INFLUENCE OF AUDIT COMMITTEE CHARACTERISTICS ON THE SUSTAINABILITY PERFORMANCE OF QUOTED FIRMS IN NIGERIA

CHAPTER ONE INTRODUCTION 1.1 Background of the Study Globally, the concept of corporate governance has garnered increasing scholarly and practical interest in recent times. This growing concern within the business landscape stems from a heightened awareness of the critical importance of promoting ethical standards and integrity in commercial dealings. Establishing such a culture creates a conducive environment—both legally and socially—for effective governance structures to thrive. Corporate governance encompasses a mix of internal and external mechanisms designed to mitigate agency-related issues within firms, thereby fostering organizational performance and long-term sustainability. As asserted by Azar, Sayyar, Zakaria, and Sulaiman (2018), the effective handling of corporate challenges by a company’s board necessitates the adoption of coherent policies, frameworks, and best practices. Nonetheless, Buallay and Aldhaen (2018) argue that despite the proliferation of governance mechanisms, national legal frameworks mandate the establishment of boards of directors. The board holds a central responsibility in ensuring that corporate decisions align with established governance principles, thereby protecting the interests of diverse stakeholders. Moreover, the board is entrusted with the task of guiding the firm towards the achievement of its objectives through ethical governance practices and fostering stakeholder confidence. In pursuit of these goals, boards often establish specialized committees—such as audit, nomination, and compensation committees—to bolster governance efficiency. These committees are instrumental in ensuring compliance with statutory obligations, internal policies, and overarching governance standards. In the Nigerian context, the presence of properly constituted audit committees has become a regulatory imperative for all publicly listed firms, with the Corporate Governance Code (2010) emphasizing their critical role (Ojeka, Adegboye, Adetula, Adegboye, & Udo, 2019). According to Ojeka et al. (2019), audit committees are integral to improving the transparency of financial statements through oversight of disclosures, particularly voluntary ones. Their monitoring functions are expected to elevate stakeholder trust, especially through robust sustainability reporting. As noted by Orazalin and Mahmood (2018), audit committees are pivotal elements in corporate oversight, enhancing the integrity of financial reporting via active collaboration with the board of directors, internal audit units, and external auditors—thus strengthening the corporate image. Contrarily, the relationship between audit committee characteristics and firm performance remains subject to diverse perspectives. Persons (2019) suggests that the establishment of effective audit committees mitigates managerial opportunism and curbs unethical behaviors by ensuring conformity with both investor expectations and societal norms. This includes preventing power abuse, misappropriation of assets, and general agency conflicts, thereby reinforcing managerial accountability. Similarly, Kantudu and Samaila (2021) argue that the independence of audit committees enhances decision-making through a richer, more diverse set of perspectives, encouraging innovation and broader market engagement. Additionally, beyond traditional financial disclosures, there is growing advocacy among stakeholders for transparency in non-financial disclosures, particularly concerning sustainability performance. Krivačić (2017) defines sustainability performance as the alignment of financial and environmental goals within core business operations, geared towards optimizing value creation. In this regard, audit committees serve as a vital oversight mechanism for sustainability-related reporting and corporate accountability. Mohammad (2015) also emphasizes that audit committees are instrumental in securing the long-term viability of firms by overseeing internal control systems, financial statement accuracy, and audit processes. Their expertise enhances the board’s supervisory capacity, leading to a deeper understanding of financial health. Furthermore, Ahmed and Manab (2016) assert that audit committees are crucial for the prudent management of organizational resources, upholding professional standards, and ensuring alignment with corporate goals. They play a pivotal role in enhancing customer satisfaction, employee morale, and market discipline, all of which contribute to financial stability and superior corporate performance. Through sustainability reporting, organizations communicate their impact and performance across environmental, social, and governance (ESG) dimensions. 1.2 Statement of the Problem In recent years, the corporate world has witnessed a surge in financial scandals and business failures, sparking intense scrutiny of the corporate governance mechanisms adopted by firms. These issues have drawn the attention of various stakeholders—including governments, regulators, and investors—who question the effectiveness of current governance frameworks. Adegboye, Alabi, Afolabi, and Iyoha (2019) highlight notorious global corporate failures such as Polly Peck, Maxwell, and multiple banking collapses in Europe. Examples from the United States (e.g., Enron and WorldCom), the United Kingdom (e.g., Marconi), and the Netherlands (e.g., Royal Ahold) further illustrate these governance breakdowns. Other notable collapses include Lehman Brothers, Barings Bank, Merrill Lynch, and locally, the cases of All States Trust Bank and Afribank Nigeria Plc. Nigeria has also experienced its share of corporate failures, including the Cadbury financial scandal and banking fraud cases that led to the dismissal of several bank CEOs. These failures are largely attributable to weak corporate governance structures and poor accounting and risk management practices, as revealed in a joint audit by the Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) in 2010 (SEC, 2015). Despite the statutory requirement of audit committees in Nigerian corporations, Emeka (2017) notes that corporate fraud continues to proliferate, raising concerns about the actual efficacy of these committees. The recurrence of corporate distress and failures suggests that audit committees may not be fulfilling their expected roles in safeguarding shareholder interests or promoting long-term sustainability. This has led to declining investor confidence and questions surrounding the actual performance and accountability of audit committees in listed firms. Several researchers have explored the advantages of sustainability reporting, which include improved operational efficiency, enhanced employee retention, and lower capital costs (Ahmed & Manab, 2016; Al-Shaer & Zaman, 2016; García-Sánchez et al., 2019). The Global Reporting Initiative (GRI) outlines that sustainability disclosures typically span economic, environmental, and social indicators. Despite this, research continues to explore the factors that drive sustainability reporting, particularly in emerging economies where such disclosures are often limited. As Orazalin and Mahmood (2018) argue, developing countries often suffer from significant information asymmetries, which result in limited voluntary disclosures, especially concerning sustainability. This highlights a notable research gap: while the volume of studies on sustainability reporting is substantial, empirical investigations into how audit committee attributes affect sustainability performance—especially in developing economies like Nigeria—remain scarce. This study, therefore, aims to address this gap by examining the influence of audit committee characteristics on the sustainability performance of listed firms in Nigeria. 1.3 Objectives of the Study The main objective of this study is to investigate the influence of audit committee characteristics on the sustainability performance of quoted companies in Nigeria. The specific objectives are to: i. Examine whether the size of the audit committee influences sustainability performance. ii. Investigate whether the level of audit committee engagement affects sustainability performance. iii. Determine whether gender diversity within the audit committee impacts sustainability performance. iv. Evaluate whether audit committee independence influences sustainability performance. 1.4 Research Questions i. Does audit committee size influence sustainability performance? ii. Does audit committee engagement affect sustainability performance? iii. Does audit committee gender diversity impact sustainability performance? iv. Does audit committee independence influence sustainability performance? 1.5 Research Hypotheses Ho₁: Audit committee size has no significant influence on sustainability performance. Ho₂: Audit committee engagement does not significantly affect sustainability performance. Ho₃: Audit committee gender diversity does not significantly impact sustainability performance. Ho₄: Audit committee independence has no significant influence on sustainability performance. 1.6 Significance of the study This study contributes to the emerging studies on sustainability performance by exploring the influence of audit committee characteristics in Nigeria context. Furthermore, the study attempts to provide empirical evidence about the impact of one of the major corporate governance mechanism of firms (audit committee) on performance, financial standard compliance and investors‟ confidence of companies thereby generating interesting literature to the regulators of the financial market, other self-regulatory organizations (SROs), Accounting Bodies, Corporate Affairs Comission (CAC), policy makers and the investing public. In addition, this study tends to help the practitioners to reprioritize the necessity for sustainability processes by providing insights into the roles of the audit committee. In furtherance of achieving global relevance in emerging countries, this study will help the policymakers in adopting sustainability reporting. Also, regulators such as the Cooperate Affairs Commission (CAC), Securities and Exchange Commission (SEC) and Central Bank of Nigeria (CBN) could also find this study useful as the study analyzes the consequences of their series of intervention in the firmss through the mechanisms of corporate governance. Shareholders as owners, who are usually concerned with maximization of their wealth, could also find this study useful because audit committee function will decrease agency cost, improve corporate governance, affect performance and improve shareholders‟ value. Researchers and students would also find this study useful because they are usually interested in understanding how the mechanisms of corporate governance affect corporate operations, activities and performance. The study therefore provides the academic audience a further opportunity to stimulate and trigger thoughts on further research and by extension increase the frontiers of knowledge. 1.1 Scope of the study This study examines audit committee characteristics and sustainability performance in Listed Companies in Nigeria. However, the study is limited to Listed Companies on the floor of Nigerian Stock Exchange (NSE) Market as at 31st December, 2022. The study therefore, covers a period of seven years (5) years (2018-2022). Audit committee in the context of this study was examined through its four basic attributes (committee magnitude, engagement(function or frequency of meetings), gender diversity, independence audit committees‟ function and frequency of meetings). This is to have specific basis for policy and decisions recommendations from the findings. The concept of sustainability performance in this study covers criteria such as firm concentration (FCON), Return on Asset (ROA), Firm Size and Firm Age. 1.8 Definition of terms Corporate Governance: is an all- encompassing concept that seeks to guarantee and institute credible bedrock governance standards, in the creation of wealth, in the light of the primacy that corporations have come to assume in privately- led economies. Audit Committee:An audit committee is a committee of an organizations board of directors which is responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external. Sustainability performance: Sustainable Performance is the harmonization of environmental and financial objectives in the delivery of core business activities to maximize value.Through sustainability reporting, companies communicate their performance and impacts on a wide range of sustainability topics, spanning environmental, social and governance parameters.