Audit Committee Financial Expertise and Entrepreneurial Firms Reporting Quality in Nigeria (Mediterranean Journal of Social Sciences)

Summary

• The study uses a conceptual and doctrinal approach based on agency theory and resource dependence theory to examine audit committee financial expertise and reporting quality in Nigerian entrepreneurial firms.p.1
• Audit committees are mandated for public interest entities by the Financial Reporting Council of Nigeria (2018) and the Securities and Exchange Commission (2011), and the Companies and Allied Matters Act (2020) extends the requirement to public companies.p.2
• A meta-analysis covering ninety studies found a consistently positive link between audit committee financial expertise and earnings quality, stronger for accounting experts.p.9
• Oyedokun, Ojo and Fodio found that audit committee expertise had a positive and significant effect on reporting quality in consumer goods firms listed on the Nigerian Exchange between 2013 and 2018.p.9
• Financial expertise without independence yields limited benefit, especially where founders nominate committee members from their own networks.p.11
• Banks and private equity investors are advised to assess the substance, not just the existence, of audit committee expertise in due diligence.p.14

Key insights

1. The mere existence of an audit committee does not improve reporting quality; the presence of members with real financial expertise matters more.p.2
2. The IASB Conceptual Framework (2018) names relevance and faithful representation as fundamental qualities, complemented by comparability, verifiability, timeliness and understandability.p.5
3. Agency theory and resource dependence theory both predict better reporting quality where the audit committee includes genuine financial experts.p.6
4. A financially expert committee can enforce consistent accounting policies and flag unexplained changes in accounting treatment.p.7
5. Some high growth firms backed by private equity or venture capital voluntarily set up audit committees at their investors' insistence.p.4
6. Timely, audited financial statements are often a precondition for banks and investors to extend credit or complete an investment round.p.10
7. For the smallest ventures, a part-time qualified accountant or shared oversight through incubators may capture some of the benefits at lower cost.p.13
8. Weak financial reporting quality constrains entrepreneurial firms' access to formal credit and equity finance.p.15