International Journal of Research and Innovation in Social Science (IJRISS) |Volume V, Issue XII, December 2021|ISSN 2454-6186

Audit Committee and Financial Performance of

Listed Firms in Nigeria
Nse Umoh-Daniel1, Beauty Ekiomado Eguasa (Ph.D)2, & Best-Okwu, Excellence3
1
Department of Accounting, Faculty of Social and Management Sciences, Benson Idahosa University
2,3
Department of Accounting, Faculty of Social and Management Sciences, Benson Idahosa University

Abstract: The broad objective of this study is to examine the essential to management and other stakeholders such as
impact of Audit Committee (AC) characteristics on the financial shareholders, debt holders and the government as it is an
performance of listed consumer goods companies in Nigeria. The outcome which has been achieved by an individual or a group
research sample comprises of eighteen (18) consumer goods of individuals in an organization related to its authority and
companies and secondary data was generated from the annual
responsibility in achieving the goal legally, not against the law
accounts and reports which spanned from 2010 – 2019 financial
years. Using the panel regression analysis; the study found that and conforming to the morale and ethic (Iswatia, & Anshoria,
frequency of AC meetings, independence of AC and AC size have 2007). A growing stream of research suggests that Audit
significant effect on financial performance. The study concluded Committee characteristics are critically important to the role
that the presence of audit committee is vital in companies. The of improving corporate financial performance.
study therefore recommended that compliance with respect to
audit committee size, meetings and independence should be The role of Audit Committees in affecting firm performance
adequately checked to ensure conformity. has been argued from several perspectives. Firstly, there is the
argument that the opportunistic tendency of managers to
Keywords: Audit Committee characteristics, financial engage in unethical practice is reduced in the presence of
performance
effective Audit Committee structure. They ensure corporate
I. INTRODUCTION conformance with investors’ and society’s interests and
expectations by limiting the abuse of power, the siphoning-off
T he Audit Committee (AC) is a central element of
corporate monitoring which can enhance the quality of
financial reporting through open, candid communication and
of assets, the moral hazard, and the wastage of corporate-
controlled resources and several other variants of the agency
problem. Simultaneously, they establish the means to monitor
working relationship with the company’s board of directors, managers’ behavior to ensure corporate accountability.
internal auditors and external auditors (Mustafa, 2012). Secondly, there is also the argument that audit committees
Undeniably, the existence of an appropriately constituted creates a more diverse resource pool that is able to make
Audit Committees is now a necessity for all listed companies decisions based on the evaluation of more. Hence Audit
in Nigeria (Corporate Governance Code, 2010) with corporate Committees bring advantages to the entity, such as broader
governance regulation placing significant importance on the perspectives in decision making, higher creativity and
role of Audit committee. Audit committees (AC) have been innovation, and successful marketing to different types of
widely recommended around the world as an important customers. (Carter, Simkins & Simpson 2003).
mechanism for improving the quality of the company’s
financial reports (Blue Ribbon Committee, 1999). AC is an Furthermore, the Audit Committee play this role of ensuring
important and necessary monitoring mechanism widely used sustainable financial performance of the company by
in worldwide corporate organizations to monitor the financial overseeing the firm’s financial reporting process, including
reporting process and strengthen corporate governance the integrity of financial statements, the effectiveness of
(Wallace, 2003). Enofe, Aronmwan and Abadua (2013) posit internal controls and the monitoring of both internal and
that in order to improve the quality of financial statements, the external auditors. They also enhance the board of director’s
Audit Committee was constituted. In recent times, the AC capacity to act as a monitor of management by providing
responsibilities have become cumbersome amid growing more detailed knowledge and understanding of financial
expectation for the AC to play a greater role as the ultimate statements of the company (Mohammad, 2015). Audit
guardian of investor’s interests and ensure corporate financial Committee ensures judicious and prudent management of
performance (Atrill, 2006). resources and the preservation of resources of the corporate
organization. In the process of ensuring ethical and
Financial performance has implications to organization’s professional standards and the pursuit of corporate objectives,
health and ultimately its survival. The Firms’ management it seeks to ensure customer satisfaction, high employee morale
effectiveness and efficiency in making use of company’s and the maintenance of market discipline, which eventually
resources is highly reflected by high financial performance results in corporate stability and improve financial
and this in turn contributes to the country’s economy at large performance (Ojeka, SIyoha, & Obigbemi, 2013; Okoi,
(Naser & Mokhtar, 2004). Company performance is very Stephen & Sani, 2014).

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume V, Issue XII, December 2021|ISSN 2454-6186

Furthermore, an examination of some of the attempts at can be used to contrast the performance of identical firms in
identifying the nature of the relationship between Audit similar industries or between industries in general (Atrill,
Committee and financial performance showed mixed findings McLaney, Harvey, Jenner, 2009). The main source of data for
in the literature. Ojeka, Iyoha and Obigbemi (2014) which determining financial performance is the financial statements,
explores the influence of Audit Committee effectiveness on the product of accounting, which consists of the statement of
firm’s performance. The result of the analysis showed a financial position which shows the assets, liabilities and
positive significant relationship between independence and equities of a business, the income statement that records the
financial expertise of the Audit Committee and ROA, ROE revenues, expenses and profits in a particular period, the cash
and ROCE. flow statement which exhibits the sources and uses of cash in
a period, and the statement of changes in the owners’ equity
Maina and Oluoch (2018) examines the effect of corporate
that represents the changes in owner’s wealth. Financial
Audit Committee characteristics on financial performance of
performance of organizations’ is commonly reflected in the
manufacturing firms in Kenya. The study revealed that there
calculation of financial ratios that show the link between
exists a significant relationship between Audit Committee
numbers in the financial statements. The financial ratios may
composition and Audit Committee meetings frequency and
include the computation of the profitability, efficiency,
firms Financial Performance. In addition, Orjinta and Ikueze
liquidity, gearing, and investment of a particular firm.
(2018) examined the effect of Audit Committee characteristics
Moreover, firm financial performance generally may also be
on performance of selected non-financial firms quoted in
reflected in market-based (investor returns) and accounting-
Nigerian Stock Exchange. A sample of 50 listed firms was
based (accounting returns) measures (Griffin & Mahon,
used for the period 2007 to 2016. The result revealed that
1997).
there is a significant positive relationship between Audit
Committee independence, Audit Committee meeting and firm Examples of market-based indicators to measure firm
performance at 5% level of significant. financial performance are price per share and Tobin’s Q
which indicate the market value or the share value of the firm
Nuhu, Umaru and Salisu (2017) examined the effect of Audit
as well as the financial prospects of the firm in the future.
Committees’ Quality (Audit Committee members, Audit
Additionally, what the shareholders have perceived from the
Committee meetings and Audit Committee financial
returns distributed by the firm is also the driver of the share
expertise) on financial performance with a focus on the
price. This price may lead to the market value of the firm.
Nigerian food and beverages sector. The result of the study
Alternatively, accounting-based measures, including
also shows an insignificant negative effect between Audit
profitability, efficiency, liquidity, gearing, and investment
Committee members and financial performance of the
ratios, are calculated using the figures from the financial
Nigerian food and beverages sector. Olayinka (2019)
reports and may represent a firm’s financial performance.
examined the effect of Audit Committee Effectiveness on the
According to Atrill et al. (2009), the ratios that may be
growth of Firms Performance in Nigeria with emphasis on
utilized to calculate the firm’s profitability are the return on
Eight Public Quoted Banks in Nigeria. The findings revealed
assets (ROA), return on equity (ROE) and return on
that Audit Committee size, frequency of Audit Committee’s
investments (ROI). These ratios express the success of a firm
meetings and financial literacy of Audit Committee members
in generating profits or returns from the resources owned. In
have no significant effect on firms’ performance in Nigeria.
contrast, the market-based measure is believed to be more
The inconsistency in the empirical literature suggests a gap in objective because it relies on market responses to particular
the literature and indicates that the area is still open for further decision made by a firm (Griffin & Mahon, 1997). The choice
examination and that there is need for more studies to present of whether to use accounting or market-based calculations for
their unique position on the issue. Given the discourse above, measuring a firm’s financial performance depends upon the
the aim of this paper is to empirically examine the specific aims of the research.
implications of Audit Committee characteristics (Audit
2.2 Audit Committee Size and Financial Performance
Committee size, independence of Audit Committee and Audit
Committee frequency of meeting) on firm financial The Audit Committee size is the number of directors and
performance using selected listed firms in Nigeria. This paper shareholders that makeup the audit committees. The Blue-
is outlined as follows: literature review, methodology, results Ribbon Committee (BRC)’s report of 1990 released the
and discussion, conclusion and recommendations. usefulness of having an Audit Committee and recommended
that an effective Audit Committee of listed companies should
II. LITERATURE REVIEW AND HYPOTHESIS
compromise of at least three directors. S. 359(4) of
DEVELOPMENT
Companies and Allied Matters asserts that AC shall consist of
2.1 Corporate Financial Performance an equal number of directors and representatives of the
shareholders of the company subject to a maximum number of
Corporate financial performance is generally defined as a
six members.
measure of the extent to which a firm uses its assets to run the
business activities to earn revenues. It examines the overall According to KMPG (2009) the size of the Audit Committee
financial health of a business over a given period of time and varies depending upon the needs and culture of the company

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume V, Issue XII, December 2021|ISSN 2454-6186

and the extent of delegated responsibilities to the committee. firm performance. Orjinta and Ikueze (2018) examined the
The objective is to allow the committee to function efficiently effect of Audit Committee characteristics on performance of
and effectively. Most companies have no set policies for selected non-financial firms quoted in Nigerian Stock
rotating committee members but depend on weighing a Exchange. A sample of 50 listed firms was used for the period
member’s experience against the risk of complacency. 2007 to 2016. The result revealed that there is a significant
Without a rotation policy, it is important for the board of positive relationship between Audit committee independence
directors to evaluate an Audit Committee member’s and firm performance.
performance to see that it meets both the board’s and the
Consequently, the hypothesis two is stated as follows:
committee’s expectations (Mohammed, 2015). On the other
hand rotation of Audit Committee members provides a H2: There is no significant relationship between audit
practical way to refresh and introduce new perspectives to committee independence and firm financial performance
Audit Committee processes.
2.4. Audit Committee Meetings/Attendance and financial
Ojeka, Iyoha and Obigbemi (2014) carried out a study on the performance
influence of Audit Committee effectiveness on firm’s
performance. Twenty-five (25) manufacturing firms were Regulators and others have expressed strong preference for an
selected and from which data were collected for the period audit committee that meets frequently. Frequent audit
committee meetings allow for better communication between
(2004-2011). Empirical analysis was carried out and the result
audit committee members and auditors (both external and
of the analysis showed that Audit Committee size had no
internal) and enable the audit committee to be more effective
significant relationship with financial performance. In another
[The Public Oversight Board (1993), the Securities and
study, Gabriela (2016) examined the impact Audit Committee
characteristics on firm performance using evidence from non- Exchange Commission chairman, Levitt (1999) and the Blue-
financial firms listed on London Stock Exchange in UK from Ribbon Committee (BRC, 1999)]. The number of Audit
Committee meetings is considered to be an important attribute
2011 to 2015. The main findings of his study suggest that
for monitoring effectiveness (Lin, Li & Lang, 2006). The
there is a significant positive relationship between the audit
number of Audit Committee meetings is taken as a proxy for
committee size and financial performance. Premised on the
foregoing, it is hypothesized that; audit committee activity (Xie, Davidson & Dadalt 2003). As a
result, the Audit Committee that meets more frequently with
H1: there is no significant relationship between audit the internal auditors is considered better informed about
committee size and firm financial performance auditing and accounting issues.
2.3 Audit Committee Independence and Financial Ojeka, Iyoha and Obigbemi (2014) conducted a study about
Performance the influence of Audit Committee effectiveness on firm’s
performance. The result of the analysis showed that meetings
The independence of the Audit Committee has been widely
of Audit Committee had no significant relationship with
researched in a variety of prior studies. It has been widely
ROA. In another study, Maina and Oluoch (2018) examined
argued as being one of the key characteristics associated with
the effect of corporate Audit Committee characteristics on
the effectiveness of the Audit Committee. Audit committee
financial performance of manufacturing firms in Kenya. This
independence implies that its members are free from any
study focused on 766 manufacturing firms in Kenya for a
relationship and independent from the company’s
period of 5 years, 2013-2017. The study revealed that there
management or having no relationship with any major
exists a significant relationship between Audit Committee
shareholders, officers and executive directors. It is generally
meetings frequency and firms Financial Performance.
believed that an independent Audit Committee provides
effective monitoring of the financial discretion of Thus, the hypothesis three is stated as follows:
management and ensures the credibility of the financial
H3: There is no significant relationship between Audit
statements (Kuang, 2007).
Committee meetings frequency and firm financial
Xie, Davidson and Dadalt (2003) state that the more performance
independent Audit Committee is, the better governance
2.5. Theoretical Framework
compared to less independent audit committee. Independence
of audit committee helps to ensure that management is 2.5.1. Agency Theory
transparent and will be held accountable to stakeholders
(Treadway Commission, 1987; Cadbury Committee, 1992; Agency theory was originated in the early of 1970s and the
Blue Ribbon Committee, 1999). first scholars to propose agency theory were Stephen Ross and
Barry Mitnick (Mitnick, 2006). Agency theory had been
Abdullah, Qaiser, Ashikur, Ananda and Thurai (2014) highly applied in the companies in the year 1980’s because
explored the relationship between Audit Committee companies had the assumption which the managers are agents
characteristics, external auditors and economic value added work on behalf of shareholders who are so called principals
(EVA) of public listed firms in Malaysia. The study found that (Zajac & Westphal, 2004). Accordingly, agency issue may
Audit Committee independence is positively associated with occur due to separation of corporate management and

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume V, Issue XII, December 2021|ISSN 2454-6186

ownership as the agents have control rights in the company FINPERF= ƒ(AUDCX) --------------------------------------(i)
and they may conduct opportunistic behaviors which are
Where FINPERF= Financial performance measured using
exploiting interests of principals (Jensen & Meckling 1976;
Return on assets (ROA)
Fama & Jensen 1983).
AUDCX= Audit Committee characteristics
Meanwhile, Fama and Jensen (1983) asserted that agency
costs have basically reduced welfare of principal, resulting in Expanding the independent variables, we have;
the agency problem such as the incurrence of expenses due to
ROAit = ∂0 + ∂1 AUDSit + µ it --------------------------------(ii)
the incentives or monitoring of agents. Agency theory also
suggested Audit Committee can strengthen their monitoring ROAit= ∂0 + ∂2 AUDINDit + µ it -----------------------------(iii)
effectiveness with advanced financial and accounting
knowledge by preventing corporate fraud therefore alleviating ROAit = ∂0 + ∂3 AUDFMit + µ it -------------------------------(iv)
agency issue between managers and shareholders and lead to a ROAit= ∂0 + ∂1 AUDSit + ∂2 AUDINDit + ∂3 AUDFMit + µ it --
better firm performance (Zahirul, Nazrul, & Bhattacharjee, ------------ (v)
2010).
Where;
III. METHODOLOGY
AUDIND= Audit Committee Independence,
The ex-post facto research design was used in this research.
Kerlinger (1970) noted that ex post facto research is one in AUDFM= Audit Committee frequency of meeting,
which the independent variable or variables have already AUDS=Audit Committee size,
occurred and in which the researcher starts with the
observation of a dependent variable or variables. The µ = Stochastic term. i = number of sampled cross-sectional
population of the study comprises of all consumer goods firms firms, t = time period of the sampled companies, ∂ =
listed on the Nigerian Stock Exchange. As at the period of beta/coefficient
this study, there are about 28 of such firms (NSE, 2021). The apriori signs are ∂1 > 0, ∂2 > 0, ∂3 > 0
However, after filtering for firms with incomplete records, for
this study coverage (which is from 2010 to 2019), only IV. RESULTS AND DISCUSSION
eighteen (18) firms were found with complete records. Table 4.1: Regression Results for Audit Committee and ROA
Secondary data was used for this study. The data was
Aprori Fixed effects
retrieved from corporate annual reports of the sampled firms. Variable Random effects Model
sign Model
0.4588* 0.5713*
3.1. Measurement of Variables C (0.0972) (0.1012)
The variables of this study are defined and measured as {0.000} {0.000}
0.0125* -0.0144
follows: AUSIZE (0.0028) (0.0039)
+
{0.000} {0.0003}
i. ROA: This is defined mathematically as, profit after
-0.0708* -0.1183*
tax divided by total assets in line with Atrill, ADIND (0.0404) (0.0554)
+
McLaney, Harvey, and Jenner (2009). {0.0401} {0.0330}
ii. Audit Committee size (AUDSIZE): This is the 0.1986* 0.1915*
number of individuals on the Audit Committee. This AUDFM (0.0539) (0.0944)
+
{0.0003} {0.0428}
approach of measuring AUDSIZE is in line with
Model Parameters
Abdellatif (2009).
iii. Audit Committee independence (AUDIND): This R2 0.6557 0.0460
entails the number of independent directors on the Adjusted R 2
0.5318 0.0366
Audit Committee. This is in tandem with the work of
F-statistic 35.831 4.8538
Xie, Davidson and Dadalt (2003).
iv. Audit Committee meetings and attendance Prob(F-stat) 0.00 0.00
(AUDFM): This represents the number of times D.W 1.9 1.511
Audit Committee meets in a year. This approach is in Model Diagnostics
line with Lin, Li and Lang (2006).
χ2
Hetero 0.725 χ2Norm 0.086
3.2. Model Specification χ2Serial/Corr 0.114 χ2
20.237 (0.000)
Hausman

The focus of the study is to examine the impact of Audit Ramsey

0.120
Committee on corporate financial performance of listed Reset test
consumer goods firms in Nigeria. The models adopt those of Source: Researcher’s compilation (2021) using Eviews 10. * sig @5%, ** sig
Mahdi, Mohammad and Hossein (2018) and Olayinka (2019). @ 10% ( ) Standard error { } p-value
The models are presented as follows;

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume V, Issue XII, December 2021|ISSN 2454-6186

As shown in the results, the R2 for the model is 0.6557 which been widely argued as being one of the key characteristics
implies that the model explains about 65.57% of the associated with the effectiveness of the Audit Committee.
systematic variations in the dependent variable with an Audit Committee independence implies that its members are
adjusted value of 53.18%. The F-stat is 35.83 (p-value = 0.00) free from any relationship and independent from the
is significant at 5% and suggest that the hypothesis of a company’s management or having no relationship with any
significant linear relationship between the dependent and major shareholders, officers and executive directors. It is
independent variables cannot be rejected. It is also indicative generally believed that an independent Audit Committee
of the joint statistical significance of the model. The D.W provides effective monitoring of the financial discretion of
statistics of 1.9 in the fixed effects indicate the absence of first management and ensures the credibility of the financial
order serial correlation in the model. The model diagnostics statements (Kuang, 2007). Xie, Davidson and Dadalt (2003)
reveals that the χ2Hetero p-value (0.725) implies the state that the more independent Audit Committee is argued to
homoscedastic behaviour of the errors and the χ2Serial/Corr p- provide better governance compared to less independent audit
value (0.114) also reveals the absence of serial correlation. In committee.
addition, χ2Norm p-value (0.086) reveals that the series follow a
This study’s findings are in tandem with Gabriela (2016)
normal distribution.
which examined the impact Audit Committee characteristics
The analysis of coefficients reveals AUDSize is positive on firm performance using evidence from non-financial firms
(0.0125) and significant (p=0.000) at 5%. The positive listed on London Stock Exchange in UK from 2011 to 2015.
coefficient suggests that increase in Audit Committee size The study found Audit Committee independence to be
resulted in an increase in ROA. According to KMPG (2009) negatively correlated with firm performance. In the same vein,
the size of the Audit Committee varies depending upon the Bansal and Sharma (2016) examined the role of audit
needs and culture of the company and the extent of delegated committee characteristics in improving firm performance.
responsibilities to the committee. Our findings are in tandem Their findings did not reveal any positive effect of Audit
with Gabriela (2016) who examined the impact Audit Committee independence on the financial performance of
Committee characteristics on firm performance using India firms. Aryan (2015) showed no positive significant
evidence from non-financial firms listed on London Stock relationship between Audit Committee composition, and
Exchange in UK from 2011 to 2015. The main findings of his companies’ profitability.
study suggest that there is a significant positive relationship
On the contrary, Ojeka, Iyoha and Obigbemi (2014) explores
between the Audit Committee size and its financial
the influence of Audit Committee effectiveness on firm’s
performance. Allam, Adel and Sameh (2013), studied impact
performance using independence as one of the variables. The
of Audit Committee characteristics on firm performance,
result of the analysis showed a positive significant
evidence from Jordan. The result showed that the Audit
relationship between independence and ROA. Orjinta and
Committee has an impact on financial and stock performance.
Ikueze (2018) examined the effect of Audit Committee
Sidiq and Krismiaji (2020) found that all of the characteristics
characteristics on performance of selected non-financial firms
of Audit Committee positively affect the company's
quoted in Nigerian Stock Exchange. A sample of 50 listed
performance.
firms was used for the period 2007 to 2016. The result
On the contrary, Mahdi, Mohammad and Hossein (2018) revealed that there is a significant positive relationship
evaluated the relationship between the characteristics of the between Audit Committee independence and firm
Audit Committee and the board and profitability among the performance. Salisu and Nur Ashikin (2016) analysed the
companies listed on the Tehran Stock Exchange (TSE) in Iran. impact of Audit Committee attributes on the performance of
The study found no significant association between Audit finance companies in Malaysia in both period before and after
Committee size and corporate financial performance. the Malaysian Code on Corporate Governance (MCCG) was
Olayinka (2019) examined the effect of Audit Committee issued. Their findings suggest a significant positive
Effectiveness on the growth of Firms Performance in Nigeria relationship between independent Audit Committee members
with emphasis on Eight Public Quoted Banks in Nigeria. The and profitability. Abdullah, Qaiser, Ashikur, Ananda and
findings revealed that Audit Committee size have no Thurai (2014) studied relationship between Audit Committee
significant effect on firms’ performance in Nigeria. In the characteristics and economic value added (EVA) of public
same vein, Ojeka, Iyoha and Obigbemi (2014) conducted a listed firms in Malaysia. The study found that Audit
study on the subject matter. The result of the analysis showed Committee independence is positively associated with firm
that Audit Committee size has no significant relationship with performance.
all performance variables.
The results showed that AUDFM has a positive beta (0.1986)
AUDIND has a negative beta (-0.0708) and also significant and significant (p=0.0003) at 5% which implies that higher
(p=0.0401) at 5%. The negative coefficient indicates that number of Audit Committee meeting will have a positive and
more independent boards will signal lower financial significant impact on financial performance. The number of
performance. The independence of the Audit Committee has Audit Committee meetings is considered to be an important
been widely researched in a variety of prior studies. It has attribute for monitoring effectiveness (Lin, Li & Lang, 2006).

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International Journal of Research and Innovation in Social Science (IJRISS) |Volume V, Issue XII, December 2021|ISSN 2454-6186

The number of Audit Committee meetings is taken as a proxy In line with the study’s findings, the following
for Audit Committee activity (Xie, Davidson & Dadalt 2003). recommendation was made. Firstly, there is the need to
As a result, the Audit Committee that meets more frequently increase the level of Audit Committee independence as more
with the internal auditors is considered better informed about independent members will ensure greater objectivity,
auditing and accounting issues. An Audit Committee that monitoring and transparency. Secondly, there is also the need
meets frequently can reduce the possibility of financial fraud for audit committees to meet more frequently as this will also
(Abbot, Parker & Peters, 2004; Raghunadan, Rama & improve their monitoring capacity. Thirdly, though current
Scarbrough, 1998). Bryan, Liv and Tiras (2004) posited that corporate governance codes in Nigeria seem to ensure that
Audit Committees that meet regularly are often expected to be Audit Committee size is not less than six, there may be
able to perform monitoring tasks more effectively than others several companies that have below this number. Hence there
that do not meet regularly. is need to check compliance by companies even though the
size of the Audit Committee may also be influenced by
This study’s findings are supported by Maina and Oluoch
several other factors.
(2018) revealed that there exists a significant relationship
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