Establishment Of Audit Committees Research Articles

Credit Rating and Board Evaluation of Family Firms

Purpose: The purpose of this paper is to shed the light on board evaluation for following analyses that will explore whether and how does credit rating agencies react to board performance evaluation. Design/methodology/approach: To test our research questions, we hand-collect board evaluation information for Taiwan publicly firms from annual reports and firm websites for the years 2019 to 2021. Then, we use the ordered probit model to examine our research questions. Finding: First, our results show that there is a relationship between family firms and unfavorable ratings. However, effective board evaluation was shown to strengthen transparency and accountability in internal governance environment, thereby moderating such negative relationships. Second, when family firms are mandated to establish audit committees or change auditors, they are more likely to receive unfavorable ratings. Specifically, effective board evaluation moderates’ negative effects on ratings and positively impacts rater perceptions. Third, rating agencies assign a more unfavorable rating to family firms that ignore gender diversity on audit committees, however, effective audit committee’s evaluation could moderate the concern whether gender diversity on audit committees affect the effectiveness of corporate governance. Research limitations/implications: First, we focus on the context of family governance to examine the effect of board evaluation on credit ratings. Therefore, our findings may not be applicable to non-family firms. Second, we are not able to directly observe the mechanism of board evaluation because our study uses hand-collected data of board evaluation obtained from publicly available MOPS reports and website news. In addition, our sample period is limited from 2019 until 2022 due to the significantly higher hand-collecting cost of using board evaluation data. Third, with respect to our extended analyses on audit changes, we didn’t consider the types of auditor changes because it is difficult to distinguish between auditor resignations and dismissals. Finally, although we include control variables consistent with prior studies, our research models may have not fully captured variables associated with credit ratings. Originality/value: First, our results contribute to the family firm literature on the relationship between corporate governance and economic consequence by focusing on the importance of board evaluation. Second, our findings can be useful to regulators and policy-makers in making governance policies aiming to mandate the establishment of audit committees’ complementary rules by encouraging family firms to fulfill the board evaluation for improving the quality of governance environment. Third, our findings not only contribute to the auditing literature but also imply that the board’s performance evaluation plays a positive factor in credit raters’ considerations. Fourth, our findings contribute to the audit committee literature examining the effects of gender diversity and performance evaluation.

Audit committee nominee directors and bank performance: Evidence from Indian banks

The audit committee (AC) in the Indian public sector banks consists of executive directors, Reserve Bank of India nominee directors, and the central government nominee directors in addition to independent directors, whereas the AC in the private sector banks consists mostly of independent directors. The difference in the constitution of the AC across different ownership may have a different impact on their performance. Hence, this study aims to investigate the impact of the nominee directors on the audit committee and the performance of the Indian listed banks. The study uses the panel data approach. We have taken 21 public sector banks and 15 private sector banks operating in the Indian banking sector. The fixed effects estimation technique to examine the relationship between the audit committee constituents and bank performance during the period 2009–2010 to 2016–2017 was used. It was found that CEO chairman duality, the presence of the chartered accountant (CA) director, AC chairman, and AC bear a positive relationship with bank performance. The findings are more or less consistent across the various bank performance measures and sub-samples classified based on the bank size, audit committee size, and ownership of the banks. The study explores the relationship between nominee directors and bank performance. The study provides insights to policy regulators and policymakers who are entrusted with the establishment of ACs in the banks in light of ongoing regulatory reforms.

Effects of Quality of Financial Statements and CEO Turnover

The purpose of this study is to explore the effect of CEO turnover and CFO turnover on earnings management. In addition, Taiwan’s authorities will require listed companies to complete the establishment of audit committee replacing supervisors in 2022. Corporate governance is not an overnight phenomenon. It has been existing from a long time. It is only that the beginning of 21st century when colossal enterprises started to fall, government across globe started giving it due credit. The present paper is an attempt to trace the history of corporate governance. It starts with discussing various theories which led to the development of such an important concept and then dwells on various models in which economies employ corporate governance in their structure and finally the evolution of corporate governance across globe. The paper sheds light on important committees and reforms which have been the genesis of corporate governance across globe. It undertakes an extensive literature review on different aspects of corporate governance. Corporate governance is a concept which still debatable among experts in describing it. The purpose of this study is to explore how the implementation and principal problems of good corporate governance in the management of current limited liability company.

Audit committee characteristics and bank performance: evidence from India

PurposeThis study aims to investigate the impact of various audit committee (AC) characteristics on the performance of Indian commercial banks. Additionally, it also analyses the non-linear relationship of AC size and AC chairman tenure with bank performance.Design/methodology/approachA panel data approach has been used in this study. The authors have used the fixed-effect estimation technique to examine the relationship between AC characteristics and bank performance during the period 2009–2010 to 2016–2017.FindingsThe authors find that the professional financial education of the AC chairman and members positively affects bank performance. the frequency of the AC meetings and audit chair busyness bears an inverse relationship with performance. The findings are more or less consistent across the various bank performance measures and subsamples classified based on the time period and ownership of the banks.Practical implicationsThis study provides insights to policy regulators and policymakers who are entrusted with the establishment of ACs in the banks in light of the ongoing regulatory reforms.Originality/valueThe study is among one of the early studies, which study the relationship between AC characteristics and bank performance in the light of recent regulatory reforms. It also extends the existing study by considering both public and private banks operating in India.

Audit Committees and Bank Governance: the Case of Tunisian Banks

This paper examines the impact of setting up new audit committees in Tunisian banks on their corporate governance. Specifically studied were the effects of the establishment of audit committees on boards of directors’ effectiveness, internal auditor independence, external auditor effort, and internal control and financial reporting quality. The interview and survey methods were used to collect data from board members and the internal and external auditors of eight Tunisian banks shortly after they introduced audit committees on their boards. The main findings show that the establishment of new audit committees influences the breadth of the directors’ discussions during board meetings. In some of the banks studied, the new audit committees improve the internal auditors’ independence from top management, internal controls and financial reporting quality, and/or result in less effort by external auditors. Some of the interviewed external auditors view the new audit committees as a valuable governance mechanism, especially in cases of disagreement with management.

Impact of Audit Committee Adoption and its Characteristics on Financial Performance: Evidence from 100 French Companies

The aim of this paper is to examine the impact of legal creation of audit committees on financial firm performance. Precisely, we examine the impact of the establishment of audit committee, following the enactment of Ordinance No. 2008-1278, on financial firm market performance. Moreover, we investigate whether the audit committee characteristics such as independence of the members of the audit committees, the size; the accounting and financial expertise of the committee members as well as the frequency of audit committee meetings determine financial performance.We choose two measures for performance namely ROE and ROA. We conduct a panel study for a sample of 100 French companies listed on the Paris Stock Exchange from 2007 to 2015.The results show that the appearance of a legal text pushes the establishment of the committee but has no significant effect on the company's performance. This can be explained by the strong voluntary adoption of the audit committee following the publication of the Viénot Reports (Saada, 1998).

Audit committees and systematic risk: Evidence from Taiwan’s regulatory change

This study examines the changes in the systematic risk of firms listed in the Taiwan stock market following the initial establishment of audit committees. While the results show that the changes in systematic risk are insignificant for the overall sample of firms, I do find that corporate governance influences the changes in systematic risk for the low-growth firms. Specifically, the low-growth firms with lower insider shareholdings, with a pyramidal ownership structure, not controlled by a family, or audited by one of the Big 4 accounting firms tend to enjoy the benefits of experiencing a decline in systematic risk following the establishment of the audit committee.

The Impacts of Establishment of Audit Committee on Controlling Earnings Management

The Impacts of Establishment of Audit Committee on Controlling Earnings Management

Establishment of audit committees in government ministries of a developing country

The underlying study to this paper attempts to establish to what extent audit committees in government ministries in Namibia have been established as a requirement for enhanced quality of service delivery and accountability to taxpayers A qualitative approach was followed, where questionnaires or an interviews were conducted with accounting officers in government ministries. Content and thematic analyses were used to formulate narratives based on the understanding of similarities and differences in respondents’ experiences, views and perceptions. The study shows that from the 17 ministries that responded, only 2 ministries have established audit committees. Confirmatory, there is currently no legislature that makes it mandatory for government ministries in Namibia to establish audit committees within their respective constituencies. There are no formal audit committee terms and references or an audit committee charters are in place. Government ministries in Namibia seem to not have adopted best national and international governance practices with respect to the establishment of audit committees within their ministries. There is a need for a clear guidance as to how audit committees must be established; the composition of the committee members, the terms of office of committee members and remuneration, to mention a few.

The Relationship between Audit and Risk Management Committees on Financial Performance of Non-financial Companies in Nigeria: A Conceptual Review

In recent years, cases of dissatisfaction from shareholders in reflection and recording of corporate financial activities, this has given rise to establishments of Audit and risk management committee and inclusion in the governance code as one of the governance mechanism for companies. It has become very serious issues of fraudulent practices by management, hence the need for audit system to signal any form of information asymmetries. This paper is purely conceptual review of past articles on corporate governance mechanism, board committees and Corporate Governance Code in Nigeria. The code defines what is needed for establishment of audit Committee by Corporations. The conceptual framework on audit and risk management committee is proposed for further study looking at Tobin q and ROA as measure of accounting and market performance respectively. DOI: 10.5901/mjss.2015.v6n3p206

AUDIT COMMITTEES IN STRUCTURES SUPERVISORY BOARD - SEVERAL YEARS EXPERIENCE

The article examines the current state of functioning of audit committees within the framework of the supervisory boards of public companies, so companies that are statutorily obliged to create such committees. According to research presented in the article, only about 40% public companies formed audit committees. The remaining 60% of the entities have benefited from their capabilities to set when the board of directors consists of not more than five members - they are called small boards. In such a situation, the entire board of directors takes over the duties and responsibilities of the audit committee. According to the author of this paper, audit committees in Poland are unnecessary. The very fact that they have no decision-making powers, but only advisory and consultative causes are seen as unnecessary, and their activity does not bring any added value.It should also be emphasized that a legal duty has been the establishment of audit committees in Poland imposed by EU legislation, which causes further their duration is inevitable.

The effectiveness of audit committees for low‐ and mid‐cap firms

PurposeThe purpose of this paper is to investigate the effectiveness of recommendations made by the Australian Stock Exchange (ASX) relating to audit committees in Australia, and whether they have improved financial reporting quality for low‐ and mid‐cap listed firms.Design/methodology/approachThe authors examine the relation between characteristics of the audit committee and financial reporting quality for listed companies not mandated to comply with these requirements, i.e. low‐ and mid‐cap firms. For a sample of 288 firms, the authors regress measures of audit committee independence, expertise and activity and size on alternative measures of earnings management.FindingsA significant association is found between all three characteristics and lower earnings management. The significant measure for independence is the proportion of independent directors on the audit committee; for expertise, it is that at least one member of the audit committee has an accounting qualification; and for activity and size, it is the frequency of audit committee meetings.Practical implicationsThe results provide support for the mandatory establishment of audit committees for the top 500 (high‐ and mid‐cap) firms introduced by the ASX and suggest those audit committee characteristics which could improve financial reporting quality for low‐ and mid‐cap firms.Originality/valueThe paper examines low‐ and mid‐cap firms in order to complement previous similar studies done for high‐cap firms. It identifies the effects on financial reporting quality of voluntarily choosing to have an audit committee and of the choice of audit committee characteristics, in the period after substantial corporate governance reform. It includes a new measure among audit committee characteristics, industry expertise, which is required in Australia and is new to the literature.

Impact of IFRS Convergence in India: An Evidence from First-Time Adoption of Indian Accounting Standards

The aim of this paper is to examine the impact of legal creation of audit committees on financial firm performance. Precisely, we examine the impact of the establishment of audit committee, following the enactment of Ordinance No. 2008-1278, on financial firm market performance. Moreover, we investigate whether the audit committee characteristics such as independence of the members of the audit committees, the size; the accounting and financial expertise of the committee members as well as the frequency of audit committee meetings determine financial performance.We choose two measures for performance namely ROE and ROA. We conduct a panel study for a sample of 100 French companies listed on the Paris Stock Exchange from 2007 to 2015.The results show that the appearance of a legal text pushes the establishment of the committee but has no significant effect on the company's performance. This can be explained by the strong voluntary adoption of the audit committee following the publication of the Viénot Reports (Saada, 1998).

The Effect of Audit Committees on Earnings–Return Association: Evidence from Foreign Registrants in the United States

Manuscript Type: Empirical Research Question/Issue: This study examines whether foreign registrants that choose not to establish audit committees in the US have generally lower earnings–return associations. Research Findings/Insights: Our empirical results indicate that earnings–return associations for foreign registrants without audit committees are significantly lower compared with those of their US-matched firms which are required to establish audit committees. This result is even more pronounced after the introduction of new audit committee rules in 1999 aimed at increasing the responsibilities of audit committees. In addition, earnings–return associations of foreign registrants are found to increase following the establishment of audit committees. Overall, our results are consistent with the idea that the establishment of audit committees may be related to higher earnings–return associations. Theoretical/Academic Implications: Our empirical results suggest that foreign registrants that have chosen to establish audit committees have better earnings–return associations. This implies that the effectiveness of the audit committee in resolving agency problems is applicable to foreign companies, even though their home countries adopt non-Anglo-American corporate governance systems. Practitioner/Policy Implications: This study offers important insights to foreign firms listed in the US. As the choice not to form an audit committee may increase the cost of capital in the US, but save the cost of establishment in home market, the managers of foreign registrants should weigh the costs and benefit of the options and make a choice accordingly.

Audit Committees in Scottish Local Authorities 1998—2005

During the last 15 years corporate governance has become increasingly prominent in the public sector. The Audit Commission's 1993 report on probity in local government recommended the establishment of audit committees. However, progress on this was slow, as demonstrated by a survey of Scottish local authorities by the authors in 1998. Recent major changes in government in Scotland at both a local and national level have prompted councils to improve the accountability, openness and integrity of their operations. One major aspect of this exercise was the formation of scrutiny committees to provide objective scrutiny of the process and audit committees were the most common vehicle for this. This article explores recent developments in Scottish local government and their impact on audit committees. The article also reports the results of a 2005 survey of Scottish local authorities and compares these with the 1998 survey. This indicates a significant growth in the number of audit committees in Scottish councils and although the level of their perceived effectiveness is patchy, they are a more important feature of local government than they were in 1998.

Impact of family dominance on monitoring of earnings management by audit committees: Evidence from Hong Kong

This study examines whether the establishment of audit committees by Hong Kong firms would constrain earnings management, especially in firms with family-dominated corporate boards, a condition unique to Hong Kong. The study uses the methodology of three-stage (3SLS) regression analyses to control for endogeneity among earnings management, voluntarily established audit committee, and corporate board size. The results of regression analyses based on 523 observations for the period of 1999–2000 when the audit committees were first established by Hong Kong firms show that overall audit committees play a significant role in constraining earnings management even in the business environment of higher ownership concentration. The effectiveness of audit committees is, however, significantly reduced when family members are present on corporate boards, especially when family members dominate the corporate board.

Audit Committees in Central Banks

This paper reviews the tasks and design of audit committees, increasingly recommended as a way to strengthen financial accountability and good central bank governance. It outlines the motivations for the establishment of audit committees in commercial corporations and public sector entities, and explains how audit committees interact with other governance bodies within a central bank. The paper focuses on the functions of an audit committee, since the terminology of the governance structure is often country-specific. It summarizes operational issues to consider in designing an effective audit committee and discusses the implications for central bank legislation.

Attributes of an Effective Audit Committee: Evidence from an Emerging Capital Market

Audit committee has been in existence for many decades. The establishment of audit committee aimed to mitigate corporate fraudulent or creative accounting practices through internal control initiated by independent and effectively functioning non-executive members of audit committee. An effectively functioning audit committee helps to improve corporate governance practice of firms. This study identifies the attributes of an effective audit committee from audit committee chairman's perspective. The study utilized questionnaire survey approach, where a total of 200 questionnaires were distributed to chairman of audit committee of companies that listed on the Main and Second Board of the Kuala Lumpur Stock Exchange. Seventy-two useable questionnaires were returned (or 36% response rate). Using factor analysis; the respondents rated highly the effectiveness attributes, which explained 72% of the variance in all of the variables. Three factors were extracted: overall features (54% variance), model to others (10% variance) and review and analysis of standards (8% variance). In general, the respondents believed that an effective audit committee should have the following attributes: sophisticated accounting knowledge, review of financial statements, traditional role in accounting and auditing to ensure auditor independence and good management, and internal control.

How Audit Practices Got Muddled in the US and UK

This paper considers how auditing practices became muddled in the US and the UK to create muddled corporate governance principles. The US 1933 law that required corporations to appoint an auditor was based on the prospectus provisions in the UK 1929 Companies Act to protect investors from fraud. However, this is not the purpose of UK statutory audits whose legal role is to protect the company and provide shareholders with intelligence for voting on the election and remuneration of directors whether or not the company issues shares or whether it has shares publicly traded. The UK statutory auditor only reports to the shareholders who approve his appointment and remuneration. The US auditor is appointed by the directors and reports to both directors and shareholders to subrogate the reason for having an auditor to identify conflicts between them. The establishment of audit committees with independent directors cannot remove the conflicts. These are exacerbated by the Sarbanes-Oxley Act and the UK Combined Code that require audit committees to provide oversight of the auditor. Some European countries avoid these conflicts by the auditor being controlled by a shareholder committee or “watchdog board”. Audit practices got muddled by corporations not establishing a shareholder audit committee as provided in the model constitution attached to the UK 1862 companies Act. Compelling arguments are presented to conclude that convergence of audit practices on those found in the US or UK is not in the best interest of directors or auditors in reducing their conflicts or safeguarding: investors, the proprietary rights of shareholders or self-governance.

Gaps in Guidelines on Audit Committees

Since the 1940s, advocacy of the establishment of audit committees was undertaken by regulatory agencies, and subsequently by the accounting profession, and committees representing combinations of interest groups. Over time, this advocacy literature has reflected changing views about the key responsibilities of audit committees. Initially, audit committees were primarily concerned with negotiations with (or responding to) auditors, and reviewing financial statements prior to publication. Since the 1970s, formal guidelines or requirements have suggested additional responsibilities that involve oversight of the internal management of corporations. There is a pattern of renewed enthusiasm for enhanced corporate governance and for a stronger role for audit committees following spates of corporate crashes or disasters. Nevertheless, some of the lessons from those events continue to be ignored, so that arguably there are gaps in contemporary guidelines on audit committees. These gaps concern the need for audit committees to review the structure and design of delegations, and the adequacy of financial and operational information being provided to senior management and boards (particularly concerning subsidiaries and associated entities). These gaps are also reflected in the charters of the audit committees of Australia's top 200 listed entities. However, in some respects, Australian practice has gone beyond the recommendations embodied in recent guidelines. Drawing from literature and practice, this article proposes a model charter which, if adopted, may contribute to improvements in the effectiveness of audit committees.