EVALUATION OF THE ROLE OF THE AUDIT COMMITTEE IN ENHANCING THE FUNCTIONS OF THE EXTERNAL AUDITOR (A CASE STUDY OF PZ PLC, ABA, ABIA STATE)

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The Accounting Profession in Nigeria has been under intense pressure due to rising public expectations. The sudden rise in public expectations was as a result of the series of financial failure that occurred during the late 80’s and early 90’s. (Atu, 2010). As a result, various corporate organizations devised a way of reducing financial failure in order for the public to have enough confidence in corporate financial reporting in Nigeria. This ultimately resulted to the establishment of Audit Committee which enable corporate managers to increase their efforts in attending to other matters while assigning specific issues to the Audit Committees. Overtime, the role of Audit Committee in enhancing the functions of external auditors received much attention because of the demands for Greater Corporate Accountability and Probity. In Nigeria this was provided for in Section 359(3) CAMA (2004) (as amended) for External Auditors to report to an Audit Committee. It’s noted that Audit committee, were originally conceived as a means of improving th functions of external auditors by ensuring their independence and effectiveness. It has been defined as a Committee of Directors of a Company whose specific responsibility is to review the Annual Financial Statements before submission to the Board of Directors.

A requirement of the Nigerian Companies and Allied Matters Act (CAMA) of 1990 is the introduction of audit committee as an additional layer of control and certification in the bid to make annual accounts of both public and private corporate organizations more acceptable and reliable. Prior to the 1990 CAMA Act, the only statutory requirement for the certification of annual accounts of public corporations in Nigeria was the provision that such accounts be audited by external auditors. The idea of appointing external auditors arose in the quest to find more efficient ways of improving their performance thus promoting accountability in corporate organizations where management interests could differ from shareholder interests. Initially, the focus was on spelling out the characteristics of external auditors in order to ensure their independence and competence thus enhancing their functions. For corporate organizations, the law usually stipulates that external auditors should be appointed by shareholders and report to shareholders at either quarterly or annual general meetings. The independence and functions of external auditors in audit committees was further enhanced by the fact that their reports were treated as professional opinions and thus attracted some degree of liability in the event it is shown that they have been negligent in the conduct of their duty (Sasegbon, 2010).

1.2 STATEMENT OF PROBLEM

Over time, however, various accounting and reporting scandals have led to corporate failures and embarrassments. Examples include the celebrated case of the Mckesson and Robbins (USA) in the late 1930s, and the failure of the Atlantic Acceptance Corporation (Canada) in 1965 (Cf. Lee and Stone, 1997, p.99; and Okaro, 2001, p155). This has led to the questioning of very concept of auditor independence. Although the law usually provides that auditors should be appointed by shareholders and report to such shareholders in quarterly or annual general meetings, the reality on ground is in these corporate firms are somewhat different. In practice, quarterly or annual general meetings are no more than rubber stamps for board decision on such matters; this has regrettably led to poor performance of audit committte. Within the board itself, executive directors usually have an upper hand since they deal with the audit committee members on a daily basis. Under such circumstances, the ability of such external auditors in the audit committee to remain truly independent, especially if there is need to express reservations about management’s accounting policies, is whittled down. The Audit Committee requirement was enshrined in the Nigerian Companies and Allied Matters Act in 1991. Despite the fact that this provision has been in existence for more than fifteen years, its utility value especially with respect to enhancing the performance of external auditors and the information value and credibility of financial accounts remain elusive (Okaro, 2001).

1.3 AIMS OF THE STUDY

The major purpose of this study is to evaluate the role of the audit committee in enhancing the functions of the external auditor. Other general objectives of the study are:

1. To examine the activities of audit committee and how it contributes to enhance audit quality
2. To examine the roles of audit committee.
3. To examine how the role of audit committee enhance the functions of external auditor.
4. To examine the factors affecting effective audit committee.
5. To examine the relationship between role of audit committee and functions of external auditor.
6. To provide suggestions on how to perform the activities of audit committee.

1.4 RESEARCH QUESTIONS

1. What are the activities of audit committee and how does it contributes to enhance audit quality?
2. What are the roles of audit committee?
3. How does the role of audit committee enhance the functions of external auditor?
4. What are the factors affecting effective audit committee?
5. What is the relationship between role of audit committee and functions of external auditor?
6. What are the suggestions on how to perform the activities of audit committee?

1.5 RESEARCH HYPOTHESES

H0: The size of audit committee has no significant influence on the functions of external auditor.

H1: The size of audit committee has a significant influence on the functions of external auditor.

1.6 SIGNIFICANCE OF THE STUDY

This research would be of interest to the management and employees of Pz Plc of Nigeria. This topic is significant for business management, shareholder and the overall financial community because of the best use of assets comes from internal auditing from its responsibilities especially after financial crisis all over the world that makes internal auditing significant in monitoring and evaluation of management performance. This study keeps track of developments and trends in the field of auditing, whether in the field of professional standards or practices and modern methods and tries to apply this Development in Nigeria. The study would serve as reference materials to other researchers who may want to carry out more research on this or related topic. The study would broaden the researcher knowledge on the subject

1.7    SCOPE OF THE STUDY 

The study is based on the evaluation of the role of the audit committee in enhancing the functions of the external auditor, a case study of PZ PLC Aba, Abia State.

1.8 LIMITATION OF STUDY

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).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Audit Committee: An audit committee is an operating committee of the board of directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee members.

Auditor: A person who officially examines the business and financial records of a company or organization.

External Auditor: External auditor as a chartered accountant who is a public officer and is professionally qualified. Section 357 of CAMD 1990 talk on our auditor is appointed and he can also be appointed according to section 86 of the 2011 constitution of the federal republic of Nigeria.