Audit Committee Attributes Research Articles

Audit Committee Attributes and Internal Audit Function Effectiveness. Evidence from Zimbabwe Local Authorities

The study aimed at establishing the impact of audit committee characteristics on internal audit function effectiveness in Zimbabwe local authorities. The study used audit committee characteristics as represented by its dimensions of competence, conduct of meetings and independence as the independent variable and internal audit function effectiveness, represented by its dimensions of independence, competence and objectivity as the dependent variable. The association between the independent and dependent variables was assessed considering the effects of the regulatory environment as the mediating variable there to. Survey data was obtained from audit committee chairpersons and chief audit executives in Zimbabwean local authorities using semi-structured questionnaires. Correlation and regression analysis were used to test whether there is a relationship between audit committee characteristics and internal audit function effectiveness. The study established that audit committee membership in Zimbabwe local authorities is not subject to qualifications, experience or expertise, as such, majority of audit committees in Zimbabwe local authorities lack the required competencies to effectively execute their mandates. Correlation and regression analysis results further established that the characteristics of independence and conduct of meetings are capable of predicting the effectiveness of internal audit functions within Zimbabwe local authorities. The study recommends the inclusion of “resource persons”, in form of independent professionals with financial expertise and experience within audit committees of local authorities, most preferably from the civil service, so as to fill the competency gap. The study also recommends the establishment of clearer guidelines on the operation of audit committees within Zimbabwe local authorities to help in ensuring the committees’ independence and objectiveness is guaranteed thereby strengthening their oversight role. Keywords: Audit committee, Attributes, Internal audit function, Effectiveness DOI : 10.7176/RJFA/10-24-07 Publication date: December 31 st 2019

Audit Committee Attributes and Readability of Financial Statement Footnotes

Purpose: The purpose of this study was to investigate the relationship between audit committee attributes and readability of financial statement footnotes of companies listed in the Iranian Stock Exchange. Method: The statistical population of this study included all companies listed in Tehran Stock Exchange over a period of 7 years from 2012 to 2018. A systematic elimination method has been used for sampling. Multivariate regression and EViews software were used to test the research models. Results: The results showed a significant relationship between the independence of the audit committee and the readability of financial statement footnotes. There was also a significant relationship between the number of audit committee meetings and the readability of financial statement footnotes. However, there was no significant relationship between the financial expertise of the audit committee and the readability of financial statement footnotes. Value: Companies with less readable financial statements are more likely to commit fraud than other companies. The readability of financial reporting plays an important role in enhancing the predictability of fraud in the financial statement. By using sophisticated and lengthy disclosures, managers keep some of their intended information secrets from investors and other stakeholders to avoid disclosing information about their bad news or performance. The results of this study can be applicable for shareholders and investors; securities exchange; universities and research institutes; suppliers of goods and services, and the government. There have also been made very limited efforts, especially in Iran, to investigate the relationship between audit committee attributes and readability of financial statement footnotes, so we address this topic in the present study.

The role of audit committee attributes in corporate sustainability reporting

PurposeThe purpose of this paper is to analyze the extent to which sustainability reporting by banks in the Gulf Cooperation Council (GCC) is affected by the attributes of audit committees.Design/methodology/approachThe research is positivist and quantitative, based on a cross-sectional and time series analysis of 59 banks from 2013 to 2017. A multivariate model is used to investigate the impact of selected audit committee attributes (financial expertise, size, members’ independence and meeting frequency) on sustainability reporting. The model is built on agency, legitimacy, resources and stakeholders theories.FindingsIn contrast to the hypothesis, the authors report a negative association between financial expertise and sustainability reporting. Members’ independence and meeting frequency play a positive role in determining the extent of disclosure. The control variables (bank size, age and auditor type) are positively associated with corporate sustainability reporting.Research limitations/implicationsThe main limitations of this study are related to the chosen attributes of audit committee and do not consider the board’s attributes. However, the authors believe these limitations do not affect the findings. Future research that includes more attributes when they became available will offer more insights into the role of audit committees on sustainability disclosure of financial institutions. Overcoming these limitations may make the results more generalizable.Practical implicationsThe results of this study have important implications for regulators, bank management, investors and creditors. For regulators, in the countries of the GCC and in countries like them, the findings reveal the importance of disclosure requirements. The development of disclosure requirements is likely to improve corporate sustainability reporting and reduce variations in the extent of disclosure among banks. Banks could use these results to improve their reporting to outsiders. For creditors and investors, the study improves their awareness of the importance of corporate social responsibility, corporate governance and environmental information on credit and investment decisions and encourages banks to improve their disclosures of non-financial information.Originality/valueThis research makes a contribution to the scarce literature on sustainability reporting by banks, especially in an environment where capital markets lack active institutional investors, where regulators play the dominant role in determining the extent of disclosure and where banks are the main source of external finance for the corporate sector.

Impact of Audit Committee Attributes on Financial Reporting Quality of Deposit Money Banks in Nigeria

The audit committee is one of the corporate governance mechanisms vested with the responsibility of monitoring the financial reporting process of corporations. This paper examines the impact of audit committee attributes of expertize, meeting frequency, independence, attendance and size on financial reporting quality of deposit money banks in Nigeria. Top ten banks based on asset capitalization were sampled during the period 2008-2017. Data was extracted from their annual report and analysed using pooled OLS regression and the Fixed effect test. Firm age and firm size were introduced as control variables in the regression model. The result of the analysis shows that audit committee attributes of attendance and independence has negative and statistically insignificant impact on financial reporting quality of deposit money banks in Nigeria while audit committee attributes of size and meeting frequency has positive and statistically insignificant influence on financial reporting quality. However only audit committee attribute of expertise seems to be positive and statistically significant at influencing financial reporting quality of deposit money banks in Nigeria. Firm age and size were also found to be positive and statistically significant at influencing financial reporting quality of deposit money banks in Nigeria. The paper recommends among others that regulatory bodies like the Financial Reporting Council of Nigeria (FRCN) and the Central bank of Nigeria being the apex bank should make it a policy for banks to ensure that appointment of members of the audit committee is based on expertise that is, members of the committee must possess relevant knowledge in accounting and belong to a professional body of accounting. Keywords: Audit committee, Expertise, Attendance, Meeting frequency, Independence, Size, Financial Reporting Quality. DOI : 10.7176/RJFA/10-4-04

AUDIT COMMITTEE ATTRIBUTES AND AUDITOR BRAND NAME OF LISTED COMPANIES IN NIGERIA

This paper examines the effect of audit committee attributes on auditor brand name proxy by the Big 4. The study utilizes 88 listed firms in Nigeria through 440 firm-year observations ranging between the years 2012 to 2016. The data for the study were extracted from the firms’ annual reports and Thompson Reuters DataStream. A panel logistic regression was employed to estimate the model of the study. Consistent with complementary hypothesis the findings demonstrate that audit committee attributes (audit committee independence, audit committee financial accounting experts, audit committee legal expert, female audit committee member and audit committee stock ownership) are positively related to auditor brand name. The findings also support the substitution hypothesis perspectives by revealing an inverse relationship between audit committee meetings, audit committee tenure, audit committee chair and auditor brand name. Our findings offer an initial insight on the effect of audit committee legal expert, and audit committee stock ownership on auditor brand name. Thus, the findings can benefit existing and prospective shareholders who are the direct users of financial reports. This study can also help policy-makers and regulators by allowing them to better recognize the importance of these distinctive audit committee attributes in enhancing the quality of audits, which is one of the most vital elements of improving financial reporting quality. Keywords:Audit committee, Audit quality, Audit size, Gender diversity, Ownership

Timeliness of financial reporting and audit committee effectiveness: evidence from UAE

ABSTRACT
 Purpose – This study aims to examine the contemporary timeliness of financial reporting in the United Arab Emirates (UAE), and the impact of audit committee effectiveness on this timeliness.
 Design/Methodology/Approach – Timeliness of financial reporting in this study is measured by audit report lag (ARL), which is the number of days between the date of the financial year end and the date of the audit report. The data from listed companies on the UAE capital markets; Abu Dhabi Securities Exchange (ADX) and Dubai Financial Market (DFM), for three years from 2011 to 2013 resulted in 298 observations. The main statistical techniques of the study are means and multiple regressions.
 Findings – The findings show that generally all companies meet the submission deadlines imposed by the two UAE markets. Furthermore, ARL is influenced by audit committee size and profitability, while no evidence is found to support the effect of audit committee expertise, audit committee meetings and firm size on ARL.
 Practical Implications – The results of the study show that only audit committee size has a significant influence in reducing ARL. This may be attributed to having minimal variation in the implementation of the Code of Corporate Governance (CCG), particularly audit committee attributes, in the UAE. The results suggest that the current governance by audit committees is adequate to ensure that the financial reports of companies in the UAE are timely. However, except for audit committee size, the other audit committee attributes are unable to further shorten ARL.
 
 Originality/Value –The capital markets in the UAE and its CCG are relatively new. Hence, regulatory requirements may be less stringently implemented by companies in this country. Consequently, timely audited financial reports are demanded by local and international investors to make decisions and alleviate speculation. Thus, determining audit committee attributes that reduce ARL is beneficial to the UAE markets, the listed companies and investors. 
 
 Keywords Audit report lag (ARL), Financial reporting timeliness, Audit committee, UAE
 Paper Type: Research paper

The Relationship between Audit Committee Attributes and Audit Fees of Listed Companies in Nigeria

This paper examines the influence of audit committee (AC) attributes on audit fees (AUF) of 440 firm-year observations of listed companies in Nigeria for five year period (2012 to 2016). A multiple regression was employed in estimating the model using robust standard errors. We explore and improve prior literature of same relations by using additional variables (AC legal experts, AC stock ownership and AC chair independence). The study found that (AC size, AC financial accounting experts, AC legal experts and AC stock ownership) are positively associated with AUF in their quest for greater audit assurance. The study also established that female AC and AC chair independence act as substitute to audit quality which praises that higher internal control will be accredited to lower audit process. The findings and inferences are also consistent with complementary hypothesis of audit quality (payment of high fees in an exchange for better audit efforts. Our result is conclusive and robust for the inclusion of the foregoing AC attributes that were limitedly explored by prior studies in this relationship. Our study provides an insight on the importance of AC legal experts; AC stock ownership and AC chair independence to the current and potential stakeholders who are the direct users of financial reports. The study informs regulators and policy makers the potential influence of these unique AC attributes on auditors’ price which is one of the most crucial drivers of audit quality.

Deceptive versus Informative Income Smoothing: Evidence from Audit Committee Attributes

Deceptive versus Informative Income Smoothing: Evidence from Audit Committee Attributes

Factors influencing the implementation of risk-based auditing

PurposeThe purpose of this paper is to examine, from the agency perspective, the influence of internal audit and audit committee attributes, as well as risk management and internal control systems, on the implementation of risk-based auditing among public-listed companies in Malaysia.Design/methodology/approachA questionnaire survey was distributed to the in-house internal audit function in approximately 620 public-listed companies. Consequently, data from 117 heads of the internal audit function was collected and analyzed.FindingsThe findings indicate that “audit committee review and concern” and “risk management system” are significantly and positively related to the implementation of risk-based auditing. Most importantly, the results indicate the importance of audit committee inputs and concerns in reviewing internal audit activities. Empirically, the findings also suggest that a more formalized risk environment would foster the existence of a strong risk-aware culture and hence provides a strong foundation for internal audit to implement risk-based auditing. However, internal audit experience, size of internal audit function, audit committee qualifications, and internal control system are not found to be significant predictors of the presence of risk-based auditing.Research limitations/implicationsThis study examined only risk-based auditing practices in the in-house internal audit function of public-listed companies; hence, the findings cannot be generalized to all Malaysian-listed companies that outsource or co-source their internal audit activities.Social implicationsAn effective internal monitoring mechanism and better quality of internal audit work will minimize potential risks that prevent the achievement of company objectives, reduce propensity to falsify financial information, and improve financial reporting quality.Originality/valueThis study contributes evidence concerning the relationship between internal monitoring mechanisms and the implementation of risk-based auditing among in-house internal audit activity.

Impact of the Revised Malaysian Code on Corporate Governance on Audit Committee Attributes and Firm Performance

Abstract. Using a sample of 37 finance companies listed under the finance segment of Bursa Malaysia, we examined the impact of the revision to Malaysian code on corporate governance on audit committee attributes and firm performance. Our result suggests that audit committee attributes significantly improved after the Code was revised. In addition, the coefficient for audit committee and risk committee interlock has a significant negative relationship with Tobin’s Q in the period before the revision to the Code and before the global financial crisis. The negative direction of the result is contrary to agency theory which suggests that separating directors on subcommittees will create information asymmetry between the directors and lead to poor coordination in the decisions of the committees thereby negatively affecting firm performance. Keywords. Corporate governance, Audit committee, Independent directors, Expert directors, performance, Executive Membership, Directors Interlock, Malaysian Code on Corporate Governance. JEL. G21, O16, O17.

THE IMPACT OF AUDIT COMMITTEE ON AUDIT FEES IN MALAYSIAN PUBLIC-LISTED COMPANIES

This study extends the literature on the quality of corporate governance and audit by examining the influence of audit committee on audit fees. The sampling frame consists of Malaysian non-financial public-listed companies from 2003 to 2012. The sample consists of 4,570 observations. The study applies pooled ordinary least square (OLS) to test the hypotheses and model. We use audit committee independence, audit committee expertise, number of audit committee meetings, and audit committee size as proxies for the quality of corporate governance and audit fees as proxy for audit quality. The findings show that the audit committee attributes are not significantly related to audit fees, which suggests that audit committee attributes have no influence on the audit fees. To extend this research, we recommend the inclusion of other attributes, such as communication between audit committee and the board, communication among the audit committee, and the extent of their understanding of the company’s risk and control systems. These additional variables complement the quantitative approach of this study using a qualitative research method. These variables can provide insights into the functions of audit committee to verify its efficacy as an internal governance mechanism. Keywords: audit committees, audit fees, proxy for audit quality, internal governancemechanism, Malaysian public-listed companies

The role of audit committee attributes in intellectual capital disclosures

Purpose – This study aims to examine the role of audit committee attributes in non-financial information releases, with a focus on intellectual capital (IC) disclosures, following significant policy changes, mandating the audit committee function in Malaysia. The study argues that, given the changing informational needs of stakeholders and the ongoing discussion on integrated reporting, the role of the audit committee should extend to ensuring the overall quality of corporate reporting. Design/methodology/approach – The study draws evidence from a sample of leading Malaysian companies based on their market capitalisation over a three-year period (2008-2010), a period subsequent to the recent policy changes. The extent and quality of IC information, as a surrogate of non-financial information, was measured and regressed against several audit committee attributes, such as audit committee size, independence, financial expertise and meetings, controlling the overall governance and firm-specific variables. Findings – The findings show a strong positive role of the audit committee function in the overall amount of IC information as well as all three subcomponents of IC information (internal, external and human capital). The results are robust to controls for the overall governance and firm-specific attributes as well as different measures of IC information. Practical implications – The results suggest that the role of the audit committee function extends to non-financial information communication such as IC. Policymakers in Malaysia should, therefore, build on the recent regulatory changes and encourage audit committees to ensure that the overall quality of corporate reporting processes include social, environmental, intellectual as well as financial capital of a firm. Originality/value – This study considers the role of the audit committee in the wider corporate reporting process – drawing attention to its potential role in the espoused integrated business reporting. It also challenges the taken-for-granted assumption that restricts the role of the audit committee function to the traditional financial reporting process.

Audit committee attributes and firm performance: evidence from Malaysian finance companies

Purpose– The purpose of this paper is to examine the impact of audit committee (AC) attributes on the performance of finance companies in Malaysia in both period before and after the Malaysian Code on Corporate Governance (MCCG) was issued in order to determine which of the AC attributes enhances performance of finance companies in Malaysia.Design/methodology/approach– The population of the study comprises firms listed under finance sector of the main market of Bursa Malaysia. The number of firms listed on the main market of Bursa Malaysia as at the time of data collection (2012) was 822, out of which 37 were finance firms. Since the number of finance companies listed on the main market was only 37, all companies were used as sample for this study. This comprises companies involved in commercial, investment and Islamic banking, insurance,Takafuland other finance-related services. The sample for the period prior to MCCG varies over the period of observation. The number of finance companies in 1992, 1993, 1994, 1995 and 1996 was 36, 40, 44, 47 and 54, respectively. The sample comprises companies in commercial banking, investment banking, Islamic banking, insurance,Takafuland other finance-related services. The sample comprises firms listed on the main board of Kuala Lumpur stock exchange as it was called before the name was changed to Bursa Malaysia. The companies listed under the Ace market are not included due to their small number and because they are subject to different listing requirements. The list of the finance companies for the period 2007-2011 is obtained from the web site of Bursa Malaysia while for the period 1992-1996, the list is obtained from Bursa Malaysia knowledge centre. The observation period for the study covers financial period from 2007 to 2011 which represents post MCCG period while period from 1992 to 1996 represents the period before MCCG.Findings– The findings suggests a significant positive relationship between independent AC members and profitability while dual membership of directors on audit and nomination committee is significant and negatively related with profitability. The result supports agency theory which suggests that independent directors provide effective monitoring of the management thereby enhancing profitability and reducing possibility for opportunistic behavior by the management and ultimately enhancing performance. In addition, the result indicates that there was significant improvement in corporate governance in finance companies after the MCCG was issued compared to the period before it was issued.Research limitations/implications– The study focussed only on finance companies listed on Bursa Malaysia. The attributes examined include independence, expertise, experience, executive membership and interlock of directors, future studies could examine other attributes such as internal process of the committee and personal characteristics of the directors. Furthermore, the study used secondary data future studies could use primary data or a combination of primary and secondary data. The study only examined the period before MCCG and after the code was issued, future study could examine the impact of the first and second revision and compare it with period after the first and second revision.Practical implications– The findings contribute to the literature and the understanding of the influence of AC attributes such as independence and experience of the directors on the committee by showing an association between director independence, expertise, experience and improved performance. Management and board of companies may use the findings to make appropriate choices about AC attributes and governance mechanisms to improve performance particularly with regards to independence, expertise, experience and interlock of the directors.Social implications– The study has provided policy makers with a better understanding of the various features a AC should have which could be incorporated in future policy formulation in order to safeguard investments of shareholders, protect the interest of various stakeholders and enhance the flow of capital and foreign direct investment into finance companies and the economy in general. Comparison of the result between the pre MCCG and post MCCG period shows an improvement in corporate governance in finance companies after the MCCG was issued. This implies that the initial issue of MCCG impacted positively on the governance of the finance companies.Originality/value– To best of the authors knowledge the study is the first to examine the attributes of AC in finance sector as a whole and to examine the impact in the period before and after the MCCG was issued.

Audit Committee Attributes and Earnings Management: Evidence from Nigeria

Using the agency theoretical framework, the study postulates that audit committee attributes can impact significantly, constraining accrual-based distortion of financial reporting credibility and thus improve the quality of financial reporting. To assess our arguments, audit committee size, audit committee financial literacy, audit committee attendance at meetings, audit committee independence and audit meetings frequency of meeting were regressed on financial reporting quality measured by discretionary accruals. The findings for the full sample and negative discretionary accruals sample confirm our expectation that audit committee characteristics have a constraining effect on earnings management. Specifically, audit committee financial expertise, audit committee size, audit committee independence and diligence showed an inverse and significant relationship with earnings management. This is in tandem with theoretical expectations and suggest that increases in these variables we exert a declining influence on earnings management. The study concludes that there is the need for companies to focus on attributes that strengthen the effectiveness of their audit committees.

Corporate governance and audit committee

The objective of this paper is to examine the relationship between audit committees, compensation plans and corporate audit fees in Lebanon by using the data of 110 family firms. A panel data was used to test our hypothesis, and the result of panel regression shows that audit committee's attributes such as size, independence, meeting frequency and expertise, and compensation plans positively affect corporate audit fees. This result comes in consistency with the fact that the audit committee members' expertise also affects the fees charged by auditors to the company under audit. In addition, both long- and short-term compensation plans affect the fees paid by the auditee to the external auditing firm.

The Triangular Relationship between Audit Committee Characteristics, Audit Inputs, and Financial Reporting Quality

Using the exogenous reforms to audit committees mandated by the Sarbanes-Oxley Act of 2002 and a difference-in-difference approach, we examine the impact of changes in audit committee attributes (financial expertise, size, and independence) on firms’ audit inputs and financial reporting quality. Firms directly affected by the reforms experienced a larger improvement in audit inputs (measured by audit fees and the appointment of an industry specialist auditor) and a larger increase in financial reporting quality (measured by restatements of financial reports) relative to firms that were already compliant. Importantly, we find that the decline in restatements is not related to the improvement in audit inputs. This suggests that larger, more independent, and more competent audit committees are better able to detect misstatements or deter opportunistic reporting by management, independent of the level of audit input quality. The results therefore provide justification for the audit committee reforms.

Determining Factors of Audit Committee Attributes: Evidence from Spain

The goal of this paper is to determine the factors that explain voluntary improvements in audit committee activity, independence and financial expertise, both individually and jointly, within a corporate governance environment other than those used in previous works. These audit committee characteristics have been selected because previous authors have found that these attributes improve the effectiveness of this monitoring committee. The findings included a relatively high level of the proxies of audit committee effectiveness for those companies which display the best practices in terms of their board of directors' independence and activities. At the same time, we observed a non‐linear relationship of substitution among internal control mechanisms, management ownership and audit committee characteristics.

Audit Committee Attributes, Financial Distress and the Quality of Financial Reporting in Malaysia

Audit committee effectiveness is one of the significant themes in corporate governance debates. We contribute to the debate by examining empirically whether audit committees imbued with the prime features are associated with reliable financial reporting in Malaysia. By using a more direct measure of financial reporting quality, this study is one of the few studies that overcome the imprecision inherent in the abnormal accruals/earnings management. The evidence suggests that the desirable characteristics which the policy makers believe would enhance the effectiveness of the audit committee in carrying out its financial oversight responsibilities do not seem to yield the intended consequence. We find an association between financial distress and financial reporting quality, consistent with Rosner (2003) and Garcia-Lara, Garcia-Osma, & Neophytou (2009). This reinforces the importance of including the distress variable in future corporate transparency studies.

Strengthening the Financial Reporting System: Can Audit Committees Deliver?

This paper reviews literature on audit committees in order to evaluate the extent to which committees are effective in terms of strengthening financial reporting. Specifically, we examine academic research on the topic of audit committee effectiveness published in a variety of accounting journals from 1994 until 2008. In particular, our review investigates from a meta-perspective the results reported in studies which examine the relationship between certain audit committee characteristics and measures of audit committee effectiveness. A large proportion of the studies report a positive association between effectiveness and the following characteristics: presence of the audit committee; audit committee members’ independence; and members’ competencies. However, the number of meetings and the size of the committee are not frequently associated positively with audit committee effectiveness. Our review also highlights important gaps in literature. Most studies are relational and explanatory; very few studies are exploratory, descriptive or transformative. Psychological and sociological perspectives of analysis are neglected. Knowledge is scant on audit committees in jurisdictions which do not follow the Anglo-Saxon model of corporate governance. Further, research on dynamics surrounding audit committee processes is scarce. As a result of these gaps in literature, our review aims to sensitize accounting researchers about the appropriateness of extending the boundaries of research on audit committees: methodologically, theoretically, and geographically speaking. Further, by summarizing research results on the effectiveness of various audit committee attributes, our review can be useful for regulators in terms of assessing the impact of extant regulation or in terms of implementing new regulation. Regulators and practitioners, however, should be careful in interpreting the results; 59 percent of the studies we reviewed focus on US public companies and most of the other studies rely on data gathered in countries characterized by the Anglo-Saxon model of corporate governance.