Determinants of Audit Committees Effectiveness in Enhancing Compliance With Regulations: Evidence From Saudi Context

Ali A Alnodel

doi:10.5296/ijafr.v8i4.14002

Abstract

This paper aims to investigate how effective audit committees are in ensuring compliance with regulations in the Saudi context. Particularly, it examines whether there is an association between the value of fines imposed by the Saudi Capital Market Authority (CMA) and the size, frequency of meeting, and the financial expertise of the audit committee. Other variables have also been incorporated to control for possible effects, particularly size, leverage, ROA, age of the company, and year of fines. Data has been collected from the archives of CMA and from the annual reports of listed companies from 2014 to 2016. In total, 360 year-observations relating to 120 non-financial listed companies were analyzed among which 95 fines and actions imposed by CMA. The results suggest that the size and financial expertise of the audit committee and the leverage of the company and years of fines have significant association with the value of the fines imposed by CMA. In contrast, the regression analysis does not show significant association between the frequency of meeting of the audit committee and other controlled variables on the value of the fines imposed by CMA. These results suggest that the availability of resources to the audit committee, as suggested by the resource dependence theory, has a significant impact on its effectiveness. Regulators and companies could benefit from these findings to enhance compliance with regulations and to improve the role of audit committees. Moreover, these findings could be valuable to strengthen corporate governance practices in similar emerging markets.

Highlights

Corporate governance (CG) has become more complex and dynamic resulting in increased responsibilities for the board of directors and its committees
The study incorporates additional factors that might influence the value of fines imposed by Capital Market Authority (CMA), size, leverage, ROA, age of the company, and the year of fines imposed
360 year-observations relating to 120 non-financial listed companies were analyzed among which 95 fines and actions were imposed by CMA

Summary

Introduction

Corporate governance (CG) has become more complex and dynamic resulting in increased responsibilities for the board of directors and its committees. The CG system's ability to protect the company from violence of regulations depends upon the level of monitoring it provides, on the board of directors and its committees. Audit committee (AC) is the most frequently established committee by the board of directors Regulations such as SOX in US and similar regulations adopted by other countries have emphasized this role (Brown et al, 2011).In the Saudi context, regulations of CG have emphasized this role.CG regulations issued by CMA (2006) suggest that the purposes of AC are to help the board of directors in the oversight of the financial reporting process, the audit process, the company's system of internal controls, and compliance with laws and regulations. This paper aims to examine how effective AC is in ensuring compliance with CMA regulations in the Saudi context

Objectives

Results

Conclusion