Audit committee effectiveness: informal processes and behavioural effects

Abstract

PurposeThis paper seeks to investigate the conditions and processes affecting the operation and potential effectiveness of audit committees (ACs), with particular focus on the interaction between the AC, individuals from financial reporting and internal audit functions and the external auditors.Design/methodology/approachA case study approach is employed, based on direct engagement with participants in AC activities, including the AC chair, external auditors, internal auditors, and senior management.FindingsThe authors find that informal networks between AC participants condition the impact of the AC and that the most significant effects of the AC on governance outcomes occur outside the formal structures and processes. An AC has pervasive behavioural effects within the organization and may be used as a threat, an ally and an arbiter in bringing solutions to issues and conflicts. ACs are used in organizational politics, communication processes and power plays and also affect interpretations of events and cultural values.Research limitations/implicationsFurther research on AC and governance processes is needed to develop better understanding of effectiveness. Longitudinal studies, focusing on the organizational and institutional context of AC operations, can examine how historical events in an organization and significant changes in the regulatory environment affect current structures and processes.Originality/valueThe case analysis highlights a number of significant factors which are not fully recognised either in theorizing the governance role of ACs or in the development of policy and regulations concerning ACs but which impinge on their governance contribution. They include the importance of informal processes around the AC; its influence on power relations between organizational participants; the relevance of the historical development of governance in an organization; and the possibility that the AC's impact on governance may be greatest in non‐routine situations.

The Effects of Audit Committee Members’ Age and Additional Directorships on the Cost of Equity Capital in the USA

“…8 Our main results are derived using data for US firms and may not hold for non-US companies, which suggests that cross-country differences may affect the impact of AC/board characteristics on the cost of equity capital. These results are also consistent with Turley and Zaman's (2007) finding that the function of an AC is influenced by the organisational and institutional environment in which it serves. We suggest that future research explore differences in institutional contexts and their impacts on AC/board behaviour by using a large sample of international firms.…”

“…Add AF_CPA, NAF_AF to the models Average AC age 20.0006 (0.1509) 20.0005 (0.1038) 20.0007 (0.0521) 20.0007 (0.1056) Effects of AC Characteristics on the Cost of Equity Capital 635 Downloaded by [Rutgers University] at 18:00 04 April 2015age, AveACAge is no longer significant, which supports the conclusion reported in the study ofTurley and Zaman (2007).Test #6: We also test a different set of control variables that includes variables commonly used in studies such as those ofAshbaugh-Skaife et al (2009), Francis et al (2004,…”

“…Turley and Zaman (2007) conclude that the AC chair is one of the key elements determining the impact of the AC on an organisation. After excluding the chair's Ogneva et al (2007), and Lee et al (2009).…”

Local Government Audit Committees: A Behaviour Framework for Effective Audit Committee Performance

“…In relation to the 'diligence of the audit committee' , Spangler and Braiotta (1990) argue that the leadership and style of the audit committee chairperson is important, which complements McMullen and Raghunandan (1996) who argue that expertise in accounting, internal controls and auditing, as well as frequency of meetings, can contribute to audit committee effectiveness. What emerges from the audit committee literature is a focus on the structural characteristics of the committee acting as proxies for effectiveness, for example, independence, financial expertise and meeting frequency (Bedard and Grendron 2010), with a rarity of presentations of 'how' and 'why' between audit committee attributes and other variables (Turley and Zaman 2007). Recurring themes include: (1) audit committees are important mechanisms for strengthening governance; (2) governance reforms have sought to improve accountability and the integrity of financial reporting and performance reporting; (3) audit committees are a mechanism to enhance financial reporting and audit independence; and (4) audit committees, as agents of councillors, can be a mechanism for monitoring and protecting the interests of the community.…”

Corporate social responsibility and corporate governance in Indonesian public listed companies

“…15,16]. As a committee of the board, its existence relates to oversight responsibility in the area of financial reporting, internal control, and external auditing activity.…”