Existence Of Audit Committee Research Articles

The impact of audit committee existence and external audit on earnings management

Purpose – This study aims to examine the combined effect of audit committee existence and external audit on earnings management. Design/methodology/approach – The paper uses ordinary least squares regression model to examine the effect of audit committee existence, external audit and the interaction between these two monitoring mechanisms on earnings management for a sample of 33 non-financial listed Portuguese firms-year from 2003 to 2009. Findings – In contrast to results of most previous studies, which assume that audit committees and external auditor act independently from one another, the paper finds a positive relationship between both audit committee existence and external audit and discretionary accruals. However, this study suggests that the existence of an audit committee and external auditor jointly reduces earnings management. Practical implications – The findings based on this study provide useful information for regulators in countries with an institutional environment similar to that of Portugal. In addition, the results also provide useful information to investors in evaluating the impact of audit committee existence and external audit on earnings quality, especially under concentrated ownership. Originality/value – The major contribution of the current study is that in contrast to previous studies, which have implicitly assumed that audit committees and external auditors act independently from one another, this study also examines the combined effects of audit committee existence and external auditors on earnings management. In addition, this paper is the first empirical study to investigate the effect of audit committee existence and external audit on earnings management in Portugal.

Compliance with IFRS 3- and IAS 36-required disclosures across 17 European countries: company- and country-level determinants

In this study, we analyse compliance for a large sample of European companies mandatorily applying International Financial Reporting Standards (IFRS). Focusing on disclosures required by IFRS 3 Business Combinations and International Accounting Standard 36 Impairment of Assets, we find substantial non-compliance. Compliance levels are determined jointly by company- and country-level variables, indicating that accounting traditions and other country-specific factors continue to play a role despite the use of common reporting standards under IFRS. At the company level, we identify the importance of goodwill positions, prior experience with IFRS, type of auditor, the existence of audit committees, the issuance of equity shares or bonds in the reporting period or in the subsequent period, ownership structure and the financial services industry as influential factors. At the country level, the strength of the enforcement system and the size of the national stock market are associated with compliance. Both factors not only directly influence compliance but also moderate and mediate some company-level factors. Finally, national culture in the form of the strength of national traditions (‘conservation’) also influences compliance, in combination with company-level factors.

Corporate Governance and impact on Bank Performance

This study aims at examining the corporate governance mechanisms and their impact on performance of commercial banks in the absence of organized stock exchange. The study assessed the relationship between selected internal and external corporate governance mechanisms, and bank performance as measured by ROE and ROA. The study used structured review of documents, and commercial banks financial data were collected covering a period 2005 to 2011. The findings indicated that board size and existence of audit committee in the board had statistically significant negative effect on bank performance; whereas bank size had statistically significant positive effect on bank performance. Similarly, capital adequacy ratio, as a measure of external corporate governance mechanism, had statistically significant positive effect on bank performance. In addition, absence of organized stock exchange; high government intervention; lack of corporate governance awareness, absence of national standards of corporate governance, as well as accounting and auditing; and weak legal framework to protect minority shareholder rights are the major factors with adverse impact on corporate governance and bank performance in Ethiopia.

Rewarding Audit Committee Members: Does it Influence Diligence and Financial Reporting Quality?

An increasing number of Australian companies pay fees to members of audit committees and the amount of such fees is rising. This study examines whether the existence and amount of audit committee fees paid to audit committee members is associated with reduced earnings management through a higher proportion of meetings attended. The results of this study indicate that when audit committee fees are higher, earnings management is reduced through increased meeting attendance. The fact that paying audit committee members higher fees encourages them to attend more audit committee meetings is surprising since audit committee fees, on average, are approximately $6,000 per annum in 2010, an arguably small fraction of the total compensation of directors sitting on the audit committees. The evidence suggests that providing audit committee members with even small amounts of financial rewards can provide incentives for them to exert more diligent effort and thus has a positive effect on audit committee effectiveness, which enhances the audit committee’s role in monitoring financial reporting quality. These results have public policy implications for non-executive directors’ compensation and for mandated disclosure of board committee fees in terms of their quantum.

The determinants of audit committees: evidence from the charity sector

Drawing on the theoretical perspectives of agency theory, institutional theory and resource dependency theory, this study finds that board attributes (consisting of the number of trustees and board structure), charity size, the nature of charitable activities, and external influences (namely proportion of restricted funds, presence of government funding and auditor quality) are all significantly positively associated with the annual report disclosure of audit committee existence. No relationship was found with either organizational legal form or donor dependence.

The Effect of Board Characteristics and Audit Committee Existence on Earnings Quality of Indonesian State-Owned Enterprises

The objective of this research is to determine the effect of Board of Commissioners characteristics which is assessed by number or size of, level of independence of, and amount of remuneration received by the Board of Commissioners on earning’s quality of Indonesia’s State-Owned Enterprises (“SOE”). The objective of this research is also to determine whether the existence of Audit Comittee has significant effect on the earnings quality of the SOE. Hypotheses testing are done by using a multiple regression model with 111 sample of State-Owned Enterprises whose majority share is owned by the state during 2009 dan 2010. The results provide empirical evidence that independency of Board of Commissioners increases the SOE earnings quality, meanwhile the other Board characteristics and the existence of Audit Committee has no significant effect on the SOE earnings quality.

CORPORATE GOVERNANCE PRACTICES, SHARE OWNERSHIP STRUCTURE, AND SIZE ON EARNING MANAGEMENT

This study tries to analyze the effect of corporate governance practices, ownership, and firmsize on the amount of earnings management. It was conducted in the companies listed in IndonesiaStock Exchange. Ownership structure can be divided into institutional ownershipand family ownership, firm size which were measured by market capitalization. The corporategovernance practices were measured using three variables (quality audit, the proportionof independent board, and the existence of audit committee). Multiple-regression was employedfor analysis with the empirical data from 117 samples of manufacturing companieslisted in the Indonesia Stock Exchange. It was found that company size and family ownershiphave a significant influence on the amount of earnings management. The larger the company,the smaller management is on average earnings and earnings management in the firms withhigh family ownership. Those that are not a corporate conglomerate are higher than averageearnings in the management of other companies. The practice of corporate governance andinstitutional ownership variable did not have significant effect on the amount of profit madeby company management.

The Existence and Composition of Audit Committees in the New Zealand Public Sector

This study investigates the association between the source of funding of New Zealand public‐sector entities (PSEs) and the existence and composition of their audit committees. We examine 134 PSEs in the health, local government and tertiary sectors. Of these PSEs, 81 (60%) have an audit committee. The size of the audit committees are on average larger than recommended by best practice guidelines. However, most of the PSEs comply with guidelines recommended for audit committee independence but not financial expertise. PSEs with higher levels of government funding are more likely to establish audit committees and PSEs that rely on funding from rate payers and debt providers are more likely to have audit committees with a majority of independent members. There is no support for the association between the source of funding and the level of financial expertise on audit committees.

The extent of corporate governance disclosure and its determinants in a developing market: The case of Egypt

This paper assesses the extent of corporate governance voluntary disclosure and the impact of a comprehensive set of corporate governance (CG) attributes (board composition, board size, CEO duality, director ownership, blockholder ownership and the existence of audit committee) on the extent of corporate governance voluntary disclosure in Egypt. The measurement of disclosure is based on published data created from a checklist developed by the United Nations, which was gathered from a manual review of financial statements and websites of a sample of Egyptian companies listed on Egyptian Stock Exchange (EGX). Although the levels of CG disclosure are found to be minimal, disclosure is high for items that are mandatory under the Egyptian Accounting Standards (EASs). The failure of companies to disclose such information clearly shows some ineffectiveness and inadequacy in the regulatory framework in Egypt. Moreover, the phenomenon of non-compliance may also be attributed to socio-economic factors in Egypt. Therefore, it is expected that Egyptian firms will take a long time to appraise the payback of increased CG disclosure. The findings indicate that that—ceteris paribus—the extent of CG disclosure is (1) lower for companies with duality in position and higher ownership concentration as measured by blockholder ownership; and (2) increases with the proportion of independent directors on the board and firm size. The results of the study support theoretical arguments that companies disclose corporate governance information in order to reduce information asymmetry and agency costs and to improve investor confidence in the reported accounting information. The empirical evidence from this study enhances the understanding of the corporate governance disclosure environment in Egypt as one of the emerging markets in the Middle East.

Does the existence of voluntary audit committees really affect IFRS-required disclosure? The Kuwaiti evidence

The purpose of this article is to investigate the effect of the existence of a voluntary audit committee on the level of International Financial Reporting Standard (IFRS)-required disclosure practices in Kuwait. A multivariate regression model is estimated using Ordinary Least Squares analysis for a sample of 68 Kuwaiti companies listed on the Kuwait Stock Exchange (KSX) at the end of 2007 to test the association between the existence of a voluntary audit committee and the level of IFRS-required disclosure. The study's results indicate that the existence of the audit committee is significantly and positively associated with the level of IFRS-required disclosure. Other factors explaining this association are multiple family members on the board, industry type and leverage. In contrast, the other four independent variables (company size, profitability, company age and ownership diffusion) do not emerge as statistically significant explanations of the IFRS-required disclosures. The findings of the study will help policy makers and practitioners to anticipate that Kuwaiti companies with a higher level of compliance with the IFRS-required disclosures are expected to have an audit committee and a higher level of leverage. In addition, there are significant differences across industries in the level of compliance with the IFRS-required disclosures. It appears that Kuwaiti companies with lower levels of compliance with the IFRS-required disclosures are likely to be dominated by families. Furthermore, as KSX listed companies are not obliged to establish an audit committee, the results of this study show that such committees are important in significantly increasing the level of compliance with mandatory disclosure. Thus, an important implication of this study for the KSX is the need to advise all listed companies and policy makers to make the formation of an audit committee mandatory thereby increasing the level of mandatory disclosure. This study is the first to empirically investigate the effect of the existence of a voluntary audit committee on the IFRS-required disclosures provided by Kuwaiti companies. Furthermore, the findings reinforce the importance of an audit committee for enhancing the level of required disclosure.

The impact of audit committee existence and characteristics on auditor auditee negotiation outcomes: an empirical study in the Tunisian context

The main purpose of this paper is to analyse the relationship between auditor auditee negotiation outcome and the existence and characteristics of the audit committee in Tunisian context. The multivariate tests were led on a sample of 142 Tunisian firms for the period 2006-2007. The results of our study reveal that audit committee existence has a significant influence on auditor auditee negotiation outcome. Meanwhile, audit committee independence, audit committee expertise and the number of meetings were not relevant in explaining auditor auditee negotiation outcomes. Within the control variable, the size of the audit firm is positively significant indicating that Big 4 audit firms are more likely to agree with their auditees than smaller audit firms. This study has important implications on the auditing profession and regulators in Tunisia. So, it reinforces the role of audit committee as corporate governance mechanisms in reducing auditor auditee conflict and in improving financial information quality.

Ownership Structure, Corporate Governance and Firm Value: Evidence from Chinese Listed Companies

This study investigates the effects of ownership structures and corporate governance on firms' performance in the Chinese capital market, which is in the early developmental stage of a socialist market economy. First, we examined companies that issued A stock listed on Shanghai and Shenzhen Stock Exchanges from 2004-2007 to analyze the effects of various facets of ownership structures and corporate governance on firms' values. Second, we examined the firms' performances under varying proportions of state ownership to examine the impact on ownership structures and corporate governance. Factors of ownership governing structures, such as state ownerships, largest shareholder ownership, and managerial ownership were found to negatively affect the firms' values. We also examined the effect of interactions between firms' performances and corporate governance structures on board independence and the existence of audit committees on the valuation of firms with high performance values.

Pengaruh Penerapan Mekanisme Good Corporate Governance Terhadap Praktik Manajemen Laba Pada Perusahaan Manufaktur Yang Terdaftar Di Bursa Efek Indonesia

AbstractThe conflict of interest between agent and principal, asymmetrical information and accounting method selection are able to be used by the manager to do earning management practices. However, it could be reduced by practicing the good corporate governance mechanism which can adjust agent and principal’s interest. The objective of this study is to test the effect of good corporate governance mechanism, as reflected by institutional ownership, managerial ownership, presence of independent board and audit committee existence on the earnings management practice. Using sample from 62 companies in the manufacturing sector at the Jakarta Stock Exchange, which publish financial statement from 2005-2006. This study shows that good corporate governance mechanism insignificantly influence earnings management practice simultaneously. We can infer that mechanism haven’t succeeded to minimize the earnings management practices.

The association between corporate governance and earnings quality: Further evidence using the GOV-Score

Abstract This paper reexamines the relation between corporate governance and quality of earnings using a summary governance measure. Prior research has used many surrogates for corporate governance including size and composition of board of directors, existence and composition of audit committee, and extent of institutional ownership. However, the criticism of the extant research has been that corporate governance comprises many facets and is not uni-dimensional. In this study we fill this void by using the Gov-Score developed by Brown and Caylor [Brown, D., and Caylor, M.L., (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy 25, 409–434.] to measure corporate governance. In the post-Sarbanes–Oxley period, we find evidence of a significant inverse relationship, namely higher levels of corporate governance are associated with lower absolute discretionary accruals and higher quality of earnings. Furthermore, our results suggest that only firms in the highest category of corporate governance experience significantly improved quality of earnings. Finally, as a test of robustness, we document that corporate governance is negatively associated with small earnings surprises. This implies that firms with weak corporate governance are more likely to manage earnings in order to meet or beat analyst forecasts.

Corporate governance practices of small cap companies and their financial performance: an empirical study in New Zealand

The purpose of this paper is to examine the effect of corporate governance practices of small cap companies have had on their financial performances. Previous studies have mainly examined governance practices of larger corporations. This analysis focuses on the governance variables that have been highlighted by the New Zealand Securities Commission (2004) governance principles and guidelines and also on the governance variables that are supported in the literature as providing an appropriate structure for the firm in the environment in which it operates. The data for 71 small cap companies listed in New Zealand over a five-year period from 2001 to 2005 was analysed. Pooled data, OLS and 2SLS regression techniques were used and Tobin's Q, ROA and OPINC were used as the dependent variables. The evidence does support the hypothesis that the existence of board independence and audit committee has enhanced firm financial performance, as measured by Tobin's Q.

External Auditors, Audit Committees and Earnings Management in France

ABSTRACT We investigate the effect of various audit quality dimensions (i.e. auditor reputation and tenure, audit committee existence and independence) on earnings management in France. We thus contribute to the empirical audit quality literature in a Continental European environment that markedly differs from the USA in terms of auditing and corporate governance. The main findings are that: (1) the presence of an audit committee (but not the committee's independence) curbs upward earnings management; and (2) the presence of a Big Five auditor makes no difference regarding earnings management activities. Implications of these findings are discussed with regard to the specificities of the French auditing and governance settings. In particular, although the audit committee acts as a device to control the more egregious (i.e. income-increasing) forms of earnings management, the monitoring incentive of outside directors may be hampered by the collective board responsibility for financial reporting quality. Second, the lack of differentiation among Big Five auditors in terms of accounting conservatism is consistent with the lower litigation risk offered by the French Civil Code (vs. the US Common Law system), which is likely to eliminate the deep pockets incentive for investors.

The Impact of Audit Committee Existence and Audit Committee Meeting Frequency on the External Audit: Perceptions of Australian Auditors

This article examines the impact of audit committee existence, the frequency of audit committee meetings and the auditor's attendance at meetings on aspects of the external audit. Using an experimental design, we find that the audit committee, the frequency of committee meetings and the auditor's attendance at meetings are significantly associated with a reduction in perceived audit risk. The impact on audit efficiency and audit testing is perceived to be minimal. Manager and partner hours are greater when meetings are more frequent and the partner attends all meetings. The audit committee is expected to provide assistance in resolving conflicts with management and to lead to some improvement in overall audit quality. In neither case is this affected by meeting frequency or the auditor's attendance at meetings. Participants expect the existence of an audit committee to lead to an increase in audit fees, particularly when meetings are more frequent and the auditor is required to attend meetings. Reasons given for any fee increase relate to the additional preparation for and attendance at meetings.

Perceptions of auditor independence in Barbados

PurposeThe study investigates the perceptions of auditor independence (PAI) between auditors and users in Barbados.Design/methodology/approachA self‐administered questionnaire was adapted and modified from Beattie et al.'s study in the UK the sample included 66 auditors and 148 users. Factors relating to the size and closeness of Barbadian society, lengthy tenure and being a sole audit practitioner, small audit firm, provision of non‐audit services (NAS) among others, were investigated.FindingsEconomic dependence of auditor on the client, the provision of NAS, high competition, small firm size, being a sole practitioner, lengthy tenure and the size and closeness of Barbadian society were found to negatively affect PAI. Auditor independence was perceived to be enhanced by the existence of audit committees, rotation of audit partners, risks to auditor arising from poor quality, regulatory rights and requirements surrounding auditor change and an auditor's right to attend and be heard at the company's annual general meetings.Research limitations/implicationsOwing to the relatively small sample size and small emerging market, these findings should be interpreted with caution.Practical implicationsThis research serves to inform audit related policies and regulation on the potential threats to auditor independence.Originality/valueThis paper contributes to the limited body of research on auditor independence in small developing countries.

Audit Committee and Auditor Independence: Some Evidence from Malaysia

This paper investigate the impact of five issues on audit committee such as active audit committee, compulsory audit committee reports, audit committee approves audit fees, audit committee reviews audit fees, audit committee comprised of majority independent and non-executive directors, to auditor independence. To achieve the research objective, this study was undertaken in two stages: the first stage involved the use of a postal questionnaire survey and the second stage employed interview survey. The population selected for this study consists of auditors, loan officers and senior managers of Malaysian public listed companies. The questionnaire survey revealed that the majority of the respondents agreed that auditor independence would be safeguarded by the presence of an active audit committee, if it was compulsory to include an audit committee report in the annual report, if the audit committee was responsible for approving and reviewing audit fees, and if the majority of audit committee members were independent and non-executive. It is found that the interview survey confirmed the questionnaire survey's findings. This indicates that the respondents have faith in the existence of audit committees in the Malaysian capital market, which would enhance communication between auditors and management.

The impact of board composition and family ownership on audit committee formation: Evidence from Hong Kong

This study investigates empirically the relationship between three major corporate governance attributes (family shareholding, non-executive directors and independent chairman) and the existence of audit committees across a sample of 397 publicly traded firms in Hong Kong. The results show that at a medium level of family shareholding (between 5% and 25%), the convergence-of-interest effect is dominant and the existence of audit committees decreases. At a high level of family shareholding (more than 25%), the entrenchment effect is dominant and as a result, the existence of audit committees increases. In addition, we show that the response of investors to audit committee existence is not dependent upon family shareholding when there is an independent chairman. The findings of our study also suggest that there is a positive association between the proportion of independent non-executive directors on the corporate board and audit committee existence. In addition, the results show that the positive association between independent non-executive directors is stronger for firms with an independent chairman. Implications of these findings for regulators are discussed.