UK audit committees and the Revised Code

Abstract

UK audit committees and the Revised CodePurpose: The audit committee is one of the most prominent board subcommittees, having a potentially important role to play in ensuring sound corporate governance. This paper examines and discusses the behaviour of companies following revisions to the UK's Revised Code.Research design/methodology/approach: A variety of annual report data from a sample of 50 UK companies, stratified according to size, is collected and analyzed.Findings: General compliance with many provisions of the Revised Code was found. All but one company had an audit committee comprising solely nonexecutive directors. However, in about a quarter of cases the chairman was a member, and in some cases directors were not 'independent' according to the Code's definition. Nevertheless, many companies exceeded the minimum stipulated requirements, for example the number of non-executive directors on the audit committee or the number of meetings held. Some companies, though, did not follow recommended practice, particularly regarding the disclosure of information, and some explanations for non-compliance were weak. Implications:Compliance with disclosure demands regarding audit committees could be improved, as could the quality of explanations when the recommendations of the Code are not followed. It would be sensible for regulators to monitor this, provide more detailed guidance and highlight examples of good practice. Given the resistance of many companies to corporate governance regulation and accusations of 'box ticking', future research should probe why many companies do more than is required or recommended. The research should be repeated when further revisions to the Code are made in respect of audit committees, and practice in countries other than the UK should be researched to provide comparative insights. INTRODUCTIONWhen compared with the board itself, relatively little attention has been paid to board sub-committees (Spira and Bender, 2004), in spite of their growing importance. This is significant, for as corporate governance has evolved, so has the role of the audit committee, to the point where 'it is arguably the most important board subcommittee' (Mallin, 2004, p. 98). Given the place of non-executive directors (NEDs) on the audit committee, this growth in importance can be seen as part of a trend 'to establish and increase the independence and powers of non-executive directors' The aim of this paper is to determine the extent to which companies adopted the audit committee provisions of the Revised Code when it was introduced, and to identify and discuss significant issues that became apparent. Given the UK's leadership, since the publication of the Cadbury Report, in "principles-based" approaches to corporate governance, such experience is of wider significance than just the UK, providing possible lessons for other jurisdictions. The paper is structured as follows. The first main section provides a review of the literature, which falls into two broad types: first, the various policy documents t...

Financially Qualified Members in an Upper Echelon and Their Relationship with Corporate Sustainability: Evidence from an Emerging Economy

“…Section 2 of SOX (2002) elaborates an AC as, "a committee (or equivalent body) established by and amongst the BOD of an issuer to oversee the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer." Research regarding ACs measures their ability to effectively monitor the formulation of financial reports and reduce the chances of EM in three dimensions, which are: Its financial expertise [40,76], its independence [77,78], and its frequency of meetings [77,79]. In [76], the authors investigated the impact of AC expertise on audit quality, and the results suggest that both specialist and non-specialist financial experts influence the audit quality, however in different ways.…”

Audit Committee Attributes and Internal Audit Function Effectiveness. Evidence from Zimbabwe Local Authorities

“…Independence is one of the most important characteristics of an audit committee. It is a requirement that an audit committee be free from the influence of senior management (Jun Lin & Tang, 2008;Avison & Cowton, 2012;Larry & Taylor, 2012). Independent audit committees are capable of resisting pressure from management (Al-Matari, 2013;.…”

The effects of corporate governance attributes and code amendments on the performance of Malaysian trading and services firms

“…Of specific relevance to this research is the work conducted by Avison and Cowton (2012) in which they examined the extent of compliance of British companies towards the revised code of corporate governance. Their findings show that some of the firms have not followed some of the recommended practices stated in the revised code, such as the fixed number of non-executive directors on the audit committees.…”

“…This could to some extent be due to different governance structures, timeframes, and cultures examined by previous studies. Of particular importance to this study is the work conducted by (Avison and Cowton, 2012), which investigated compliance by corporations with the amended code of corporate governance in the UK. The study found that some of the firms involved have not followed some of the recommended practices stressed in the revised code such as the required number of non-executive directors on the audit committees.…”

“…Studies concerning the relationship between corporate governance attributes and corporate performance are wide-ranging in the accounting and finance literature (Ang and Ding, 2006;Avison and Cowton, 2012;Bebchuk et al, 2009;Black, 2001;Doidge et al, 2007;Durnev and Fauver, 2011;Durnev and Kim, 2005;Joh, 2003;Lam and Lee, 2012;Maury, 2006;Sun et al, 2002).…”