The Corporate Governance Effects of Audit Committees

Arguments associated with the promotion of audit committees in many countries are premised on their potential for alleviating weaknesses in corporate governance. This paper provides a synthesis and evaluation of empirical research on the governance effects associated with audit committees. Given recent policy recommendations in several countries aimed at strengthening these committees, it is important to establish what research evidence demonstrates about their existing governance contribution.A framework for analyzing the impact of audit committees is described, identifying potential perceived effects which may have led to their adoption and documented effects on aspects of the audit function, on financial reporting quality and on corporate performance. It is argued that there is only limited and mixed evidence of effects to support claims and perceptions about the value of audit committees for these elements of governance. It is also shown that most of the existing research has focused on factors associated with audit committee existence, characteristics and measures of activity and there is very little evidence on the processes associated with the operation of audit committees and the manner in which they influence organizational behaviour.It is clear that there is no automatic relationship between the adoption of audit committee structures or characteristics and the achievement of particular governance effects, and caution may be needed over expectations that greater codification around factors such as audit committee members' independence and expertise as the means of correcting past weaknesses in the arrangements for audit committees. The most fundamental question concerning what difference audit committees make in practice continues to be an important area for research development. For future research we suggest (i) greater consideration of the organizational and institutional contexts in which audit committees operate; (ii) explicit theorization of the processes associated with audit committee operation; (iii) complementing extant research methods with field studies; and (iv) investigation of unintended (behavioural) as well as expected consequences of audit committees.     

Corporate governance and social norms during financial crisis: evidence from France and Saudi Arabia

The resistance to financial crisis and compliance with social norms and effectiveness of corporate governance mechanisms is considered recently as a good matter of concern. Focusing on differences between French and Saudi firms, we examine the effect of (1) board of directors, (2) audit committee, (3) compliance with Corporate Social Responsibility activities, (4) compliance with Shariah principles on financial volatility during subprime crisis of 2007. We find that larger boards, larger audit committees, independent members on boards and audit committees are related negatively to financial volatility. The result supports corporate governance theory which suggests that corporate governance variables outlined provide effective of monitoring of the management thereby enhancing firm’s resistance to financial crisis. In addition, we find that compliance with CSR alone does not explain the financial volatility. Its concert with corporate governance variables is necessary. This result supports stakeholder theory which argues that companies compliant with CSR activities in their business strategy and have larger boards and audit committees, and independent directors on boards and audit committees resist more financial downturns and any economic shock. Furthermore, we find that compliance with Shariah norms plays a significant role in protecting shareholder interests, improving functioning of corporate governance mechanisms and affect positively the resistance of Saudi firms to financial crisis.     

Audit committee and internal audit and the quality of earnings: empirical evidence from Spanish companies

Corporate scandals and failures such as Enron, WorldCom, etc. were highly catastrophic and had a terrible effect on stakeholders. The pressure of globalisation and the intense competition have lead to organisations encouraging good corporate governance. Organisations have to promote transparency and accountability of financial information. As Gramling et al. (J Account Lit 23:194–244, 2004) argued there are four important mechanisms of corporate governance include boards of directors, audit committees (among others) and internal and external audit functions. However, this paper will focus on the relationship between two corporate governance mechanisms (audit committee and internal audit function). Thus, our purpose is to analyse the relation between characteristics of the audit committee and internal audit function and earnings management measured as abnormal accruals to test the quality of financial statements. We hypothesise that the association between the effectiveness of the audit committee and the presence of an internal audit function and its relationship with this committee would indicate less opportunity for management to manipulate earnings. Using a sample of 108 non-financial Spanish companies that traded on the Madrid Stock Exchange between 2003 and 2006 (432 observations), we have found that the size and number of meetings of the audit committee had a significant negative association with earnings manipulations. Also, our results suggest that a negative relation between having an internal audit function and earnings management.     

Managerial dominance and audit committee independence in Spanish corporate governance

The purpose of this paper is to analyse whether the independence of audit committees is affected by the degree of control exerted by managers over the board of directors. Results from a sample of 75 listed Spanish companies show that the majority of firms that voluntarily adopted an audit committee between 1998 and 2001, made an effort to guarantee their independence from management. The degree of independence is shown to be determined by the proportion of inside directors on the board, the same person holding both the CEO and board chairperson positions, and the level of management ownership. These findings may have political implications because existing regulations do not limit the presence of inside directors on audit committees. The presence of inside directors may compromise effectiveness, turning audit committees into instruments of management to provide the appearance of monitoring.

Ceremonies of Governance: Perspectives on the Role of the Audit Committee

The widespread establishment of auditcommittees in large UK companies cannot be explainedby evidence of their effectiveness as a mechanism ofcorporate governance, since such evidence is sparse.In this paper, participants' accounts of auditcommittee activity are explored, using conceptsdeveloped in actor-network theory. The paper suggeststhat a possible explanation for the popularity ofaudit committees may be found in their ceremonialfunction, which, through a comforting display ofconcern for corporate governance standards, validatescompany legitimacy and enables access to resources forsurvival and growth.The paper briefly reviews the literature on auditcommittee effectiveness, noting its limitations, anddescribes a qualitative study of audit committeeactivity through the perceptions of participants –audit committee chairs and members, finance directors,internal and external auditors. The actor-networkconcept of `translation' is used to frame theseperceptions, highlighting the ceremonial components ofaudit committee meetings and the performance ofquestioning. It is argued that, aside from anysubstantive audit committee activity, this ceremonialperformance plays an important part in offeringcomfort and reassurance to investors and lenders.     

审计委员会与信息披露质量:来自中国上市公司的经验证据

本文选择深交所信息披露考评结果与证券分析师盈余预测精度作为上市公司信息披露质量的衡量指标,使用2006年深市上市公司的相关数据,实证检验了审计委员会与上市公司信息披露质量之间的关系.研究发现,与未设置审计委员会的上市公司相比,设立审计委员会的上市公司具有更高的信息披露质量,审计委员会的独立性对提高上市公司信息披露质量有着积极的促进作用.本文的政策含义是,在进一步完善资本市场的过程中应重视上市公司审计委员会建设.     

Audit committee perspectives on mandatory audit firm rotation: evidence from Canada

This study examines audit committee (AC) members’ perspectives on mandatory audit firm rotation (MAFR), mandatory audit partner rotation, ways in which ACs monitor auditor independence and objectivity, and the costs associated with switching audit firms. In-person interviews with AC members in Canada were conducted to improve our understanding of the reasons underlying AC members’ positions on MAFR. All AC members interviewed in this study were adamantly opposed to MAFR. MAFR was perceived as a threat to their shareholder-granted authority to make audit firm appointment decisions. Participants believe that their professional judgment and observations are the most effective means of ensuring auditor independence and view MAFR as an unnecessary intervention. We explain these results using self-determination theory. Our findings were also used to develop a conceptual model of AC relationships with external auditors and financial management.     

Effective working relationships between audit committees and internal audit—the cornerstone of corporate governance in local authorities, a Welsh perspective

This research looks at the working relationship between audit committees and the internal audit function within Welsh local government. The focus is primarily on the working relationship from the perspective of the head of internal audit, also known as the Chief Audit Executive or Chief Internal Auditor [Head of internal audit will be used synonymously with that of Chief Audit Executive and Chief Internal Auditor]. Is it a marriage of convenience or a working relationship where the two can capitalise on what they both bring to the corporate governance arena? Reluctance by local government in Wales to embrace the merits of audit committees in the late 1990s means that local government is playing catch up with other public sector organisations. This in turn affects the recognition of the benefits of an effective audit committee capable of working with the internal audit function to promote sound corporate governance. Published guidelines by the UK public sector accountancy body in 2005 on the implementation of audit committees within local government made those organisations yet to establish an audit committee to rethink the situation, and were encouraged by the seemingly positive benefits of audit committees. Wales was no exception, and the 22 local authorities considered embracing the concept of audit committees. Consequently, this placed the internal audit function and head of internal audit under the spotlight in terms of the expectations of the audit committee members. Audit committees roles and responsibilities mean that they should assist councils and officers to ensure they undertake their responsibilities with probity and effectiveness, especially in respect of financial control. It is imperative that committee chairs and internal audit can function as a working team in order to be effective. Audit Committees have a role to assess the performance of the internal audit function, appoint heads of internal audit, support and promote the audit function within the organisation. It is therefore important that the heads of internal audit have confidence and respect for the audit committee and its chair in terms of the skill and knowledge it has of the audit role in relation to the financial and non-financial aspects of the organisation. Laura Spira (2003) comments on how very little research has been undertaken in relation to the audit committee activities, within the private sector, consequently very little is known about what they actually do, let alone how effective they are in undertaking their role. In a similar vein, the same is true of the public sector audit committee activities, especially when they have tended to adopt the private sector audit committee as a blue print to their own audit committee development.     

How to manage corporate reputation? The effect of enterprise risk management systems and audit committees on corporate reputation

Research on corporate reputation has generally argued that reputational risk, or risk of reputation loss, stems from all company risks. As companies use enterprise risk management (ERM) systems to manage all their risks, we analyse the effect of ERM system quality on corporate reputation. Furthermore, as audit committees are in charge of supervising ERM systems, we analyse the effect of audit committee characteristics (i.e. independence and independent members' knowledge and diligence) on corporate reputation through their effect on ERM system quality. Our results for a sample of listed Spanish firms support consultants’ arguments that ERM system is a useful tool for managing corporate reputation. Our results also show that audit committee independence improves corporate reputation through the ERM system. Finally, our findings also reveal a positive relationship between the average educational level of independent directors of the audit committee and ERM system quality. These results provide evidence that ERM systems are platforms to manage corporate reputations and suggest the importance of the audit committee as a supervisor of ERM system and as guarantor of corporate reputation.     

Audit Within the Corporate Governance Paradigm: A Cornerstone Built on Shifting Sand?

This paper is a case study‐based investigation of aspects of the current paradigmatic approach to ‘good’ corporate governance, with its focus on the interlinked roles of internal control and risk management procedures, internal audit and external audit, overseen and coordinated by a formal structure of board committees, in particular the audit committee. The evidence that we adduce from the study of four high‐profile cases of perceived accounting and governance failure provides limited assurance that this approach will in fact be cost‐effective or efficient in preventing further such cases of accounting and governance failure. Specifically, issues as to remuneration and fee dependence, lack of relevant knowledge and expertise, social and psychological dependence upon executive management appear to have significantly and negatively affected the quality of decision‐making of governance gatekeepers. This suggests that further consideration of relevant economic, institutional and cognitive/behavioural factors beyond the rational choice model of traditional economics should underpin future developments in required modes and structures of governance.     

《萨班斯法案》对美国公司董事会影响的分析

2002年度美国出台的《萨班斯法案》全方位地对安然等事件暴露出来的问题作出相应的调整性规定,必将对公司治理产生深切的影响。《萨班斯法案》对审计委员会提出了修正性和提高性要求,本文选择外部董事、女性董事、财务专家、CEO兼任董事会主席、CEO在提名委员会任职等指标进行分析。实证分析结果说明:《萨班斯法案》有效消除了董事会和管理层任人唯亲的现象,董事会的独立性和专业性均有所提高。其实,《萨班斯法案》颁布之前就有加强公司治理的要求,公司治理就有改进的趋势,但《萨班斯法案》关于审计委员会方面的明文规定加速了公司董事会的变化,使得公司治理改革超越了法律的既定要求。     

Does social exchange relationship impair audit committee effectiveness?

This research applies the three-tier agency theory and social exchange theory to study the role of audit committees in improving financial reporting quality and reducing the likelihood of earnings restatements. Utilizing a matched sample of restated and non-restated U.S. listed firms between 2002 and 2005, this paper finds that firms with a larger proportion of audit committee members appointed after the CEO are associated with higher incidences of restatements, while the presence of an all-independent nomination committee is associated with a lower likelihood of restatements. The paper also shows that firms whose audit committee members have longer average tenure and receive higher director compensation are associated with a smaller likelihood of restatements. Finally, the paper documents changes in the impact of audit committee characteristics on financial restatements after the enactment of the Sarbanes–Oxley Act. Overall, our results suggest that audit committees’ effectiveness in supervising financial reporting quality is affected by social exchange processes and the broad social context.     

Australian evidence on corporate governance attributes and their association with forward-looking information in the annual report

We investigate the role played by a firm’s corporate governance framework in the decision to voluntarily disclose forward-looking information in the published financial reports of Australian companies in 2000 and 2002. With respect to the year 2000, the corporate governance category, audit quality, consisting of the presence and independence of the audit committee, its meeting frequency, the use of a big 6 auditor and the auditor’s independence, is positively associated with the disclosure of forward-looking information. The corporate governance category, board committees, consisting of the appointment and independence of a compensation committee and the creation of a nomination committee, and the overall efficacy of the corporate governance system are also positively associated with the disclosure of forward-looking information. However, corporate disclosure does not seem to be driven by the same factors in 2002 since in that year none of the governance categories is significantly associated with the firm’s decision to publish forward-looking information in financial reports.

Board attributes and foreign shareholdings in Malaysian listed firms

This study examines the association between foreign shareholdings and several characteristics of board of directors in the context of a developing capital market. Using data of 777 listed firms on Bursa Malaysia for the financial year 2008, the study predicts that foreign shareholdings are positively related to board independence, multiple directorships, and financial literacy of the board of directors. The study finds a strong positive relationship between multiple directorships and foreign shareholdings. Contrary to our expectation, the association between board financial literacy and foreign shareholdings is negative and significant. With regard to the link between board independence and foreign shareholdings, we find weak evidence to support our prediction that there is positive relationship between board independence and foreign shareholdings. The multivariate results also show strong positive relationships between foreign shareholdings and number of foreign directors on boards, and between foreign shareholdings and audit quality. The study also documents a significant negative association between foreign shareholdings and firm size, and between foreign shareholdings and book-to-market ratio. The findings of the study supports the view that multiple directorships is an important asset to firms in emerging markets partly due to limited pool of potential talents and experts which in turn could signal reputational capital and quality of directors. Since there is a mandated presence of finance and accounting qualified director on the audit committee, foreign shareholders can somewhat rely on the oversight of audit committee instead of depending entirely on the board of directors for the quality of financial statements and financial reporting oversight. Finally, the presence of foreign directors on a board of directors may signal a firm’s commitment to adopt good corporate governance practices. It is also possible that foreign investors can influence corporate governance through their participation on the board of directors.     

审计在基金会治理中能够有效发挥作用吗?

本文以2005年至2009年中国全国基金会为样本,研究基金会捐赠收入与外部审计师选择之间的关系,即在中国慈善市场上,外部监督机制之一的外部审计是否具有治理效应及治理职能如何有效实现。实证结果表明:当基金会选择百强事务所审计时,能够有效实现审计的治理职能,吸引更多的捐赠者进行捐赠;当基金会选择民政部中标事务所审计时,不能有效实现审计的治理职能,从而不能显著增加捐赠收入。上述结论在一定程度上验证了在慈善市场中,外部审计具有治理效应,其有效治理效应依赖于高质量的审计。     

Comparing corporate governance practices and exit decisions between US and Japanese firms

This study examines how widespread the similarities between US and Japanese corporate governance practices have become. Results suggest that, in spite of convergence in many areas of business practices, Japanese board structures and governance practices still differ greatly from those in the United States—particularly in Securities and Exchange Commission-mandated reforms such as independent audit and compensation committees. Our results suggest that corporate governance differences between Japanese and US firms may be driven, in part, by differences in directors’ recognition of investors’ performance expectations. In particular, results indicate that the exit barriers related to employment influence decision-making for Japanese directors more strongly than they affect US directors’ decisions. Board independence—particularly with respect to audit and compensation committee membership—reduces the height of perceived exit barriers. Results suggest that, in spite of convergence in many areas of business practices, Japanese board structures and governance practices still differ greatly from those in the United States although it does not conclude that the transition is necessarily desirable.     

Experimental evidence on external auditor reliance on the internal audit

With the revised version of ISA 610 (revised 2013), external auditors now face both requirements and guidance addressing their responsibilities when relying on the internal audit function (IAF). The reliance decision of an external auditor has important economic consequences and implications for the efficiency and effectiveness of the annual audit. Using an experimental design, we explore how German external auditors’ reliance decisions regarding the IAF are affected by varying levels of environmental factors, like client business risk, effectiveness of the internal control system, and quality of the corporate governance. Furthermore, the experiences of external auditors in collaborating with an IAF are taken into consideration. The results indicate main effects for each factor and a two-way interaction between the effectiveness of the internal control system and the quality of corporate governance. Specifically, a strong internal control system can compensate for weaknesses in corporate governance with respect to the confidence of external auditors in the IAF. Also, the type of audit procedure influences the willingness of auditors to rely on the IAF, and the inherent risk of the examined transaction strengthens the negative impact of client business risk on the reliance decision. Moreover, past experiences of external auditors with an IAF have a significant impact on their reliance decision. Overall, the findings suggest that organizations can foster internal–external auditor coordination by enhancing corporate governance effectiveness and strengthening the internal control system.

     

External audit and bankruptcy prediction

In this paper, we investigate the relationship between external auditor characteristics and the likelihood of bankruptcy. We use a sample of US public companies to analyse whether auditor attributes are associated with default. We also test whether the inclusion of such attributes in bankruptcy prediction models improves their predictive ability. We find that firms audited by industry-expert auditors, large audit firms and long-tenured auditors are less likely to default. Firms with higher audit fees are more likely to default. Our results also show that the inclusion of auditor attributes significantly increases the predictive ability of bankruptcy prediction models. This paper contributes to the literature about auditing and bankruptcy prediction. Our results suggest that the auditor attributes can provide predictive signals concerning a default risk and that an external audit can play a relevant role in early warnings of financial distress. Our study also suggests that bankruptcy prediction models can become more effective if they are complemented with audit data. Our results are of interest to market participants, auditors, regulating authorities, banks and other financial institutions that are interested in credit risk assessment.     

审计委员会制度与盈余质量的改善

本文采用2002年至2004年上市公司的数据.以盈余质量视角研究审计委员会制度的有效性.研究发现,基于各年截面数据,设有审计委员的上市公司均具有较高的盈余质量,同时也发现这种盈余质量上的差异已经存在于上市公司成立审计委员会的上一年.当控制这种成立前的盈余质量差异之后,本文发现,设立审计委员会前后,上市公司盈余质量没有显著变化.因此,本文结论并没有发现审计委员会在提高会计盈余质量方面已发挥了应有的作用.     

External audit and goodwill write-off

Building on agency theory, we investigate whether and how salient external auditor characteristics (size, audit fees, non-audit fees, tenure) impact on the reported goodwill write-off. We use a sample of US firms applying SFAS 142. We find that Big-4 auditors are more prone to limit underestimated write-offs rather than overestimated write-offs and that auditors require higher fees from companies underestimating the write-offs. The findings are consistent with the auditors’ preference for more conservative goodwill and earnings values, which reduce their litigation and reputation costs. This preference can converge with the managerial interest to use unnecessary overestimated goodwill write-offs for earnings management purposes (e.g. to smooth the income or take big baths). Our findings do not support the hypotheses that non-audit fees and tenure affect the goodwill write-off. Our paper contributes to prior literature on external audit and financial accounting choices. Our study suggests that leniently audited discretional fair value estimates are likely to compromise the role of auditing (and of financial reporting) as an external control mechanism. Our study can contribute to the current policy debate around goodwill accounting.