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Effect of Audit Committee Independence on Earnings Quality of Listed Companies in Nigeria

Abstract

Audit committee independence has become a critical element of corporate governance due to its role in strengthening financial reporting integrity, enhancing oversight of the financial reporting process, and improving the credibility of published financial statements. Audit committee independence refers to the extent to which members of the audit committee are free from management influence, conflicts of interest, and other relationships that may impair their objectivity in carrying out oversight responsibilities. Independent audit committees are expected to provide effective monitoring of financial reporting, internal control systems, external audit processes, risk management practices, and compliance with statutory and regulatory requirements. Consequently, audit committee independence is regarded as an important mechanism for improving earnings quality by reducing earnings manipulation, limiting managerial opportunism, and enhancing the reliability and transparency of reported financial information. In Nigeria, listed companies are required to establish audit committees in accordance with the Companies and Allied Matters Act (CAMA), the Nigerian Code of Corporate Governance (NCCG), the Securities and Exchange Commission (SEC) Corporate Governance Code, and the listing requirements of the Nigerian Exchange Group (NGX). These regulatory frameworks emphasize the need for independent audit committees to strengthen corporate governance and safeguard shareholders' interests. Despite these regulatory reforms, concerns regarding earnings management, financial reporting irregularities, weak corporate governance practices, and declining investor confidence continue to persist among some listed companies. Although previous studies have examined corporate governance and financial reporting quality, empirical evidence regarding the effect of audit committee independence on earnings quality of listed companies in Nigeria remains limited and inconclusive. Against this background, this study investigates the effect of audit committee independence on earnings quality of listed companies in Nigeria. The study is anchored on Agency Theory, Resource Dependence Theory, and Stewardship Theory. Agency Theory posits that independent audit committees reduce agency conflicts between management and shareholders by providing effective oversight of financial reporting and limiting opportunistic managerial behaviour. Resource Dependence Theory argues that independent audit committee members contribute valuable expertise, professional experience, and external perspectives that enhance organizational decision-making and financial reporting quality. Stewardship Theory explains that effective governance structures empower managers and oversight bodies to act responsibly in protecting shareholders' interests and improving organizational performance. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between audit committee independence and earnings quality of listed companies in Nigeria. The study adopts a quantitative research design using a structured questionnaire administered to audit committee members, chief financial officers, finance managers, internal auditors, external auditors, company secretaries, compliance officers, risk managers, accountants, and other personnel responsible for corporate governance and financial reporting within selected listed companies in Nigeria. A stratified random sampling technique will be employed to ensure adequate representation of companies operating in the financial services, manufacturing, consumer goods, industrial goods, oil and gas, telecommunications, agriculture, healthcare, and other sectors listed on the Nigerian Exchange Group (NGX). Audit committee independence will be measured using the proportion of independent members, independence from executive management, objectivity in decision-making, oversight effectiveness, freedom from conflicts of interest, committee autonomy, and compliance with corporate governance regulations, while earnings quality will be measured using earnings reliability, earnings persistence, earnings predictability, accrual quality, absence of earnings management, financial reporting transparency, and faithful representation of financial information. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding audit committee independence and earnings quality. Structural Equation Modeling (SEM) will be employed to examine the effect of audit committee independence on earnings quality. The measurement model will be evaluated using Cronbach's Alpha, Composite Reliability (CR), Average Variance Extracted (AVE), and Confirmatory Factor Analysis (CFA) to establish the reliability and validity of the research instrument. Additional diagnostic tests, including multicollinearity assessment, common method bias analysis, and model fit indices such as the Comparative Fit Index (CFI), Tucker-Lewis Index (TLI), Root Mean Square Error of Approximation (RMSEA), and Standardized Root Mean Square Residual (SRMR), will be conducted to ensure the adequacy, consistency, reliability, and robustness of the structural model. The study anticipates that audit committee independence will have a significant positive effect on earnings quality of listed companies in Nigeria. Independent audit committees are expected to strengthen oversight of financial reporting, improve compliance with accounting standards, enhance internal control systems, and reduce the likelihood of earnings manipulation and financial misstatements. Listed companies with highly independent audit committees are also anticipated to improve the credibility, transparency, and reliability of reported earnings, thereby strengthening investor confidence, enhancing corporate reputation, and improving access to investment capital. Furthermore, effective audit committee independence is expected to reinforce ethical financial reporting, improve communication with external auditors, strengthen regulatory compliance, and promote sustainable corporate governance practices. Conversely, weak audit committee independence, management interference, conflicts of interest, inadequate oversight, and ineffective governance structures may encourage earnings management, reduce the credibility of financial statements, weaken investor confidence, and adversely affect corporate reputation. Consequently, effective audit committee independence is expected to contribute significantly to improving earnings quality, financial reporting integrity, corporate transparency, and long-term organizational sustainability among listed companies in Nigeria. This study is expected to make significant theoretical and empirical contributions to the literature on corporate governance, auditing, accounting, and financial reporting by providing comprehensive evidence on the relationship between audit committee independence and earnings quality of listed companies in Nigeria. Unlike previous studies that broadly examined corporate governance mechanisms, this research specifically evaluates audit committee independence as a strategic determinant of earnings quality using primary data and Structural Equation Modeling (SEM). The findings will provide valuable insights for the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), the Nigerian Exchange Group (NGX), corporate boards, audit committees, professional accounting bodies, investors, policymakers, regulators, and academic researchers regarding the strategic importance of audit committee independence in enhancing financial reporting quality. The study will also provide evidence-based recommendations for strengthening audit committee independence, improving board oversight, enhancing internal control systems, reinforcing compliance with corporate governance regulations, promoting auditor independence, and fostering greater transparency and accountability among listed companies in Nigeria.

Keywords: Audit committee independence, earnings quality, listed companies, corporate governance, financial reporting quality, audit committee, earnings management, Structural Equation Modeling (SEM), corporate transparency, Nigeria.