Audit Committee Financial Expertise and Fraud Prevention: Evidence from Nigerian Listed Deposit Money Banks

Abstract

Audit committees are statutorily established in listed deposit money banks (DMBs), yet fraud cases continue to rise, raising concerns about whether the financial competence of audit committee members influences fraud prevention. The correlation between audit committee financial expertise level and fraud prevention in the DMBs listed in Nigeria was examined in this study. The study was based on agency theory, and took a correlational design with secondary data obtained from the annual reports of the 15 DMBs listed on the Nigerian Exchange Group (NGX) and also from the fraud report of the Nigeria Deposit Insurance Corporation (NDIC) for 2014-2023. A census approach was adopted; Premium Trust Bank Plc (which appeared in 2023, with one year of data only) and six bank-years with irreconcilable missing data were excluded leaving a sample of 135 firm-year observations from 14 banks. Fraud prevention was measured by a composite fraud prevention index (fraud amount ratio, fraud frequency, and disclosure score) that reflects the inverse of fraud incidence, and audit committee financial expertise was defined by the percentage of members with recognised accounting or finance qualifications. The data were analysed using descriptive statistics, Pearson correlation and random-effects panel regression (as determined by the Hausman specification test) in STATA 17. The financial expertise of the audit committee had a positive association and also was significant to fraud prevention (β = 0.3245, z = 3.70, p < 0.01). Meeting frequency (β = 0.0876, p < 0.01) and female membership (β = 0.2345, p < 0.05) were also positively and significantly correlated with fraud prevention, with independence having no significant correlation. The study finds that audit committee competence is an important correlate of fraud prevention in the Nigerian DMBs. The study recommends that the Central Bank of Nigeria should require at least 2 members of the audit committee in every bank to be financially competent and that banks should seek to appoint professionally qualified accountants to enhance fraud control.

Audit Committee Financial Expertise, Fraud Prevention, Deposit Money Banks, Nigeria, Corporate Governance