2.1.

1 Corporate Governance

Corporate governance is a complex issue. It has no accepted single definition. The

definition varies based on the framework and cultural situation of the country under

consideration (Armstrong and Sweeney, 2002). Also, the differences in definition can be as a

result of the different viewpoint from the different perspectives of the policy-maker,

researcher, practitioner, or theorist (Solomon, 2010). Corporate governance, as a concept, can

be viewed from at least two perspectives that is narrow view which is concerned with the

structures within a corporate entity where an enterprise receives its basic orientation and

direction and the broad view which is regarded as being the heart of both a market economy

and democratic society (Oyejide & Soyibo, 2001). Olayiwola (2002) emphasizes that the

narrow view perceives corporate governance in terms of issues relating to shareholders

protection management control and the popular principal-agency problems of economic

theory.

Corporate governance can be defined as the process affected by a set of legislative,

regulatory, legal, market mechanisms, listing standards, best practices and efforts of all

corporate participants including auditors and financial advisors which create a system of

checks and balances with the goal of creating, enhancing, and enduring sustainable value

while protecting the interest of external environment. (Zabihollah, 2009). According to the

Cadbury Committee report (1992), corporate governance is perceived as the system by which

companies are directed and controlled.

In an organizational setting, corporate governance is among the key factors that

influence the health of the system and the strength to survive economic shocks. The main

factors that support the ability of any countrys financial system include good corporate

governance, effective marketing discipline, strong prudential regulation and supervision,

accurate and reliable financial reporting systems, a sound disclosure regimes and an

appropriate savings deposit protection system. (Mork, Shleifer and Vishny: 1989).

In the work of Isele and Ugoji (2009), corporate governance is the process by which

managers provide leadership and direction, create enabling climate and link systematized

collaborative efforts to work groups. Managers in this sense must be capable of cultivating

conceptual thinking and setting achievable goals and objectives to be met as well as

prioritizing activities and arriving at appropriate decisions. All these definitions show that

corporate governance has no consensus definition different scholars view it in different ways

but pointing to the same point. Conclusively, the scholars divergent views are just a matter of

saying the same thing in a different way.

2.1.2 Corporate Governance Mechanisms

Corporate governance is a set of mechanisms, both institutional and market based,

designed to mitigate agency problems that arise from the separation of ownership and control

in a company, protect the interest of all stakeholders, improve firm performance, and ensure

that investors get an adequate return on their investment (Shleifer and Vishny, 1997; La Porta

et al, 2000). Corporate governance mechanisms are classified into two namely, internal and

external mechanisms.

2.1.2.1 Internal Control Mechanisms

Corporate governance mechanisms under internal control mechanisms include: board

composition, board size, roles of chief executive officer, CEO status, shareholding

(ownership) concentration and audit committee.

(i) Board Composition
The boards of corporate organizations are among the most venerable instruments of

corporate governance (Zahra & Pearce, 1989). The boards of directors can play an

important role in improving corporate governance and the value of a firm (Hanrahan,

Ramsey & Stampledon 2001). The value of a firm is also improved when the board

performs its fiduciary duties such as monitoring the activities of management and

selecting the staff for a firm. The board can appoint and monitor the performance of

an independent auditor, resolve internal conflicts and decrease the agency cost in a

firm and be held accountable to the shareholders for their decision. The board consists

of two types of directors: outsider (Independent) and insider directors.

A positive relationship is expected between firm value as well as performance

and the proportion of outside directors sitting on the board, unlike inside directors,

outside directors are better able to challenge the CEOs. It is perhaps in recognition of

the outside directors that in UK, a minimum of three outside directors is required on

the board and also in the US, the regulation requires that they constitute at least two

third of the board (Bhagat & Black, 2001) cited in (Adekunle et al, 2014).

(ii) Board Size

The role of a board of directors is to discipline the Chief Executive Officer (CEO) and

the management of a firm so as to improve the value of the firm and thereby enhances

investor confidence. A larger board has a range of expertise to make better decisions

for a firm as the CEO cannot dominate a bigger board because the collective strength

of its members is higher and can resist the irrational decision of a CEO as suggested

by Pfeffer (1972) and Zahra and Pearce (1989). However, Yermack (1996) argues that

larger board tends to be slow in decision making and hence can be an obstacle to

change. He further argued that large board affects the firms value in a negative

fashion as there is an agency cost among the members which may be less in a small
 board. But, result of the study of Kyereboah Coleman (2007) indicates that large

board enhances shareholders wealth more positively than smaller ones.

(iii) Role of Chief Executive Officer

The Chief Executive Officer (CEO) of an organization can play an important role in

creating the value for shareholders. The CEO can follow and incorporate governance

provisions in a firm to improve its value (Brian, 1997; Defond & Hung, 2004). In

addition, the shareholders invest heavily in the firms having higher corporate

governance provisions as these firms create value for them (Morin & Jarrel, 2001).

The decisions of the board about hiring and firing a CEO and their proposed

remunerations have an important bearing on the value of a firm as argued by

Holmstrom and Milgrom (1994). The board usually terminates the services of an

underperforming CEO who fails to create value for shareholders. The high rate of

turnover of CEO is negatively associated with firm performance especially in

developed markets because the shareholders lose confidence in these firms and stop

making more investments. It is the responsibility of the board to determine the salary

of the CEO and the firm by linking the salary of a CEO with the performance of a

firm so as to boost the investor confidence.

(iv) Chief Executive Officer Status

A lot of studies that have examined the separation of office of board chair from that of

CEO generally sought to reduce agency costs for a firm. Kojola (2008) found a

positive and statistically significant relationship between firm value and performance

and separation of board chairman and CEO. Yermack (1996) also found firms are

more valuable when different persons occupy the CEO and board chairman. The

result of the studies show that boards that are structured to be independent of the CEO

are more effective in monitoring corporate financial accounting process and therefore
 more valuable (Klein, 2002). Abor and Biekpe (2005) demonstrate that duality of both

functions constitute a factor that influences the financing decision of the firm.

(v) Shareholding (Ownership) Concentration

This refers to the proportion of a firms shares owned by a given number of the largest

shareholders. A high concentration of shares tends to create more pressure on mangers

to have in ways that are value maximizing. In support of this argument, Gorton and

Schmid (1996) and shleifer and Vishy (1997) suggest that a low level of ownership

concentration will be associated with an increase in firm value, but that goes beyond a

certain level of concentration, the relationship might be negative. Studies like

Renneboag (2000) reported result not totally in agreement with hypothesis/postulate

of a positive relationship between confidence of investors and ownership

concentration.

2.1.2.2 External Control Mechanisms

The basic categories under the external mechanism of corporate governance, though

not perfectly distinct are: the takeover market for control; the legal and regulatory

environment; and product market competition.

(i) Take over market for Control
There is an incentive for outside investors to take over the firm if an already-placed

internal control mechanism fails to maximize the value of a listed firm. By acquiring

control of the firm, an acquirer can improve the operations of the firm and realize a

profit on the increased value of the shares. Changes in the control of firms always

occur at a premium, thereby creating value for the target firms shareholders.

Furthermore, the threat of being acquired also works as an enforced measure for the

management ofa firm to keep the firm in profits. There is a vast literature on the

effects of takeovers and acquisitions as a measure of corporate governance

(Holmstrom & Kaplam, 2001; Sheleifer & Vishny, 1997, 1998).

(ii) Product market completion
 Jensen (1993) suggests that product market competition is at best blunt instrument in

the fight for effective corporate governance. The lack of good corporate governance

creates opportunities for management (or controlling shareholders) to exploit the

resources resulting in poor performance in product markets. The firm should sell its

products at a competitive price to remain on the positive side of the market. Thus,

product market competitive becomes an effective tool of corporate governance.

(iii) Legal and regulatory framework

The laws and regulations of a country that influence the contracting parties and their

actions towards a more transparent and binding transaction are basic pillars of

corporate governance. La Porta et al. (1998, 2000) state that the extent to which a

countrys law protect investors rights and the extent to which those laws are enforced

are the most basic determinants of the ways in which corporate governance evolves in

that country. They find that cross-country differences in ownership structures, capital

market, financial and dividend policies are all related to the degree to which investors

are legally protected from expropriation by managers and controlling shareholders.

For example, their empirical analyses found an inverse relationship between degree of

investor protection and ownership concentration across the world.

While talking about enforcement of laws, countries under German and

Scandinavian laws have stronger measures of enforcement that countries under

German and French laws. Hence, the difference in types of investor protection

(corporate governance codes) and enforcement levels plays an important role in

determining the firm-level governance structure. Better legal protection leads

investors to demand lower expected rates of return, resulting in easier and more

feasible access to external finance for firms (La Portaet al, 1997). There have been

several studies in economic literatures discussing legal systems and their effects on

the firms ability to access external finance (Wurgler, 200; Demirguc-Kunt &
 Maksimovic, 2003; Gul & Qui, 2002). These studies relate country-level investor

protection measures with firm performance, analyzing the impact of investor

protection measures on the availability of external finance for the firm. The

relationship between country-level determinants and firm performance ultimately

affects the economic growth of a country. Hence, the common finding of these studies

is that strong legal protection and enforcement of property rights result in a positive

economic development for a country. La Porta et al, (2002) show that development

and economically strong have better corporate governance mechanisms in place.

Hence, the improvement of general investor protection in a country through reforms,

law and enforcement affects firms in that particular country.

Audit Committee Formation

In Nigeria, SEC, under the provisions of the Companies and Allied Matters Act

(CAMA 1990: Section 359, sub-section 3 & 4), requires all listed companies on the Nigeria

Stock Exchange (NSE) to establish audit committees (SEC, 2003). The wide acceptance of

audit committees suggests their importance as part of corporate accountability and

transparency, where audit committees are expected to serve as the watchdog of stakeholder

interests (Blue Ribbon Committee, 1999). Prior studies have demonstrated a positive

relationship between audit committee formation and earnings quality. Baxter and Cotter

(2009), for example, indicated that earnings quality increased after the year of audit

committee formation. Dechow, Sloan, and Sweeney (1996) showed that firms with audit

committee are less likely to manipulate earnings and are more likely to voluntarily disclose

information (Ho & Wong, 2001). Wild (1996) reported a significant increase in market

response to earnings reports released after audit committee formation. However, other studies

show that the mere establishment of an audit committee does not necessarily mean better

financial reporting quality (Kalbers & Fogarty, 1993; Menon & Williams, 1994). This study

proposes that there is a degree of association between audit committee formation and
improved financial reporting quality and thus, the following hypothesis tests the relationship:

H1: The formation of audit committees is significantly associated with improved financial

reporting quality.

Audit Committee Independence

Independence of audit committees helps to ensure that management is transparent and will be

held accountable to stakeholders (Treadway Commission, 1987; Cadbury Committee, 1992;

Blue Ribbon Committee, 1999). It is expected that independent audit committee members

will be more objective and less likely to overlook possible deficiencies in the

misappropriation and manipulation of financial reporting. Abott et al. (2004) found evidence

to support this interpretation within the context of financial reporting misstatements. After the

passage of SOX in 2002, audit services and to set procedures for handling complaints related

to accounting and auditing issues. Klein (2002) posited that independence of audit

committees increases with board size and board independence. Beasley, Carcello,

Hermanson, and Neal (2000) found that audit committee independence is significantly related

to financial reporting quality, since financial statement fraud is more likely to happen in firms

with less audit committee independence. However, other studies found different results. Lin,

Li, and Yang (2006) reported no evidence of a relationship between audit committees having

independent members and earnings restatements. Xie, Davidson, and DaDalt (2003) also

found no evidence of a significant relationship between the level of discretionary accruals

and an independent audit committee. This led to the second hypothesis as follows:
H2: The independence of audit committee is significantly associated with financial reporting

quality.

Audit Committee Expertise

Defond, Hann, and Hu (2005) investigated how markets react to the appointment of an audit

committee member with a different level of accounting and financial expertise and found a

positive market reaction to appointing accounting and financial expert. Carcello,

Hollingsworth, Klein, and Neal (2006) studied the association between financial expertise
and earnings management proxy by abnormal accruals and found that accounting and

financial experts are consistently associated with less earnings management. Dhaliwal,

Naiker, and Navissi (2010) found a positive relationship between accounting and financial

expertise in audit committees and financial reporting quality.

Audit committees that have financial expertise have greater interaction with their internal

auditors (Raghunandan, Read & Rama, 2001) and are less likely to witness internal control

problems (Krishnan, 2005). They are more likely to understand external auditors and support

the auditors in conflict situations with management (Dezoort & Salterio, 2001). Davidson,

Xie, and Xu (2004) investigated the impact of financial expertise of audit committees on

stock returns at the time of appointment of audit committee members and found a positive

stock price reaction when new members have accounting or financial expertise. On the other

hand, Yang and Krishnan (2005) and Lin et al. (2006) failed to find any significant

association between financial expertise and financial reporting quality measured as the level

of earnings management. In this connection, the following hypothesis has been developed:
Another important factor and believe is that the audit committee comprises expertise well-

versed in the understanding and operation of the task entrusted to them so that its easier to

identified error and communicate with external auditors. This could avoid any form of doubts

arising from the parties concerned regarding the sincerity in the perpetual preparation and

submission of such reports. Audit committee expertise is important in order to deal

effectively with external auditors; it is because audit committee often act as the mediator

between the management and auditors (Hashim and Abdul Rahman, 2011). Abbott and Parker

(2004) findings showed there is relationship existing between financial reporting restatement

and fraud. The chances of terminating an auditor who issued a going-concerned report should

be reduced, especially in the existence of audit committee with better governance and

financial expertise (Carcello and Neal, 2003). Hence the hypothesis to be tested is:
H3: The expertise of audit committee members is significantly associated with financial

reporting quality. There is a positive relationship between audit committee expertise and audit

report lag.

Audit Committee meeting

The number of audit committee meetings is an indicator of audit committee effectiveness.

Financial statement users perceive fewer meetings as an indicator of less commitment and

insufficient time to oversee the financial reporting process. Xie et al. (2003) showed that

increased audit committee activity as proxies by the number of committee meetings is

associated with reduced levels of earnings management. Bryan, Liv, and Tiras (2004) posited

that audit committees that meet regularly improve the transparency and openness of reported

earnings and therefore improve earnings quality. Audit committees members who meet

regularly are often expected to be able to perform monitoring tasks more effectively than

otherwise. Zhang, J. Zhou, and N. Zhou (2007) used the number of meetings to measure

whether the frequency influences financial reporting quality and found a positive correlation.
However, empirical evidence on the impact of frequency of audit committee meeting on

financial reporting quality differs. Vafes (2005) found a negative relationship between the

number of meetings and earnings management. Bedard, Chtourou, and Courtteau (2004) and

Lin et al. (2006) did not find any positive association between frequency of audit committee

meetings and financial reporting quality. Based on the foregoing literature, this study tests the

following hypothesis:
H4: The Frequency of meeting of audit committees is significantly associated with financial

reporting quality.
The audit committee meetings is obviously concerned as the right platform for directors to

discuss the financial reporting process of monitoring financial reporting matters (Mohamad-

Nor et al. 2010). However, the frequencies of meetings may reflect the activeness of audit

committee is assessing internal control and it may also respond to the emergence of problems
(Krishnan, 2005). Audit committee must carry out actively effectively through an increased

frequency of meeting in order to maintain its control functions (Bedard et al. 2004).
Mohamad-Nor et al., (2010) have investigated the relation between an audit committee that

meets at least quadruple a year and audit report lag. It seems obvious that audit committee

meeting is the right platform to ensure that all principles and rules are adhered to in the

carrying out of all financial commitments by the respective organizations. The more often

they meet to find out the course effect of the present time lag the better it could be (at least

quadruple times in a year as dictated in the Bursa Malaysia Corporate Governance Guide

2009). This leads to the next hypothesis, which is;

: There is a positive relationship between audit committee meetings and audit report lag.
Audit Committee Size
Previous researches have investigated the role of the size of audit committees as an effective

mechanism for monitoring and controlling financial reporting. Yermack (1996) found that a

small board size enhance firm value. Jensen (1993) asserted that having a small number of

board members improves the efficiency of audit committee monitoring and control.

Goodstein, Gautam, and Boeker (1994) posited that large board size is associated with delays

and administrative bottlenecks.

However, other studies suggested that smaller boards may be less encumbered with

bureaucratic problems. Anderson, Mansi and Reeb (2004) stated that large boards can devote

more time and resources to monitor the financial reporting process and the internal control

systems. This implies that an increase in audit committee size enables members to distribute

the workload and commit more time and resources to monitor management and detect

fraudulent behaviour. The mixed results from these studies led to the formulation of the

following hypothesis:
: The size of audit committees is significantly associated with financial reporting quality.
The number of audit committee members has been well spelt out by Bursa Malaysia to

appoint among the directors and must be not less than three members. It has been pointed out

by Mohamad-Nor et al. (2009), the size should be optimal enough to work efficiently so that

eventual result will be a genuine report highlighting all the important components and
produce the report on time. On the other hand, Bedard and Gendron (2010) had opinioned

that the size and composition of the audit committee did not matter much. Saleh et al. (2007)

had also occurred with much a view that the size does matter to have significant effet on the

monitoring of earning management. Therefore, the next hypothesis:

: There is a negative relationship between audit committee size and audit report lag.

Board Independence
With reference to board independence, Yaacob and Che-Ahmad (2010) in their studies had

found a positive relationship leading to delay in auditing with a p-value of 0.030, meaning

presence of independent management requires higher quality of financial statements and a

good quality audit. This study appears to agree with Afify (2009) who come out with very

close relationship between ARL and independence of the board in Egypt. The fifth hypothesis

is thus:
: There is a negative relationship between board independence and audit report lag:
Ownership Concentration
Ashton et al. (1987) and Bamber et al. (1993) advocated that companies tend to experience

longer audit report lag if the level of manager ownership is greater due to the less pressures

being impose to external auditors and they might already have access to the required

information. However, Gilling (1977) found a negative relationship and reported that too

much of pressures being imposed on external auditors to complete the report in a very short

duration in order to obtain information on time.

Ishak et al. (2010) found that the ownership of a companys share is more closely and tightly

held by a few internal shareholders relative compared to the shares held by outside

shareholders. Since higher acceptable audit risk allows the auditor to reduce the extent and

amount of work performed before completing the audit, such companies therefore are

expected to experience relatively shorter audit delays. Based on the previous discussion, the

following seventh hypothesis is proposed.