CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The past few years have seen several well-known companies with significant international operations become mired in financial scandals. In some of these cases, investors have lost hundreds of millions or even billions of dollars. A number of the companies involved have been forced into bankrupting as a direct or indirect result of the scandals, these financial scandals caused many to be concerned about investors’ confidence in the integrity of companies. As means of reducing the weakness in corporate governance, several mechanisms have been introduced among which is the adoption of audit committee. Audit committee as a concept has not acquired mass coalesce as a mandatory element of corporate governance code. Instances of corporate and audit figures and heightened concern of investors about the corporate reports of companies in the developed world led to the establishment of tread way commission (1987) in US, Cadbury commission (1992). The aforementioned committee emphasized on the need for the establishment of audit committee as a board sub-committee comprising of independent directors to ensure the credibility of financial statement. Audit committee was promoted on voluntary basis as part of corporate governance reforms (Turley & Zaman, 2004), and gained significant acquaintance with the formation of specialized committees like Blue Ribbon Committees in 1999. The Lehman brothers, Barings Bank, Merrill Iynch, all State Trust Banks, and the Afribank Nigeria PLC, Cadbury PLC and the Bank credit scam in Nigeria, leading to the sacking of five bank chief executives. Some of these scandals could be traced directly to poor corporate governance.
In Nigeria, the scandals were traced to poor corporate governance and faulty accounting and risk management practices as demonstrated by joint audit by securities and exchange commission and the central bank of Nigeria in 2010, globally, corporate governance is believed to be means of importing economic efficiency in a country and that its rule have economically significant impact on a firm’s value. Academic literature also suggest that audit committee effectiveness has significant positive impact in minimizing agency conflicts, protecting stakeholders’ interests and thus, in maximizing firm’s overall value. This critical role of audit committee is believed to be a means of improving economic efficiency and stakeholders’ confidence in the banks through financial standard compliance. However, to achieve this, audit committee should possess some certain attributes which include independence of the committee, frequency of meetings, the size of the committee and financial knowledge of the committee members. These attributes of the audit committee are significant in addressing the short comings and weaknesses associated with the internal control system of the banks and the errors and limitations associated with external audit function