Role Of Audit Committee Research Articles

Reporting Internal Control Deficiencies in the Post-Sarbanes-Oxley Era: The Role of Auditors and Corporate Governance

This study addresses the role of audit committees and auditors in the reporting of internal control deficiencies after the passage of the Sarbanes Oxley Act (SOX). We find that a higher number of meetings of the audit committee, lesser proportion of experts in the audit committee, and more auditor changes characterize firms that report weaknesses in their internal controls compared to firms with no weaknesses. Prior restatements of financial statements are also higher for firms not reporting such weaknesses. The results are robust to controlling for a variety of firm characteristics such as complexity of operations, profitability, and growth. Our results underscore the importance of governance characteristics beyond general firm characteristics in examining the reporting of internal control weaknesses.

TRACKS: Musings on Post-Enron Reforms

In the aftermath of one of the worst financial and accounting scandals, the SEC and other regulatory bodies have initiated a flurry of reforms designed to improve corporate governance and to hopefully deter future abuses. The Sarbanes-Oxley Act of 2002 (SOA) has imposed harsher penalties on errant directors and officers and significantly enhanced the role and responsibility of audit committees and independent directors. But the suggested reforms so far have failed to address the major problem that still besets corporate America today. Namely, the agency costs of managing corporations: CEOs, CFOs, and other directors and officers serve their entrenched—insular interest to the detriment of shareholders. In this article, we intend to survey the landscape of the recent suggested reforms, especially as they relate to accounting and audit failures, and evaluate their effectiveness in terms of their ability to alleviate the agency cost of conducting business. We will also offer a proposed reform which we believe can be an effective deterrent to financial and auditing failures.

The Role and Functions of Audit Committees in the Indian Corporate Governance: Empirical Findings

This paper examines the composition, focus and functions of audit committees (ACs), the effects of meetings and the criteria used in the selection of members by Indian listed companies from 73 questionnaire responses. The survey was carried out during February–March, 2002. The study reveals that so far only 56.2% of companies have established an AC despite the fact that it is now mandatory. Of those companies which have ACs, 68.3% have between three and six members on ACs. However, only 14.6% of companies have independent non‐executive directors on the committee, while 90.2% have non‐executive directors. This shows a lack of independent representation on the committees. The functions of ACs are quite diverse and are classified in three areas: financial statements and reporting, audit planning, and internal control and evaluation. The review of annual audited financial statements, discussion and recommendations of audit fees and review of the effectiveness of internal control were rated very highly by the respondents. The review of note disclosure and scope of external audit work are other important functions performed by ACs. The most important areas for focus are compliance with the standards and regulatory bodies, probing material items and undisclosed liabilities. However, there are statistical differences between medium and large sized companies in the performance of their role. The main criteria used for membership of an AC are: experience and knowledge of business, experience of holding similar positions and accounting and finance expertise. Ownership in the company was not perceived as an important criterion. The majority of companies’ AC meetings are held monthly or quarterly. MANOVA analysis reveals that the frequency of AC meetings has an effect on the internal control functions. The study concludes that the concept of an AC is not new in India but their formation is slow and their composition lacks independence. AC functions are still concentrated in the traditional areas of accounting and their role is not changing fast enough to make the corporate governance more effective.

The role of audit committees in decreasing earnings management: Korean evidence

The several accounting scandals that have occurred recently in the USA suggest the importance of well-functioning audit committees. This study examines how the characteristics of audit committees – independence, competency and activity – are related to earnings management. The data used in the analyses are collected from the Korean stock market during the period 2000-2001. The empirical results demonstrate that the independence and competency of the audit committee are associated with the earnings management of a firm. Specifically, the committee members' shareholdings are positively associated with earnings management, while the presence of professors or the employees of financial institutions on the committee is negatively associated with earnings management. However, the activity measure of the committee is not significantly related to earnings management. These results suggest several important implications for regulatory bodies on the composition of audit committees.

Book Reviews

Book ReviewsBooks Reviewed:Clive Lennox, Opinion Shopping and the Role of Audit Committees when Audit Firms are Dismissed: The US Experience, Institute of Chartered Accountants of ScotlandChris Cornforth, ed., The Governance of Public and Non‐Profit Organisations

Opinion Shopping and the Role of Audit Committees when Audit Firms are Dismissed: the US Experience

Opinion Shopping and the Role of Audit Committees when Audit Firms are Dismissed: the US Experience

Audit Committees: begging the question?

Audit committees have become a standard feature of corporate governance in UK listed companies since the publication of the Cadbury Committee's report in 1992. Despite some initial sceptical comment, their widespread adoption has apparently been uncontroversial. However, a decade later, remarkably little is known about how they operate and whether they are effective in providing the benefits anticipated by Cadbury. In the aftermath of Enron, expectations of the audit committee role in supporting auditor independence are likely to intensify. A key feature of audit committee activity – indeed, of the role of the non‐executive director – appears to be the asking of questions, but the practical link between the questioning process and the achievement of the benefits outlined by the proponents of audit committees remains obscure. This paper argues that both the content and context of the questioning process deserve further examination if audit committee activity is to be seen as anything more than a ceremonial performance.

Audit Committees and Accountability in Local Government: A National Survey

Financial scandals in city governments have received increased publicity in recent years. Audit committees have been suggested as a way review and improve standards and procedures for financial accountability. Audit committees assist local government managers in overseeing and monitoring the financial accounting and auditing process. They provide a communication link between elected officials, municipal managers, and independent auditors. This study relies on national survey data to examine the prevalence, role, and composition of audit committees in cities with populations over 65,000 and the conditions affecting their use and effectiveness. Interviews and a brief case study supplement survey data to provide richer detail regarding the performance of audit committees in ensuring improved accountability.

Una manifestación pública de la ética en la empresa: información financiera de calidad

One of the main manifestations of ethics and fulfilment of social responsibility in business is the provision of truthful information sufficient in quantity and quality concerning the economic and financial situation and results of companies. This requirement is not always met. Manipulation, falsification and concealment of accounting information and the creative use of accounting rules and regulations cause a great deal of mistrust on the part of users and hinder correct decision-making. Commitment to corporate ethics is only possible through the correct behaviour of all the groups involved in the drawing up, approval and checking of economic and financial information, including management, the board of directors and external auditors. This article looks at the proposals for codes of good corporate governance drawn up at domestic and international level, and more specifically at the role of audit committees and the new demands made of external auditors as measures seeking to restore the trust of investors and assure the proper operation of markets.

Audit Committee Characteristics and Auditor Dismissals following “New” Going-Concern Reports

One important role of audit committees is to protect external auditors from dismissal following the issuance of an unfavorable report. We examine auditor dismissals following new going-concern reports that Big 6 firms issued between 1988 and 1999. Our findings suggest that audit committees with greater independence, greater governance expertise, and lower stockholdings are more effective in shielding auditors from dismissal after the issuance of new going-concern reports. In addition, we find that the relation between audit committee independence and auditor protection from dismissal has grown stronger over time. Finally, independent audit committee members experience a significant increase in turnover rate after auditor dismissals. These findings, coupled with those from Carcello and Neal (2000), suggest that when affiliated directors dominate the audit committee, management often can (1) pressure its auditor to issue an unmodified report despite going-concern issues, and (2) dismiss its auditor if the auditor refuses to issue an unmodified report.

An Examination of the Role of Audit Committees in the Saudi Arabian Corporate Sector

Based on a series of research interviews with academics and external and internal auditors, this paper examines the role of audit committees in the Saudi Arabian corporate sector. The interviewees expressed concerns about the terms of reference of audit committees and the scope of work undertaken. The independence of audit committees was called into question, as was the expertise of audit committee members. Audit committees had failed to establish close working relationships with either internal or external auditors. A particular criticism was that the requirements for audit committees as set out in Ministerial Resolve 903 lacked clarity. It was suggested that the Ministry of Commerce should issue further regulations and guidance in order to improve the effectiveness of audit committees and to enhance corporate governance in Saudi Arabia.

Opinion Shopping, Audit Firm Dismissals, and Audit Committees

This paper tests whether SEC registrants engage in opinion shopping and examines the role of audit committees when auditors are dismissed (1996-98). There are three main findings. First, companies strategically dismiss incumbent auditors if they are more likely to issue unfavorable audit opinions compared to newly appointed auditors. Using the methodology of Lennox (2000), it is estimated that opinion shopping motivates 17% of auditor dismissals. Opinion shopping dismissals are also found to occur significantly later in the fiscal year compared to other types of dismissals. Second, I use the level and change in meeting activity during the auditor dismissal year to investigate the extent to which committees participate in auditor dismissal decisions. It is estimated that 15% of audit committees do not participate in auditor dismissal decisions but opinion shopping is not significantly associated with participation. Third, Accounting Series Release No. 247 requires that companies disclose whether audit committees approve audit firm changes. After controlling for non-participation, I find audit committees are more likely to disapprove of auditor dismissals that are motivated by opinion shopping. However, independent audit committee members are more likely to leave committees that disapprove of opinion shopping.

Turnbull – generating undue expectations of the corporate governance role of audit committees

Reviews the Turnbull Report, outlining the key recommendations and discussing some of its implications, particularly the increasing emphasis on a broader corporate governance role for audit committees.

Independence in Corporate Governance: the Audit Committee Role

The Code of Best Practice produced by the Cadbury Committee on the Financial Aspects of Corporate Governance (Cadbury Committee 1992) may be viewed as an ethical code in that it prescribes standards of board behaviour. The Code’s specific recommendations with regard to audit committees appear to offer a practical mechanism for the promotion of ethical behaviour through the inhibition of potentially unethical influences exerted by executive directors over external auditors. The rationale for these recommendations centres on the independence of audit committee members, implying that independence is a prerequisite for ethical behaviour. This paper questions the assumptions regarding the role of independence through an exploration of conceptions of independence held by individuals involved in the activities of audit committees in major UK public limited companies. It suggests that audit committees may have an unarticulated role in providing an arena for the display of independence by the participants. This display forms a part of the ceremonial performance which builds confidence in corporate governance mechanisms.

An Evolutionary Perspective on Audit Committee Effectiveness

In the wake of the report of the Cadbury Committee on Financial Aspects of Corporate Governance, most major public companies in the UK now have an audit committee in place. However, commentators have noted that the establishment of an audit committee does not guarantee its effectiveness and it is pertinent to the continuing corporate governance debate to consider how such effectiveness may be assessed. This paper reports on a study which examines audit committee activities through interviews with audit committee chairs, finance directors and internal and external auditors. The study identifies influences on the development and activities of audit committees which have not previously been researched in any detail: these include the reasons for audit committee establishment, the timing and conduct of meetings, and communication between participants. The paper argues that audit committee effectiveness should be evaluated from a perspective which acknowledges these influences and recognises the continuing development of the audit committee role over time.

The role of audit committees in UK universities

Audit committees have a relatively long history dating back to the nineteenth century. It is only in recent years that their use has been popularized again in the private sector. Fundamentally, it is often argued that audit committees exist to mediate between executive directors and auditors while providing an overall enhancement of corporate accountability. One of the recent effects of the drive to incorporate business methods into other sectors has been the establishment of audit committees. It does, however, pose the question of the role of these committees which are operating in a different context from their origins. Looks at the operation of audit committees in a defined sector, namely universities. Using a postal questionnaire, all directors of finance (or equivalent) in UK universities were surveyed to establish whether or not audit committees existed in their institutions, the purpose being to determine the extent of audit committees, the reasons why they have or have not been established, and the advantages and problems encountered with them. One interesting result that arose with implications for accountability and governance was that in universities the stewardship and strategic policy‐making functions are generally separate and that audit committees report only on the former. This is in contrast to the situation in the private sector where both functions are generally combined in the activities of the board of directors. Because there is considerable overlap between the membership of audit committees and the boards of directors, it could be argued that this provides the potential for a greater degree of accountability and governance than currently exists in universities.

Canadian audit committees and their contribution to corporate governance

This paper looks at the development of Canadian audit committees and researches the functions which are currently being performed. The role of the audit committee and its contribution to corporate governance is examined. Research into the role of audit committees also assists our understanding of auditors' legal liabilities and responsibilities. Since the role of audit committees is still evolving, an historical perspective is used. The paper provides evidence that Canadian audit committees have an important and expanding role to play in the financial reporting process. It suggests that an effective audit committee can help to close the expectation gap by monitoring management and also by enhancing the independence of the external auditor. The conclusion of the study is that audit committees have become a well-established part of corporate governance.

The Internal Auditor′s Relationship with the Audit Committee

Gives examples of a number of organizations, committees, and commissions which have promoted both internal auditing and audit committees during the past two decades. Explores the need for a close working relationship between the internal auditor and the audit committee. Examines: (1) the evolution of both internal auditing and audit committees; (2) the Treadway Commission recommendations regarding the importance and role of audit committees and internal auditors; (3) ways in which internal auditors can work with audit committees; and (4) benefits gained from this relationship. Shows how, recently, internal auditors have been transformed from a financial enforcer to a respected member of the management decision‐making process, and audit committees have also assumed more oversight responsibilities in the areas of financial reporting and internal control. Thus, a close and effective working relationship between the audit committee and the internal auditor will be beneficial not only to the company which they serve but also to society as a whole.

Audit Committees: Where Now?

Audit committees have a vital role to play in business, performing a number of important functions. The future role of audit committees is examined and some proposals for their development are described: to review and report to the board; to monitor the management information systems and their adequacy, to review the effectiveness of internal controls; and to ensure compliance with regulations and legislation.

Director Liability Committee and the Audit

To reduce their growing exposure to liability suits, many directors are attempting to take a more active role in the evaluation of their firms and to simultaneously have formally recorded the performance of their responsibility. To meet both of these objectives, directors must have access to complete and reliable corporate information and be able to conduct independent inquiry into the quality of information they receive. The board of directors9 audit committee has the potential to fulfill these needs. The researchers queried CEOs and outside directors of nearly two hundred forms and applied these data to evaluation of the audit committee concept, analysis of the perceived and actual role of audit committees, and identification of actions that can improve audit committee performance and thus reduce the directors9 potential liability exposure.