Does Audit Committee Characteristics Promote Risk Management Practices in Nigerian Listed Firms?

Abstract

There has been a huge and deluge of risk threatening industries at an unequalled magnitude in recent times. As such, the board of directors and senior executives are increasingly expected to manage their various organizations' risk portfolios, affecting their financial performance. This has led to the assigning of the risk assessment role to the audit committee. The board of directors and its audit committee play an essential function in Enterprise Risk Management (ERM) by building up the right condition or tone-at-the-top. Given the board's responsibilities for representing the interests of shareholders, it plays a vital role in overseeing management's approach to ERM. This study examined the relationship between audit committee characteristics and risk management of some selected listed firms in a developing country like Nigeria. The study used secondary data to describe the dependent variable (financial risk decomposed into credit risk and liquidity risk) and the explanatory variables (decomposed into audit committee accounting expertise, audit committee meetings, audit committee independence and audit committee gender). The study used pair sample t-test, student t-test, Pearson Moment Correlation and random panel data estimator for twenty (20) selected listed firms for 2012-2016. Findings indicate that there is a negative between audit committee accounting expertise and financial risk. This revealed that Accounting Expertise in Audit Committees are likely to involve in activities and practices to curb financial risk. In addition, the Audit committee meeting indicates a negative relationship with credit risk. Audit committee gender and audit committee independence have a negative effect on liquidity risk. Therefore, this study recommends that Audit committees embrace Enterprise Risk Management (ERM) to manage risks effectively across the organization. Risk management processes should be one of the major points of discussion during audit committee meetings.

Audit committee attributes and Islamic bank risk-taking behavior

“…An independent AC is expected to successfully monitor risk management operations in line with the risk-based approach because doing so benefits the committee, particularly when reviewing the firm’s risk assessment system (Alzharani and Aljaaidi, 2015). Also, independent members of AC can typically help a company to attain a high market value because they have in-depth knowledge about the riskiness of a company (Ojeka et al , 2021).…”

“…Regular meetings and commitments of AC are essential factors for assessing the effectiveness of the committee (Motubatse and Mashele, 2018). During AC meetings, one of the main topics of discussion should be risk management procedures (Ojeka et al , 2021). Hence, studies focusing on AC use the number of meetings held annually as a proxy for its performance (Alzharani and Aljaaidi, 2015).…”

“…Despite most banks around the globe have established standalone RMCs, various studies, such as Bhasin (2013), Barton et al (2014), Sun and Liu (2014), KPMG (2015), Deloitte (2018), Kallamu and Saat (2015), Alzharani and Aljaaidi (2015), Abdullah et al (2017), Nyumutsu (2019), Pérez-Cornejo et al (2019), Tai et al (2020), Nyumutsu (2019), Ojeka et al , 2021) and Nguyen (2022a), among others, acknowledged the contributions of AC in bank risk management. Specifically, Barton et al (2014), Deloitte (2018) and Wong (2020) indicate that there are circumstances in which AC is more capable of constraining banks from excessive risk-taking and detecting related fraudulent activities than RMC.…”

“…First, it contributes to the scant literature showing how AC characteristics influence the risk-taking of Islamic banks. Generally, we found a few studies that examined the relationship between AC attributes and bank risk-taking, such as Sun and Liu (2014), Alzharani and Aljaaidi (2015), Motubatse and Mashele (2018), Nyumutsu (2019), Nguyen (2019), P erez-Cornejo et al (2019, Nguyen (2021) and Ojeka et al (2021). Of these studies, only a study by Nguyen (2021) used a sample of Islamic banks.…”

“…2. Literature review and hypotheses development 2.1 The audit committee's risk oversight role By creating the proper environment or tone at the top, the board of directors and its AC play a crucial role in enterprise risk management (ERM) (Ojeka et al, 2021). Members of AC are required to perform their duties independently from management (Barton et al, 2014).…”