 50% observed in 2006 and 53% in 2007. The coefficient was negative (-1.450) but significant (p=0.044) at 5% level. The F-stat (2.198) and p-value (0.044) did not support the hypothesis of no significant effect of ACFL on quality of financial reporting at 5% level while the D. W statistics of 1.9 indicated the absence of serial correlation of the residuals in the model. Audit Committee Frequency of Meetings (ACFM) accounted for 59% of systematic changes in quality of financial reporting in 2009. The coefficient was negative (-0.129) in line with the predicted sign and significant (p=0.00) at 5% level. The F-stat (4.61) and p-value (0.003) did not support the null hypothesis of no significant effect of ACFM on quality of financial reporting at 5% level while the D. W statistics of 2.00 indicated the absence of serial correlation of the residuals in the model. For 2010, Audit Committee Financial Literacy (ACFL) explained about 51% of systematic changes in quality of financial reporting. The coefficient was negative (-0.189) but significant (p=0.039) at 5% level. The F-stat(3.708) and p-value(0.026) did not support the hypothesis of null significant impact of ACFL on quality of financial reporting at 5% level while the D.W statistics of 1.9 indicated the absence of a serial correlation of the residuals in the model. Audit committee frequency of meetings (AUDFM) accounted for about 54% of systematic changes in the quality of financial reporting in 2010. The coefficient was negative (-0.026) and significant (p=0.039) at 5% level. The F-stat (2.021) and p-value (0.041) did not support the null hypothesis of no significant influence of ACFM on quality of financial reporting at 5% level in 2010 while the D. W statistics of 2.00 indicated the absence of serial correlation of the residuals in the model. For 2011, Audit Committee Financial Literacy (ACFL) explained about 52% of systematic changes in quality of financial reporting. The coefficient was negative (-0.058) but significant (p=0.045) at 5% level. The F-stat (2.422) and p-value (0.038) did not support the null hypothesis of no significant impact of ACFL on quality of financial reporting at 5% level while the D. W statistics of 2.0 indicated the absence of serial correlation of the residuals in the model. Audit committee frequency of meetings accounted for 53% of systematic changes in quality of financial reporting. The coefficient was negative (-0.191) and significant (p=0.043) at 5% level. The F-stat (2.561) and p- value (0.031) failed to support the null hypothesis of a no significant influence of ACFM on quality of financial reporting at 5% level while the D. W statistics of 2.00 indicated the absence of serial correlation of the residuals in the model. For 2012, Audit Committee Financial Literacy (ACFL) explained about 55% of systematic changes in quality of financial reporting. The coefficient was negative (-0.763) but significant (p=0.024) at 5% level. The F-stat (2.156) and p-value (0.042) did not support the null hypothesis of no significant impact of ACFL on financial reporting quality at 5% level while the D. W statistics of 2.1 indicated the absence of a serial correlation of the residuals in the model.
Audit committee frequency of meeting accounted for 54% of systematic changes in quality of financial reporting. The coefficient was negative (1.073) though significant (p=0.601) at 5% level. The F-stat (6.61) and p-value (0.00) did not support the null hypothesis of no significant effect of ACFL on quality of financial reporting at 5% level while the D. W statistics of 2.00 indicated the absence of a serial correlation of the residuals in the model.
5. Conclusion and Recommendations
The study postulates, in line with prior studies, based on agency theoretical framework that audit committee can impact significantly, constrain accrual-based distortion of quality of financial reporting credibility and thus improve the quality of financial reporting. To buttress this argument, audit committee financial literacy and audit committee frequency of meetings were regressed on discretionary accruals used as proxy for quality of financial reporting while board diligence and board size as control variables. The findings of the study suggest that audit committee financial literacy and audit committee frequency of meetings are important attributes that significantly determined the level of financial reporting quality in Nigerian quoted companies as both audit committee financial literacy and audit committee frequency of meetings had positive statistical significant impact on quality of financial reporting in Nigerian quoted companies.
Arising from the findings, are the following recommendations:
There is the need for trainings and seminars to be organized for members of audit committee by regulatory authorities such as Central Bank of Nigeria (CBN), Securities and Exchange Commission (SEC) and Nigeria Deposit Insurance Corporation (NDIC) as obtainable in other developed countries where audit committee institutions are established to train members of audit committee. This will enable members keep abreast of up to date information as regards their roles and responsibilities which will make them more effective and efficient in their assignments.
Importantly also, the Securities and Exchange Commission and the Central Bank of Nigeria should put in place a regulation which ensures that audit committee members maintain at least an attendance rate of 85% for them to be retained in the audit committee for the following financial year. The practice where audit committee members are simply there just to complete the audit committee size without active attendance and participation at meetings should be curtailed.
Lastly, it is suggested that regulatory authorities such as SEC, CBN and NDIC should give special attention to audit committee members with high status with a view to making it mandatory for all companies to comply with it bearing in mind that while financial literacy provides the knowledge necessary to improve quality of financial reporting, it may not be sufficient by itself to effectively reduce accounting irregularities. Status, in this context, implies an aspect of personal power reflecting the ability to influence outcomes based on perceived skills, qualities and personal attributes.
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