Voluntary Adoption of Audit Committee: Managerial Hegemony Perspective

Abstract

[Purpose]The purpose of this study is to investigate whether firms establish an audit committee to appoint favorable auditors instead of a full－time auditor or an auditor required by law. Under Korea Commercial Code, the voting rights of majority shareholders are effective up to 3% including specially related persons for inside members of an audit commit but not for outside members of an audit committee. [Methodology]Based on the managerial hegemony theory that perceives audit committee as one of managerial tools to achieve strategic objectives, all non－financial firms from 2012 to 2018 are selected with audit committee, agenda at the shareholders meetings, and total assets. [Findings]I find that firms are more likely to adopt audit committee instead of an full－time auditor or an auditor. I also find that firms whose total assets are slightly below two trillion won increase their total assets, and thereby make an audit committee for granted and avoid the criticism of investors. [Implications]My results suggests that outside members as well as inside members of an audit committee should be elected with grand 3% rule at the time of elections of directors of the shareholder meeting. Also, my results suggests that managerial hegemony theory along with agency theory helps to understand the opportunistic behavior of managers.