Factors Associated With The Quality of Audit Committees

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Factors associated with the quality of audit committees is a well-researched topic, it can be used as a guide or framework for your Academic Research.

Abstract

Purpose – The purpose of this study is to analyze whether several indicators of audit committee quality are associated with a number of supply and demand factors such as board composition, board activity, auditor type, and leverage Design/methodology/approach – The 2001 annual reports of a random sample of 200 Australian listed companies were analyzed and data gathered on several audit committee quality indicators, i.e.

independence, expertise, size, and activity. Regression analysis was performed to determine the level of association between these indicators and several board and other variables. Findings – The results indicate that, in 2001, many Australian listed companies were already complying with several of the ASX Corporate Governance Council’s recommendations relating to audit committees.

Furthermore, in a time period absent of audit committee regulation, there was strong support for the influence of the board of directors on the composition and activity of the audit committee.

Research limitation/implications – Consistent with prior research, this study confirms the influence of the board of directors on a number of audit committee quality indicators. Practical implications – Corporate regulators and companies will find these results useful to understand the factors driving several of the main indicators of audit committee quality.

Originality/value – This study adds to the current limited empirical research on Australian audit committees by analyzing several indicators of audit committee quality in a time period not affected by regulation.

1. Introduction

Audit committees are now mandatory for companies in many jurisdictions around the world. This has largely been in response to the many high profile corporate collapses that have occurred in recent years. A lack of effective corporate governance is widely accepted as being the key failure behind most of the collapses (Leung and Cooper, 2003; Fridman, 2005).

For example, in the case of Enron, it has been noted that corporate governance was weak in almost all respects. The non-executive directors were compromised by conflicts of interest and consequently, the audit committee failed to The current issue and full-text archive of this journal is available at www.emeraldinsight.com/0114-0582.htm

This paper is based in part on Peter Baxter’s Ph.D. thesis completed at the University of Southern Queensland (USQ). Funding support for Peter’s Ph.D. was provided by USQ, Central Queensland University, and a Ph.D. scholarship sponsored by AFAANZ, CPA Australia, and the Institute of Chartered Accountants in Australia. The author acknowledges the valuable comments on the paper from Julie Cotter, David Gadenne,

Gary Monroe and participants at the 2008 annual conference of the Accounting and Finance Association of Australia and New Zealand (AFAANZ). The paper has also benefited from the comments provided by the two anonymous reviewers. perform its functions of internal control and checking the external audit function(Solomon and Solomon, 2008).

In response to these corporate collapses, there have been recommendations made by many groups regarding several audit committee characteristics that have been suggested as being indicators of the committees’ effectiveness at achieving their objectives and hence their overall quality.

Corporate regulators, the accounting profession, and other groups have made recommendations regarding such characteristics as the independence, expertise, size, and activity level of audit committees (e.g. Cadbury Committee, 1992; Price Waterhouse, 1993; Blue Ribbon Committee, 1999; KPMG, 1999; ASX Corporate Governance Council, 2003, 2007). By making recommendations regarding such characteristics, these groups have implicitly argued that the characteristics are indicators of the overall quality of audit committees.

Research on the factors influencing audit committee quality indicators will inform future policymaking by regulators. This understanding will assist countries such as Australia that currently have regulations on audit committee structure and activity, to evaluate the ability of companies to meet such regulations. Therefore, the primary objective of this study is to analyze whether several indicators of audit committee quality are associated with a number of supply and demand factors such as board composition, board activity, auditor type, and leverage.

This study contributes to the limited prior research in this area in a number of ways. First, it examines a sample of Australian companies in a time period with limited audit committee regulation, compared to the US which has been the focus of a number of similar prior studies. Second, the study examines a broader range of audit committee characteristics than many of the prior studies. Finally, the study uses a larger sample of companies than many prior studies.

The remainder of the paper is structured as follows. First, there is a review of the prior literature on audit committees, which leads to the development of the hypotheses tested in the study. This is followed by the research methodology section. The main findings from the study are then discussed. Finally, the summary and conclusions are presented.

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Type

Project Topic and Material

Category

Accounting

No of Chapters

5

Reference

Yes

Format

PDF

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