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JOURNAL OF

FORENSICACCOUNTING

& FRAUD INVESTIGATION (JFAFI)

ISSN 2659-1138 (Print) ISSN 2659-1146 (Online)

A Publication of The Association of Forensic Accounting Researchers (AFAR)

VOL. 5. ISSUE 1

JANUARY – JUNE, 2020

JOURNAL OF FORENSIC ACCOUNTING & FRAUD

INVESTIGATION (JFAFI)

ISSN 2659-1138 (Print): ISSN 2659-1146 (Online)

Volume 5, Issue 1, January – June, 2020

A publication of the Association of Forensic Accounting

Researchers (AFAR)

A member of International Association of Accounting Education

and Research (IAAER)

Vision Statement

To inspire and enable a better world through collaborations,

education and promotion of forensic accounting research to help

the practice of forensic accounting

Mission Statement

To build a vibrant and supportive atmosphere for forensic

researchers by markedly expanding opportunities to connect and

explore ideas in the Forensic Accounting, Audit, Taxation, Internal

Auditing and Investigation, Investigative Accounting and Fraud

Examination and Litigation Support among others

Official publication of the Association of Forensic Accounting

Researchers (AFAR)

+2348132445878, +2348095491026, +2348118051923

[email protected], [email protected],www.afars.org

https://afars.org/research/journals/

ii





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Researchers (AFAR)



Editorial Board

Editor-in-Chief

Professor Muhammad Akaro Mainoma Nasarawa State University, Keffi, Nigeria

Managing Editor

Professor Godwin Emmanuel OyedokunCharisma University, Providenciales, Turks and Caicos Islands, British West Indies, UK

Editorial Board Members

Professor Tankiso Moloi University of Johannesburg, South Africa

Professor Suleiman A. S. Aruwa

Nasarawa State University, Keffi, Nigeria

Professor Linus Enobi AkepeCooperstone University, Kitwe, Zambia

Professor Aderemi Kabiru AdeyemoLead City University, Ibadan,Nigeria

Professor Uwalomwa Uwuigbe Covenant University, Ota, Nigeria

Professor Russell O. C. Somoye Olabisi Onabanjo University, Ago Iwoye, Nigeria

v

Professor Barnabas E. BardeNasarawa State University, Keffi, Nigeria

Professor Eugene O. Uwadialor Godfrey Okoye University Enugu, Nigeria

Professor Muhammad Liman Muhammad Bayero University, Kano, Nigeria

Professor Luke Onuoha Babcock University, Ilishan-Remo, Nigeria

Professor J. A. Abosede Olabisi Onabanjo University, Ago-Iwoye, Nigeria

Professor J. Ihendnihu Michael Okpara University of Agriculture, Umudike, Nigeria

Professor Lawyer C. Obara Rivers State University, Nigeria

Ass. Prof. (Mrs) Fatima Tahir University of Maiduguri, Nigeria

Dr. Titilayo Eni-Itan Fowokan OGE Business School, Lagos, Nigeria

Dr. Abdallah Ali-Nakyea

Ghana School of Law & WTS Nakyea Tax Attorneys & Solicitors in Accra

Dr. Maureen Nwala Nasarawa State University, Keffi, Nigeria

Dr. Abdul Adamu Nasarawa State University, Keffi, Nigeria

Dr. Mary Kehinde Salawu University of Johannesburg, South Africa

Dr. Ruth Andah Nasarawa State University, Keffi, Nigeria

Dr. Ismaila A. Olotu Nasarawa State University, Keffi, Nigeria

Dr. A.D. Zubairu Nasarawa State University, Keffi, Nigeria

vi

Dr. Ayooluwa Olotu Ajayi-Owoeye Babcock University, Ilishan Remo, Nigeria

Dr. A.A. MusaNasarawa State University, Keffi, Nigeria

Dr. Dagwon Y. Dang Plateau State Internal Revenue Service, Jos, Nigeria

Editorial Advisory Board

Professor Taiwo Olufemi Asaolu Obafemi Awolowo University, Ile Ife, Nigeria

Professor Muhammed Taofeeq Abdulrazaq Lagos State University, Ojo, Nigeria

Professor Kabiru Isa Dandago Bayero University Kano, Nigeria

Professor Rafiu Oyesola Salawu Obafemi Awolowo University, Ile-Ife, Nigeria

Professor Ishola Rufus Akintoye Babcock University, Ilishan- Remo, Nigeria

Professor Olubukola Ranti UwuigbeCovenant University, Ota, Nigeria

Professor Jonathan Ayuba Nasarawa State University, Keffi, Nigeria

Professor Janurus Asongo Saint Monica University, USA

Professor PeterChris Okpala Charisma University, TCI, UK

Secretary Editorial & Advisory Board

Mr. Joseph Kayode Oyedokun, FFAR

Secretary

Mr. Taiwo Oyetope Olakunle, FFAR Assistant Secretary

vii


INVESTIGATION (JFAFI)ISSN 2659-1138 (Print): ISSN 2659-1146(Online)


Researchers (AFAR)A member of International Association of Accounting Education


CALL FOR PAPERSThe Association of Forensic Accounting Researchers (AFAR) is an

organization established with registration RC 120254 to enhance

forensic accounting research and practice in Africa and beyond.

AFAR is an organization that seeks to make impact as a not-for-

profit making organization who combines both academic and

professional qualities in researching into forensic related matters in

order to bring about reduction in the incidences of corruption in

terms of white-collar crime and other fraudulent activities in the

world. AFAR uphold the regulations of the forensic and fraud

investigation professions by setting high ethical and professional

standards for her members in order to in turn create an ethical and

value-driven society. Members of AFAR are Professionals,

Academics and Industry' experts in the field of Forensic Accounting,

Forensic Audit, Forensic Investigation, Investigative Accounting,

Fraud Examination, Forensic Taxation and Forensic Internal

Auditing among others.

Journal of Forensic Accounting & Fraud Investigation (JFAFI)The Journal of Forensic Accounting & Fraud Investigation (JFAFI) is

the official Journal of the Association of Forensic Accounting

Researchers (AFAR). JFAFI is devoted to the study of Forensic

viii

Accounting, and related field and its role in economic development.

The journal's specific areas of interest include the theoretical and

empirical analysis of Forensic Accounting, Forensic Audit, Forensic

Investigation, Investigative Accounting, Fraud Examination,

Forensic Taxation and Forensic Internal Auditing among others in

the fields of Accounting, Finance, Economics and Business

Administration and their contributions to the mission of JFAFI.

Manuscripts submitted to JFAFI are peer-reviewed, and are

expected to promote scholarly interactions among forensic

professionals, academics, policy makers, development partners,

and other development stakeholders in Africa and beyond. See


Guidelines for the submission of manuscripts

1. Submission of manuscript for publication in JFAFI

presupposes that it is original research; has never been

previously published and is not being concurrently submitted

for publication elsewhere.

2. All articles must be well researched on contemporary issues in

keeping with the JFAFI's mission outlined above. These can be

under any of the following categories:

a. Original research - These must report studies and explain

the purpose, methodology, sample, results and

implications of the findings. A variety of research designs

are welcomed but manuscripts should not exceed 7,500

words typed in Times New Romans 12 font and double-

spaced (Maximum of 22 pages is allowed, when this

ix

exceeded, the author would be charged for extra pages as

another manuscript).

b. Best practice – analytical reports of specific, successful

documented efforts that improved, or provide evidence-

based guidelines that can be used to improve, taxation

administration, policy, etc. Whether entirely innovative

or a variation of a tried and true approach, the best

practice described must offer evidence as to how the

subject matter was or could be enhanced and should have

wide application. Such best practice papers should not

exceed 4,000 words typed in Times New Romans 12 font

and double-spaced.

c. Insights - well-reasoned and effectively articulated

perspectives on issues within the JFAFI mission. Such

contributions could take the form of counterpoint

columns on a controversial topic. Insight papers are

intended to stimulate thought and prompt open dialogue

about taxation administration and social effect as well

contribute to new lines of study. Such insight papers

should not exceed 2,500 words typed in Times New

Romans 12 font and double-spaced.

d. Reviews – these are a synopsis of worthwhile reading,

viewing, and direct experience in forensic related

research and practice. Such review papers should not

exceed 1,000 words typed in Times New Romans 12 font

and double-spaced.

3. Articles submitted should have a covering page that contains

the following information:

x

a. Category submitted as outlined in 2 above

b. Title of Article

c. Name of Author(s)

d. Brief bio-data of the Author(s) at the bottom of the first

page e.g. XXX is a Professor at …University; or xxx,

Forensic Manager, Training Manager, Managing Partner,

Partner XYZ Associates/& Co. (not exceeding 100 words)

e. Email address(es) and GSM number(s)

f. Text references should be cited in the body of the paper as

follows: Author's last name and publication year (E.g.,

Ogbong, 2019)

4. Full references using the current edition of the American

Psychological Association (APA) styled should be listed at the

end of the paper as follows: Last Name, F. M. (Year Published)

Book. City, State: Publisher.

5. Footnotes should be avoided apart from the Author's bio-data

on page one.

6. Manuscripts: The manuscript must be submitted in soft copy

as a Microsoft Word document. Other file formats, including

PDF documents, are not accepted for the main (text)

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author identity, such as acknowledgements, institutional

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in the covering letter. Thus, information that might identify

the author(s) should be omitted or highlighted in black. The

first page of the manuscript should include only the title of the

manuscript and date of submission. All manuscripts must

include an abstract of 150- 200 words and three to six

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keywords. Line numbers should be embedded in the left

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7. Where tables and figures are necessary, they should not

duplicate the text. Tables must be formatted using Microsoft

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tables may create problems when typesetting and may result

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8. Plagiarism is a serious offence. Authors should ensure

appropriate citation of documents used in their articles and

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9. Final Revisions: Authors of accepted manuscripts must

obtain and provide the managing editor all necessary

permissions for reproduced figures, pictures, or other

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10. Desk Rejection Policy: Before the full review, submissions are

examined at the editorial level. If the editor and an editorial

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manuscript may receive a desk reject decision.

xii

Submission and correspondence:Manuscr ipts should be submit ted e lectronical ly to

[email protected] is published twice in a year (June and December).

Publication Fee: N30,000.00

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For further enquiries, please contact:

The Editor-in-Chief

Journal of Forensic Accounting & Fraud Investigation (JFAFI)

Association of Forensic Accounting Researchers (AFAR)



+2348132445878, +2348095491026, +2348118051923

[email protected], [email protected],www.afars.org


xiii






Researchers (AFAR)



TABLE OF CONTENTS

Contents Page

Effect of Audit Committee Financial Expertise and 1

Gender Mix on Financial Reporting Quality of

Quoted Health Care Companies in Nigeria

Ahmadu Alhaji Babanrabi

Effect of Non-Executive Directors and Independent 30

Directors on Audit Quality of Listed Oil and Gas

Companies in Nigeria

David Christopher, Uwaleke Uche Joseph,

and Aza Solomon Mangba

Audit Committee Characteristics and Financial 62

Performance of Listed Manufacturing Firms in Nigeria

Micah Ezekiel Elton Mike, Oyedokun Godwin Emmanuel

and Gimba John Toro

xiv

Effect of Stress on the Performance of the Employees' 97

of West African Examination Council (WAEC)

Mba Paschal Nchedochukwu

Effect of Naira Depreciation on Stock Market 125

Performance in Nigeria

Joshua Dandaura Jeremiah

Human Resource Management Practices and 152

Organisational Performance: A Study of University

of Benin

Erimife Joy and Akenzua Amenze

Evaluating the Efficacy of Credit Risk Management 193

on the Financial Performance of Finance Companies

in Nigeria

Faboyede Samuel, Ben-Agbo Rachael,

Ajetunmobi Opeyemi, and Adejana Bolaji

Politics of Oil Blocks Allocation and the Nigerian 221

Economy

Cletus, O. Akenbor

Economic Effect of COVID-19 Pandemic Lockdown 256

measures on Business Activities in Nigeria

Abubakar, Hadiza Saidu and Aruwa, Suleiman A. S.

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Researchers (AFAR)



NOTE ON CONTRIBUTORS

Adejana Bolaji of the Department of Accounting, College of

Business and Social Sciences, Covenant University, Canaanland,

Ota, Ogun State, Nigeria

Ahmadu Alhaji Babanrabi is of the Department of Accounting at

faculty of Administration in Nasarawa State University, Keffi

Ajetunmobi Opeyemi is of the Department of Accounting, College

of Business and Social Sciences, Covenant University, Canaanland,


Akenzua Amenze is of the Department of Business Administration,

Faculty of Management Sciences, University of Benin, Benin City

Aza Solomon M.is a an Associate Professor at the Department of

Taxation, Faculty of Administration in Nasarawa State University,

Keffi

xvi

Ben-Agbo Rachael is of the Department of Accounting, College of

Business and Social Sciences, Covenant University, Canaanland,


David, Christopher is of the Department of Accounting at faculty of

Administration in Nasarawa State University, Keffi

Erimife Joy is of the Department of Business Administration,

Faculty of Management Sciences, University of Benin, Benin City

Faboyede Samuel if an Associate Professor at the Department of

Business Administration, Faculty of Arts, Management, and Social

Sciences, KolaDaisi University, Ibadan, Oyo State, Nigeria

Gimba, John Toro is Lecturer at the Department of Banking and

Finance, Faculty of Administration in Nasarawa State University,

Keffi

Joshua DandauraJeremiah is of the Department of Banking &

Finance at Faculty of Administration in Nasarawa State University,

Keffi

Mba, Paschal Nchedochukwu is of the Department of Public

Administration at Faculty of Administration in Nasarawa State

University, Keffi

Micah, Ezekiel Elton Mike is of the Department of Accounting at

Airforce Institute of Technology in Kaduna

xvii

Oyedokun Godwin Emmanuel is a lecturer at the Department of

Taxation, Faculty of Administration in Nasarawa State University,

Keffi

Uwaleke Uche Joseph is Professor of Capital Market at the

Department of Banking and Finance, Faculty of Administration in

Nasarawa State University, Keffi.

Abubakar, Hadiza Saidu is a lecturer in the Department of Business

Administration, Kaduna State University, Nigeria.

Aruwa, Suleiman A. S.is a Professor of Accounting and Finance,

Department of Accounting, Faculty of Administration, Nasarawa

State University, Keffi, Nigeria.

Cletus, O. Akenbor is a Professor of Accounting and Taxation,

Federal University Otuoke, Bayelsa State.

xviii

EFFECT OF AUDIT COMMITTEE FINANCIAL

EXPERTISE AND GENDER MIX ON FINANCIAL

REPORTING QUALITY OF QUOTED HEALTH CARE

COMPANIES IN NIGERIA

Ahmadu, Alhaji Babanrabi

Department of Accounting

Faculty of Administration

Nasarawa State University, Keffi

ABSTRACT

Financial reporting quality has received increased attention following

corporate financial scandals in the US, Europe and other parts of the world.

To address the issue of quality, discussion has focused on corporate

governance mechanisms. This current study ascertained the effect of audit

committee financial expertise and audit committee gender mix on financial

reporting quality of quoted companies in the health care sector.

Correlational design was adopted where five out of the nine companies in

the sector were selected using purposive sampling technique for the period

of eight years (2010-2017). The result of the study using panel regression

analysis indicated that financial expertise has insignificant effect on

financial reporting quality while gender mix had a significant effect on

financial reporting quality of selected quoted companies in the health care

sector. The study also controlled for leverage which indicated a significant

effect at 90% confidence level. It was therefore recommended that quoted

pharmaceutical companies in Nigeria should comply with the corporate

governance rules for having atleast one financial expert on the audit

committee team. Although, such compliance as indicated by the result

improves reporting quality but is not significant, so companies can consider

1

monitoring other audit committee attributes closely. It was also

recommended that these companies should include female members on the

committee as it indicates a significant impact on improving financial

reporting quality.

Keywords: Audit Committee, Financial expertise, gender mix,

financial reporting quality, health care sector, Nigeria

INTRODUCTION

In the past decade, financial reporting quality has received increased

attention following financial scandals in the US, Europe and other

parts of the world. The credibility and reliability of these reports has

been questioned due to the collapse of firms soon after publication of

juicy profits. This necessitated the constriction of regulations,

standards and amendment of corporate governance mechanisms.

Audit committee is one of those mechanisms introduced by

regulatory bodies to ensure reliable and high quality financial

reporting. This initiative is a global phenomenon. In Nigeria,

Regulatory authorities responded by compelling companies to

comply with stringent corporate governance codes. Idornigie (2010)

reported that Nigeria have multiplicity of codes of corporate

governance with distinctive dissimilarities namely: Security and

Exchange Commission (SEC) code of corporate governance (2003)

addressed to public companies listed in the Nigeria Stock Exchange

(NSE). The code was reviewed in 2011; Central Bank of Nigeria

(CBN) Code (2006) for banks established under the provision of the

Bank and Other Financial Institutions Act (BOFIA);National

Insurance Commission (NAICOM) Code (2009), directed at all

insurance, reinsurance, broking and loss adjusting companies in

EFFECT OF AUDIT COMMITTEE FINANCIAL EXPERTISE AND GENDER MIX ON FINANCIAL REPORTING QUALITY

OF QUOTED HEALTH CARE COMPANIES IN NIGERIA

2

Nigeria; and Pension Commission (PENCOM) Code (2008), for all

licensed pension fund operators.

On account of the role audit committees plays, listed companies in

Nigeria are required by Companies and Allied Matters Act, (CAMA,

2004) to put together an audit committee which is expected to assist

in ensuring the overall integrity and reliability of the company's

financial statements and monitor the effectiveness of a firm's

accounting system. The composition, technical competence and role

of audit committees vary from country to country although the goal

is the same and is aimed at addressing the weakness of poor

financial reporting and prevent corporate failures. The audit

committee is a sub-committee of the board and acts as a link between

the management, internal and external auditors The committee has

the responsibility of making recommendations for the appointment

of external auditors to the board and also monitoring management

opportunistic behaviors on behalf of the shareholders.

Evidence from prior studies suggests effective audit committee

oversight plays a key role in corporate governance (Smith Report,

2003) and improves financial reporting quality (Pomeroy &

Thornton, 2008; Beasley, Carcello, Hermanson & Neal, 2009).

Improvements are achieved through strengthening governance,

promoting conservatism (Krishnan & Visvanathan, 2008) and

reducing opportunistic earnings management (Xie, Davidson &

DaDalt, 2003; Bédard, Chtourou & Courteau, 2004; Leventis &

Dimitropoulos, 2012). Audit committees are also associated with

error reduction and regulatory compliance (Barako, Hancock &

Izan, 2006), oversight of risk management and internal control



3

systems (Chambers & Weight, 2008) and the extent of voluntary

disclosure (Ho & Wong, 2001).

In Nigeria, audit committee has not shown the capacity to perform

expected oversight responsibilities as evidenced in the collapse of

financial institutions and mismanagement of government agencies.

This scenario led to criticisms of audit committee for the failure to

discharge functions vested on it by CAMA 2004, Security and

exchange commission and regulators. There are a number of

reasons suspected to have contributed to this anomaly. The

competence of members of the audit committee has been questioned

as it is believed that majority of members do not understand

financial reporting and are unable to make plausible contributions. Scant empirical studies have examined audit committee and

financial reporting quality in third world countries (Owolabi &

Dada, 2010; Ofo, 2010; Ojeka, Kanu & Owolabi, 2013; Uwuigbe,

2013; Ojeka, Iyoha & Obigbemi, 2014; Ojeka, Iyoha &Asaolu, 2015;

Temple, Ofurum & Egbe, 2016; Umobong & Ibanichuka, 2017), but

none of the studies considered audit committee's characteristics of

financial expertise and gender mix in pharmaceuticals sector of

Nigeria. Whether or not, these variables enhance financial reporting

quality in Nigeria calls for further study. The study specifically

determined the impact of financial expertise and gender mix of

audit committee members on financial reporting quality of quoted

health care companies in Nigeria. Industry specific analysis is

therefore a necessity to clearly identify the role of audit committee in

firm reporting



4

The study is based on the following hypothesis;

H : Audit Committee financial expertise has no significant impact 01

on financial reporting quality of quoted pharmaceuticals

companies in Nigeria.

H : Audit committee gender mix has no significant impact on 02

financial reporting quality of quoted pharmaceuticals

companies in Nigeria.

LITERATURE REVIEW

Audit committees vary according to the objectives, functions and

responsibilities given to them. Arens, Elder and Besaly (2009)

defined audit committee as "a group of persons selected from

members of the board of directors and saddled with the

responsibility of retaining the independence of external auditors."

AL-Thuneibut (2006) defined audit committee as "that which is

composed of non-executive directors in the establishment." The

second definition may be defective as audit committee does

constitute only non-executive directors, as (found in the sample of

this study) most audit committees consist of executive and non-

executive directors. Therefore, the primary objective behind the

establishment of audit committee is to improve quality of audit and

check the board of directors thereby increasing the quality of

financial reporting.

In Nigeria, section 359(3) and (4) of the Companies and Allied

Matters Act (2004) as amended requires every public traded

company to establish an audit committee. It is part of their

responsibility to assist in the oversight of the integrity of the

company's financial statements, comply with legal and other



5

regulatory requirements, assess the qualification of independence of

external auditors and perform the company's internal audit function

as well as that of external auditors. It is also meant to establish an

internal audit function and ensure that there are other means of

obtaining sufficient assurance on the regular review or appraisal of

the system of internal controls in the company. They also oversee

management's process for the identification of significant fraud

risks across the company and ensure that adequate prevention,

detection and reporting mechanisms are in place. In addition to

audit committee statutory functions, Securities and Exchange

Commission Code of Corporate Governance (2011) provides that

audit committee shall assist in the oversight of the integration of

company's financial requirements.

Accordingly, accounting expertise is the most important

characteristic of an audit committee because “best practices”

suggest that audit committee members should have knowledge of

accounting concepts and the auditing process to recognize

accounting trepidations and ask for the information from

management and the auditor. It has also been advocated that older

people have greater working experience than younger ones.

Experience is particularly important for working in any occupation.

Audit committees comprising greater experience may help identify

the weaknesses in internal control easier.

Also, reasonable argument drawn from agency theory posits that

gender and ethnic diversity can have either a positive, negative or

neutral influence on a firm's performance (Carter, Simkims

&Simpson, 2010). Women participation in the corporate board has



6

been increasing. In the past five years, several countries have passed

legislation mandating female board representation and eight have

set non-mandatory target (Suisse, 2012). Pearce and Zahra (1991)

argue that a representation of diverse interest including the number

of females and minority members is an important characteristic of an

effective board.

On the other hand, financial reporting is an important element of the

system of corporate governance and some failures of corporate

governance may therefore be due to inadequate financial reports

(Whittington, 1993). This is because, the financial reporting serves as

the main means of communication between companies and

stakeholders by relieving fundamental information asymmetry

between the directors, who have access to management information,

and providers of finance who are external to the company

(Whittington, 1993). In order to ensure high quality financial

reporting, the International Accounting Standards Board (IASB)

indicated in its framework the guidelines for the preparation and

presentation of financial statements under the assumption of four

principal qualitative characteristics, namely: understandability,

relevance, reliability and comparability.

Stakeholders to the financial statements (users) include creditors,

suppliers, customers, shareholders, lenders, employees,

government agencies. These users have varying information needs.

The quality of financial statements is relevant to the particular

information needs of each of the stakeholders for the purpose of

making informed decisions. Financial reporting embodies two types

of information, namely: quantitative and non-quantifiable



7

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.

Empirically, Findings from the existing academic studies generally

support the prediction and find that the presence of audit committee

members with financial expertise is positively associated with

financial reporting quality. Carcello, Hollings worth, Klein and Neal

(2006) find that independent audit committee members with

accounting expertise and certain types of non-accounting financial

expertise are most effective in mitigating earnings management.



8

Using internal control weakness as a measure of financial reporting

quality, Zhang, Zhou and Zhou (2007) find that firms are more likely

to be identified with an internal control weakness if their audit

committees have less accounting financial expertise and non-

accounting financial expertise. However, another two recent studies

find contradicting results on the role of accounting expertise and

non-accounting expertise. Examining the composition of audit

committees for a sample of 500 firms, Krishnan and Visvanathan

(2008) find that only accounting financial expertise, rather than non-

accounting financial expertise, is positively associated with

conservatism, a fundamental property of financial statements.

On the other hand, Goh (2009) finds that only non-accounting

financial expertise, rather than accounting financial expertise, is

positively associated with reporting quality. Access can only be

gained to what the executive directors provide. Therefore, the need

to have an audit committee with financial expertise cannot be

overemphasized.

Also, Ghafran (2013) in the UK finds that audit committee financial

expertise exerts significant impact on audit quality which invariably

impact on the quality of financial reports. Although Krishnan and

Visvanathan (2008) fail to find any significant impact of non-

accounting financial expertise on financial reporting quality existing

theoretical and empirical research suggest that a mix of accounting

and non-accounting expertise may enhance audit committee's

ability to monitor financial reporting process.



9

In Nigeria, Umobong and Ibanichuka, (2017) examined the

relationship between audit committee characteristics and financial

reporting quality of food and beverage firms using secondary data

obtained from Nigeria Stock Exchange. Study revealed a positive

link between audit committee independence, financial expertise of

members, firm age and frequency of meetings on financial reporting

quality. While increase in audit committee size and firm size as a

negative nexus on financial reporting quality.

Badalato, Denelson and Ege (2013) studied the relationship between

audit committee financial expertise and financial reporting quality

and found that audit committee with both financial expertise and

high relative status are more effective at determining earnings

management as measured by accounting irregularities and

abnormal accruals.

Hussaini and Gugong (2014) studied the relationship between

Audit Committee characteristics and earnings quality in the context

of food and beverages firms in Nigeria. Their study covered a period

of 2007 to 2014. Data for the study were extracted from the firms'

annual reports and accounts. After running the OLS regression, the

results from the analysis revealed significant association between

audit committee characteristics and earnings quality of the firms.

While audit committee size and committees' financial expertise

showed inverse relationship and discretionary accrual, committee's

independence and frequency of meetings were positively and

significantly related to discretionary accrual.



10

Joseph, Carl, April and Terry (2014) examined the associations

between audit committee financial expertise and alternate corporate

governance mechanisms and earnings management. The study

covered a period of 2013. The regression result revealed a positive

relationship concerning audit committee expertise and financial

reporting quality.

Furthermore, Muhammad, Ayoib and Noor, (2016) investigated the

characteristics of audit committee and its effect on the quality of

financial reporting of Nigerian listed firms. The study employed

multivariate regression as a tool for analysis. The study utilized a

sample of 101 firm-years observations of non-financial companies in

the Nigeria for the period 2010-2014. The results showed that audit

committee financial expertise has a significant effect on quality

financial reporting of listed non-financial firms in Nigeria.

Dam and Ferreia (2009) found that female directors can be better

monitor of managers'behaviour through board input such as

attendance. Gulzar and Wang (2011) explained that the emergence

of an issue of board gender diversity in corporate governance

literature started from the last few years. Carter, Simkins and

Simpson (2003) argued that women may improve decision making

of the board. Fondas and Sassalos (2000) argued that heterogeneous

board is more efficient than homogenous board.

Srinidhi, Gui and Tsui (2011) conducted a study on US firms over the

years 2001-2007 and use accruals quality (extended Dechow &

Dichev model as proposed by McNichols (2002)) and target beating

as proxies for earnings quality. All the results showed that female



11

presence on the board is associated with both higher accruals quality

and less propensity to manage earnings to beat benchmarks.

Tsui (2011) investigated the relationship between female

participation and corporate boards and earnings quality drawn

from a sample of US listed firms from 2007 to 2011. The result of the

study showed that the presence of female directors in monitoring

position on audit and corporate governance committees makes

more transparent reporting and earnings quality. It also revealed a

positive relationship between female participation in corporate

boards and earnings quality.

Springer (2008) examined whether and how the participation of

women in the firm's board of directors and senior management do

not enhances firm's financial reporting or ability of checkmating

opportunistic behaviour of management. The study found that

women are often appointed to leadership positions under

problematic organizational circumstances associated with greater

risk of failure and criticism, however, having more women on

corporate board and top management does not seem to generate

significant excess return and cannot restrained managers?

opportunistic behaviour.

Ghazaleh and Garkaz (2015) examined the relationship between the

presence of women on the boards of directors of listed companies in

Tehran Stock Exchange using and earnings management with

discretionary accruals index. The findings of the study indicated

that the presence of female directors in board is significantly and

negatively associated with earnings management. It was made clear



12

that firms with women on their boards have less use of discretionary

accruals for earning management.

Audit committee is an essential tool for corporate management and

supports the monitoring process aimed at mitigating agency

conflicts between principal and agents. Audit committee without

external influence enjoying independence with expertise of

members in financial matters strengthens internal control in

organizations and mitigates conflicts of interest (Krishan, 2005).

Theoretically, Formation of audit committees derives its impetus

from agency theory. When the management of firms are delegated

by shareholders to agents it creates agency relationship. This ceding

of responsibility by the principal and the resultant separation of

responsibilities are beneficial in enhancing an efficient and

rewarding entity (Jensen & Meckling, 1976). However, delegation

requires principal trust the agent to act in the principal's best

interests. There may be conflict of interest between the principal's

expectation and the desire of the agent (Jensen & Meckling, 1976;

Ross, 1973). The agent may also possess superior information on the

activities of the entity than the principal. These divergences could

occur because of financial reward, labor market opportunities, and

relationships with other parties that are not beneficial to the

principal.

Also, agents could be more risk averse than principals. These

scenarios could create conflicts and the opportunity for the principal

to institute monitoring functions to curtail the activities of the agent

and ensure goal congruence when there is divergence of views and



13

motives. Agency model suggests that, as a result of information

asymmetry and self- interest, principals lack reasons to trust their

agents and will seek to resolve these concerns by putting in place

mechanisms to align the interests of agents with principals and to

reduce the scope for information asymmetries and opportunistic

behavior (Fama &Jensen, 1983; Eisenhardt, 1989).

METHODOLOGY

This study employed correlation research design to assess the

impact of audit committee characteristic on financial reporting

quality of listed pharmaceutical companies in Nigeria. The

population of the study comprised of all the nine (9) health care

companies listed on the floor of Nigerian Stock Exchange (NSE)

Market as at 31st December, 2018 and are operating throughout the

period of the study (2011-2018). Only five these companies met these

criteria and were considered as sample size for this study. Secondary

sources of data were used for the purpose of data collection. The data

were taken from the annual reports and accounts of the sampled

Firms and Nigerian Stock Exchange Fact Book is used to find out the

listed Firms for the period of 2013 to 2018. The study will employ

panel regression techniques. Furthermore, the study will conduct

Multicollinearity test, using the Variance Inflation Factor (VIF) and

Tolerance Value (TV). Also Breuch and Pagan/Cook-Weisberg test

was also, be conducted to test the effects of Autocorrelation and

Heteroscedasticity.

Model Specification

The following is the model used to empirically test the hypotheses

formulated. The adoption of this model is in line with the work of



14

Issarawornrawanich (2011), Somsak, Nuchjaree and Nimnuan

(2016)

FRQit = âit0 + â1ACFEPit + â2ACGENit + â3LEV + åit

Where:

FRQ = Financial Reporting

â0 = Constant

ACFEP = Audit Committee Financial Expertise of firm i in time t

ACGEN = Audit Committee Gender mix of firm i in time t

LEV = Leverage of firm i in time t

å = other factors that were n ot captured by the model.

Table 1: Measurement of Variables



15

Variables

Financial Reporting

Quality

Audit Committee

Financial Expertise

(ACFEP)

ACGEN

LEV

Definition and Measurement

Measured by absolute values of the

residuals (discretionary accruals)

using Modified Jones model.

Proportion of audit committee members

with financial expertise(financial

knowledge) to total number of the audit

committee

Proportion of female audit committee

members

Measured by ratio of total debt to equity

Source: Researcher's Compilation, 2019

The variables of the study consist of Dependent Variable which is

accrual quality measured by discretionary accruals using

Sarawornrawanich (2011), This was done by conducting the analysis



16

in two stages- extracting the residuals from the model first and then

run the regression with the model of the study.

? TCA = â0it + â1CFOit - 1 + â2CFOit + â3CFOit +åit

All variables are scaled by average total assets (Assetsj,t + Assetsj,t-1)

/ 2

Where ? WC = change = f (? CAj,t - ? CLj,t - ? Cashj,t + ? STDEBTj,t)

? CAj,t =firm j's change in current assets between year t-1 and year t

? CLj,t =firm j's change in current liabilities between year t-1 and

year t

? Cashj,t =firm j's change in cash between year t-1 and year t

? STDEBTj,t =firm j's change in short-term debt between year t-1 and

year t

CFOit-1= preceding year cash flow from operation

CFOt= current year cash flow from operation,

The residual of the regression is the unexplained portion of the

variation in working capital accruals and is employed as an inverse

measure of accruals quality. That is, the higher the portion of

unexplained variation, the lower the accruals quality.

RESULTS

Table 2:Descriptive Statistics

Mean

Median

Maximum

FRQ

0.511077

0.461918

1.201591

EXP01

0.529412

1.000000

1.000000

ACGENDIX

0.213235

0.156667

0.300000

LEV

16.92150

0.466843

540.6020



17

Minimum

Std. Dev.

0.034812

0.331658

0.000000

0.506640

0.000000

0.211487

0.169509

92.55647

Skewness

Kurtosis

Jarque-Bera

Probability

Sum

Sum Sq.

Dev.

Observations

0.638327

2.485579

2.683842

0.261343

17.37661

3.629891

34

-0.117851

1.013889

5.666940

0.058808

18.00000

8.470588

34

0.622243

2.193096

3.116442

0.210510

7.250000

1.475989

34

5.565850

31.99651

1366.675

0.000000

575.3310

282701.1

34

Source: E-views Output, 2019

Table 2 shows the descriptive statistics of the variables used in the

study. The minimum aggregate value of financial reporting quality

is 0.03 while the aggregate maximum value of 1.20 was recorded.

The minimum value for financial expertise and gender mix

indicated 0.00 and 0.00 which means within this period the

minimum number of audit committee members embedded in the

board was more than one. Meanwhile, the maximum for the period

was regarding financial expertise was 100% while gender mix

recorded 30%. The mean indicated that financial reporting quality

increased by 51% while the number of audit committees with

financial expertise for the companies stood at 53%. The audit

committee with gender mix for the sampled firms cut across the

period was 21% and leverage grew by 17%.

Table 3: Correlation Matrix



18

Variables FRQ ACEXP ACGEN LEV

FRQ 1.000

ACEXP 0.0590 1.000

ACGEN 0.1993 -0.1350 1.000

LEV -0.0235 0.1066 0.1539 1.000


The table3 reveals a positive correlation between the dependent

variable of financial reporting quality and the explanatory variables

of audit committee financial expertise and audit committee gender

mix with coefficients of 0.0590, 0.1993 and 0.1679 respectively. This

implies that the two explanatory variables move in the same

direction with financial reporting quality. However, leverage has a

negative relationship with financial reporting quality.

Table 4: Variance Inflation Factor

Variable Coefficient Un-centered Centered

C 0.009813 3.958317 NA

ACEXP 0.010814 2.309244 1.086703

ACGEND 0.062253 2.231836 1.090081

LEV 3.12E-07 1.081964 1.045945




19

The result on Table 4 above indicate absence multicollinearity

among the variables as the variance inflation factor for the variables

have values less than 8.

Table 5: Test for Heteroskedasticity

Heteroskedasticity Test: Breusch-Pagan=Godfrey

F-statistic 1.461508 Prob. F(3,30) 0.2448

Obs*R-squared 4.335491 Prob. Chi-Square(3) 0.2274

Scaled explained SS 2.612940 Prob. Chi-Square(3) 0.4552

The result in the Table 5 above shows an F-statistic value of 1.4615

with a corresponding p-value of 0.2448. Since the p-value is greater

than 5%, it implies there is no case of Heteroskedasticity.

Table 6: Regression Result for Audit Committee Characteristics

and Financial Reporting Quality

Variable Coefficient Std. Error t-Statistic Prob.

C 0.533345 0.102666 5.194966 0.0000

EXP01 0.134546 0.107773 1.248430 0.2215

ACGENDIX -0.514443 0.258581 -1.989481 0.0058

LEV 0.000957 0.000579 1.654036 0.1085



20

R-squared 0.303356 Mean dependent var 0.511077

Adjusted R-squared 0.233691 S.D. dependent var 0.331658

S.E. of regression 0.290330 Sum squared resid 2.528743

F-statistic 4.354527 Durbin-Watson stat 2.056040

Prob(F-statistic) 0.011633


The result in Table 6 above shows the result of the regression

analysis. The result shows an r-squared value of 30% the remaining

70% could be explained by other factors not included in the model.

The adjusted r-squared of 23% measures the strength of the

relationship. The probability of F-statistics is 0.011 which is less than

0.05 test criteria which implies that the model is fit and is capable of

explaining the relationship between audit committee characteristic

and financial reporting quality. Based on the result as presented

above, it indicates that in absence of the selected characteristics, the

financial reporting quality of health care companies will stand at

53% which is significant as indicated by the p-value of 0.000 which is

lower than 5% Evidence from the individual explanatory variables

show that audit committee financial expertise has a coefficient of

0.1345 and accompanying probability of 0.2215 which signify that

ACFE contributes 13% to FRQ of health care companies in Nigeria.

However, such contribution is insignificant as indicated by the p-

value of 0.2215 which is more than 5%.

Again, the result also shows that audit committee gender mix has a

coefficient of -0.5144 and a p-value of 0.005 which imply that audit



21

committee gender mix has a negative contribution of 51% to

financial reporting quality of quoted health companies in Nigeria.

Although, as shown by the result, it is significant at 95% level of

confidence (p-value 0.005).

The result of the control variable as presented indicates that the

coefficient is 0.00095 and a p-value of 0.10. This mean that leverage

has a positive contribution to financial reporting quality and that

contribution is significant at 90% degree of confidence as evidenced

by the p-value of 0.1085.

CONCLUSION AND RECOMMENDATION

Based on the findings of the study, it was concluded that audit

committee characteristics has a significant impact on financial

reporting quality of quoted health care companies in Nigeria.

Although, the findings in the individual explanatory variable

indicates that audit committee financial expertise has an

insignificant impact on the financial reporting quality of quoted

health care companies in Nigeria.

Again, the result showed that audit committee gender mix has a

significant impact on financial reporting quality of quoted health

care companies in Nigeria. It was also found that leverage has a

significant impact on the financial reporting quality of quoted

pharmaceutical companies in Nigeria. Although, at 10% level of

confidence.

From the findings and conclusion, it was recommended that quoted

health companies in Nigeria should comply with the corporate



22

governance rules for having at least one financial expert on the audit

committee team. Although, such compliance as indicated by the

result improves reporting quality but is not significant, so

companies can consider monitoring other audit committee

attributes closely.

It was also recommended that quoted health care companies in

Nigeria should include female members on the committee as it

indicates a significant impact on improving financial reporting

quality.

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29

EFFECT OF NON-EXECUTIVE DIRECTORS AND

INDEPENDENT DIRECTORS ON AUDIT QUALITY OF

LISTED OIL AND GAS COMPANIES IN NIGERIA

David, Christopher; Uwaleke, Uche Joseph; and

Aza, Solomon M.

Department of Accounting

Faculty of Administration

Nasarawa State University, Keffi

[email protected];+234 803 294 6967

ABSTRACT

This study examined the effect of non-executive directors and independent

directors as important features of corporate governance on audit quality of

oil and gas companies in Nigeria. The study adopted the ex-post facto

research design. Secondary data were extracted from the annual reports of

10 oil and gas firms for the period 2009 to 2018. The logistic regression

technique was used for data analyses and tests of hypotheses. The non-

executive director was measured by the proportion of non-executive

directors to executive directors on the board while the independent director

was measured using the proportion of independent directors to non-

independent directors on the board and audit quality measured using Big4.

From the analysis, it was found that non-executive directors have a

negative but significant influence on audit quality while independent

directors have a positive and significant effect on audit quality of financial

reports of quoted oil and gas companies in Nigeria. Independent director is a

requirement for one of the board's most fundamental responsibilities that

are, unbiased oversight of management. Based on this assertion and

findings from this study, it is recommended that larger non-executive

30

directors and independent directors should be on the boards of oil and gas

companies in Nigeria as this will improve the audit quality of their financial

reports.

Keywords: Audit Quality, Non-Executive Directors, Independent

Directors, Nigeria.

INTRODUCTION

High-quality external auditing is a vital element of well-functioning

capital markets. Firms with a reputation for reliable financial

reporting are likely to change auditors when their audit quality is

questioned to avoid capital market consequences of unreliable

financial reporting. The performance of independent auditors is

deemed fundamental to the functioning of the financial and capital

markets based on the assumption that, by issuing an opinion on the

reliability of accounting information, it contributes to a business

environment characterized by trust and credibility (Newman,

Patterson & Smith, 2005; Ojo, 2008; Zagonov, 2011). However, with

the corporate scandals at the start of the century, characterized by

fraud and accounting manipulations, much has been discussed

about the scope of responsibilities of auditors, given that the opinion

on financial statements has not changed.Also, independent audit is considered as a measure of external

control effectiveness of corporate governance that protects the

rights of all stakeholders in the company through accreditation to

the financial statements, ensuring reliability and confirming the

quality of financial information (Seyedeh, Hamid & Hashem, 2016).

Moreover, investors, creditors and other stakeholders who evaluate

the viability of the various business units and decision-making on

EFFECT OF NON-EXECUTIVE DIRECTORS AND INDEPENDENT DIRECTORS ON AUDIT QUALITY OF LISTED

OIL AND GAS COMPANIES IN NIGERIA

31

the various investment opportunities rely on the results of the audit

performed by valid independent audit companies. Thus, a greater

auditor reputation increases the value, reliability, and acceptability

by the users of the financial statements and consequently reduces

earnings management and agency costs (Ashbaugh, LaFond &

Mayhew, 2003).

The board of directors assumes an important role in corporate

governance. Owing to the separation of corporate management and

ownership, boards exist to protect the interests of shareholders. The

linkage between the board and the quality of audit services

performed may be formal or informal. In terms of formal linkage, the

board of directors typically collaborates with management in

selecting the external auditor, often subject to shareholder

ratification (Adeyemi & Temitope, 2010). Since the auditor is to look

to the board as its client, it is reasonable to expect the board to review

the overall planned audit scope and proposed audit fee (Public

Oversight Board, 1994; Blue Ribbon Committee, 1999). The board

also may influence audit quality through informal means. The

board's commitment to vigilant oversight may signal to

management and the auditor that the expectations placed on the

audit firm are very high. If the auditor understands that the client

(that is, the board) is particularly of high quality and demanding, the

auditor may perform a higher-quality audit so as not to disappoint

the client and jeopardize the relationship.

O'Sullivan (2000) and Sallah, Stewart, and Mason (2006) found that

the proportion of non-executive directors had a significant positive

impact on audit quality. They suggested that non-executive



32

directors encouraged more intensive audits as a complement to their

monitoring role while the reduction in agency costs expected

through significant managerial ownership resulted in a reduced

need for intensive auditing. Independent directors, on the other

hand, are the board of directors who does not have a material or

pecuniary relationship with the company or related persons, except

sitting fees. Gao, Omar, and Shelley (2019) posit that companies with

vibrant independent directors serving on the audit committee have

higher financial reporting quality, more efficient audits, and higher

earnings quality. This suggests that lead independent directors on

audit committees serve a governance role that improves financial

reporting quality, audit quality, and earnings quality. Independent

directors are also audit committee members and create direct

connections between audit committees, external audit firms, and

companies' CEOs.

It is also, posited that the operation of a good monitoring system

reduces the negative effects of earnings management as well as the

likelihood of creative financial reporting arising from fraud and

errors (Beasley, 1996, Dechow et al, 1996; MacMullin, 1996.

However, with the number of corporate reporting failures at the

start of the century, such as Enron, WorldCom, Global Crossing and

Xerox in the USA, Parmalat in Italy/Maxwell saga in the UK,

Daewoo in Korea, and leisure net and regal bank in South Africa.

Also, the cases of Cadbury Nigeria Plc, Oceanic Bank Plc,

Intercontinental Bank Plc, Union Bank Nigeria, Afribank, etc. where

most of the failures were attributed to the inherent weaknesses in the



33

monitoring systems of these companies. This prompted a re-

regulation in the governance framework for most countries.

This study is timely because previous studies are mostly from

developed economies which given the economic differences makes

it difficult for the findings to apply to Nigeria (the problem of

external validity). The few studies conducted in Nigeria are outside

the oil and gas sector which is one of the most important sectors of

the Nigerian economy and is not very recent. This presents a

problem of external validity and timing differences. This study is

also, considered for ten years which makes the observations more

robust than other previous studies.

Given the importance of monitoring through the board in corporate

organisations and the gap existing in literature, this study examined

the effect of non-executive directors and independent directors on

audit quality of quoted oil and gas companies in Nigeria.

The following hypotheses guided the study;H : Non-Executive directors have no significant effect on audit 01

quality of quoted oil and gas companies in Nigeria.

H : Independent directors have no significant effect on audit 02

quality of quoted oil and gas companies in Nigeria.

LITERATURE REVIEW

Audit Quality

There are many attempts to define the concept of audit quality either

on professional organisations level, or academic level. On the

professional organisations level: For example, the International



34

Federation of Accountants (IFAC, 2009: 12) pointed to the concept of

auditing quality in the international standard on quality control. It

stated that “the objective of the audit firm is to establish and

maintain a system of quality control to provide it with reasonable

assurance that: (a) The firm and its personnel comply with

professional standards and applicable legal and regulatory

requirements; and (b) Reports issued by the firm or engagement

partners are appropriate in the circumstances” (IFAC, 2009; 15). This

means that the concept of quality from the perspective of (IFAC) lies

in compliance with professional standards and legal and regulatory

requirements. In the same context, International Auditing and Assurance

Standards Board (IAASB, 2010) in its framework for audit quality

mentioned that the purpose of an audit is to enhance the degree of

confidence of intended users in the financial statements. This can be

achieved through gathering sufficient appropriate audit evidence to

express an opinion on whether the financial statements are

prepared, in all material respects, under the applicable financial

reporting framework. This indicates that IAASB linked between

auditing quality and audit evidence that used to express an opinion

about firms' financial statements according to financial reporting

standards. Furthermore, the Public Company Accounting Oversight Board

(PCAOB, 2009) in auditing standard no. 7 - engagement quality

review and conforming amendment to the board's interim quality

control standards stated that:



35

1. the engagement team failed to obtain sufficient appropriate

evidence under the standards of the PCAOB;

2. The engagement team reached an inappropriate overall

conclusion on the subject matter of the engagement;

3. The engagement report is not appropriate in the

circumstances; or

4. The firm is not independent of its client (PCAOB, 2009).

Based on PCAOB factors, affecting the quality of well-performed

audit engagement, audit quality can be seen as a process of

gathering sufficient evidence based on professional standards to

achieve appropriate overall conclusion about the firm's

conformance with applicable reporting standards. Moreover, the Supreme Audit Institutions of the European Union

(2004) proposed the instructions and guidance about auditing

quality, pointing out that the concept of auditing quality lies in the

audit faculty achieving the following: high levels of quality

ineffectiveness of the planning and execution of auditing and other

related works, clear demonstration of audit reports, objectivity and

fairness of the given estimates and opinions basis, the issuance of

audit reports promptly to the needs of potential users, authenticity

and reliability of the views or results, and appropriateness of the

recommendations and other matters included in the audit reports

(SAIs of European Union, 2004).

ICAEW (2002) suggested a definition for audit quality by stating

that, at its heart, audit quality is about delivering an appropriate

professional opinion supported by the necessary evidence and



36

objective judgments. As long as the auditors provide an

independent audit opinion that is supported by adequate audit

evidence, the regulator assumes that such auditors have performed

a quality auditing service. Even though technical qualities, such as

an auditor's ability to detect and report errors, have been argued as

the defining aspects of audit quality, Duff (2004) suggested that

audit quality is made up of both technical quality and service quality

(the levels of clients' satisfaction and expectations). Technical

quality consists of reputation capital, capability, expertise,

experience and independence scales.

On the other hand, in the field of academic studies, it is clear that

these studies did not agree on one definition of the concept of

auditing quality. Knechel, Krishnan, Pevzner, Stefchik, and Velury

(2013) asserted that there is little consensus among researchers

regarding the definition of audit quality. Audit quality is defined in

numerous ways that link audit quality to the risk of failure to modify

audit reports of financial statements that contain material

misstatements (Watkins, Hillison & Morecroft, 2004). Nevertheless,

a widely used definition of audit quality is that by DeAngelo (1981),

which states that the “quality of audit service is the market-assessed

joint probability that a given auditor will both (a) discover a breach

in the client's accounting system and (b) report the breach” (p. 186).

Breach detection is related to the auditor's abilities and competence

in exercising control over the quality of reported information

through assuring conformity with GAAP while reporting a breach is

related to the auditor's independence, which is an important driver

for the demand of the audit service.



37

Palmrose (1988) described audit quality in terms of levels of

assurances. Higher levels of assurances (i.e. possibility that financial

statements contain fewer errors or misstatements) are associated

with higher audit quality and vice-versa. The grounds for this

definition have been developed from audit failures (where an

auditor has failed to detect a material error or misstatement) than

can be traced in litigation cases. According to Francis (2004), audit

failure can be classified as extremely low audit quality (end quality)

that can result in several outcomes such as regulatory sanctions,

litigation rates, business failures, and earnings restatement.

Besacier, Hottegindre and Fine-Falcy (2011), audit quality is the core

of the latest regulatory movements. For them, from a practical point

of view, the financial scandals of the early century, particularly

involving Arthur Andersen, have demonstrated the inadequacy of

the conceptual parameters that underpin audit quality based on the

assumptions of independence and competence. For this reason,

according to the authors, the regulations expanded the perception of

audit quality, covering issues such as the auditor's responsibility

level, restrictions on consulting services, and characteristics and

concentration of the audit market.

Issa (2008) defined audit quality as the ability of audit process to

detect and report important falsification of financial statements as

well as to reduce asymmetry of information between managers and

stakeholders that are relevant to the level of quality of the

information in financial statements. Also, Deis and Giroux (2002)

argued that auditing quality is the auditor's ability to detect

weaknesses and gaps in the accounting system for the client and the



38

reporting. However, Copley and Doucet (2013) went in another

direction by defining the auditing quality as the application of

professional standards related to fieldwork and reporting

standards. The audit quality is a set of methods and techniques that

work to reduce errors and fraud, and it is supported through access

to sufficient and convincing evidence to protect the interests of

relevant parties (Abu, Ijela & Hamdan, 2010). The probability of

detection is a matter of competence, whereas the probability of

revelation depends on the independence of the auditor, i.e. his/her

willingness to face the pressure exerted by the producers of financial

statements (Piot & Janin, 2005).

Non-Executive Directors

According to the Australia Institute of a company director (2001), a

non-executive director is one who is not employed by the

organization. This is not the same as an independent director who is

not only employed by the organization (non-executive director) but

also has no relations with the organization other than being a

director of the firm. The non-executive directors can additionally be

referred as 'part-time', 'independent' or 'external directors', taking

all the essential actions as advisers to management and making

certain that the enterprise is run in the nice pastimes of the

shareholders (Kakabadse & Kakabadse, 2007; Olatunji & Stephen,

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