The role of the audit committee in resolving auditor‐client disagreements: a Malaysian study

Abstract

PurposeThis paper aims to report the findings of semi‐structured interviews with management, external auditors and audit committee members in Malaysia concerning the role of the audit committee in resolving auditor‐client disagreements.Design/methodology/approachAn exploratory case study method was applied in seven publicly listed companies in Malaysia. In each company interviews were conducted with an audit committee chair/member, the finance manager/CFO and the external auditor.FindingsThe study finds that, when the issue is very material, the audit committee plays a mediating role as a third‐party intermediary who provides assistance to resolve the dispute. The authority of the committee to act as a mediator comes from its oversight responsibilities, its understanding and awareness of possible issues and the members' accounting and business expertise. Mediation techniques used include controlling the agenda, gathering information, advising and solving problems. With two exceptions, the interviews indicate that the audit committee does not take sides when helping to resolve a dispute. The outcome from the mediation process is generally a compromise solution.Research limitations/implicationsThe study is based on 21 interviews undertaken in Malaysia. Hence, the findings may not be generalizable to other cultures and jurisdictions. Further, while a number of mediation techniques used by audit committees are identified, the paper does not examine in‐depth the mediation processes used in resolving disagreements.Originality/valueThe study extends the auditor‐client negotiation literature by examining whether the audit committee plays a mediating role to help resolve disagreements. The findings demonstrate that audit committee effectiveness can extend beyond a pure oversight role to more active involvement in resolving contentious accounting issues.