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Effect of Audit Committee Financial Literacy on Financial Reporting Quality of Listed Companies in Nigeria

Abstract

Audit committee financial literacy is an important corporate governance attribute because it influences the ability of audit committee members to understand financial statements, evaluate accounting policies, assess financial reporting risks, and effectively oversee the preparation and disclosure of corporate financial information. Audit committee financial literacy refers to the knowledge and understanding of accounting, auditing, financial reporting, financial analysis, risk management, and related financial matters possessed by members of an audit committee. Financial reporting quality refers to the extent to which financial reports provide relevant, reliable, accurate, complete, comparable, timely, and faithfully represented information to users. In Nigeria, listed companies operate within an increasingly complex financial and regulatory environment characterized by sophisticated business transactions, economic uncertainty, technological developments, and growing investor demand for credible corporate information. These developments have increased the need for audit committees whose members possess sufficient financial knowledge to critically evaluate management's accounting judgments, review financial statements, monitor internal controls, and engage effectively with internal and external auditors. Regulatory institutions such as the Financial Reporting Council of Nigeria (FRCN), the Securities and Exchange Commission (SEC), and the Nigerian Exchange Group (NGX) emphasize sound corporate governance, effective audit oversight, and credible financial reporting among listed companies. Despite these requirements, concerns regarding earnings management, financial misstatements, inadequate disclosures, weak internal controls, and non-compliance with financial reporting standards continue to affect the credibility of corporate reports. Although previous studies have examined audit committee characteristics and financial reporting quality, empirical evidence regarding the effect of audit committee financial literacy on financial reporting quality of listed companies in Nigeria remains limited and inconclusive. Against this background, this study investigates the effect of audit committee financial literacy on financial reporting quality of listed companies in Nigeria. The study is anchored on Agency Theory, Resource Dependence Theory, and Stewardship Theory. Agency Theory suggests that financially literate audit committee members can effectively monitor management and reduce information asymmetry, managerial opportunism, and earnings manipulation. Resource Dependence Theory explains that financial literacy provides audit committee members with valuable knowledge and expertise required to perform effective oversight and evaluate complex financial reporting issues. Stewardship Theory emphasizes the role of competent governance structures in promoting responsible management, accountability, transparency, and reliable financial reporting. Collectively, these theoretical perspectives provide a comprehensive framework for explaining the relationship between audit committee financial literacy and financial reporting 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, accountants, financial controllers, internal auditors, external auditors, company secretaries, compliance officers, and other professionals involved in financial reporting and corporate governance 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 financial literacy will be measured using members' understanding of financial statements, accounting knowledge, auditing knowledge, financial analysis skills, knowledge of financial reporting standards, risk assessment knowledge, budgeting and financial management knowledge, and professional financial qualifications, while financial reporting quality will be measured using reporting accuracy, relevance, faithful representation, comparability, timeliness, completeness, reliability, compliance with International Financial Reporting Standards (IFRS), and the extent of earnings management. Primary data collected from respondents will be analyzed using descriptive statistics to summarize respondents' demographic characteristics and perceptions regarding audit committee financial literacy and financial reporting quality. Structural Equation Modeling (SEM) will be employed to examine the effect of audit committee financial literacy on financial reporting 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 financial literacy will have a significant positive effect on the financial reporting quality of listed companies in Nigeria. Financially literate audit committee members are expected to possess greater capacity to understand complex financial statements, identify unusual accounting treatments, evaluate significant accounting estimates, assess financial reporting risks, and challenge management when necessary. Their financial knowledge is also expected to strengthen oversight of internal controls, improve communication with external auditors, enhance compliance with IFRS, and reduce opportunities for earnings management and financial misstatements. Furthermore, financially literate audit committees are expected to improve the effectiveness of audit oversight, strengthen corporate accountability, enhance investor confidence, and promote greater transparency in corporate financial reporting. Conversely, inadequate financial literacy among audit committee members may limit their ability to critically evaluate financial information, understand audit findings, identify reporting irregularities, and effectively monitor management's financial reporting activities. Consequently, stronger audit committee financial literacy is expected to contribute significantly to improving the reliability, credibility, transparency, and overall quality of financial reports prepared by listed companies in Nigeria. This study is expected to make significant theoretical and empirical contributions to the literature on auditing, corporate governance, accounting, and financial reporting by providing comprehensive evidence on the relationship between audit committee financial literacy and financial reporting quality of listed companies in Nigeria. Unlike previous studies that broadly examined audit committee characteristics such as independence, size, meeting frequency, or general expertise, this research specifically evaluates financial literacy as a determinant of financial reporting 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), listed companies, audit committees, audit firms, professional accounting bodies, investors, policymakers, regulators, and academic researchers regarding the importance of financial literacy within audit committees. The study will also provide evidence-based recommendations for strengthening audit committee appointment criteria, improving financial literacy requirements, promoting continuous professional development, enhancing accounting and auditing training, strengthening regulatory oversight, and ensuring effective audit committee monitoring of financial reporting processes among listed companies in Nigeria.

Keywords: Audit committee financial literacy, financial reporting quality, listed companies, corporate governance, accounting knowledge, financial expertise, audit oversight, earnings management, Structural Equation Modeling (SEM), Nigeria.