NATIONAL OPEN UNIVERSITY OF NIGERIA

(SCHOOL OF POST GRADUATE STUDIES)

FACULTY OF LAW

2ND SEMESTER SEMINAR PAPER ON

CORPORATE LAW MANAGEMENT & FINANCE (ADVANCED CORPORATION
LAW 11) – CLL 802

TOPIC

EXAMINATION OF THE RELEVANCE OF THE ROLE OF THE AUDIT

COMMITTEE OF

THE BOARD OF DIRECTORS OF A PUBLIC COMPANY

BY

AROWOSAFE, SAMUEL OLAYINKA (NOU232138874)

ABIKA, UZOCHUKWU JAPHET (NOU232140481)
AGUNLEJIKA, SUNDAY ADEGOKE (NOU232139361)

PRESENTED TO

DR. ERNEST OGWASHI UGBEJEH SNR (DEAN)

AND
DR FRANCIS OKANIGBUAN (JNR)

EXAMINATION OF THE RELEVANCE OF THE ROLE OF THE AUDIT

COMMITTEE OF THE BOARD OF DIRECTORS OF A PUBLIC COMPANY

1
1.0 Introduction

In contemporary corporate governance, the role played by the Audit Committee of the Board
of Directors cannot be over emphasized. The stability and resistance of the company against
threats of fraud, financial risks as well as operational instabilities, internal control and
compliance to regulations both internal, are made possible by the oversight functions of the
Audit Committee. While board of directors generally has the essential function of managing
the company’s affairs, the audit committee, an offshoot of the board, through its oversight
functions and feedback, helps to ensure the company’s is put on track in compliance with
financial reporting laws, compliance with accounting standards and regulations, checkmate
fraud, enforce internal control mechanisms and risk management. The duty of the committee
is to ensure a quality financial report that is objective and reflects the true financial position
of the company in the reporting year. Its general purpose is to build confidence in the
financial reporting system and encourage investors and assure the shareholders of the safety
of their investments.

1.1 Objectives of the Study

This paper seeks to examine the relevance of the role of the Audit Committee in Nigeria. It
focuses on its functions, regulatory guidelines, challenges, and prospects. The study aim is to
understand how Nigeria's unique socio-economic conditions have shaped the Audit
Committee's role and what lessons there are for future corporate governance reforms. The
overall objective of our study, therefore, is to assess the effectiveness of the role of audit
committees of companies in Nigeria, in the strengthening of the internal control of such
organizations. In this journey, we shall also highlight both the legal and the institutional
regulatory environment that pertain to the operations of an audit committee. We shall also
make recommendations which will further strengthen the capability of an audit committee.

2.0 Historical Perspective of Audit Committees

The concept of an Audit Committee can be traced back to the early 20th century, primarily in
the United States and the United Kingdom. Its evolution was deeply tied to various financial
scandals that was prominent among corporate bodies both in the United States and other
nations economy, especially the Enron debacle in the United States of America and other
corporate failures across Europe. the collapse of commercial banks in Nigeria, the persistent
fraud amongst financial institutions and companies resulting in the loss of trust and

2
confidence by investors and the subsequent need for transparent and reliable financial
reporting.

The Emergence of Audit Committee The idea of audit committee was first mooted on a
global basis in 1939 while the celebrated case of McKesson and Robbins was under
investigation. It was therefore not surprising when the investigation report recommended the
establishment of audit committee by public companies to strengthen the structure of corporate
governance by improving the status of auditor and offer more protection to the shareholder. It
was however not until 1967 that the American Institute of Certified Public Accountants
(AICPA) supported the idea. The Sarbanes-Oxley Act of 2002, enacted in response to
corporate malfeasance in the U.S., has had a profound influence on audit committee functions
worldwide, including Nigeria.

In Nigeria, the requirement for audit committee was for the first time introduced by the
CAMA 1990. Section 359 (3&4) of companies and Allied matters Act (1990) gave birth to
creation of audit committee. S.359(3) says “In addition to the auditors reports, the auditor
shall in the case of a public company also make a report to an audit committee which shall be
established by the public company”. The Company and Allied Matters Act 2020 in its
contents retained the provisions. Other statutes that made provision for the establishment and
the roles of Audit Committee in Nigeria include the Nigerian Code of Corporate Governance
2018, the Investment and Security Act, Nigerian Stock Exchange Act. etc. Nigeria had had
its own fair experience of failed institutions in the early 20 th and 21st Centuries. The
experience of failed banks, and corporate institutions obviously exposed the negative effect
of weak corporate governance and lack of internal control mechanisms in our corporate
economy.

2.1 Background and the Regulatory Framework in Nigeria

Nigeria's corporate scenery is regulated by various enactments, including the Companies and
Allied Matters Act (CAMA), Investments and Securities Act (ISA) 1999, guidelines from the
Nigerian Stock Exchange (NSE) and Securities and Exchange Commission (SEC), Federal
Inland Revenue (Establishment etc) Act (FIRSA), the Central Bank of Nigeria Act (CBN),
amongst others. Operations of public liability companies, are equally guided by the Nigerian
Code of Corporate Governance. These regulations set forth requirements for the
establishment, constitution and roles of Audit Committees. However, for the purpose of this

3
paper, we shall focus mainly on the provisions of the Companies and Allied Matters Act, the
Nigerian Code of Corporate Governance and the Nigeria Stock Exchange Rules.

3.0 The Internal Control System

Internal control has been defined as the whole system of controls, financial and otherwise,
established by the management in order to carry on the business of the enterprise in an
orderly and efficient manner, ensure adherence and management policies, safeguard the
assets and secure as far as possible the completeness and accuracy of the records. 1 Internal
controls are to be an integral part of an organization’s financial business policies and
procedures. Internal control consists of all the measures taken by the organization for the
purpose of protecting its resources against waste, fraud and inefficiency, ensuring accuracy
and reliability in accounting and operating data, securing compliance with the policies of the
organization and evaluating the level of performance in all organizational units of the
organization. Internal controls are simply good business practices.

Furthermore, the Committee of Sponsoring Organisations (COSO) also defined Internal

Control as

“a process effected by an entity’s Board of Directors, management and other

personnel, to provide reasonable assurance regarding the achievement of
objectives in the three categories of reliability of financial reporting;
compliance with applicable rules and regulations; as well as the effectiveness
and the efficiency of operations”.2

The following form the foundation of internal control

 Effectiveness and efficiency of operations

 Reliability of reporting
 Compliance with applicable laws and regulations

It is therefore the responsibility of management to ‘design’ and put in place a suitable

system of internal controls. Internal controls are designed to deal with financial risks,
operational risks and compliance risks. It is the duty of the auditors to evaluate these
internal controls that are established by management. The findings are made

1
Researchclue.com INTERNAL CONTROL SYSTEM: A necessity to the survival and growth of public
organization (A case study of power holding company of Nigeria, Enugu).
2
Institute of Chartered Accountants of Nigeria (ICAN) 2021 Emile Woolf International pg. 16
4
available to the management and the audit committee in a report which serves as a
working material for management decisions,

4.0 AUDIT COMMITTEE

Audit committee is the selected members of companies who take an active role in
overseeing the companies accounting and financial reporting policies and practices. 3
An audit committee is one of the major operating committees of a company's board of
directors that is in charge of overseeing financial reporting and disclosure. It is trite to
say that Audit Committee of a company is a committee of the board saddled with the
duty of oversight function of the operation of the company to ensure that they comply
with the required standards approved by the regulatory bodies and at the same time
ensures the sanctity and integrity of the financial record system and internal regulation
and risk management system. They form the eagle eye of the board of directors.

5. 0. STATUTORY PROVISIONS FOR AUDIT COMMITTEE IN NIGERIA

5.0.1 The Companies and Allied Matters Act (CAMA) 2020 The Companies and Allied
Matters Act 2020 Section 404 (2)4 makes provision for the compulsory establishment of
Internal Audit Committee of the Board for all public companies.5

The objectives for the establishment of audit committee were stated in Section 404(4) – and it
state that “The audit committee shall examine the auditors’ report and make
recommendations thereon to the annual general meeting as it may deem fit.” In addition,
Section 404 (7) of CAMA, highlighted the functions of the audit committee. These functions
shall be discussed in due course as we progress in this report. The Committee is referred in a
public company as Statutory Audit Committee (“SAC”).

5.0.2 Nigerian Code of Corporate Governance 2018

The Code of Corporate governance recommended the establishment of Audit Committee as a

desirable organ of the corporate organization. The code states that

3
Rick et al 2005 :20-25. (Cited in Owolabi, S. A. and Dada, S. O. Audit Committee: An Instrument of
Effective Corporate Governance European Journal of Economics, Finance and Administrative
Sciences. Issue 35 (2011))
4
Section 404(2) Companies and Allied Matters Act (CAMA) 2020
5
Ibid S404 (3)
5
 “Without prejudice to the provision of extant laws on the Statutory
Audit Committee, it is desirable for every Company to have a Board
committee responsible for audit.)6

It is pertinent to observe here that the extant laws referred here include section 404(2) of
CAMA 2020. Section 11 of the Code introduces additional responsibilities for the audit
committee. Using the language of the Code of Corporate Governance, it is a desirable
requirement for every company to establish an audit committee, whether a listed or unlisted
company.

Specifically, the audit committee is expected to monitor the comprehensive internal control
framework and obtain annual audit reports (internal and/or external) and to report annually
the audited financial statements the company’s objective financial position for the year.
These reports are presented to the members at the annual general meetings.

5.0.3 Nigerian Stock Exchange (NSE) Rules 2011

The Nigeria Stock Exchange rules 2011 makes the establishment of audit committee
mandatory for every public company. The rule provides that

a. Every public company shall establish an Audit Committee with written term of
reference. The Committee shall be independent in carrying out its terms of
reference.

b. The audit Committee shall maintain records of attendance and deliberations

of its meeting and interactions.

c. The Audit Committee of every public company shall review the company’s
financial statements prior to approval by the Board of the company and present
the report at the Annual General Meeting.7

The Nigeria Stock Exchange has equally established specific rules concerning the formation
and functions of Audit Committees for companies listed on the Exchange. These rules
highlighted above complement the provisions in CAMA, which has provided a detailed
framework for audit committee of public companies.

6
Nig Corporate Governance Code Sec. 11.4.1
7
The Securities and Exchange Commission Rule 2011. Rule 34 (4)
6
It is also pertinent to note that the Nigeria Stock exchange rule recommended the
establishment of additional board by the companies for risk management oversight. Rule 9.2.
states that

“The Board may in addition to the Audit Committee required by CAMA

establish a Governance/Remuneration Committee and Risk
Management Committee and such other committees as the Board may
deem appropriate depending on the size, needs or industry
requirements of the company.”8

This emphasizes the importance of risk management as a veritable tool for company stability
and survival.

5.1.1 MEMBERSHIP OF AUDIT COMMITTEE

In a public company or statutory corporation, the number of members of the committee is a

maximum of 5 (five) members comprising 3 (three) Shareholder Representatives and 2 (two)
Directors. 9

Members are elected at annual general meetings of the company. Any member of the
company may nominate another member of the company to the audit committee by giving
written notice of such nomination to the secretary of the company at least 21 days before the
annual general meeting and any nomination not received prior to the meeting as stipulated is
invalid.10 The audit committee member presenting the members shall not be entitled to
remuneration and shall be subject to re‐election annually.

The private sectors Audit Committee may comprise of None Executive Directors and
Independent Non-Executive Directors. While it is a mandatory requirement for all public
companies, private companies, are encouraged to constitute an Audit Committee as a
desirable instrument for risk management and financial control mechanism.

Members of the committee responsible for audit should be None Executive Directors and
Independent Non Executive Directors. A Non-executive Director is not a part of the
management of the company. An Independent Director is not only a non-executive director
but also a director who holds no substantial shares of the company.

8
Ibid Rule 9.2
9
S404(3) of CAMA 2020
10
S404 (3) of CAMA 2020
7
5.1.2 Qualification of Members of Audit Committee

The extant laws which include S404 (5) of CAMA11, the Code of Corporate Governance of
the Securities and Exchange Commission Act 2011 (“the SEC Code”), and the Nigerian Code
of Corporate Governance 2018 (“NCCG 2018”) requires that members of the Audit
Committee should be financially literate and should be able to read and understand financial
statements. They must also be familiar with the operations of the control measures so that
they will be capable of ascertaining the effectiveness of the controls and to determine whether
to recommend a new system or a review of the existing control systems.
It has been observed that Audit committees that have financial expertise have greater
interaction with their internal auditors and are less likely to witness internal control
problems.12 They are more likely to understand external auditors and support the auditors in
conflict situations with management. Davidson, Xie, and Xu (2004) investigated the impact
of financial expertise of audit committees on stock returns at the time of appointment of audit
committee members and found a positive stock price reaction when new members have
accounting or financial expertise. On the other hand, Yang and Krishnan (2005) and Lin et al.
(2006)13 failed to find any significant association between financial expertise and financial
reporting quality measured as the level of earnings management. The possession of
accounting experience or qualification puts the member in an advantageous position to
understand the language of financial reporting. This adds values to the quality of the
financial statements presented by the company at the general meetings
In Nigeria, in the case of a statutory audit committee, the chairman of the committee is
elected from among the members and he must be financially literate. That is to say he must
be able to read, understand and appreciate financial statements. 14 In addition, at least one
member should be a member of a professional Accounting body established by an Act of the
National Assembly.15

They are nominated at the Annual General meeting of the company. Any member of the
company can nominate another member to the committee. The nomination must be in
writing and must be submitted to the secretary of the company at least 21days before the

11
S404 (5) of CAMA 2020
12
(Raghunandan, Read, & Rama, 2001)
13
Lin, J. W., Li, J. F., & Yang, J. S. (2006). The effect of audit committee performance on earnings quality.
Managerial Auditing Journal, 21(9), 921-933 (cit. in. Abdulkadir Madawaki et.al Journal of Modern Accounting
and Auditing, ISSN 1548-6583 August 2013, Vol. 9, No. 8, 1070-1080).
14
Sec. 114.4 Nigerian Code of Corporate Governance 2018
15
Section S404 (5) CAMA 2020
8
annual general meeting. This requirement is strict as any nomination that fails short of this
provision remains invalid.

5.1.3 Meetings:

The Committee should meet at least once in every quarter. However, the meeting of
members can be held as often as the need arises in other to give a more effective and fruitful
attentions to the needs of the company. The frequency of the committee meeting does not
only show their commitment to the affairs of the company, it also give opportunity to closely
monitor the activities of management. Erring managements are easily controlled with the
close monitoring of the audit committee. This will also reassure the confidence of the
investors and investor. Scantiness of committee meeting may be an indication of less
commitment to the affairs of the company. Bryan, Liv, and Tiras (2004) 16 posited that audit
committees that meet regularly improve the transparency and openness of reported earnings
and therefore improve earnings quality. Audit committees’ members who meet regularly are
often expected to be able to perform monitoring tasks more effectively than otherwise.
Zhang, J. Zhou, and N. Zhou (2007) 17 used the number of meetings to measure whether the
frequency influences financial reporting quality and found a positive correlation.

6.0 AUDIT COMMITTEE IN INDIA

In India, Companies Bill, 2009 and the Securities and Exchange Board Act made it
mandatory for listed companies to constitute an audit committee. The Companies Bill
requires every listed company to have an audit committee that comprises a minimum of three
directors with independent directors forming a majority with at least one of them with
expertise and knowledge in financial management, audit or accounts. In India, all public
companies having a paid-up capital of Rs 10 crore or more or a turnover of Rs 100 crore or
more must have an audit committee. Also, all public companies having outstanding loans or
borrowings in excess of Rs 50 crore should constitute an audit committee.

Every member of an audit committee in India must be financially knowledgeable with at least
one of the members having accounting or related financial management expertise. An

16
Abdulkadir Madawaki, Noor Afza Amran Audit Committees: How They Affect Financial Reporting in Nigerian
Companies Journal of Modern Accounting and Auditing, ISSN 1548-6583 August 2013, Vol. 9, No. 8, 1070-
1080 accessed on 5/10/2023.
17
Ibid. p4
9
independent director must be appointed as the Chairman of an audit committee. The
committee must meet at least three times in a year.

The leading case that revolutionized the position of the law in corporate governance in India
is the case of Satyam Computers Services Ltd. The case of Satyam Computers Services
Ltd is an example of corporate failure in India where audit committee played the major role
in the scam. The Company failed every pillar of corporate governance and deceived
authorities like Securities and Exchange Board (SEBI), Registrar of Companies and other
authorities. One of the best audit company- Pricewaterhouse Coopers, audited the books of
the said company for ten years but failed to take into due diligence regarding the frauds as it
never verifies the forged statements with the bank and debtors etc. The audit committee did
not take any step in curbing the malpractices in the company and failed to recognize
fraudulent activities. After this scam, the SEBI amended rules of Listing Agreement to
improve corporate governance.

6.2 AUDIT COMMITTEE IN GHANA

In Ghana, the number of audit committee consists of five members. The majority of members
are usually independent members who are nominated by the Internal Audit Agency and the
Institute of Chartered Accountants. The Internal Audit Agency and the Institute of Chartered
Accountants, Ghana nominates the majority of members from among persons who do not
work in the covered entity to which the Audit Committee relates and two other members shall
be nominated by the Principal Account Holder. However, the committee may co-opt a senior
management personnel to serve in the Audit Committee. The Chairman of the Audit
Committee is elected from among the independent members of the Committee.

Unlike what obtains in Nigeria, the members of audit committee in Ghana are usually
appointed by external and statutory institution, whereas in Nigeria, members are elected at
the annual general meeting of the company. The same requirement of financial knowledge
and membership of a professional body by at least one of the members of the committee
applies both in Nigeria, India and Ghana

7.0 THE AUDIT COMMITTEE AND THE INTERNAL CONTROL

An Audit Committee refers to one of the key committees in the governance of corporate
entities. It is an operating committee of the Board of Directors. It is established to oversee the

10
discharge and the realization of statutory audit compliances as envisaged by the established
internal control system. Membership consists of non-executive directors tasked with
overseeing the integrity of financial reporting, risk management, internal controls, and
compliance with regulations. Their function extends beyond mere financial oversight; but
also encompasses ethical considerations, transparency, and safeguarding of shareholders'
interests.

7.1 HOW AUDIT COMMITTEE CONTRIBUTE TO INTERNAL

CONTROL/STATUTORY ROLES OF AUDIT COMMITTEE

The statutory functions of the Audit Committee are contained in Section 404 (4) and (7a-f) of
the Companies and Allied Matters Act 2020. .

The audit committee shall examine the auditors’ report and make recommendation thereon to
the annual general meeting as it may deem fit. 18

Subject to such other additional functions and powers that the company's articles of
association may stipulate, the objectives and functions of the audit committee shall be to‐

 ascertain whether the accounting and reporting policies of the company are in
accordance with legal requirements and agreed ethical practices;
 review the scope and planning of audit requirements;
 review the findings on management matters in conjunction with the external auditor
and departmental responses thereon;
 keep under review the effectiveness of the company's system of accounting and
internal control;
 make recommendations to the Board in regard to the appointment, removal and
remuneration of the external auditors of the company; and
 authorise the internal auditor to carry out investigations into any activities of the
company which may be of interest or concern to the committee.19

Furthermore, though this may appear like a repetition of the provisions of the CAMA stated
above as statutory functions of the audit committee, they are amplified by Code 30.4 (a - o)
of the Code of Corporate Governance in Nigeria 2018. Code 30.4 provides: 20

These functions above are commonly referred to as the statutory function of the Audit
Committee.

18
Section 404 (4) CAMA 2020
19
Section 404 (7 a-f) CAMA 2020
20
Code 30.4 Nigeria Code of Corporate Governance for Public Companies 2018
11
The common practice is that the audit committee is made up of directors and some
shareholders. The board of directors is commonly divided into sub committees in order to
take advantage of the board member’s special skills, knowledge, experience and expertise
and audit committee is one of such committees. Other committees include Risk Management
Committee and Selections/Remunerations Committee. Etc. The audit committee performs its
function as a coordinator between external audit and the internal audit. The internal audit is
officially expected to report to the audit committee. The audit committee re-appraises the
functions and relevance of the internal auditor reports and eventually report to the Board of
Directors and to the Annual General Meeting of Members. 21

7.2 OTHER ROLES OF AUDIT COMMITTEE

In addition to the statutory functions provided in instant laws, the audit committee plays
numerous functions in other to enhance and sustain the survival of the company, sustain the
integrity and security of financial health of the company. We shall examine these function in
the subheadings below.

Enhanced financial reporting: The Audit Committee of every public company shall
review the company’s financial statements prior to approval by the Board of the company and
present the report at the Annual General Meeting. The essence is to ensure that the financial
reports reflects the fair and objective financial position of the company for the year under
report. In Nigeria, there has been experiences of over padding of financial statements by
companies and expanding event of unethical and financial misappropriation behaviours
among a few known organisations. This shows a failure in its major roles as audit
committee to ensure that financial statement prepared by accountants and audited by external
auditors are free from material misstatement in order to help users to make quality decision.
In Nigeria, the reverse appears the case as ineffectiveness on the part of audit committees has
resulted in preparation and presentation of low quality financial reports that could not
guarantee that businesses operate as going concerns.

Presentation of the Audited Financial Statement to the Annual General Meeting: The
Audit committee ensures that the audited financial statements are presented at the annual
general meeting of the company. They also ensure that the reports represents the objective
and accurate position of financial status of the company. Based on this they may make

21
Owolabi, S. A. and Dada, S. O. Audit Committee: An Instrument of Effective Corporate Governance
European Journal of Economics, Finance and Administrative Sciences. Issue 35 (2011))
12
recommendations for improvement or changes in the financial reporting and internal control
system of the company.

Review of Financial Statement and Reports for Accuracy and Compliance with
Regulations: It is the duty of the Audit Committee to assess the adequacy of accounting
policies and ensure compliance with relevant regulations and accounting standards. This
helps to maintain the accuracy and reliability of financial information, providing confidence
to investors and other stakeholders. Audit committees thoroughly review the financial
reports prepared by management, including the balance sheet, income statement, cash flow
statement, and accompanying notes. They examine these reports to ensure they accurately
represent the organization’s financial position, performance, and cash flows. In addition to
verifying the accuracy of the financial reports, audit committees also assess their
completeness. They ensure all necessary disclosures, like information about transactions,
contingencies, related party transactions, and significant accounting policies, are
appropriately presented.

Risk management: It is the duty of the Audit committees to monitor and evaluate the
effectiveness of a company’s internal controls mechanism and risk management systems to
safeguard the company’s assets and minimize the chances of fraud or mismanagement. To
fulfill this responsibility, the committees review internal audit reports and risk assessments
and discuss findings with internal auditors and management.

By reviewing internal control reports, audit committees assess their design and operation
effectiveness to mitigate various risks. For example, they examine whether the control
environment is strong, including factors such as the ethical values, and integrity.

Whistle Blowing Mechanism: The audit committees maintain a whistle blowing mechanism
by establishing a confidential insider information system to monitor the activities of the
companies. Feedbacks are received from stakeholders on the operations and or abuses of the
accounting processes of the company in a confidential manner. As part of their oversight,
audit committees review these reports of alleged misconducts or violations received through
the whistleblower and ethics programs. They assess the nature and significance of these
issues and determine the appropriate course of action, which may involve initiating
investigations or engaging external resources, such as forensic audit or legal counsel. This

13
mechanism helps a lot in checkmating nefarious and fraudulent activities of the accounting or
management personnel.

Ensuring Compliance with ethical standards: It is the duty of the Audit committees to
ensure that the organization operates within the boundaries of regulatory laws and regulations
as well as its ethical standards. This is essential for maintaining the company’s reputation,
integrity. They also ensure that the operations of the company complies with the requirements
of the corporate governance rules and sector regulations as well as other standards applicable
to the company sector.

Fraud Detection and Prevention

One of the outstanding cases that brought to fore the relevance of Audit Committee in
Nigeria is the case of Cadbury Nigeria Plc. In the case of Cadbury Nigeria Plc., the financial
statements were falsified until December 12, 2006, when the Managing director and the
Financial Director were suspended for cooking and window dressing the books of account of
the company. These financial books padding scandal and corruption lasted for three years
where the company’s financial position was overstated to the tune of between N13 and N15
billion and if this is to be corrected, it will lead to an operating loss of N1 to N2 billion Naira.
This can be seen as similar to the case of Enron corporation scandal in the United States. In
the same view, at Afribank Nigeria Plc, the former Managing Director accused the Board of
Directors of colluding with its External auditors to window dress the books of accounts for
some time.

Another case of corporate fraud is the case of Enron. At Enron, management was rewarded
by given themselves stock option. The value of the stocks depended on propping up their
company’s share price, the board and management therefore exercised undue pressure on
rating agencies to ensure good investment rating. As these dubious acts were going on, shares
were sold off to innocent investors at premium. At WorldCom, sales men were paid several
commissions for helping to perpetrate fraud by presenting false sales report and by recording
a single sale many times. These cases evidence the absence of a valid and viable Audit
Committee that are independent, thorough and effective or a compromised committee.

Establishing a cordial relationship with the external auditors: Audit committees plays a
major role in the selection, appointment, remuneration and oversees the external auditors’
work. They maintain direct communication with these external auditors, ensuring their
14
independence, objectivity, and effectiveness. This relationship helps foster a robust auditing
process and promotes open dialogue between the auditors and the committee.

To ensure the implementation of the reports and recommendations of the external

auditors. Where the observations of the external auditors are unfavourable, or where the
internal control process requires changes, it is the duty of the committee to ensure that the
recommended changes are put in place. It will also monitor the implementation of the new
process to ensure that it produces the expected results.

To Recommend for Investigation on the Activities of the Company or a section: The

Committee can recommend the conduct of investigation into any records, operations and
activities of any department or sections of the company to ensure the compliance with the
regulatory standards.. The audit committee can recommend such an investigation into the
operation of any section or department of the company for the interest of the company to
ensure evaluate its compliance with the internal regulations and ascertain whether there will
be need for changes or improvement in the operation of such department/section.

Introduction of Changes in the Risk Management and Internal Control System: Audit
committees stay abreast of regulatory changes and assess their impact on the organization.
They monitor developments in laws and regulations relevant to the company’s industry and
operations. The audit committee works closely with the Corporate Governance Committee to
investigate compliance and resolve matters. They identify matters requiring the attention of
the Board and other duties of the Board of Directors.

Enhancing a Cordial Relationship Among the Management and Staff of the Company:

The Audit committee ensures that there is a cordial relation among the management and other
personnel of the company to foster a healthy working environment. This can also be effected
by providing independent opinion in the event of disagreements between management and
accountants or other principal staff/stake holders of the company for services rendered.

Importance of the Audit Committee in Corporate Governance

The Audit committee is in a fiduciary relation with the company and therefore is expected to
act in the good interest of the company. The audit committee has a particular role, acting
independently from the executive, to ensure that the interests of shareholders are properly
protected in relation to financial reporting and internal control. They are not in any way
15
expected to connive, collude or compromise with the management to conceal any fraud,
financial recklessness or deviation from financial guidelines or risks.

Credible and high-quality financial statements that are free from any material misstatements
or misrepresentation enhance users’ decision making quality. IASB (2008) provide that the
aim of preparation and presentation of financial reports is to provide high-quality information
concerning economic entities, primarily financial in nature, useful for economic decision
making by users as cited in (Anthony, Oluoch, Willy & Memba 2017). According to
Anthony, et al. (2017), provision of high quality financial reporting information is very
crucial because it influences capital providers and other stakeholders in making investment,
credit, and similar resource allocation decisions. Financial reports occupied a significant
position in users’ decision-making process especially to investors (Dezoort & Salterious,
2001).22 Therefore the position of the audit committee is to ensure that these financial reports
turned in by the company possesses these qualities and are reliable.

In Nigeria, the Audit Committee's role is not just an administrative formality; it is a

cornerstone of corporate governance. As companies expand and business landscapes become
more complex, the need for strict oversight and risk management grows in tandem. Recent
corporate scandals have further highlighted the need for effective audit committees that can
provide independent scrutiny of operations and restore public trust.

Corporate governance in Nigeria, as in other countries, is a complex interplay of structures,

processes, and relationships that guide and control a public company. The Audit Committee
plays a critical role in this framework, acting as a guardian of transparency, accountability,
and integrity. Audit committee remains one of the most vibrant committees in corporate
governance.

8.0 CHALLENGES

8.1 Limitation of Number of Membership Of Audit Committee

The statutory provision of just five as a maximum number of membership of the Audit
Committee in Public companies has been a course of debate in some quarter. This though is
a variation from the original provision of CAMA 2004 which had provided for a minimum of
6 members for public companies. There is no provision for a minimum number of members.
It has been argued that limiting the number of membership to a maximum of five members
22
Udisifan Michael Tanko1 & Akeem Adetunji Siyanbola Audit Committee and Financial Reporting Quality:
Evidence from Listed Firms in Nigeria JAFMD ISSN 2714-2566 Volume 2 Number 2 December 2019
16
may not give the body a reasonable number of skilled and expertise required to cover the
much needed area of its function. Some researchers are of the opinion that the size function
allows the audit committee to adequately monitor the executive directors' activities and
powers with high regard to the accounting preparation and reporting functions. It is believed
that in the existence of a large audit committee, all financial reporting issues can be revealed
and addressed. (Mohammed, Shafie & Hussin, 2010).23 Audit Committee size and Financial
Reporting Quality Audit committee size is the total number of individuals that serve as
members of audit committee in a particular entity within a particular accounting period.
Appropriateness is essential when determining the number of people to occupy audit and all
other board committees to ensure prompt delivery and efficiency and the needed to avert
agency conflict that may result from audit committee ineptitude (Pugliese et al., 2014).
Empirical studies also show that audit committee size is a determinant of the quality in
corporate financial reporting.24 Aderemi, Osarumwense, Kehinde and Ben-Caleb (2016), find
that large number of audit committee members play crucial role in constraining earnings
management.25

It is important to note that the lesser the number of members, the easier it will be to
coordinate the operation of the committee. However, in a very large organization, it may be
necessary to allow the board of directors to choose the size of audit committee members that
will be proportional to the size of their company.

The UK guidelines for Best practice requires that every board should consider in detail what
audit committee arrangements are best suited for its particular circumstances. Accordingly,
Audit committee arrangements need to be proportionate to the task, and will vary according
to the size, complexity and risk profile of the company.26

In our study, we identified possible inhibition to the effectiveness of the audit committee’s
performance. An example is Section 404 (3) of the Companies and Allied Matters Act:

The audit committee referred to in subsection (2) of this section, shall consist of
five members comprising of three members and two non-executive directors. The

23
: Cited in Ilogho, Simon Osiregbemhe/Oyelude, Mojoyin et. al. (2022). Audit Committee Qualities and
Corporate Fraud Abatement in Listed Nigerian Non-Financial Institutions. [S.l.] :4
24
Udisifan Michael Tanko1 & Akeem Adetunji Siyanbola Audit Committee and Financial Reporting Quality:
Evidence from Listed Firms in Nigeria JAFMD ISSN 2714-2566 Volume 2 Number 2 December 2019
25
Ibid.
26
The Financial Reporting Council Limited 2016 - Guidance on Audit Committees (April 2016) p. 5
17
 members of the audit committee are not entitled to remuneration, and are
subject to election annually.

It is our concern that the above provision which deny members of the audit committee
remunerations, especially when members of the other committees of the Board are not so
subjected, may negative efficiency and the retention of capable hands.

Subsection 5 of Section 404 of CAMA 2020 envisages professionalism in the conduct of the
affairs the audit committee. It provides that All members of the audit committee shall be
financially literate, and at least one member shall be a member of a professional accounting
body in Nigeria established by an Act of the National Assembly.
(i) To subject election of members of the audit committee to “election annually” may
be injurious to the retention of competent hands, especially in the handling of
contingent and post balance sheet matters.
It is our view that the phrase “and are subject to election annually” should be
amended to “and are subject to re-election annually provided no member shall
serve for more than three years”.

Codes 30.2 and 30.3 of the Code of Corporate Governance in Nigeria are quite instructive.

30.2. Members of the audit committee should have basic financial literacy and
should be able to read financial statements. At least one member of the committee
should have knowledge of accounting or financial management.

30.3. Whenever necessary, the audit committee may obtain external professional
advice.

Consequently, we hereby call to question the reasonableness of denying members of the audit
committee remunerations.

Regulatory Complexity: The multiplicity of regulations and guidelines can create a complex
landscape that may hinder effective operations of the committee. With a blend of local laws
like the Companies and Allied Matters Act and international standards like the International
Financial Reporting Standards, navigating the regulatory terrain in Nigeria demands immense
expertise and adaptability.

Limited Independence: The effectiveness of Audit Committees can be compromised if

there is limited independence from the management. Historical ties between board members

18
and management in some Nigerian companies, have sometimes blurred the lines of
independence. In theory, one might be tempted to assume that the absence of remunerations
to the members of the audit committee might foster the much-desired independence of the
committee. However, in practice, this may not necessarily be so in view of our current ethical
values in Nigeria.

(c) Skill and Capacity Gaps: A lack of adequately skilled personnel can undermine the
effectiveness of Audit Committees. The fast-evolving financial landscape requires continuous
skill development which is a challenge in regions with limited access to ongoing professional
training. In an attempt to bridge the obvious lacunae that exists in the Companies and Allied
Matters Act, the Code of Corporate Governance in Nigeria has made provision for the
appointment of at least one financially literate member in the audit committee and the
engagement of experts where necessary. A problem may arise where all the members are
lacking in the requisite expertise knowledge of financial skills or where there is no member
of the prescribed professional body. This will certain imply that the committee will resort to
external assistance. Even though a resort to external body may be lawful, it may not be cheap
and there could delay or hamper the effective operation of the committee.

(d) Cultural Barriers: Traditional business practices may conflict with modern governance
principles. Striking a balance between traditional hierarchical structures and the collaborative
approach needed for effective auditing can be a complex issue in some Nigerian enterprises.
The issue of gender parity comes to mind here. In their research (A. M. Chijoke-Mgbame A.
Boateng C. O. Mgbame), considered the effects of female representation and the proportion
of female representation on corporate boards and audit committees on financial performance
in an African context where institutions are weak. They concluded that female board
representation exerts a positive and significant influence on firm financial performance.
They also reported the performance effect of gender diversity is stronger for firms with two
or more female directors, suggesting that building a critical mass of female representation
enhances firm financial performance. Further analysis indicates that the inclusion of females
on the audit committee appears to have a positive impact on firm financial performance. 27

(g) Standard Audit Manual for Audit Committees.

27
Board gender diversity, audit committee and financial performance: evidence from Nigeria: Accounting
Forum: Vol 44, No 3 (tandfonline.com)
19
It is obvious that, as at now, there is no documented audit manual to guide the operations of
audit committees. The best the committee members can go is to apply their best of judgment.

Consequently, we resolved to recommend that the Financial Reporting Council of Nigeria

(FRCN) should be approached to come up with a suitable Statements of Audit Standard for
Audit Committees of quoted companies. Such a harmonized document will certainly address
the presently observed knowledge gap in the set up.

9.0 Conclusion

The introduction of the Audit Committee in corporate governance has gone a long way to
input stability, confidence and sanity into the corporate practice in Nigeria. The ugly
experiences of failed institutions, as a result of fraud, window washing and false financial
statements which was a common experience among corporate bodies has so much been put to
a check by the operation of the audit committee. One cannot expect a 100 percent success in
the activities of the boards of directors. The duty of the committee is to ensure a quality
financial report that is objective and reflects the true financial position of the company in the
reporting year. Its general purpose is to build confidence in the financial reporting system
and encourage investors and assure the shareholders of the safety of their investments.

The examination of the relevance of the Audit Committee within the framework of corporate
governance in Nigeria unveils a multifaceted landscape. This study elucidated the regulatory
framework, presented real-world examples, and navigated the challenges and opportunities
that are peculiar to the Nigerian context. It also offered recommendations aimed at fostering
growth, innovation, and alignment with global standards.

The Audit Committee's role, as highlighted in this study, is not merely a procedural
requirement but a pivotal element in building a transparent, accountable, and resilient
corporate culture in Nigeria. It serves as a linchpin in the alignment of Nigeria's corporate
practices with international norms; thereby enhancing global competitiveness.

The Nigerian case study drives the potential of a well-structured Audit Committees that will
reinforce corporate integrity, trust, and growth. The insights drawn offer valuable lessons and
pathways for both Nigeria and other emerging economies striving to build robust and
dynamic corporate governance systems.
20
Succinctly, the role of the Audit Committee transcends mere oversight. It symbolizes a
commitment to excellence, integrity, and forward-thinking that resonates well beyond the
boardroom. The journey of corporate governance in Nigeria, with the Audit Committee as its
fulcrum, reflects a promising trajectory toward a transparent, accountable, responsive, and
sustainable economic growth of the society.

21
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Reporting Quality: Evidence from Listed Firms in Nigeria JAFMD ISSN 2714-2566 Volume
2 Number 2 December 2019

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