Economic agency and audit committees: responsibilities and membership composition

Abstract

Committees, commissions, and regulatory authorities in the US, the UK, Canada and Australia have identified the corporate audit committee as a key component of effective corporate government. Categorizations of the responsibilities frequently assigned audit committees have been prepared by professional groups and by Wolnizer. However, evidence linking assigned responsibilities to the experience backgrounds of audit committee members has not previously been provided. Statements in international accounting firm publications indicate that to function effectively some audit committee members should have backgrounds in financial reporting, accounting, or auditing. The current study uses data that are publicly available to investors and others to document assigned committee responsibilities and the membership backgrounds of the audit committees of large US multinational enterprises. It provides competing explanations of the proportion of audit committee members with instrumental experience (i.e. technical skills to relate to accounting, auditing and control issues). The results indicate that the backgrounds of the chief executive officer and the audit committee chair help to explain the proportion of members with instrumental experience, while the breadth and technicality of assigned responsibilities, multinational and domestic complexity, leverage, and asset structure do not. Because these results appear to be inconsistent with the agency costs paradigm that has guided much of published research on monitoring and controls, suggestions for future research to clarify the relation between assigned audit committees responsibilities and membership background are provided.