BOARD CHARACTERISTICS AND QUALITY FINANCIAL REPORTING IN NIGERIA
CHAPTER ONE
INTRODUCTION
Background to the Study
The quality of decisions that users can make is largely dependent on the quality of information available to them. This information can be quantitative (financial) or qualitative (non-financial) both of which require a reasonable level of skills on the side of the user to effectively interpret and use. The published financial statements prepared by the directors of companies and certified by external auditors remain the primary means of informing users about financial performance, progress and position of the firm. All things being equal, the audited financial statements should be credible, believable and reliable. However, this condition may not hold due to weak corporate governance structures, codes and institutions, untimeliness of the financial information and the level of skills of the user (Dabor and Adeyemi 2009).
A number of studies have been conducted on corporate governance and financial reporting at different times in developed, as well as, developing countries, most of which are well documented in accounting and finance literature (Ofoegu and Okoye, 2006; Dabor and Adeyemi, 2009; Tijjani and Dabor, 2010; Abbas, 2011; Hassan, 2011). And the major reasons for the huge bodies of literature is to ensure that the financial statement show the true and fair view of the actual outcome of the operations of the firm, and management claims empty of any form of manipulations, falsifications and the art of creative accounting. Recent corporate scandals have created holes in the mind of investors and have made investment decision to be cumbersome creating the need for quality financial information by ensure the appropriate structure or governing bodies within and outside the organisation are available, not just available but sure to perform their duties to shareholders and avoid the threat of loss of investment due mainly to large scale corporate fraud.
In Nigeria, concerns have been expressed about the large scale malpractices and abuse of the system by capital market operators in the past, especially following the recent incidence on the sale of forged shares of publicly quoted companies. Companies have gone into liquidation for reasons bordering on ineffective or non-existing system of corporate governance. Examples are OnwukaHitech, Abacus Merchant bank and others (Tijjani and Dabor 2010). In the Nigerian petroleum industry the case of Africa Petroleum (now Forte Plc) where 24 billion naira credit facility was not disclosed in the financial statement was unethical. In response to calls for strengthening corporate governance mechanism to enhance the oversight function of the board of directors and to restore public confidence in the integrity of financing reporting, the Security and Exchange Commission promulgated the Nigerian Code of corporate governance in 2003 which was later reviewed in 2011 to enhance its effectiveness. This code requires companies listed on the Stock Exchange to appoint independent directors and supervisors, including at least one financial expert, and to establish an audit committee.
The purpose of quality of financial reporting is to promote transparency and deliver high quality annual report through comprehensive disclosure. Users should be able to understand the information presented without undue effort (IASB, 2008). Standard setters, regulators, and policy-makers all have a vital interest in the effect of financial reporting on the economy. This interest is due to the economic consequences associated with financial information. According to proponents of International Financial Reporting Standards (IFRS), publicly traded companies must apply a single set of high quality accounting standards, in the preparation of their consolidated financial statements, in order to contribute to better functioning capital markets (Quigley, 2007). The wide spread adoption of International Financial Reporting Standards (IFRS) facilitated the harmonization of accounting standards around the globe. For example, Ball (2006) notes that the fair value orientation of IFRS could add volatility to financial statements, in the form of both good and bad information, the latter consisting of noise which arises from inherent estimation error and possible managerial manipulation. Therefore it is one of the major responsibilities of the board to ensure the appropriateness of the application of the standards that will yield or produce quality financial report
1.2 Statement of the Problem
The weakness of corporate governance is perhaps the most important factor blamed for the corporate failure of the past. The question of audit quality has received increased attention from regulators, academics and practioners around the world in recent years due to highly publicised audit failures (Lin & Liu, 2009). The impact of a lack of auditor independence can be extremely severe to the audit process; this has affected audit quality (Abdullar, 2003). Therefore our study extends and contributes to the body of research using Nigerian data to investigate the relationships between corporate governance and  quality financial reporting.
In recent times, a series of well-publicized cases of accounting improprieties in Nigeria (for example, such as is reported in relation to Wema Bank, NAMPAK, Finbank, and Spring bank, Oceanic Bank, among others in Nigeria) has captured the attention of investors and regulators alike (Adeyemi&Fagbemi, 2010). The search for mechanisms to ensure reliable, high quality financial reporting has largely focused on the structure of a strong corporate governance practices. The auditing profession which is part of the governance structure has been proactive in attempting to improve audit quality by issuing standards focused on discovery and independence. As a result, there has been a concerted effort to devise ways of enhancing independence (Corporate Governance Code of Nigeria, 2005). The profession has also responded to denigrations on audit quality.
This study is motivated by the interest surrounding the appropriateness of reforms instituted by corporate governance practice in relation to corporate failures, global best practice and their implied efficacy in the face of significant implementation whether or not the these structure formations of governance and regulations impacted quality financial reporting in Nigeria. Following from the above, the research questions therefore are:
1 what is the relationship between board independence and financial reporting quality?
2 what is the relationship between audit committee size and financial reporting quality?
3what is the relationship between board size and financial reporting quality?
1.3 Objectives of the Study
The broad objective of the study is to examine the relationship between Board characteristics      and financial reporting quality in Nigeria. The specific objectives of the study are:
1 To examine the significant relationship between board independence and financial reporting quality;
2 To ascertain the significant relationship between audit committee size and financial reporting quality and
3 To evaluate the significant relationship between board size and financial reporting quality.
 1.4 Hypotheses of the Study
The following null hypotheses are formulated to be tested in this study.
H1: there is no significant relationship between board independence and financial reporting quality;
H2: there is no significant relationship between audit committee size and financial reporting quality;
H3: there is no significant relationship between board size and financial reporting quality
1.5 Scope of the Study
This study basically seeks to investigate the effect of Board Characteristics on quality financial reporting. To achieve the objectives of this study, data are collected for the period of ten (10) years (2004-2013) from companies’ annual reports and accounts. In addition, using simple random sampling technique, the study considered a total of 20 listed firms in the Nigerian Stock Exchange Market. The choice of the selected firms arises based on the availability of data.
1.6 Significance of the Study
The importance of governance can be illustrated under the principal-agent relationship. The demand for checks is directly related to the fact that it is the directors (the agents) who prepare the financial statements, which is primarily based on cost reasons (Adeyemi&Fagbemi, 2010).Therefore, this study is expected to provide useful insight into improving quality financial reporting. This study contributes to literature as it provides additional empirical evidence on the impact of the size of audit firm (big and non-big) on the level of audit quality. The study also reflects the quality of audit services between “big and non-big” audit firms in Nigeria that will ensure quality financial reporting. This study will be useful to stakeholders in the Nigerian Stock Exchange (NSE) as it provides evidence on the relationship between quality reporting and the reform instituted by them in formulating the Code of Corporate Governance for listed companies in Nigeria.
1.7 Limitations of the Study
The limitations of this study are outlined below.
The data for this study is a secondary data extracted from annual reports and accounts of sampled firms. But the availability of companies’ report from year to year was not consistent as some companies’ report was not in stock. This posed challenge for the researchers in data extraction.
The sampled firms are a mere representation of the entire population of the study. The sampled twenty (20) firms are considered small compare to the entire population. But the researchers make do with these numbers due time constraint.