Audit Committee Formation in a Semi-Mandatory Setting. A Case of an Emerging European Economy

Abstract

This study investigates the determinants of the audit committee (AC) formation in a semi-mandatory setting of a European economy where ownership and control are predominantly in the hands of families and business groups and the voluntary practice of forming an AC has not been widely accepted. Our primary analysis provides evidence of an inverted association between the determinants of AC formation commonly accepted in the Anglo-Saxon world, such as the number of independent members on supervisory board and accounting and finance expertise of supervisory board members. When it comes to ownership structure, companies with foreign ownership are more likely to have an AC. Our results also point to an important learning effect related to the existence of other supervisory board committees as an important determinant of AC formation. The results are important for supervisory bodies and regulators, as they provide insights into factors that influence audit committee formation. Of particular interest is the link between the experience of having other supervisory board committees and the likelihood of having an AC, suggesting that the AC concept may be more successfully implemented by the promotion of best practices and benefits of having board committees rather than by adjusting the behavior of companies through additional changes in regulation. This may be particularly helpful in addressing the challenges of adopting the Eighth Directive across European states.