EFFECT OF AUDIT COMMITTEE ON SUSTAINABILITY REPORTING IN NIGERIA

1.1 Introduction

The audit committee is the corporate governance mechanism that monitors disclosure and determines the extent of voluntary disclosure made in the firms (Carcello & Neal, 2003). With the oversight responsibility of the audit committees, firms are expected to meet the stakeholders’ expectations through sustainability reporting. Nevertheless, voluntary sustainability disclosures have a tendency to improve the companies’ corporate image (Orazalin & Mahmood, 2018). Studies have identified the possible benefits of the sustainability reporting process, which include increased efficiency; higher levels of employee retention and lower cost of capital (Ahmed & Manab, 2016; Al-Shaer & Zaman, 2016; García-Sánchez et al., 2019).

As a prelude to other parts of this study, this chapter will discuss the background upon which this study was initiated, the statement of problems that led to this study, the Aim and Objectives of the study. Others are Significance of the study, Scope of work, Limitations of the Study and Definition of technical terms.

1.2 Background of Study

During the last two decades audit committees (henceforth ACs) have become a common mechanism of corporate governance internationally. Originally non-mandatory structures used by a minority of corporations, more recently numerous offcial professional and regulatory committees in many countries have recommended their more universal adoption and have advocated expanded roles for ACs. The Sarbanes-Oxley Act of 2002 in the US, the report of the Australian Treasury (2002) and the recommendations of the Smith Committee (2003) and the Higgs (2003) review in the UK (Turley and Zaman, 2003) are recent examples. The objective of this paper is to evaluate the extent to which research evidence demonstrates corporate governance effects associated with the operation of ACs in private sector corporations1. This evaluation incorporates consideration of perceived effects that may have led to AC adoption and demonstrated effects on the audit function, financial reporting quality and corporate performance.

While no a priori position on the effcacy of ACs for alleviating weaknesses in corporate governance is adopted in this paper, it can be noted that regulators, governmental bodies and researchers in many countries have raised questions about ACs’ effectiveness and their contribution to governance (Sommer, 1991; Wolnizer, 1995; Lee, 2001; Turner, 2001). The incidence of high profile corporate failures, notably in the period since 2000, involving fraud, poor accounting and failure of internal control have provided at least anecdotal evidence to support concerns about the adequacy of the monitoring provided by ACs. Such events have accentuated concerns that have been expressed over a somewhat longer period. For example, researchers and commentators have argued that many AC members lack critical attributes such as independence, expertise and experience in oversight (Vicknair et al., 1993; DeZoort, 1997; Cohen et al., 2002; Guy and Zeff, 2002), that the level of interaction between the AC and auditors is variable, undermining the AC’s value as an effective vehicle for pursuing shareholders’ interests (Hatherly, 1999), and that whether ACs are actually discharging their important responsibilities is not suffciently understood (Kalbers and Fogarty, 1993). Some have also argued that the adoption of ACs may be primarily symbolic (Kalbers and Fogarty, 1998) and that the benefits associated with them are more rhetorical than substantive (DeZoort, 1997).

Recent years have seen attempts to enhance the role of ACs to address governance issues (for example, Cadbury (1992) in the UK, AARF (1997) in Australia and the Blue Ribbon Committee (1999) in the US), followed by significant corporate failures such as Enron in which the adequacy of the AC has been questioned (Powers, 2002; Benston and Hartgraves, 2002), followed in turn by further attention to ACs’ responsibilities and the qualities necessary for AC effectiveness (see for example, Sarbanes-Oxley and SEC (2002) in the US, Australian Treasury (2002) and Smith (2003) in the UK). Given, on the one hand, the continued reliance on and development of rules for ACs in the governance policy arena and, on the other hand, the concerns expressed about the realization of the intended benefits from having ACs as part of the governance structure for corporations, the question of what is the impact of ACs on specific aspects of governance in practice is of considerable importance. It is this question that this paper seeks to address by evaluating available empirical evidence about the impact of ACs on a number of governance factors. While the governance environment continues to change in the aftermath of Enron and similar cases, evaluation of existing demonstrated effects associated with ACs is relevant in forming expectations about the likely results of current regulatory change, in establishing benchmarks against which the future impact of such change can be evaluated and in guiding the emphasis of future research.

Therefore, in Nigeria where the research was carried out, the activities that was conducted is to know the Effect of Audit Committee on Sustainability Reporting.

1.3 Statement of Problems

Investigation reveals the following problems of the Effect of Audit Committee on Sustainability Reporting in Nigeria research work;

There is a positive relationship between audit fees and the purchase of both recurring and non-recurring non-audit services at the same time. When two-stage least squares are used to control for joint determination of audit services and non-audit services, there is no relationship. The lack of relationship (or positive relationship) is consistent with previous studies in this area and the results of the non-recurring non-audit services support Beck et al. (1988a) suggestion of a lack of incremental bonding.

The issue of audit committee services provided by auditors, and whether these services have an effect on auditor independence, continues to be controversial. This reasoning is convincing when considering the Tesco scandal, since the amount of NAS provided to the company, in exchange with high non-audit fees (NAF) to the auditor, probably had an impact on the extensive auditor tenure. Consequently, this raised awareness to issues regarding auditors’ independence and their capability to encounter long-lasting clients, from which they incur significant amount of income (Harriet, 2014).

It is clear that there is no automatic relationship between the adoption of audit committee structures or characteristics and the achievement of particular governance effects, and caution may be needed over expectations that greater codification around factors such as audit committee members’ independence and expertise as the means of "correcting" past weaknesses in the arrangements for audit committees. The most fundamental question concerning what difference audit committees make in practice continues to be an important area for research development.

1.4 Aim and Objectives of Study

The aim of the study is to investigate the Effect of Audit Committee on Sustainability Reporting in Nigeria. In achieving this aim, the following specific objectives were laid out as follows:

1. To investigate the effect of Audit Committee on Sustainability Reporting, and the importance of Audit Committee services as a source of income for audit firms in the Nigeria;
2. To identify the opinion of auditors and audit beneficiaries on the statutory role of external auditors in Nigeria; and
3. To identify whether responsibility, reliability, nature and meaning of audit report messages and independence factors contribute to the audit expectation gap in Nigeria.

1.5 Research Questions

The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:

• Does Audit Committee enhance Sustainability Reporting in Nigeria?
• Is an Audit Committee service a crucial source of income for audit firms in the Nigeria?
• Does Audit committee characteristics and bank concentration on sustainability reporting disclosure?
• To what extent have external auditors and audit Committee beneficiaries perceive the statutory role of auditors in Nigeria?
• To what extent do reliability scores between auditors, bankers, investors and accountants in Nigeria contribute to an audit Committee?
• To what extent do nature and meaning of audit report messages scores between auditors, bankers, investors and accountants in Nigeria contribute to an audit Committee?
• To what extent do independence scores between auditors, bankers, investors and accountants in Nigeria contribute to Committee?

1.6 Research Hypothesis

In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.

Hypothesis One

• H0: The audit committee magnitude has a negative and significant influence on the sustainability disclosure.
• H1: The audit committee magnitude has a positive and significant influence on the sustainability disclosure.

Hypothesis Two

• H0: The influence of audit committee independence and gender diversity of audit committee are significantly negative on the sustainability disclosure
• H1: The influence of audit committee independence and gender diversity of audit committee are significantly positive on the sustainability disclosure

Hypothesis Three

• H0: Audit committee magnitude does not influence the sustainability reporting quality
• H1: Audit committee magnitude influences the sustainability reporting quality

1.7 Significance of Study

This study tends to provide insights on sustainability reporting and assist stakeholders in emphasizing on the importance of sustainability disclosure through the audit committee oversight. This study will be of immense benefit to researchers who intend to know more on this study and can also be used by non-researchers to build more on their research work. This study contributes to knowledge and could serve as a guide for other study.

1.8 Scope of Study

The scope of this research is focused on the Effect of Audit Committee on Sustainability Reporting in Nigeria.

1.9 Limitations of the Study

During the course of this study, many things militated against its completion, some of which are:

1. Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
2. Research material: availability of research material is a major setback to the scope of the study.
3. Frequent power failure: This made the researcher append more money on fuel to ensure sustainable power.
4. Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

1.10 Definition of Terms

Audit: In this study ‘audit’ refers to statutory audit carried out by external auditors. It is an independent examination of the financial statements of a company.

Expectation: This word refers to the purpose of audit as perceived by the users of financial statements.