UNIVERSITY OF GHANA COLLEGE OF HUMANITIES AUDIT COMMITTEE CHARACTERISTICS AND FIRM PERFORMANCE: THE MEDIATING EFFECT OF FINANCIAL REPORTING QUALITY BY FAVOUR AMARACHI UWAKWE THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON, IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL ACCOUNTING DEGREE DEPARTMENT OF ACCOUNTING AUGUST, 2023 University of Ghana http://ugspace.ug.edu.gh 2 UNIVERSITY OF GHANA COLLEGE OF HUMANITIES AUDIT COMMITTEE CHARACTERISTICS AND FIRM PERFORMANCE: THE MEDIATING EFFECT OF FINANCIAL REPORTING QUALITY BY FAVOUR AMARACHI UWAKWE (10805832) THIS THESIS IS SUBMITTED TO THE UNIVERSITY OF GHANA, LEGON, IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF MPHIL ACCOUNTING DEGREE DEPARTMENT OF ACCOUNTING AUGUST, 2023 University of Ghana http://ugspace.ug.edu.gh i DECLARATION I hereby declare that; this study is my original work and that it has not been submitted for an award in the University of Ghana or any other tertiary institution. I bear sole responsibility for any shortcomings. 01/11/2023 ……………………………. …………………… UWAKWE FAVOUR AMARACHI DATE (10805832) University of Ghana http://ugspace.ug.edu.gh ii CERTIFICATION This is to certify that this thesis has been supervised with the laid down principles of the University. ………………………………… ………01/11/2023..………………. DR. TEDDY OSSEI KWAKYE DATE (Supervisor) …………………………………. ………….01/11/2023…………….. DR. RITA AMOAH BEKOE DATE (Co-Supervisor) University of Ghana http://ugspace.ug.edu.gh iii ACKNOWLEDGMENT My profound gratitude goes to my supervisors, Dr. Teddy O. Kwakye, and Dr. Rita A. Bekoe, for their constant support and contribution to make this thesis a top notch one. I say God bless you. I also want to acknowledge Dr. Eric Boachie Yiadom for his contribution and guidance. Also, to my colleagues who were always there to assist me throughout my thesis. I say a big thank you. University of Ghana http://ugspace.ug.edu.gh iv DEDICATION This work is dedicated to God Almighty for his love towards me. Also, to my loving husband Dr. Eric Boachie Yiadom, and my beautiful girls, Sikapa Afriyie Boachie-Yiadom, and Akyedeepa Kwatemaah Boachie-Yiadom for being supportive throughout this journey. God bless you. University of Ghana http://ugspace.ug.edu.gh v ABSTRACT The study investigates the mediating effect of financial reporting quality on the relationship between audit committee characteristics and firm performance, using empirical evidence from listed firms in Ghana. This research uses data from the 37 listed firms in Ghana, for the period 2007-2019. The study adopts the system-GMM estimation techniques. The results of the study revealed that all audit committee (AC) characteristics positively and significantly influence firm performance. However, in relation to financial reporting quality, all AC characteristics employed except for AC independence, and legal expertise showed a significant and positive relationship. The result also revealed that financial reporting quality (FRQ) mediated only the relationships that met all the conditions of Baron and Kenny's (1986) mediation analysis between AC characteristics and firm performance. These include the relationship between AC size, financial expertise, industry expertise, gender diversity, and firm performance. Thus, the study recommends that in developing policies toward the characteristics of audit committees, emphasis should be placed on strengthening weak ones such as AC independence, which forms one of the primary requirements for an effective audit committee (AC). University of Ghana http://ugspace.ug.edu.gh vi TABLE OF CONTENTS DECLARATION ........................................................................................................................ i CERTIFICATION ..................................................................................................................... ii ACKNOWLEDGMENT ........................................................................................................... iii DEDICATION .......................................................................................................................... iv ABSTRACT ...............................................................................................................................v TABLE OF CONTENTS .......................................................................................................... vi LIST OF TABLES .................................................................................................................... xi LIST OF FIGURES ................................................................................................................. xii LIST OF ABBREVIATIONS.................................................................................................. xiii CHAPTER ONE .........................................................................................................................1 INTRODUCTION ......................................................................................................................1 1.1 Background of the Study ........................................................................................2 1.2 Statement of the Research Problem .........................................................................6 1.3 Objectives of the Study ......................................................................................... 10 University of Ghana http://ugspace.ug.edu.gh vii 1.4 Research Questions............................................................................................... 10 1.5 Significance of the Study ...................................................................................... 10 1.6 Organization of the Study ..................................................................................... 12 1.7 Chapter Summary ................................................................................................. 13 CHAPTER TWO ...................................................................................................................... 14 LITERATURE REVIEW .......................................................................................................... 14 2.1 Chapter Introduction ............................................................................................. 15 2.2 Concept of Audit Committee ................................................................................ 15 2.3 Role of the Audit Committee ................................................................................ 16 2.4 Characteristics of the Audit Committee................................................................. 18 2.4.1 Audit Committee Independence ............................................................................ 18 2.4.2 Audit Committee Size ........................................................................................... 19 2.4.3 Audit Committee Financial Expertise ................................................................... 20 2.4.4 Audit Committee Industry Expertise ..................................................................... 20 2.4.5 Audit Committee Legal Expertise ......................................................................... 21 2.4.6 Audit Committee Gender Diversity ....................................................................... 22 2.5 Theoretical Review ............................................................................................... 22 2.5.1 Agency Theory ..................................................................................................... 22 2.5.2 Resource Dependency Theory .............................................................................. 24 2.6 Firm Performance ................................................................................................. 25 2.7 Financial Reporting Quality .................................................................................. 27 2.8 Conceptual Framework ......................................................................................... 28 2.9 Empirical Literature Review and Hypotheses Development (AC characteristics, financial reporting quality, and firm performance) ................................................ 29 2.9.1 AC Independence and Firm Performance .............................................................. 30 2.9.2 AC Size and Firm Performance............................................................................. 31 2.9.2 AC Financial Expertise and Firm Performance ..................................................... 32 University of Ghana http://ugspace.ug.edu.gh viii 2.9.3 AC Industry Expertise and Firm Performance ....................................................... 33 2.9.4 AC Legal Expertise and Firm Performance ........................................................... 35 2.9.5 AC Gender Diversity and Firm Performance......................................................... 36 2.10 AC Characteristics and Financial Reporting Quality ............................................. 38 2.10.1 AC Independence and Financial Reporting Quality ............................................... 38 2.10.2 AC Size and Financial Reporting Quality ............................................................. 39 2.10.3 AC Financial Expertise and Financial Reporting Quality ...................................... 41 2.10.4 AC Industry Expertise and Financial Reporting Quality ........................................ 42 2.10.5 AC Legal Expertise and Financial Reporting Quality ............................................ 43 2.10.6 AC Gender Diversity and Financial Reporting Quality ......................................... 45 2.11 The Mediating Effect of Financial Reporting Quality and Firm Performance ........ 45 2.12 Control Variable ................................................................................................... 46 2.13 Chapter Summary ................................................................................................. 47 CHAPTER THREE ................................................................................................................... 49 RESEARCH METHODOLOGY............................................................................................... 49 3.1 Chapter Introduction ............................................................................................. 50 3.2 Research Paradigm ............................................................................................... 50 3.3 Research Design ................................................................................................... 51 3.4 Sample Size and Sources of Data .......................................................................... 51 3.5 Data Analysis and Empirical Model ...................................................................... 51 3.6 Variable Measurement .......................................................................................... 52 3.6.1 Firm Performance ................................................................................................. 52 3.6.2 Financial Reporting Quality .................................................................................. 53 3.6.3 Independent Variables .......................................................................................... 54 3.6.4 Control Variable ................................................................................................... 55 3.7 Testing the Mediation ........................................................................................... 55 University of Ghana http://ugspace.ug.edu.gh ix 3.8 Chapter Summary ................................................................................................. 56 CHAPTER FOUR ..................................................................................................................... 57 RESULTS AND DISCUSSIONS OF FINDINGS ..................................................................... 57 4.1 Introduction .......................................................................................................... 58 4.2 Descriptive analysis .............................................................................................. 58 4.3 Correlation Analysis ............................................................................................. 61 4.4 Regression Results and Hypothesis Testing .......................................................... 64 4.4.1 AC Characteristics and Firm Performance ............................................................ 64 4.4.2 AC Characteristics and Financial Reporting Quality ............................................. 70 4.4.3 Financial Reporting Quality and Firm Performance .............................................. 76 4.5 Mediating Effect of FRQ on the AC Characteristics and Firm Performance .......... 78 4.5.1 Audit Committee Independence ............................................................................ 81 4.5.2 Audit Committee Size ........................................................................................... 81 4.5.3 Audit Committee Financial Expertise ................................................................... 82 4.5.4 Audit Committee Industry Expertise ..................................................................... 83 4.5.5 Audit Committee Legal Expertise ........................................................................... 84 4.5.6 Audit Committee Gender Diversity ....................................................................... 85 4.6 Chapter Summary .................................................................................................... 85 CHAPTER FIVE ...................................................................................................................... 86 SUMMARY OF FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS ...................... 86 5.1 Introduction .......................................................................................................... 88 5.2 Summary of Findings ........................................................................................... 88 5.3 Conclusion ........................................................................................................... 89 5.4 Implications and Recommendations ...................................................................... 90 5.5 Contribution of the Research ................................................................................ 91 University of Ghana http://ugspace.ug.edu.gh x 5.6 Limitation of the Study ......................................................................................... 93 5.7 Recommendations for Future Research ................................................................. 94 REFERENCE ..................................................................................................................... 94 University of Ghana http://ugspace.ug.edu.gh xi LIST OF TABLES Table 4.1: Descriptive Statistics………………………………………………………………….59 Table 4.2: Matrix of correlations…………………………………………………………………63 Table 4.3: AC Characteristics and Firm Performance……………………………………………64 Table 4.4: AC Characteristics and Financial Reporting Quality………………………………….71 Table 4.5: Financial Reporting Quality (DA) and Firm Performance…………………………….76 Table 4.6: AC Characteristics, Financial Reporting Quality, and Firm Performance…………….78 Table 4.7 Indirect Effect and Total effect for all Hypothesized Paths…………………………….80 University of Ghana http://ugspace.ug.edu.gh xii LIST OF FIGURES Figure 1: Conceptual Framework – Mediating Role of FR in the AC-Firm Performance nexus….29 University of Ghana http://ugspace.ug.edu.gh xiii LIST OF ABBREVIATIONS FRC Financial Reporting Council GSE Ghana Stock Exchange AC Audit Committee FRQ Financial Reporting Quality FP Firm Performance GMM Generalised Method of Moment BRC Blue Ribbon Committee SOX Sarbenes Oxley Act GAAP Generally Accepted Accounting Principles ROA Return on Asset ROE Return on Equity ROCE Return on Capital Employed EM Earnings Management DA Discretionary Accruals University of Ghana http://ugspace.ug.edu.gh 1 CHAPTER ONE INTRODUCTION University of Ghana http://ugspace.ug.edu.gh 2 CHAPTER ONE INTRODUCTION 1.1 Background of the Study Firm performance has an implication on an organization’s health and ultimately its survival (Ibrahim & Ombaba, 2019). Investors and stakeholders globally communicates that a company's performance is one of the first things they analyze to inform their engagement with the firm (Zabri et al., 2016). According to Bartoli and Blatrix (2015), corporate governance, research and development, assessment and control, efficiency, effectiveness, and comprehensive quality management, could be used to improve performance. Corporate governance is essential in the running of many organizations, and this practice helps ensure the overall performance of a firm (Ghazali, 2010). Within corporate governance, the audit committee (AC) is regarded as one of the crucial and influential participants in corporate governance (Mangena & Pike, 2005). Turley and Zaman (2014) assert that in recent times, there has been a greater emphasis on audit committees as one of the corporate governance regulations. This is a result of major corporate collapses, business failures, and new or updated legislation (Zraiq & Fadzil, 2018). Codes of best practices, legal legislation, industrial requirements, and stock exchange market requirements are designed to guide firms’ implementation of audit committees (Blue Ribbon Committee, 1999). The Audit Committee comprises experts with varied backgrounds, as it assists the board of directors in discharging its responsibilities in overseeing corporate management (Li, Mangena & Pike, 2012). The audit committee performs numerous roles within the organization, among which are formulating and supervising the financial reporting processes, determining, and strengthening University of Ghana http://ugspace.ug.edu.gh 3 internal controls, financial report assessments, formulating and testing risk management controls, and promoting quality audit processes (Aldamen et al., 2012; Klein, 2002). The audit committee can enhance the quality of financial reporting (FRQ) to improve firm performance (Contessotto & Moroney, 2014; Zabri et al., 2016). This promotes overall stakeholders' confidence (Herdjiono & Sari, 2017). Bagais and Aljaaidi (2020) asserted that audit committees assist in establishing the distinctness of internal audit departments and ensuring that internal auditors have adequate influence within a company to properly fulfill the goals of their audits. The internal audit functions are carefully organized by an audit committee, with suitable weight given to engaging employees who have the required skills and experiences. Additionally, one of the essential roles of the AC is to oversee the firm’s financial reporting process and review of financial statements (Aldamen et al., 2012). This oversight duty of AC is important because the market participants often use the financial statements as a tool to evaluate firm performance (Cornett, Marcus & Tehranian, 2008). Decisions are based on the information disclosed in financial statements (Van der Raadt et al., 2010). Hence, to ensure reliability, the audit committee is set up as a monitoring mechanism to oversee the entire process of disclosure and financial reporting (Contessotto & Moroney, 2014). The committee's effectiveness depends on its specific attributes, rather than just its existence, as noted by (Al-Matari, 2014). Similarly, several characteristics of an audit committee have been suggested as indicators of how well it fulfills its role in enhancing a company's performance (Aldamen, et al., 2012; Zraiq & Fadzil, 2018; Al-Matari, 2014). These suggested attributes encompass elements like independence, diversity, expertise, tenure, meeting frequency, and committee size, among others. The qualities of the audit committees play a vital role in upholding University of Ghana http://ugspace.ug.edu.gh 4 the quality of various tools and processes aimed at boosting a firm's performance, as emphasized by (Cornett, Marcus & Tehranian, 2008). Furthermore, Omar and Khaled (2020) have documented that the AC characteristics in relation to firm performance relationships is not limited to straight linear model. This underscores the importance of conducting additional research to thoroughly investigate the impact of audit committees and financial reporting quality on firm performance (Koutoupis & Bekiaris, 2019). Consequently, these findings emphasize the necessity of delving into the mediating role of financial reporting in the relationship between audit committee characteristics and firm performance, especially within companies listed on the Ghana Stock Exchange. According to Robins and Greenland (1992), a mediator is a variable that is part of a causal sequence between two variables. Financial reporting quality is an ideal mediator between audit committee characteristics and firm performance due to the fact general stakeholders often use financial statements as a tool for evaluating the performance of a firm (Sukmono & Yadiati, 2016: Islam, Slof & Albitar, 2023). Hence, manipulation of these financial statements information will result in declining quality of financial reporting information. This is because it reduces the usefulness of information for forecasting future profit and cash flow (Sukmono & Yadiati, 2016). Financial reporting quality is one of the corporate processes AC oversees (Jonas & Blanchet, 2000). The characteristics they possess help in ensuring good oversight over these processes. That is, companies who report quality financial information are associated with subsequent higher firm performance (Garcia-Lara et al., 2010; Ahmed & Duellmand, 2011; Bushman & Smith, 2001). This shows that financial reporting quality is an intervening variable mediating AC characteristics University of Ghana http://ugspace.ug.edu.gh 5 and firm performance. The mediation effect suggests that the AC is expected to enhance FRQ, which subsequently, enhances firm performance (FP). University of Ghana http://ugspace.ug.edu.gh 6 1.2 Statement of the Research Problem The prior empirical literature on the audit committee and its characteristics have been discussed using various dependent variables. This includes the studies of (Omar & Khaled, 2020; Sidiq & Krismiaji, 2019; Amer, Ragab & Shehata, 2014; Ugbede, Lizam & Kaseri 2013; Zraiq & Fadzil, 2018) on firm performance; (Liao & Hsu, 2013) on executives’ networks; (Kibiya, Ahmad & Amran, 2016; Madawaki & Amran, 2013) on financial reporting quality; (Ali, Besar & Mastuki, 2017; Yatim, 2009) on risk management; (He, Pittman, Rui, & Wu, 2017; Inaam & Khamoussi, 2016) on audit quality; and (Mohd & Wan, 2004) on the choice of external auditors amongst others. Studies such as Omar and Khaled (2020) and Sidiq and Krismiaji (2019) argue that the relationship between AC characteristics and firm performance goes beyond a direct linear model. Hence, there is an empirical call to include either a mediating or a moderating variable in explaining the relationship between AC characteristics and firm performance (Omar & Khaled, 2020; Sidiq & Krismiaji, 2019). This study seeks to answer this empirical call by introducing financial reporting quality as a mediating variable in explaining the relationship between AC characteristics and firm performance. The relationship between audit committee characteristics and firm performance is complex (Omar & Khaled, 2020). Audit committees are responsible for providing oversight and ensuring the integrity and quality of financial reporting within a company. The characteristics of an audit committee can have both direct and indirect effects (Garcia-Lara et al., 2010) on a firm's performance. One of the primary ways in which audit committee characteristics can influence firm performance is through their impact on financial reporting quality. Characteristics such as independence, expertise, and experience of committee members, can enhance the accuracy, transparency, and reliability of financial statements. High-quality financial reporting is crucial for University of Ghana http://ugspace.ug.edu.gh 7 investor confidence and trust, which can positively affect a firm's stock price and access to capital (Zraiq & Fadzil, 2018). Thus, as a way of projecting quality financial reporting, managers may engage in earnings management (Louis, 2004). Financial reporting quality (FRQ) as the mediating factor in this study is negatively linked to earnings management (EM), which is considered the opposite of FRQ (Dechow & Dichev, 2002). Earning management is regarded as a tool managers use in achieving short-term objectives and or presenting the company's financial performance in a favorable light. Also, manager engages earning management to meet or exceed market expectations (Louis, 2004). Thus, as companies that consistently meet or beat earnings estimates may experience positive stock price reactions and attract more investors. However, in the long run, manipulative companies face negative consequences as the market penalizes them, resulting in lower overall corporate performance (Rangan, 1998). Earnings Quality (EQ) is one of the most employed proxies of FRQ in research. Louis (2004) also finds a positive relationship between EQ and future profitability, similarly to the findings of Rangan (1998). They asserted that over time, unethical earnings manipulation leads to reduced profitability and corporate performance. Jo and Kim (2007) analyzed the connection between information disclosure, earnings management (EM), and subsequent performance. They found out, that higher levels of earnings management are linked to lower disclosure quality and lower future performance. When companies provide more comprehensive and transparent information in their financial statements, the tendency to engage in earnings management decreases (Tu, 2012). The research of Gunny (2005) found out that the impact of EQ on future performance is examined by analyzing the economic consequences of various types of real earnings management. He also noted that EQ affects future metrics like University of Ghana http://ugspace.ug.edu.gh 8 tobin Q, return on assets, operating performance, and cash flows. Thus, companies with better- quality of financial information are associated with subsequent higher firm performance. This is also supported by the findings of Cornett, Marcus, and Tehranian (2008) as they asserted that financial reporting quality in the form of financial statements is frequently utilized by market participants and other stakeholders to assess a company's performance. Financial reporting quality as the mediating variable in this study is one of the corporate processes AC oversees (Ugbede, Lizam & Kaseri 2013). Thus, the characteristics of the audit committee, such as independence and expertise, can directly impact the committee's ability to provide effective oversight of the financial reporting process. For example, an independent audit committee is more likely to scrutinize financial statements rigorously, hence an enhanced financial reporting quality (Alqatamin, 2018; Koutoupis & Bekiaris, 2019). Independent audit committees are better positioned to prevent management from engaging in earnings management practices or financial misrepresentation (Al-Matari, Al-Swidi, & Fadzil, 2012). Similarly, audit committees with industry expertise can better understand industry-specific accounting issues and ensure their accurate representation in financial reports (Cohen et., 2008). These characteristics possessed by the AC, would ensure high financial reporting quality, in turn, leads to improved firm performance (Alqatamin, 2018). Thus, enhanced trust placed on the financial reporting process by the audit committee can attract more investment, lower the cost of capital, and lead to improved firm performance (Madawaki, 2013), in terms of higher stock prices, lower financing costs, and stronger overall financial results (Ghafran & O'Sullivan, 2013). However, despite the presence of audit committee, corporate scandals and firm failure still exist. A notable example in Ghana is that of UT Bank and the defunct savings and loans. Hence, the University of Ghana http://ugspace.ug.edu.gh 9 mere existence of an audit committee does not necessarily mitigate manipulation by management. This has created doubt as to the integrity of the financial statement and questioned the independence of AC (Kibiya, Ahmad & Amran, 2016). Consequently, in recent times concern and emphasis have gone beyond just the formation of audit committees, but on their effectiveness in the form of the characteristics they possess (Ghafran & O'Sullivan, 2013). Therefore, the audit committee must possess certain characteristics to be effective in their overall duties (Madawaki, 2013). The search for mechanisms to ensure reliable, quality, and credible control of a firm activity is often centered on audit committee characteristics (Zraiq & Fadzil, 2018). Prior empirical studies that have examined AC characteristics employed the primary characteristics. These characteristics include AC independence, size, meeting frequency, and financial expertise (Ashari & Krismiaji, 2020; Badhabi & Ku Ismail, 2017; Amer, Ragab & Shehata, 2014; Ugbede, Lizam & Kaseri 2013; Hassan & Ahmed, 2012). The study of Ashari and Krismiaji (2020) calls for empirical studies in line with other characteristics the audit committees possess. In extension to the primary characteristics, the current study employs the AC industry expertise, legal expertise, and gender diversity. This has been added to the characteristics audit committees should possess, as evidenced by the Ghana Corporate Governance Rules (2020). Finally, consistent with Alzeban and Gwilliam's (2014) observation, it was noted that in developing countries ACs are current, and they operate within cultural and hierarchical frameworks. These are different from the developed countries with different traditions and a more formalized governance. This gives more room for further research to be done in developing economies like Africa, specifically in Ghana. Few studies which have been done in developing University of Ghana http://ugspace.ug.edu.gh 10 economies includes, Mrwan, Aiman, and Shehata (2014) using Egypt, Omar and Khaled (2020) using Saudi Arabia; Rateb (2018) using Jordan; and Sidiq and Krismiaji (2019) using Indonesia. 1.3 Objectives of the Study The primary objective of this study is to examine mediating effect of financial reporting quality on the relationship between AC characteristics and firm performances in Ghana, using empirical evidence from listed firms in Ghana. 1.4 Research Questions To find a solution to the research problems, this study seeks to answer the question of how financial reporting quality mediates the relationship between AC characteristics and firm perform of listed companies in Ghana. Specifically, this study has considered the following questions: i. Do the audit committee characteristics influence the firm performance of the listed firms in Ghana? ii. Do the audit committee characteristics influence the financial reporting quality of the listed firms in Ghana? iii. Does FRQ affect the firm performance of the listed firms in Ghana? iv. Does FRQ mediate the relationship between the AC characteristics and the firm performance of the listed companies in Ghana? 1.5 Significance of the Study There is much evidence on the impact of AC characteristics on firm performance around the globe. For example, some studies that examined the relationship between AC characteristics and firm University of Ghana http://ugspace.ug.edu.gh 11 performance (e.g., Bagais, & Aljaaidi, 2020; Ashari, & Krismiaji, 2020; Koutoupis & Bekiaris, 2019), AC characteristics and FRQ (e.g., Madawaki, 2012; Madawaki & Amran, 2013; Kusnadi, Leong, Suwardy & Jiwei, 2015), and FRQ on firm performance (e.g., Sohail & Aziz, 2019). However, there is limited evidence from the prior literature empirically examining the mediating role of financial reporting quality on the relationship between the AC characteristics and the firm performance of the listed firms in Ghana. Consequently, this study introduced FRQ to mediate the relationship between AC characteristics and firm performance. Thus, to the best of the researchers' knowledge, this study is the first of its kind to investigate the mediating impact of financial reporting quality on the connection between audit committee characteristics and a firm's Tobin's Q. Consequently, conducting a mediation analysis will offer a more comprehensive understanding of how the influence of the audit committee affects financial reporting quality and, subsequently, how this quality affects a firm's profitability. The anticipated findings of this study are expected to have significant implications for various stakeholders, including regulators, practitioners, professionals, and company boards responsible for enhancing corporate governance within organizations. This is particularly important in reducing the likelihood of management engaging in accounting irregularities. The study's results will also benefit professionals like corporate executives and board chairpersons of publicly traded companies by providing insights into the crucial roles played by audit committee characteristics. This understanding can encourage them to take necessary steps to ensure the effective composition of their audit committees, thereby enhancing various aspects of a firm's operations, including financial reporting quality, and ultimately contributing to the firm's overall value. University of Ghana http://ugspace.ug.edu.gh 12 Furthermore, the study can offer valuable insights to policymakers, aiding their comprehension of the essential attributes that audit committees should possess. This knowledge can be used in the development of future policies aimed at safeguarding the interests of shareholders and meeting the needs of other key stakeholders in the corporate governance. Lastly, the results of this study will also provide regulators with a deeper understanding of the potential mediating role that financial reporting quality can play in augmenting the effectiveness of audit committees and improving the financial reporting process, consequently contributing to overall firm performance. By conducting a mediation analysis, we aim to shed light on whether financial reporting quality complements audit committee attributes in enhancing firm performance, which could either result in full or partial mediation. The insights gained from this research are expected to address existing gaps in the field of corporate governance and serve as a valuable reference for future researchers examining these variables, both within and beyond the context of Ghana. 1.6 Organization of the Study The study is organized into five chapters as outlined below. In chapter one, the research problem is introduced, and the underlying motivation for the study is presented. The chapter sets the stage for the research objectives and provides an overview of what the study aims to address. Chapter two delves into the theoretical and conceptual framework of the study. It also offers an extensive review of empirical literature related to audit committee characteristics, financial reporting quality, and firm performance. The chapter covers essential concepts and issues necessary for a comprehensive understanding of these subject, and finally a proposed conceptual framework is outlined, and key findings from the literature review are summarized. Chapter three provides details on the methodology employed in the study. It includes information on the population, University of Ghana http://ugspace.ug.edu.gh 13 sampling techniques, data collection methods, empirical models used for analysis, and the techniques applied to interpret the results. The study's results are discussed and analyzed. Key findings and their implications are presented in chapter four of the study. Chapter five serves as a summary of the entire study, offering a concise recap of the key findings. It also provides recommendations based on these findings and draws conclusions based on the research outcomes. Additionally, this chapter highlights the significant contributions of the study, discusses its limitations, and suggests potential directions for future research. 1.7 Chapter Summary This chapter presented an introduction to the thesis. In doing so, it provided a background to the thesis, identified the problem, stated the research questions and objectives, and explained the significance of the thesis. It also presented the scope and structure of the thesis. University of Ghana http://ugspace.ug.edu.gh 14 CHAPTER TWO LITERATURE REVIEW CHAPTER TWO LITERATURE REVIEW University of Ghana http://ugspace.ug.edu.gh 15 2.1 Chapter Introduction Audit committees, financial reporting quality, and firm performance have widely been discussed both in the theoretical and empirical literature. This chapter in establishing a conceptual framework for the study would review topical highlights in the literature. The theoretical review focuses on the definition of concepts and critical exploration of theories relating to audit committees and their characteristics, financial reporting quality, and firm performance. 2.2 Concept of Audit Committee Corporate boards are required to establish various sub-committees to ensure the effectiveness of their operations. These committees typically include the audit committee, appointment and nomination committee, executive committees, and compensation committees, among others, as deemed necessary to fulfill specific corporate obligations. However, this study specifically focuses on the audit committee (AC) within the corporate board. The audit committee is widely recognized as a crucial component of corporate governance mechanisms, as emphasized in prior studies (Brennan & Kirwan, 2015; Arens, Elder & Mark, 2012). Bedard et al. (2004) propose that the audit committee functions as a representative body of the corporate board, entrusted with the responsibility of safeguarding and advancing the economic interests of the shareholders. The effectiveness of their role is contingent on the presence of qualified and dedicated independent members within the committee. In practice, the audit committee is expected to predominantly consist of independent non-executive directors. Marx (2009) observes that this composition of the audit committee makes them more effective in reviewing or supervising the executive directors in the preparation and reporting of financial statements. University of Ghana http://ugspace.ug.edu.gh 16 Audit Committees are widely recognized as a valuable component of corporate governance (Brennan & Kirwan, 2015; US Securities and Exchange Commission, 2003; UK Financial Reporting Council, 2006).These committees play a crucial role in assisting the board of directors in fulfilling their corporate governance and oversight responsibilities, particularly regarding the preparation and presentation of financial statements and the management of risks and adherence to established internal control systems. The audit committee is often viewed as the linchpin of a reliable and trustworthy financial reporting system. In accordance with the guidelines outlined by the US Securities and Exchange Commission (2003), the committee's primary function is to offer advice and recommendations to the board of directors within the framework of its terms of reference or charter. This advisory role enhances the credibility and integrity of the internal control and financial reporting systems while bolstering trust in a company's financial reporting (Alzeban & Sawan, 2015). Additionally, audit committees are responsible for overseeing internal controls, managing risks, and providing an authoritative platform for resolving any disagreements or disputes among various stakeholders. 2.3 Role of the Audit Committee The audit committee plays a wide range of roles, which are significant for the success of an organization. AC helps to minimize the extent of the perceived information asymmetry; hence, it mitigates managers' hidden agenda (Jensen & Meckling, 1976). The audit committee (AC) plays a crucial role in addressing concerns related to information asymmetry (McMullen, 1996). Additionally, it serves to protect the interests of the company's primary stakeholders, as emphasized by (McDaniel et al., 2002), by improving the transparency and disclosures made in audit reports (Barako et al., 2006). University of Ghana http://ugspace.ug.edu.gh 17 More so, AC facilitates the setting up of the internal audit departments within the organization. This is in the form of employing personnel who are suitably professional, knowledgeable, and capable. According to Bagais and Aljaaidi (2020), the AC also determines how appropriate risk assessment procedures are, as well as how often and how broad audits should be conducted, considering the type of firm involved, its size, and the complexity of its operations. The audit committee (AC) is responsible for evaluating the internal auditor's work and monitoring how management responds to the findings and recommendations presented by the internal auditor (Alzeban & Sawan, 2015). In addition, one of the audit committee's roles is to monitor the firm's financial performance and financial reporting. The audit committee is likely to have a substantial impact on auditor selection, dismissal, remuneration, audit substance and scope, auditor independence, and conflict resolution between auditors and executive management in this environment (Carcello & Neal, 2000). AC ensures compliance with corporate legal and ethical requirements, as well as the maintenance of preventive fraud controls, in addition to monitoring the accuracy of the company's accounting procedures (Turley & Zaman, 2004). The Financial Reporting Council (FRC, 2015) claims that AC safeguards the interests of investors and other stakeholders through its independent supervision function of the yearly financial reporting process. The AC's responsibility is to examine and keep track of how management has responded to the findings and suggestions of the internal audit function as they work toward achieving their stated goals (Alzeban & Sawan, 2015). Above all, the AC works as a corporate governance mechanism since it examines the financial data of the company and helps the internal audit function and financial accountants with their work. University of Ghana http://ugspace.ug.edu.gh 18 2.4 Characteristics of the Audit Committee There are several proposed characteristics that audit committees should possess to be effective and efficient in their oversight duties. The following are some of the suggested characteristics, amongst others including diversity, independence, expertise, and size of the AC (Alqatamin, 2018; Madawaki, 2013). 2.4.1 Audit Committee Independence The independence of an audit committee (AC) is typically determined by the presence of a larger proportion of non-executive directors within the committee. Global regulations, such as the Sarbanes-Oxley Act of 2002 (SOX Act), often require a significant number of AC members to be independent directors. The Ghanaian Code on Corporate Governance (2020) reinforces this by recommending that firms listed on the Ghana Stock Exchange maintain an AC with a minimum of three members. This requirement aligns with the guidance provided by the Blue-Ribbon Committee (1999) and the Financial Reporting Council (2015). However, in the interest of independence, a company's chairperson may be a member of the AC but cannot hold the position of the AC's chairperson ( Nekhili et al., 2016; Akhigbe & Martin, 2006). The Cadbury Report (1992) further emphasizes that, to foster independence, AC positions should be occupied by non- executive directors. Non-executive directors are considered suitable for these roles because they are less directly influenced and can make decisions based on their impartial judgment. The independence of the audit committee is crucial for effective oversight of the company's financial reporting process, encompassing the integrity of financial statements, the efficiency of internal controls, and the supervision of both internal and external auditors. The performance of ACs is often influenced by the degree to which they are connected to company management. In other words, higher performance is typically achieved when AC members are free University of Ghana http://ugspace.ug.edu.gh 19 from any dependence on management and do not have personal or financial ties to company management, a characteristic commonly associated with affiliated directors. 2.4.2 Audit Committee Size Appiah and Amon (2017) define the AC size as the number of directors on the audit sub-committee of a corporate board. This is the potential manpower available for the function of the audit committee. The Sarbanes-Oxley Act (2002) and Ghana Corporate Governance code (2020) suggested that listed firms should set up an AC with at least three members consisting of non- executive directors. There have been several debates among studies, as to either having a large or small board. According to Jensen (2001), having a smaller audit committee increases the effectiveness of audit committee oversight and control. Similar to this, Lipton and Lorsch (2002) stated that big audit committees allow for raucous behavior, which weakens the committee's monitoring role. Large audit committee sizes are linked to delays and administrative bottlenecks (Goodstein, Gautam & Boeker, 2004). Goodstein et al. (2004) further report that smaller audit committee sizes can reduce the delay in decision-making resulting from bureaucratic procedures. Large audit committees, however, can devote more time and resources to monitoring the financial reporting process and internal control systems, according to Anderson and Orsagh (2004). Simply, put a large audit committee enables its members to divide the responsibility and dedicate more time and resources to managing the committee and identifying fraud. Similar to this, larger audit committees can devote more time and effort to monitoring management, according to Monks and Minow (2011). For efficient supervision, organizations need larger audit committees (Adams & Mehran, 2002). According to Kalbers and Fogarty (1993), a sizable AC can enhance the performance of the committee and increase its influence inside the organization. Larger size, University of Ghana http://ugspace.ug.edu.gh 20 however, may have detrimental effects on the board's efficacy and, as a result, the firm's performance (Switzer & Tang, 2009; Guo & Kumara, 2012). 2.4.3 Audit Committee Financial Expertise An AC financial expert is someone who understands GAAP and financial reporting and can assess the overall implementation of those principles in terms of accounting estimates, accruals, and revenue (Sarbanes Oxley Act, 2002). He or she should also have experience performing audits and assessments of financial reports with a wide range of complexity in accounting difficulties, as well as a general understanding of internal accounting controls; and an understanding of the audit AC functions (Trautman, 2013). The Ghana Corporate Governance code (2020) recommends that at least one member of the audit committee must have either academic or industrial experience background in accounting or finance. This view is supported by the Higgs Report (2003) as well. Higgs Report (2003) suggests that experience in audit, finance, and accounting improves the technical ability of the AC in performing their responsibilities. AC members who have financial expertise, that is experience or knowledge in either accounting, finance, and or auditing have greater interaction with their internal auditors (Ghafran & O'Sullivan, 2013) and minimize the tendency of setting up weak internal control systems (Krishnan, 2005). According to the United Kingdom Corporate Governance Code (2012), the board and its committees should have the appropriate balance of skills, experience, independence, and company knowledge to enable them to discharge their respective duties and responsibilities effectively. 2.4.4 Audit Committee Industry Expertise The industry experts of the audit committee are those members who have broad business knowledge relevant to the company’s business as stipulated by the Ghana codes of Corporate Governance (2020). More so, these are members who are knowledgeable in the operations and University of Ghana http://ugspace.ug.edu.gh 21 conditions affecting the business of a firm. Additionally, an AC that involves industry experts will have a greater understanding of the dynamics of the industry and will be able to interact more efficiently with the auditor (Cohen et al., 2014). However, the audit committee's industry expertise shows that AC members have had comparable experiences with management. It has been argued by Badolato, Donelson, and Ege (2014), that having only accounting/ financial experts on the AC is not sufficient enough to ensure the quality of the various corporate activities. Countering the findings of Badolata et al. (2014), Cohen et al. (2014) argued that the status of AC might not be an issue; rather, AC members with accounting and industrial expertise. 2.4.5 Audit Committee Legal Expertise AC legal experts are the directors with industrial or academic skills in legal matters among the members of the committee. Krishnan, Wen, and Zhao (2011) argue that members of the AC with legal backgrounds are stronger on legal issues. This helps the committee to be careful with legal risks that may emanate from any misappropriation in a firm’s activity. They further propose that firms could engage non-executive directors with legal backgrounds to mitigate legal risk. Although legal or litigation risk is a concern for all directors on the board, members with specialized legal knowledge will be particularly burdened and look out for possible breaches. Furthermore, Krishnan et al. (2011) posit that audit committee members with legal expertise can meticulously scan internal control systems to identify the possible threat that may lead to liabilities arising from financial figures misstatements. Companies may engage lawyer-directors to deal with complex legal issues such as patents, mergers, and acquisitions, rather than directly improving the quality of financial statements. Such University of Ghana http://ugspace.ug.edu.gh 22 directors on the AC may not be offering formal legal counsel like a company lawyer, but such members can indirectly help to limit liabilities, legal risk, and misstatement (Krishnan et al., 2011). 2.4.6 Audit Committee Gender Diversity Incorporated board diversity is examined from several angles, including experience, gender, nationality, and skill set (Solimene, Coluccia, & Fontana, 2017; Pletzer et al., 2017). Gender diversity is emphasized in this study. The gender diversity of the AC is measured by how many female directors (both inside and outside) are present. Due to different information, abilities, experiences, ideas, and behaviors, diversity on the board has positive effects (Solimene et al., 2017). According to Pletzer et al. (2015), a higher percentage of women on corporate boards may benefit the company in terms of fresh, strategic advantages and desirable leadership characteristics being introduced into the boardroom. However, findings from the study of Milliken and Martins (1996) advised caution because diversity is a double-edged sword in and of itself. That is, it has the potential to help the boards and its sub-committees' aims, while also causing undesired results such as boardroom conflicts. Srinidhi et al. (2011) argued that women are more independent in decision-making, less tolerant of unethical behavior, and take a lower risk as compared to men. These are a few arguments in favor of women being on any sub-committee such as the audit committee (AC). 2.5 Theoretical Review In this chapter, the study examines the theories that form the basis of the study. 2.5.1 Agency Theory Agency theory has been extensively applied in various aspects of corporate governance research, as seen in the works of Davis, Schoorman, and Donaldson (1997) and Dedman (2004). Berle and University of Ghana http://ugspace.ug.edu.gh 23 Means (1932) asserted that the interests of management and directors differ from those of the firm's owners. Similarly, Jensen and Meckling (1976) proposed that firms should be structured to minimize agency costs. Dellaportas et al. (2012) noted that managers and owners consistently have different objectives, which can manifest in various ways, indicating an inherent conflict of interests. The differences in the quantity and nature of information available to managers and shareholders complicate the agency problem (Jensen & Meckling, 1976; Dellaportas et al., 2012). As a result, managers are often more deeply involved in business operations for longer periods than shareholders, leading to information asymmetry (Aboody & Lev, 2000). This information gap can lead to managers prioritizing their goals over shareholders' wealth maximization interests, resulting in agency costs. Increased agency costs necessitate monitoring mechanisms to ensure that managers adhere to their contractual obligations (Huang, 2006). According to agency theory, these monitoring systems should align with the objectives of both management and owners to prevent conflicts of interest and opportunistic behaviour by managers (Jensen & Meckling, 1976). Various governance mechanisms can be employed to align the interests of owners and management, including both internal and external devices, such as boards of directors, ownership concentration, and external auditors (Fama & Jensen, 1983). The establishment of an independent audit committee (AC) comprised of directors with specific qualifications like independence, expertise, and experience is one approach to curbing self-serving behavior by agents (Wiseman et al., 2012). According to agency theory, the AC should possess certain attributes that enable its members to function effectively and oversee various aspects of a firm, including the internal control process, financial reporting, and risk management. Additionally, audit committee members University of Ghana http://ugspace.ug.edu.gh 24 with expertise in areas like finance, industry, and law can better comprehend financial misrepresentation and the potential legal costs resulting from such misrepresentation. Furthermore, diversity within the audit committee, such as the inclusion of female directors, is viewed as beneficial. This diversity brings about a broader range of knowledge, skills, experiences, ideas, and behaviors (Solimene et al., 2017). Therefore, it is expected that companies with stronger audit committees will provide higher-quality monitoring for the benefit of stakeholders and investors (McDaniel, Martin & Maines, 2002). 2.5.2 Resource Dependency Theory The study of Pfeffer and Salancik (1978) laid the foundation for the resource dependency theory, which asserts that organizations are interlinked with external resources. According to their perspective, these external resources have a significant influence on an organization's behavior. In the context of this theory, organizations heavily rely on resources, which are a crucial element of their power. These external resources, such as labor, materials, and capital, are vital to an organization's functioning. The resource dependency theory posits that the board of directors can assist organizations in reducing their dependence on external resources or in securing these resources. Therefore, companies employ boards of directors to connect with significant external entities with which they have relationships (Pfeffer, 1972). Cohen et al. (2007) emphasize the role of governance mechanisms as tools to help organizations achieve their strategic objectives. According to Hillman, Cannella, and Paetzold (2000), stakeholders may rely on the competence of the board, including members of the audit committee, to oversee the actions of managers and the organization's pursuit of its goals. Furthermore, the resource dependency theory acknowledges that the role of directors, including members of the University of Ghana http://ugspace.ug.edu.gh 25 audit committee, extends beyond minimizing uncertainty. They bring valuable expertise in various strategic areas, such as the financial reporting process, the audit process, and the internal audit process. 2.6 Firm Performance Companies' performance is subject to evaluation by investors worldwide before engaging with a firm (Bozec, Dia, & Bozec, 2010). The process of assessing the efficiency and effectiveness of a firm's actions constitutes its performance (Bartoli & Blatrix, 2015). According to Bititci, Carrie, and McDevitt (1997), firm performance involves managing organizational performance to align with corporate, functional, and strategic goals. The company's financial statements serve as a tool for appraising firm performance. Consequently, a high-performing company will commend management for providing high-quality disclosures (Herly & Sisnuhadi, 2011). Corporate governance significantly influences a firm's performance by safeguarding it against potential financial challenges and fostering substantial growth (Al-Matari et al., 2014). Hence, corporate governance is vital for enhancing firm performance. Performance measurement show crucial data that empowers management to monitor a firm's performance, identify bottlenecks, and implement measures to optimize resources (Waggoner, Neely & Kennerley, 1999). Firm performance is often gauged using either accounting-based or market-based metrics. Previous studies employing Tobin's Q as a proxy for firm performance include (Mousa et al., 2012; Saibaba, 2013; Sami et al., 2011; Zeitun & Gang Tian, 2007). Other studies have used metrics such as Return on Assets (ROA) (Obiyo & Lenee, 2011; Rouf, 2011; Swamy, 2011) and Return on Equity (ROE) (Muritala, 2012; Moh'd & Obeidat, 2013). University of Ghana http://ugspace.ug.edu.gh 26 In this study, Tobin's Q was chosen as the performance metric of focus. The selection of Tobin's Q over other possible performance measures is based on several reasons. Tobin's Q is a widely recognized and accepted financial performance metric in the context of corporate finance. It is employed to assess the relationship between a firm's market value (market capitalization) and the replacement cost of its assets (Mousa et al., 2012). It serves as a traditional measure of projected long-term business performance (Bozec, Dia, & Bozec, 2010). Tobin's Q as a financial metric offers a comprehensive perspective on a firm's performance by considering both the market's valuation of the company and the tangible value of its assets (Sami et al., 2011). More also, as stated by Zeitun and Gang Tian (2007), Tobin's Q mirrors the market's perception of a company's prospects. It encompasses not only historical financial data but also market sentiment and expectations, which are crucial for comprehending a firm's financial health and outlook. Saibaba (2013) highlighted that since audit committees primarily focus on financial oversight and accuracy, Tobin's Q is directly relevant in achieving it. It reflects how effectively the firm manages its assets and generates returns for shareholders. Furthermore, Tobin's Q enables meaningful comparisons among companies and industries, making it a useful tool for benchmarking and evaluating a firm's performance in relation to its peers (Bozec, Dia, & Bozec, 2010). Finally, a high Q ratio indicates that a firm has effectively leveraged its investments to create a company with a market value exceeding its book value, and vice versa (Kapopoulos & Lazaretou, 2007). Finally, this metric can reveal firm's potential for future growth, which may result from factors unrelated to managerial decisions, such as the company's level of profitability (Shan & McIver, 2011; Demsetz & Villalonga, 2001). University of Ghana http://ugspace.ug.edu.gh 27 2.7 Financial Reporting Quality Financial reporting is one of the most essential accounting system products that aims to offer users the necessary information about the company's profitability and performance, to make informed decisions (Mohammadi, 2014). The accuracy of reported information is one aspect of financial reporting quality that helps to better describe a company's operations. In line with the Accounting Standards Board's (ASB) proposal, the ultimate goal of financial reporting quality is to keep informed shareholders and potential stakeholders, so they may make informed decisions and evaluate the firm's predicted performance. Rajgopa and Venkatachalam (2011) suggested that an improved FRQ is the reduction of problems related to information asymmetry caused by agency conflict. According to Jonas and Blanchet (2000), financial reporting quality is not only a finished output; its quality is determined by various components. This includes the company's transactions, the choice of applied accounting principles, and knowledge of the judgments made. Thus, the audit committee oversees and supervises, to ensure the overall quality of each process. Choi and Pae (2011) asserted that though companies are mandated to publish financial statements guided by accepted accounting principles, quality may vary from company to company. That is, FRQ is the faithfulness of the information conveyed by the financial reporting process However, the difference in the quality of financial statements may be a result of managers’ manipulations to show a certain level of a firm’s performance. However, leading academics including Gao and Zhang (2015) argue that most earnings management practices are always to the benefit of shareholders. Furthermore, this study employs earnings management as a proxy for financial reporting quality. "Earnings management occurs when managers use judgment in financial reporting and in University of Ghana http://ugspace.ug.edu.gh 28 structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers" (Healy & Wahlen, 1999 p. 368). Managers may engage in earnings management activities because they have the freedom to make accounting or operational decisions, and to conceal confidential information from financial statement users. Furthermore, according to Sun and Rath (2008), managers express judgment for concealing actual performance to gain from contractual conditions or influence regulatory judgments. 2.8 Conceptual Framework The present study’s framework is grounded on previous empirical studies (Rahman, Meah & Chaudhory, 2019; Al-Matari, Al-Swidi, & Fadzil, 2012; Badhabi, & Ku Ismail, 2017; Soliman & Ragab, 2014). Based on the literature we demonstrate the interrelationship among the various constructs of the study as depicted in Figure 1. In Figure 1, the study first identifies the AC characteristics that are found to impact the performance of a firm. These characteristics include independence, size, financial expertise, industry expertise, legal expertise, and gender diversity. In a similar vein, the framework shows how AC characteristics influence financial reporting quality, and how financial reporting quality affects firm performance. In addition, the framework controls for each relationship. This current study is different from the existing literature by advancing that the effect of one of AC oversight duties which is financial reporting quality is a mediating factor that mediates the relationship between AC characteristics and firm performance. Accordingly, when the financial reporting process is overseen and monitored effectively by the AC, it reduces the opportunity for individuals (managers) to engage in fraudulent acts and earnings management. This may show an University of Ghana http://ugspace.ug.edu.gh 29 b cꞌ c Firm Performance enhanced level of performance in a firm. We support our argument with a conceptual framework depicting the mediating role of financial reporting quality in the relationship between AC characteristics and firm performance. The conceptual framework is shown in Figure 1. Figure 1: Conceptual Framework – Mediating Role of FRQ in the AC-Firm Performance nexus (Source: Author’s construction) 2.9 Empirical Literature Review and Hypotheses Development (AC characteristics, financial reporting quality, and firm performance) Several studies have been written in line with the impacts of AC and its characteristics on firm performance. Existing evidence suggests that AC can affect firm performance. (e,g., Koutoupis & Bekiaris , 2019; Aldamen et al., 2012, Al-Mantari, 2013). a AC characteristics Financial Reporting Quality University of Ghana http://ugspace.ug.edu.gh 30 2.9.1 AC Independence and Firm Performance The influence of Audit Committee (AC) independence on firm performance has been the subject of investigation in several prior studies (e.g., Alqatamin, 2018; Koutoupis & Bekiaris, 2019; Aanu, Odianonsen, & Foyeke, 2014; Al-Matari, Al-Swidi, & Fadzil 2012). For instance, in the study conducted by Alqatamin (2018), AC independence and its impact on firm performance were examined. The study analyzed panel data from 165 listed firms over three years and used Return on Assets (ROA) as a proxy for firm performance. The analysis was conducted using panel regression, and the results indicated a positive and significant relationship between AC independence and firm performance. This finding aligns with previous research, such as the study by Aanu, Odianonsen, and Foyeke (2014), which also reported that AC independence enhances firm performance. Aanu et al. (2014) studied 25 manufacturing companies in Nigeria over the period 2004-2011. They used three proxies for firm performance (ROA, ROE, ROCE) and employed both panel data analysis and Pearson Moment correlation. In contrast, Koutoupis and Bekiaris (2019) found a negative relationship between AC independence and Return on Assets (ROA), which serves as a proxy for firm performance. Their study used panel data from a mixed sample of 30 companies over the years 2008 to 2012 in Italy and Greece. Consequently, existing studies have suggested that there is insufficient evidence to conclusively support a significant positive impact of higher AC independence on corporate performance (Xie et al., 2018; Zabri et al., 2016; Bhagat & Black, 2002). Moreover, Mohammed et al. (2019) reported that AC independence and the presence of an AC improve firm performance in the Iraqi context. However, Fuzi et al. (2016) conducted an extensive literature review and found mixed results regarding the relationship between independence and University of Ghana http://ugspace.ug.edu.gh 31 performance. These empirical findings suggest that higher AC independence is associated with improved financial reporting quality and, subsequently, better firm performance. H1a: There is a relationship between AC independence and firm performance of listed firms in Ghana. 2.9.2 AC Size and Firm Performance Most global practices in good corporate governance require that a minimum number of three non- executive directors should serve on the audit committee (Smith Report, 2003; Cadbury Report, 1992). Previous literature has reported that AC size is a determinant of their effectiveness (Herdjiono & Sari, 2017). However, the results from earlier studies reveal inconclusive debates on AC size, as to whether to maintain a small or large size. According to the resource dependency theory, large AC size is regarded as highly resourceful as they possess diverse skills, expertise, and experience. Yasser and Al Mamun (2016) and Al-Matari (2013) investigated the relationship between audit committee size and their performance. They recommend that if the size of the AC is large, it will enable the committee workload to be shared which improves efficiency and effectiveness. On the other hand, as compared with small size AC, that may lack diversity of skills and knowledge, and hence becomes ineffective However, its high number may be a double-edged sword, where members may tend to lose focus and be less participative of any activity. Furthermore, Wu, Habib, and Weil (2012) suggested in favor of a small audit committee size. They believe having a smaller AC size may be less encumbered with bureaucratic problems. Thus, helps them possess greater control of corporate processes to ensure quality. More so, it is argued that audit committees that have larger sizes are characterized by delays in decision-making (Raghunandan & Rama, 2007). In a similar vein, smaller AC sizes may be effective in impacting University of Ghana http://ugspace.ug.edu.gh 32 firm performance because they may be more focused on addressing any financial issues challenged by a company (Yah, 2006). Relevant to the resource dependency theory, the effectiveness of an audit committee increases as the size of the committee increases. Hence, making them competently capable of reducing the likelihood of fraud, lowering company risk, and increasing available resources (Al-Ghamdi, 2012). This is necessary for improved firm performance as more resources would be available to address the issues faced by the company. Aldamen et al. (2012) and Yasser and Al Mamun (2016) demonstrated through empirical research that there is a positive and significant relationship between AC size and firm performance. H1b: There is a relationship between AC size and firm performance of listed firms in Ghana. 2.9.2 AC Financial Expertise and Firm Performance Extant research has shown the positive impacts of accounting and finance competence on firm performance (e.g. Amer, Ragab & Shehata, 2014; Aldamen et al., 2012; Ashari & Krismiaji, 2020). Aldamen et al. (2012) indicated that an audit committee composed of directors with prior executive experience or financial knowledge is positively associated with company performance. Hamid and Aziz (2012) suggested that there is a positive and significant impact on company performance when the audit committee has directors with accounting and financial backgrounds, after investigating the sample of government-linked companies in Malaysia for 2005-2010. In addition, Ashari and Krismiaji (2020) investigated the effect of audit committee characteristics on a company’s performance. Characteristics of the audit committee used include independence, size, competence (ACCO), and frequency of meetings on the financial performance (PERF) of manufacturing firms listed on the Indonesian Stock Exchange for the years 2016 and 2017. PERF University of Ghana http://ugspace.ug.edu.gh 33 was measured and proxy with the return on assets (ROA); ACCO was measured using the percentage of audit committee members who have accounting and finance educational background. This study used a sample of 466 observations of publicly listed companies on the Indonesian Stock Exchange. The study found that the audit committee's financial expertise positively affects the company's performance. Alqatamin (2018) also sought to investigate the effect of audit committee characteristics on the company’s performance. The sample consists of 165 non- financial companies listed on the Amman Stock Exchange (ASE) over the period 2014- 2016. However, results revealed an insignificant association between audit committee financial expertise and firm performance. H1c: There is a relationship between AC financial expertise and firm performance of listed firms in Ghana. 2.9.3 AC Industry Expertise and Firm Performance During the financial crisis of 2008-2009, the significance of directors' industry experience became a central point of discussion in corporate governance. Directors with industry knowledge are better equipped to comprehend a company's operations and financial conditions, analyze relevant information, and provide more effective monitoring (Wang et al., 2015). Bedard and Gendron (2010) highlighted that industry expertise can enhance the monitoring capabilities of Audit Committee (AC) members, enabling them to oversee the firm's financial reporting process more effectively. This is particularly beneficial for internal audit functions and addressing industry- related risks. Cohen, Hoitash, Krishnamoorthy, and Wright (2014) observed that financial statements often involve numerous estimates, and industry expertise can assist the AC in understanding and evaluating industry-specific estimates. For instance, warranty obligations are University of Ghana http://ugspace.ug.edu.gh 34 closely tied to industry and product specifications, making industry expertise crucial for ensuring the accuracy of warranty estimates. Furthermore, an AC that includes industry experts can better grasp the dynamics of the industry and communicate more efficiently with auditors (Cohen et al., 2014). However, the presence of industry expertise on the audit committee implies that AC members share similar experiences with management. This could lead to directors being more empathetic to the challenges managers face, potentially resulting in weaker monitoring and more adverse behavior by managers. In a similar vein, prior experience in a firm's industry may reduce the effective separation between directors and management, as they may have common connections from within the industry, share the same professional circles due to industry events, or have crossed paths in their careers (Wang et al., 2015). Leventis and Weetman (2004) propose that having an industry expert on the audit committee can assist the committee in effectively analyzing the disclosure timing behavior of competitors and staying updated on accounting methods and techniques recently adopted by industry peers. According to the Resource Dependence Theory, AC members with valuable non-accounting expertise, such as industry and business knowledge, can enhance AC effectiveness. Accordingly, Badolato, Donelson, and Ege (2014) argue that preventing earnings management requires more than just having an accounting or financial expert on the AC; it necessitates a combination of financial expertise and the high status of AC members. In line with this perspective, Hayes (2014) suggests that a lower status has made ACs less efficient and more susceptible to misreporting. Cohen et al. (2014) support these findings, adding that status may not be the primary concern; University of Ghana http://ugspace.ug.edu.gh 35 instead, AC members with accounting and industry expertise tend to outperform those with only accounting expertise. H1d: There is a relationship between AC industry expertise and firm performance of listed firms in Ghana. 2.9.4 AC Legal Expertise and Firm Performance Guided by the resource dependence theory, Cohen et al. (2008) asserted that AC members with valuable non-accounting expertise such as legal expertise could also contribute toward AC effectiveness. The performance of a firm is threatened when there is weak risk management. The audit committee is charged with overseeing the process of risk management to promote company performance. Thus, an AC with legal directors would ensure effectiveness in that process (risk management). This is because of their sensitivity to litigation risk that may arise as a result of misleading financial statements (Krishnan et al., 2011). These legal directors on the AC understand legal liability and are more alert. As a result of their natural focus and attention to legal risk, more emphasis is placed on internal controls and compliance (Langevoort, 2007). Furthermore, the financial statement forms an integral tool used to evaluate a firm before any engagement with it. It is thus argued that to ensure advanced firm performance, AC with legal experts helps deal with specific legal issues affecting the financial statement e.g., issues relating to patents, mergers, and acquisitions (Krishnan et., 2011). Additionally, AC members with legal directors ensure greater compliance with laws and regulatory policies. All this puts the firm in the good standing books, which is a good indicator of a well-performing firm. However, based on the director’s profile, most of the AC legal directors do not have accounting backgrounds, which may impair their effectiveness in overseeing the audit process and financial reporting process. University of Ghana http://ugspace.ug.edu.gh 36 Similarly, they are likely to fail in solving disputes that may arise between managers and auditors in dealing with audit-related and financial issues. In line with the AC legal expertise, Krishnan et al. (2011) found out that the inclusion of legal experts on the audit committee would improve corporate processes in general, which would in turn affect the performance of a firm. H1e: There is a relationship between AC legal expertise and firm performance of listed firms in Ghana. 2.9.5 AC Gender Diversity and Firm Performance The introduction of diversity on the audit committee has been widely documented by coming literature. This is where they elaborated on the difference in gender in terms of management style, communication process, and decision-making (Ittonen, Miettinen & Vahamaa, 2011). Following empirical studies, it has been found that the presence of females on the audit committee enhances the monitoring process, leading to a more competent board. (Wahid, 2019). The corporate governance system is strengthened with female directors’ involvement, thus improving disclosure quality (Gul et al., 2011). The improvement in disclosure quality, thus, would bring about improved earnings quality (Oradi &Daejezi, 2019). Usman, Zhang, Makki, and Khan, (2019) assert that female directors reduce the probability of loan default and the cost of debt. This is because inherently, women are great financial savers and often opt for monies accrued within rather than outside. This translates into their leadership style and how they conduct business. The performance of a firm can be affected immensely by conflict between management and owners. Nielsen and Huse's (2010) findings, suggested that the female directors on the audit committee reduce the level of conflict that exists in the company. They asserted that because of the peaceable nature affiliated with women, they help find alternative solutions to resolving conflicts. More so, more attention is paid to risk management, due to the sensitivity women have over financial losses University of Ghana http://ugspace.ug.edu.gh 37 (Schubert, 2006). This is one important corporate process of a firm overseen by the AC to ensure improved performance. In this vein, Ho, Li, Tam, and Zhang (2015) examined the presence of female members in their relationships. Their results suggested that the AC’s gender diversity improves the internal control environment and reduces the likelihood of restatements. However, the studies about AC gender diversity are inconclusive. Findings from Tajfel and Turner (2004) suggested that ACs with gender diversity may experience higher emotional conflicts and are less cooperative. Thus, affects their interactions and control of the firm. Similarly, studies report that gender diversity on the AC is linked with a higher level of conflicts among themselves. Hence, “consensus” cannot often be obtained, and impacts negatively on firm performance. Previous studies have yielded varying results when examining the relationship between gender diversity on corporate boards and firm performance. Some studies have reported a positive and significant association between gender diversity and firm performance (Miller & del Carmen Triana, 2009; Campbell & Mínguez-Vera, 2008; Lückerath-Rovers, 2013). These findings suggest that having a more diverse gender composition on corporate boards can have a favorable impact on a company's performance. However, there are also studies that have found no significant relationship between the proportion of females on the board and company performance. For instance, Rose (2007) found no such relationship in the context of Danish companies, and Carter et al. (2010) reached a similar conclusion when examining U.S. companies. These studies indicate that the influence of gender diversity on firm performance may vary depending on the specific context and the factors at play in each organization or region. University of Ghana http://ugspace.ug.edu.gh 38 H1f: There is a relationship between AC gender diversity and firm performance of listed firms in Ghana. 2.10 AC Characteristics and Financial Reporting Quality Audit committee characteristics have affected the quality of financial reporting. Prior literature has shown mixed findings in relation to the two. 2.10.1 AC Independence and Financial Reporting Quality O One of the primary responsibilities of the audit committee (AC) is to oversee the financial reporting process of the firm. AC independence is critical in ensuring that they can provide unbiased assessments of financial statement quality. Klein (2002) argued that independent AC members are appointed to act objectively in order to produce unbiased financial reports. This implies that a greater number of AC members should be non-executive directors who are independent of the day-to-day management activities. Abbott et al. (2014) emphasize that independent AC members are more likely to be objective, and this reduces the chances of financial reporting manipulation going unnoticed. Furthermore, independent AC members are crucial for ensuring the effectiveness and reliability of financial reports, as they are not directly involved in the firm's daily operations. This allows them to play a strong scrutiny and monitoring role over the financial reporting process. Existing studies, such as Arslan et al. (2014), have found that the independence of AC members enhances the quality of financial reports and overall performance. Evidence from the earnings management literature suggests that the degree of independence of an audit committee is positively associated with a firm's financial reporting quality (Nuryanah & Islam, 2011; Yasser et al., 2011; Bouaziz & Triki, 2012; Arslan et al., 2014). Additionally, Beasley et al. (2000) proposed that the quality of financial reporting is significantly linked to audit committee independence, meaning that financial statement fraud is more likely to occur in firms University of Ghana http://ugspace.ug.edu.gh 39 with less independent audit committees. However, there are studies that present different findings. For instance, Lin, Li, and Yang (2006) reported an insignificant and weak positive relationship between audit committee independence and earnings quality. Similarly, Soliman & Ragab (2014) found no significant relationship between discretionary accrual levels and AC independence in the context of Canadian firms. Pomeroy & Thornton (2008) also found no significant association between financial reporting quality and audit committee independence in their research. H2a: There is a relationship between AC independence and financial reporting quality listed firms in Ghana. 2.10.2 AC Size and Financial Reporting Quality Dhaliwal et al. (2010) have considered AC size to be highly resourceful, due to diversity in expertise, skills, and experiences. Inconclusive findings have been documented in regard to the audit committee size, as to either have a small or large size. Raghunandan and Rama (2007) suggested that the number of meetings is increased by the size of the audit committee. The increase in the number of meetings is argued to provide a more effective monitoring role over the financial reporting process. Hence, promotes better financial reports. Leong et al. (2015) asserted that due to diversities, large AC size is more capable of reducing manipulations of earnings and enhancing the quality of financial reporting of a firm. Furthermore, the study of Yasser and Al Mamun (2016) suggested that large boards can allocate more resources, in terms of time and manpower to oversee the process of financial reporting. This implies a large audit committee allows AC members to spread over their workload easily among themselves, monitoring management and controlling fraudulent behavior. The large size of the AC is likely to have more independent directors (Xie, Davidson & DaDalt, 2003). This increase in independent directors empowers them to share unbiased opinions of the financial reporting process to ensure quality. University of Ghana http://ugspace.ug.edu.gh 40 Interestingly, on the other hand, older studies have shown that audit committee is more efficient when they have a small number on the AC (Yermack, 1996; Jensen, 1993; Gautam & Boeker, 1994). Effective monitoring role and control are high when a smaller number of ACs involved in the process, asserted by Jensen (1993). In addition, Goodstein et al. (1994) postulated that corporate processes are overseen by large AC sizes, often resulting in delays and administrative bottlenecks. This is because when the workload is shared among a large size audit committee, it is expected that the views and opinions of all should be heard. Thus, this results in delays and more meeting times. More so, smaller AC sizes may be less burdened with organizational problems (Gautam & Boeker, 1994). The relationship between Audit Committee (AC) size and Financial Reporting Quality (FRQ) has yielded diverse findings over the years, especially in the contexts of Malaysia, Pakistan, and Nigeria. In the context of Malaysia and Pakistan, Yasser and Al Mamun (2016) concluded that AC size is negatively and significantly associated with earnings management (EM). Similarly, in Nigeria, Abubakar (2016), Chi-Chi, and Friday (2016), and Miko (2016) found that AC size is negatively significant with EM, particularly in the form of discretionary accruals. This suggests that a larger AC is linked to a higher likelihood of reducing earnings management. In contrast to these findings, Mohammed, Ahmed, and Ji (2017) and Ismail and Kamarudin (2017) reported that AC size is positively and significantly related to accounting reporting manipulation. Their findings support the notion that larger ACs may be associated with an increase in creative accounting practices employed by management. The predictions made by the resource dependence theory align with the expectation that a larger AC size would be negatively related to Discretionary Accruals (DA), reflecting a potential constraint on earnings management. Additionally, a larger University of Ghana http://ugspace.ug.edu.gh 41 AC is anticipated to be positively related to FRQ, as these committees may possess more diverse experiences, ideas, and expertise compared to smaller ACs. From the foregoing debate, this study hypothesizes that; H2b: There is a relationship between AC size and the financial reporting quality of listed firms in Ghana. 2.10.3 AC Financial Expertise and Financial Reporting Quality One of the characteristics of audit committees (AC) that is often linked to Financial Reporting Quality (FRQ) is the level of financial knowledge possessed by its members. According to the resource dependence theory, the role of the AC is to provide resources, including expertise and experience, that can help the organization gain competitive advantages, particularly in terms of FRQ (Tanyi & Smith, 2015). Therefore, having members with financial expertise can enhance the AC's effectiveness in its monitoring role in the financial reporting process. This is because accounting expertise may be particularly relevant for AC members, as "best practices" recommend that AC members be accountable for tasks requiring a high degree of accounting and financial knowledge (DeFond et al., 2005). Audit committee members with financial expertise can better understand accounting standards, policies, and the choices that impact financial reporting, which makes them more capable of identifying deceptive practices in the preparation of financial statements (Cohen et al., 2007). Studies have produced divergent findings concerning the relationship between audit committee financial expertise and financial reporting quality. For example, Madawaki (2013) discovered a significant and positive association between audit committee members with financial or accounting expertise and earnings quality in Nigerian firms. This finding aligns with other research University of Ghana http://ugspace.ug.edu.gh 42 by scholars such as Tanyi & Smith (2015), Bedard et al. (2004), and Xie et al. (2003), which have indicated that audit committee members with accounting or financial backgrounds are effective monitors in reducing earnings manipulation by management. Dhaliwal, Naiker, and Navissi (2010) also reported a positive relationship between the accounting/financial expertise of an audit committee and a firm's financial reporting quality, supported by Bedard et al. (2004), who argued that financial expertise within the audit committee reduces financial restatements and constrains the likelihood of managerial manipulation of financial reports. However, some studies, such as those by Yang and Krishnan (2005) and Lin et al. (2006), failed to find any significant association between accounting or financial experts on the audit committee and financial reporting quality, measured as the level of earnings management. These authors suggest that financially knowledgeable audit committee members are more likely to prevent and detect material misstatements in financial reporting. H2c: There is a relationship between AC financial expertise and the financial reporting quality of listed firms in Ghana. 2.10.4 AC Industry Expertise and Financial Reporting Quality Krishnan et al. (2011) believe that other technical expertise of the audit committee is necessary for overseeing the financial reporting process. Such expertise includes the AC industry expertise. The industry expertise of the AC helps understand industry-specific estimates affecting the financial statements. This is because usually, financial statements include various estimates. For instance, warranty obligations are related to the industry and product specifications. Thus, industry expertise is essential to ensure the accuracy of the warranty estimate. The knowledge of the industry helps University of Ghana http://ugspace.ug.edu.gh 43 the audit committee to identify any discretions on the financial statements, in regard to any industry item. There is limited research on the relationship between industry expertise within the Audit Committee (AC) and Financial Reporting Quality (FRQ). However, Cohen et al. (2014) conducted a study that uncovered a positive correlation between AC industry expertise and the financial reporting process. They argued that the presence of industry experts within the AC can facilitate effective communication with external auditors, especially when technical expertise is required to comprehend industry intricacies. They also concluded that a lack of industry expertise overseeing the financial reporting process may necessitate a higher level of audit quality, resulting in increased audit fees. This could entail engaging specialized auditors with knowledge of the specific industry to understand or evaluate industry-specific estimates. Conversely, having AC members with industry expertise might mean they share similar experiences and knowledge with the management. This exposure to the same challenges and difficulties encountered by managers can lead to a certain level of empathy, potentially resulting in weaker monitoring of the financial reporting process (Wang et al., 2015). Hence, the study tests the following hypothesis that: H2d: There is a relationship between AC industry expertise and the financial reporting quality of listed firms in Ghana. 2.10.5 AC Legal Expertise and Financial Reporting Quality Under the observation of both agency and resource dependency theory, AC with members who have non-accounting expertise such as legal can also affect accounting procedures to reflect its true state Cohen et al. (2008). Krishnan et al. (2011) asserted that legal expertise in the AC could University of Ghana http://ugspace.ug.edu.gh 44 assist in ensuring better FRQ since the quality of financial reporting can be related to legal liability threats and their legal backgrounds require them to be more vigilant to such threats (Krishnan et al., 2011). However, the literature on AC legal expertise and FRQ is limited. The few that have been found include, Baxter and Cotter (2009) who used 309 firms in Australia to examine the influence of AC and EM. The Jones model (1991) and Dechow and Dichev (2002) were adopted as measures of earnings quality. The findings reveal that the AC legal expert is negatively and significantly associated with EM in both models. This suggests that legal experts in the AC reduce the magnitude of earnings manipulation provided by the management. Furthermore, in the study done by Krishnan et al. (2011), a sample of 1,000 firms for the three years of 2003 to 2005 was examined to find the relationship between legal expertise on corporate AC and FRQ in the US. They adopted the performance-adjusted model by Kothari et al. (2005) and the Jones model (1991) as proxies of FRQ. The study revealed a negative significant impact between the AC legal expert and DA. This indicates that legal expertise acts as a monitor rather than a mere signal to financial reporting. However, more recently, Shankaraiah and Amiri (2017) examined AC and FRQ in India. They employed a sample of 133 firms from 2002 to 2012. The result from the study shows that AC legal experts have a negative significant impact on DA. On the other hand, prior studies such as Jintawattanagul et al. (2016) considered the mediating role of the accrual’s quality on the AC attributes and the cost of equity. They used 272 listed firms in Thailand from 2010 to 2012. The study found a negative non-significant relationship between AC legal experts and quality of accrual. H2e: There is a relationship between audit committee legal expertise and financial reporting quality. University of Ghana http://ugspace.ug.edu.gh 45 2.10.6 AC Gender Diversity and Financial Reporting Quality Amran, Saad, Abdullah, and Ibrahim (2016) contended that women are highly rated in terms of adjusting transformational leadership fashion. There is extensive research on the effect of gender diversity on financial reporting quality. The results remain mixed so far. The study of Thiruvadi and Huang (2011) sampled listed companies for 2003 to examine AC gender differences and EM in the US. They adopted Ashbaugh et al. (2003) measurement of EM. They found that a female AC member mitigates EM by increasing the negative income and decreasing DA. Moreover, Martinez et al. (2016) studied the influence of female directors and FRQ in Spain. They maintained a sample of 920 firm-year observations for the period of 2004 to 2011. For this, they found a positive relationship between gender diversity and FRQ. On the other hand, using the Chinese setting, Ye, Zhang, and Rezaee (2010) did not find any significant relationship between gender diversity and earnings quality. H2f: There is a relationship between audit committee gender diversity and financial reporting quality. 2.11 The Mediating Effect of Financial Reporting Quality and Firm Performance Financial information provided by a company serves as a crucial resource for various market participants, helping to reduce information imbalances among investors, managers, regulatory agencies, society, and other stakeholders. This raises a fundamental question about the impact of financial reporting quality (FRQ) on a firm's subsequent performance. Firms that furnish high- quality financial information to the market's various participants enable them to operate under better conditions and with access to a higher level of information (Jo & Kim, 2007). Research on the relationship between financial reporting quality and firm performance has yielded diverse fi