CHAPTER ONE

INTRODUCTION

1.1. Background of Study.

The International Auditing and Assurance Standards Board (IAASB) indicated that the recent financial terms have stressed fundamental importance of reliable and high quality financial reporting in all economic sectors of the world. Not least international capital markets, small companies, not-for profit and governmental organizations and it underline the urgent necessity in the public interest, for continuous improvement towards audit quality. 

As one of the key steering committees of the company’s board of directors, the audit committee oversees and controls financial information of firms, internal control systems, risk management systems, and the internal and external audit functions. It also maintains contact with the financial director and the company’s personnel. The audit committee plays a key role in helping the board meets its supervisory responsibilities in areas such as financial information, internal control systems, risk management systems, and internal and external audit functions.

Historically, the concept of audit committee is not new. Audit committee first attracted attention in the late 1930’s when the Securities and Exchange Commission (SEC) and New York stock exchange encouraged their establishments after the McKesson and Robbins case.in recent years there has been a significant increase in the number of corporations that have formed audit committees.

The primary role of the audit committee includes; monitoring the official announcements related to the integrity of the company’s financial statements and reviewing the judgments of important financial reports included, reviewing the internal control and risk management systems of the company, monitor and reviewing the effectiveness of the company’s internal audit function, recommend the board of directors for the appointment of external auditor, request shareholder approval of the general meeting, and approve the terms of the external auditors remuneration and contract. Auditors ensures that the financial information presented complies with the accounting standards. The Audit Committee is an important element of governance and operates under the delegated authority of the board. The audit committee is one of the main steering committees of the company’s board of directors overseeing financial information, monitors accounting policies, supervises external auditors and discusses risk management policies with the administration.

One of the best corporate governance practices that has received the attention of financial policy makers and researchers in recent years in auditing. Auditing is inclusive of management and stake holder’s investments as well as to attract more foreign investments. In order words, it is widely claimed that the monitoring role of audit committee is a key element in corporate governance, which helps to control and monitor managers’ practices. It is also believed that audit committees can improve the quality of financial reporting and decrease audit risk, thereby improving the quality of reported earnings. These claims means that auditing and audit committees play an important role in overseeing and monitoring a company’s management, with the aim of safeguarding the interests and investments of the owners. The role covers wider areas including the monitoring of managers and review of company’s internal control system. Central to the effectiveness of audit committee are audit characteristic such as size of the audit committee, independence of the audit committee meeting and financial expertise or knowledge of audit committee members. It has widely been argued that the quality of such audit committee characteristics helps enhance the effectiveness of audit committee, which in turn has a significant positive impact on the performance of the organization. Following the assumption that audit committee characteristics have significant impact on organizational performance, several studies have been done and continue to be to be done to empirically assess the impact. Despite the significant relationship, while some studies have discovered a positive relationship, others have not. This shows how ambiguous the relationship is, meaning there is still enough room for further research.

Cameroon is a member of both CEMAC (Economic and Monetary Community of Central African) and the OHADA (Organization for the Harmonization of Business Law in Africa, which has authority to issue and approve applicable auditing standards.

In June 2017, the OHADA issued Regulation No. 01/2017/CM/OHADA pratiques Professionelles de la Comptabilite et de l‟Audit dans les pays membres de l‟OHADA to harmonize regional auditing standards with international best practices. The regulation states that effective from January 1, 2018 all audits in member’s states, which includes Cameroon, must be conducted in accordance with ISA (International Standards on Auditing) as issued by the IAASB

Moreover, in the Cameroonian context few of studies have been made to analyze specific audit committee characteristics and the performance of financial institutions. This calls for more investigations to establish clearly the impact of audit committee characteristics on the performance of microfinance institutions in Cameroon. The need to assess the effect of audit committee characteristics such as size of the committee, independence, expertise, and meetings of the committee and gender diversity of audit committee on the performance of microfinance institutions in Cameroon cannot be overemphasized. This is necessitated from the importance of corporate governance and the results of several studies done across the globe on the relationship between audit committee characteristics and organizational performance. The results of such a study would be a useful source of information for national financial policy-makers, executive boards, stakeholders of financial institutions and institutions under study for decision making towards organizational performance. Given this background, it was considered necessary to conduct this study to gather and analyze data to understand and appreciate the audit committee characteristics on the financial performance of microfinance institutions in Cameroon particularly in Bamenda ii. The conduct of top management if not properly monitored can lead managers‟ practices, organizations stand a high risk of losing investments. It is believed that fraudulent financial reporting could be corrected or minimized by employing an effective audit committee This is because it is in the best interests of audit committee activities to exercise influence over the financial resources available to the internal audit function. In addition, it is widely argued that the quality of the audit committee characteristics determines the effectiveness of the audit committee, which in turn positively influence the performance of the organization

This study considers how audit committee characteristics (independent variable) affects the performance of micro finance institutions (dependent variable). Independence of audit committee, size of audit committee, financial expertise of audit committee and gender diversity of audit committee will be used to measure audit committee characteristics whereas profitability and financial performance will be used to measure performance of microfinance institutions within Bamenda ii.

1.2. Statement of the Problem.

The increase in corruption and fraud in financial and non-financial institutions have been a call for concern. These are corporate governance scandals which turn to influence the organizations performance. A critical review of the cases and circumstances surrounding majority of the cases reveals that the situation could have been mitigated if well characterized audit committees were put in place to check on the management’s activities, complementing and strengthening audit effectiveness. The audit committee plays a very important role in an organization. It is worth mentioning that the effects of audit committee characteristics on the performance of an organization cannot be underestimated. Some organizations especially micro finance institutions do not have an audit committee let alone knowing how their characteristics can affect or influence their performance. It is to this effect that the researcher wants to know the effects of audit committee characteristics on the performance on micro finance institutions.

1.3. Research questions.

1.3.1. Main Question.

What is the effect of audit committee characteristics on the performance on microfinance institutions?

1.3.2. Specific questions.

What is the effect of audit committee independence on the performance on microfinance institutions?

What is the effect of audit committee size on the performance on microfinance institutions?

1.4. Objectives of the study.

1.4.1. Main objective

 To evaluate the effects of audit committee characteristics on the performance on microfinance institutions.

1.4.2. Specific objectives.

To examine the effects of audit committee independence on the performance on microfinance institutions.

To determine the effects of audit committee size on the performance on microfinance institutions.