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Journal of Accounting and Auditing: Research & Practice

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Vol. 2014 (2014), Article ID 301176, 12 pages
DOI: 10.5171/2014.301176

Research Article

Effectiveness of Audit Committee and Firm

Financial Performance in Nigeria: An
Empirical Analysis
Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke

Department of Accounting, Covenant University, Ota, Ogun State, Nigeria

Correspondence should be addressed to: Ojeka Stephen Aanu;

[email protected], [email protected]

Received date: 21 September 2013; Accepted date: 9 January 2014; Published date: 2 July 2014

Copyright © 2014. Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke.
Distributed under Creative Commons CC-BY 3.0

Abstract

Audit Committee role is very important to the protection of shareholders and other
stakeholders interests. This research study explores the influence of audit committee
effectiveness on firm’s performance using four characteristics: independence, financial
expertise, size, and meetings of the audit committee. The performance measures were Return
on Equity (ROE), Return on Asset (ROA) and Return on Capital Employed (ROCE). Twenty- five
(25) manufacturing firms were selected and from which data were collected for the period
(2004-2011). Empirical analysis was carried out using regression and correlation. The result of
the analysis showed a positive significant relationship between independence and financial
expertise of the audit committee and ROA, ROE and ROCE. However, the size and meetings of
audit committee showed no significant relationship with all performance variables. This study
therefore recommends that the audit committee should be made more effective by ensuring that
members are made up of independent non-executive directors and also ensure that more
members with financial expertise especially accounting expertise be drafted into the audit
committee and lastly ensure that audit committee meetings are tailored towards relevant issues
that enhance the financial performance of the firm.

Keywords: Audit Committee Characteristics, Financial Performance, Nigeria

JEL Classifications: M40; M41; M42

Introduction Plc. Quadri (2010) posited that “the recent

insider trading, massive and prevalent
There have been massive fraud and unethical frauds, mandatory retirement of CEOs of
practices within and among a number of banks, due to corrupt practices and
organizations in Nigeria including Unilever inefficient rubber-stamped board, have
______________

Cite this Article as: Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014),
“Effectiveness of Audit Committee and Firm Financial Performance in Nigeria: An Empirical Analysis", Journal
of Accounting and Auditing: Research & Practice, Vol. 2014 (2014), Article ID 301176,
DOI: 10.5171/2014. 301176
Journal of Accounting and Auditing: Research & Practice 2
_____________________________________________________________________________

combined to signal the absence of or failure the management and the owners of the
of existing corporate governance structure”. business was expected to ease the agency
In addition, the Companies and Allied problems which would invariably lead to the
Matters Act (CAMA) 2004 which was enacted reduction of agency cost when the
to ensure that the relationship among the substantial interests of the owners are
board, shareholders and the management aligned with the company’s interests (Yayah,
including other stakeholders is balanced for Abdullah, Faudziah & Ebrahim, 2012).
healthy competition has not lived up to However, this objective seems not to have
expectation both from the government and been realized in Nigeria.
the public at large.
In the light of the foregoing, various authors
The events had serious devastating effect on have studied the audit committee as an
stakeholders in terms of losses in their instrument of good corporate governance
investments. The events also resulted in the (Owolabi and Dada, 2011; Kumar and Singh,
loss of hundreds of jobs especially in the 2012) and also their influence on the
manufacturing sector and drastic drop in financial reporting process for better
the share prices of most listed companies on performance. In their study, Mohiuddin and
the Nigerian Stock Exchange Market. The Karbhari (2010) found that an audit
shock to the stakeholders and the public led committee that will influence corporate
to the yet unanswered question of ‘how’ such financial reporting positively and effectively
event could have happened when companies carry out their agency duties must possess
were declaring billions of Naira in profit. certain attributes such as independence,
Therefore, the trust which investors had on financial expertise, membership mix, size and
the credibility and the quality of financial number of meetings. These are in line with
report presented by the management of the revised SEC Code of 2011.
companies could no longer be sustained as
they were considered misleading. Hence, a Similar studies have also been carried out in
higher need to protect stakeholders’ interest the context of Nigeria (see Mohammed &
so as not to have another overwhelming Oladele, 2008; Uwuigbe, 2013). These studies
shock becomes imperative. The cumulative have focused on corporate governance and
effects of the ugly events led to the total the financial performance of firms in Nigeria.
overhaul of the Nigerian Code of Corporate Thus, the question still remains: what is the
Governance by the Securities and Exchange impact of audit committee characteristics on
Commission (SEC) in 2011. the financial performance of firms in Nigeria?
The objective of this study, therefore, is to
The overhaul was particularly instructive examine the relationship between audit
because the audit committees of companies committee characteristics and firm
were severely criticized because they are performance in the context of Nigeria’s
charged with the responsibility to oversee manufacturing companies. The audit
the financial and other reporting process of committee characteristics are decomposed
organization in order to enable them show into: independence, financial expertise,
credibility, integrity and transparency in meetings and size while performance is
their operations, including financial captured by Return on Equity (ROE), Return
reporting. Oniwinde (2010) posits that the on Assets (ROA) and Return on Capital
reported cases of poor and fraudulent Employed (ROCE).
financial reporting and governance
experienced recently in Nigeria The rest of the paper is structured into four
demonstrated the role the audit committee parts. Part 2 discusses the literature and
has to play either directly or indirectly as hypotheses development and part 3 the
they are charged with overseeing financial methodology, part 4 discusses the analysis
reporting. The responsibilities bestowed on and implications of findings while part 5 is
them due to information asymmetry between the conclusion and recommendations.

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
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Literature Review and Hypotheses Audit Committee Financial Expertise and

Development Financial Performance

Every public company in Nigeria is mandated The issue of financial expertise for at-least
under Section 359 (3) and (4) of the CAMA to one audit committee member was first
establish an audit committee. It is the recognized under Section 359 (3) and (4) of
responsibility and the function of the Board the CAMA. This was further re-echoed in the
to make sure that the committee is SEC code of 2011. And this has support in the
constituted according to the laid down literature. Carcello, Hollingsworth, Klein and
policies which would make it able to Neal (2006) opined that having a member of
effectively carry out its statutory duties and an audit committee that possesses a financial
responsibilities. There are many indicators expertise would likely reduce earnings
or variables that may form yardsticks by management for firms where the corporate
which audit committee can be measured in governance mechanisms are weak. Similarly,
an organization. Some of these yardsticks Qin (2007) found that firms with higher
which have earlier been identified are briefly quality of earning are more associated with
discussed below. audit committee members who have
financial expertise. This position has also
Audit Committee Independence and Financial been confirmed in more recent studies.
Performance Bouaziz (2012) found that “audit committee
financial expertise has a significant impact on
The independence of directors of companies returns on equity and return on asset”. Based
has been widely discussed in the literature. on the above evidence, a positive relationship
Klein (2002) found that having outside between audit committee financial expertise
directors on the board enhances and and firm financial performance is expected.
promotes corporate performance and the This study therefore hypothesized as follows:
returns to shareholders. Similarly,
independent directors are better monitors of H2: A significant relationship does not exists
management than are inside directors between audit committee financial
(DeFond and Francis, 2005). In like manner, expertise and Return on Equity, Return
the outside directors are seen as acting in the on Asset and Return on Capital Employed
interest of shareholders which makes a (ROCE) of listed manufacturing
significantly excess return follows the companies in Nigeria
appointment of outside directors (Sanda,
Garba & Mikailu, 2011). This is particularly Audit Committee Meeting and Financial
true when independent directors are Performance
members of the audit committee. For
instance, Anderson, Mansi and Reeb (2004) The Code of best practice (2003) in Nigeria
found that full independent audit committees recommends that the audit committee meets
brings about lower debt financing costs not less than three times a year. Chen and
which indicates that all the members must be Zhou (2004) noted that audit committee
independent before there could be any meetings serve as an important mechanism
significant impact. Based on the foregoing, for improving and promoting corporate
the following hypothesis is proposed: governance in firms. There is likeliness that
financial fraud would be reduced if the audit
H1: A significant relationship does not exists committee meets frequently and carry out its
between audit committee independence duties as required (Stewart & Munro, 2007).
and Return on Equity, Return on Asset The frequency of audit committee meetings
and Return on Capital Employed (ROCE) has also been observed to have positive
of listed manufacturing companies in influence on return on equity (Azam, Hoque
Nigeria and Yeasmin, 2010). This paper therefore
hypothesized that:

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176
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listed manufacturing companies in

H3: A significant relationship does not exists Nigeria
between audit committee meetings and
Return on Equity, Return on Asset and Research Methods
Return on Capital Employed (ROCE) of
listed manufacturing companies in The focus of this study is on the
Nigeria manufacturing sector in Nigeria. According to
the Nigerian Stock Exchange listings, the total
Audit Committee Size and Financial number of manufacturing firms is 110. In
Performance obtaining the sample for this study, the
judgmental non-probability sampling
It is the requirements of some Stock technique was employed. As a result, a
Exchanges that the audit committee for the sample size of 25 companies listed on the
listed companies be made up of three Nigerian Stock Exchange from 2004 to 2011
members (Al –Sa’eed & Al-Mahamid, 2011). was selected based on the availability and
However, CAMA (1990) sec. 359 specifies the accessibility of the financial report of the
maximum number of audit committee chosen companies. The sectors include:
members in Nigeria as six but did not specify Agriculture, Food and Beverage,
the minimum. Bedard, Chtourou and Conglomerates, Health care, Building
Courteau (2004) have argued that when the material, Industrial goods, Printing and
audit committee is large, the control and Publishing, Automobile, Breweries,
oversight functions over the accounting and Chemicals and paints and Construction/Real
financial processes increase. In agreement to estate.
this Anderson, Mansi and Reeb (2004) found
that large size audit committees with a large The firm performance was measured by
size has the potential to protect and control Return on Equity (ROE), Return on Asset
the process of accounting and finance by (ROA) and Return on Capital Employed
bringing in greater transparency. A very (ROCE) as the dependent variables, while the
large audit committee can bring about independent variables were measured by
dispersion of responsibility and process four audit committee characteristics namely:
losses (Karamanou & Vafeas, 2005). This audit committee independence (ACINDP),
hypothesis is therefore drawn: audit committee financial expertise
H4: A significant relationship does not exists (ACSFEXP) and one control variable, board
between audit committee size and size (BSIZE), audit committee meetings
Return on Equity, Return on Asset and (ACMEET) and audit committee size
Return on Capital Employed (ROCE) of (ACSIZE),

Table 3.1: Synopsis of Variables’ Measurement/Description

Names of variables Acronym Measurement

Dependent Variables

Return on Equity ROE PAT/equity

Return on Asset ROA PAT/Total Assets

Return on Capital Employed ROCE PBIT/capital employed

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176
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Summary of Variables Measurement/Description (continued)

Independent Variables

Audit Committee Independence ACIND The percentage of non-

executive director in the audit
committee.

Audit Committee Financial Expertise ACFEXP The number of individuals on

the audit committee who are
experienced in finance
knowledge.

Audit Committee Meetings ACMEET The number of times which an

audit committee required to
meet in a year

Audit Committee Size ACSIZE The minimum and maximum

number of members which an
audit committee required to
have.

Control Variable

Board Size BSIZE The number of people on the

board as at the day of the year
or period end.

Model Specification

However, the following mathematical model was developed to analyze the relationship that exists
between financial performance and audit committee effectiveness as represented below:

Y= β0 + βX1 +µit......................................................................................................................................... (1)

Where, Y represents the dependent variable. β0 is constant, β is the coefficient of the explanatory
variable (audit committee effectiveness), βX1 is the independent variable and eit is the error term.

Representing equation (1) above in an econometric model, equation (2, 3 &4) below therefore
becomes:

ROAit= β0+β1ACINDit+ β2ACFEXPit+ β3ACMEET it+β4ACSIZEit + BSit +µit ……………….………… (2)

ROEit= β0+ β1ACINDit+ β2ACFEXPit+ β3ACMEET it+β4ACSIZEit + BSit + µit..................................... (3)

ROCEit= β0+ β1ACINDit+ β2ACFEXPit+ β3ACMEET it+β4ACSIZEit + BSit + µit................................. (4)

Analysis and Presentation of Results regression analysis for the hypotheses

testing.
The data presented involved tables and
figures which were used for the descriptive
statistics and correlation analysis and

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176
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Descriptive Statistics

Table 4.1: Distribution of Samples

Sector Percentage
Food and Beverage 12%
Agriculture 8%
Breweries 8%
Industrial products 8%
Conglomerates 16%
Chemicals and Paints 8%
Building Materials 12%
Health Care 16%
Automobile 4%
Printing and Publishing 4%
Construction 4%
Total 100%

Table 4.1 shows the sample distribution of publishing and construction came last. This
each sector in the manufacturing industry. was because the financial statement of these
While Conglomerates account for the highest sectors is not easily assessable. But overall,
as a result of the accessibility of the financial all the sectors are fairly represented in the
statements, the automobile, printing and sample.
Table 4.2: Descriptive Statistics for all the selected Sectors (2004-2011)

Variable Year Observations Mean Std. Dev.

ROA 200 11.0722 60.17561

ROE 200 19.67307 40.15511
ROCE 200 31.01451 27.70467
ACIND 200 31.96295 14.12511
ACFEXP 200 2.26 0.751815
ACSIZE 200 5.72 0.688455
ACMEET 200 2.755 0.798853
BSIZE 199 9.567839 2.45035

The result in table 4.2 showed on the manufacturing industry as denoted in the
average, that, there are two financial experts biographical information of members, but
in the audit committee in the Nigerian surprisingly they do not meet more than 2

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176
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times in a year as against minimum four challenges, the industry was still able to
times specified in the Securities and generate relatively high return on capital
Exchange Commission Codes of 2011 in employed when compared with ROA and
Nigeria. However, the industry maintained ROE.
on the average a required six members that
Company and Allied Matters Act (2004) Correlation Analysis
stipulated, whereas the percentage of non-
executive directors in the audit committee Pearson Moment Correlation was carried out
was not quite encouraging considering the on both the dependent and explanatory
figure. The table also shows a mean score of variables to check for multicollinearity and
11, 20 and 31 on ROA, ROE and ROCE relationship between the various variables in
respectively. These low figures could be as a the study. Gujarati and Porter (2009); Hair,
result of the credit crunch suffered in the Black, Babin and Anderson (2010) reasoned
system during the financial meltdown, and 0.8 as the threshold at which
also- infrastructural facilities lacking in multicollinearity concerns can be harmful to
Nigeria for example power (electricity) the regression analysis and make the
which has increased the cost of production in reliability or the positive power of the model
the country. However, with those attendant as a whole to be reduced.
Table 4.3: Result of Pearson Correlation Analysis of independent variables and ROA, ROE
and ROCE

Return on Asset (ROA) as dependent variable

Variables ROA ACIND ACFEXP ACSIZE ACMEET BSIZE
ROA 1
ACIND 0.1768 1
ACFEXP 0.2807 0.2387 1
ACSIZE 0.064 -0.0577 0.1166 1
ACMEET 0.0239 0.0305 0.1638 0.1649 1
BSIZE 0.0161 0.1039 0.1319 0.2384 0.1693 1
Return on Equity (ROE) as dependent variable
Variables ROE ACIND ACFEXP ACSIZE ACMEET BSIZE
ROE 1
ACIND 0.1533 1
ACFEXP 0.1707 0.2387 1
ACSIZE 0.0263 -0.0577 0.1166 1
ACMEET 0.1108 0.0305 0.1638 0.1649 1
BSIZE 0.1535 0.1039 0.1319 0.2384 0.1693 1
Return on Capital Employed (ROCE) as dependent variable
Variables ROCE ACIND ACFEXP ACSIZE ACMEET BSIZE
ROCE 1
ACIND 0.359 1
ACFEXP 0.2705 0.2387 1
ACSIZE 0.0179 -0.0577 0.1166 1
ACMEET 0.1615 0.0305 0.1638 0.1649 1
BSIZE 0.2023 0.1039 0.1319 0.2384 0.1693 1

The correlation matrix as shown in table 4.3 0.7 and 0.8. All the variables were positively
indicates that the assumption of correlated to one another apart from the
multicollinearity has not been violated ACIND and ACSIZE which show a negative
because none of the variables is greater than sign.

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176
Journal of Accounting and Auditing: Research & Practice 8
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Multiple Linear Regression Analysis

Table 4.4: Regression Results: Whole Sample

Financial Performance Measurements

1 2 3

Independent Variables Predicted Sign ROA ROE ROCE

Coefficient Coefficient Coefficient

(t-statistics) (t-statistics) (t-statistics)
P-value P-value P-value
ACIND 0.530704** 0.3103271 0.5868732***
+ (1.75) (1.5) (4.47)
0.082 0.134 0.000
ACFEXP 20.45318** 6.446168* 6.185742*
+ (3.52) (1.63) (2.46)
0.082 0.100 0.015
ACSIZE 4.804003 -1.258133 -1.412742
? (0.77) (-0.3) (-0.52)
0.444 0.768 0.603
ACMEET -1.80809 3.601922 3.728032
+ (-0.34) (0.99) (1.61)
0.736 0.324 0.109
Control Variable
BSIZE -0.96771 1.961693* 1.57484**
- (-0.55) (1.63) (2.06)
0.585 0.100 0.041
Constant -65.4909* -26.40585 -18.88821
(-1.73) (-1.02) (-1.15)
0.086 0.307 0.251
P-value 0.0015 0.0273 0.000
F-test 4.07 2.59 9.5
R2 0.0955 0.0628 0.1975
R2 Adjusted 0.721 0.0385 0.1767
No of Obs. 199 199 199
Note: ROA, ROE and ROCE in this table represents Return on Asset, Return on Equity and Return
on Capital Employed and three indicators represent the financial performance variables for this
study; ACIND represents audit committee independence, ACFEXP represents audit committee
financial expertise, ACSIZE represents audit committee size, ACMEET represents audit committee
meeting and BSIZE represents Board Size. ***= significant at 1%; **= significant at 5%; *=
significant at 10%

Note: Numbers in each cell are arranged in the following order-Coefficient, t-values (in parenthesis)
and P-values.

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176
9 Journal of Accounting and Auditing: Research & Practice
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From table 4.4, the results showed that, the audit committee size (ACSIZE) does not
audit committee independence (ACIND) had influence the financial performance of firms
positive signs in all the three equations (i.e. in Nigeria. Therefore, this study concludes
ROA, ROE and ROCE), but was significant in that there is no relationship between audit
two of them i.e. ROA and ROCE at 10% and committee size and the firm’s financial
1% level of significance respectively. Thus, performance. Mere size may not be enough
the null hypothesis was rejected in favor of for financial performance. This study is in
the alternative hypothesis with respect to contrast with Yayah, Abdullah, Faudziah and
ROA and ROCE. This indicates that, audit Ebrahim (2012) who found a negative but
committee independence (i.e. number of non- significant relationship between audit
executive directors in the audit committee) is committee independence and performance in
good for firm financial performance. This Saudi Arabia’s firms.
result supports our early expectation of
positive relationship and is in agreement Similarly, audit committee meeting shows
with earlier studies such as Chan and Li positive sign with respect to ROA, ROE and
(2008), whose result shows that a significant ROCE but was not significant. The audit
positive relationship between Tobin’s Q and committee in the manufacturing sector in
independence of the audit committee exist. Nigeria meets on the average two times as
Mohiuddin and Karbhari (2010); Sanda, seen in table 4.2 which indicates that, audit
Garba & Mikailu (2011) also concluded in committee meeting does not influence the
like manner that, outside directors are seen financial performance of firms in Nigeria.
as acting in the interest of shareholders in This result is in agreement with previous
that the appointment of outside directors is studies Yayah, Abdullah, Faudziah and
accompanied by significantly positive excess Ebrahim (2012) who found that audit
returns. However, this finding is in contrast committee meeting (ACMEET) was
with the submission of Hsu (2007) who insignificantly related to the performance of
failed to establish any relationship between firms in Saudi Arabia. The audit committee
audit committee independence and could be meeting just to comply with the
performance. Yayah, Abdullah, Faudziah and requirements of various governmental
Ebrahim (2012) also found audit committee agencies (e.g. Central Bank of Nigeria and
independence (ACIND) to be insignificantly Securities and Exchange Commission’s) and
related to performance. not necessarily carrying out roles that can
enhance the financial performance of firms.
With respect to audit committee financial
expertise (ACFEXP), the result supports Conclusion
earlier expectation. It shows that audit
committee financial expertise (ACFEXP) has This study investigated the relationship
positive impact on the financial performance between audit committee effectiveness and
(ROA, ROE and ROCE). The impact is also the firm’s financial performance in Nigeria.
significant at the 10% and 5% respectively The results showed that certain measures of
for ROA and ROCE. ROE is insignificant. The audit committee effectiveness (such as audit
result partly supports the alternative committee independence, audit committee
hypothesis that audit committee financial financial expertise and board size) have
expertise positively and significantly positive coefficients and significantly
influences the firm’s financial performance. influence the firm’s financial performance.
This result is consistent with prior studies Although, the result showed that audit
(see Bouaziz, 2012). committee meeting had a significant positive
relationship with return on capital employed
In term of audit committee size (ACSIZE), the (ROCE), but generally the result showed that
result shows a positive sign for ROA, ROE and audit committee size and audit committee
ROCE but not significant. This indicates that

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
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meeting did not add value to the firm’s members, state of origin of the members, and
financial performance in Nigeria. political connection(s) of the members.

The results suggest important implications References

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Ojeka Stephen Aanu, Iyoha Francis Odianonsen and Obigbemi Imoleayo Foyeke (2014), Journal of Accounting
and Auditing: Research & Practice, DOI: 10.5171/2014. 301176