The Audit Committee as a Key Corporate Governance Mechanism

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  • Topic: Auditing, Audit, External auditor
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  • Published : October 6, 2008
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There has been considerable interest in recent years
in the role of the audit committee as a key corporate
governance mechanism. Corporate governance
committees and regulators around the world have
addressed the need for effective audit committees,
with many requiring that listed companies must
have a committee (European Union (EU) 8th
Company Law Directive, 2006; Smith Report, 2003;
United States (US) Congress, 2002). Recognising
that the existence of a committee does not
guarantee that the committee will be effective,
attention has moved to the composition and
activities of audit committees. Recommendations
have focused on the independence and expertise
of committee members and the frequency of
committee meetings (Smith Report, 2003;
Australian Stock Exchange Corporate Governance
Council (ASX), 2003; National Association of
Corporate Directors (NACD), 1999). However,
research suggests that there is considerable
divergence in the recommended structure and role
of audit committees across different jurisdictions
(Collier & Zaman, 2005).
Following the well-publicised corporate
collapses (such as Enron and WorldCom in the
US and HIH Insurance and Harris Scarfe Ltd
in Australia), the efficacy of audit committees
has been challenged (Turley & Zaman, 2004).
Legislators have responded by expanding the
responsibilities of audit committees and placing
greater emphasis on the role that they play in
enhancing audit independence (US Congress,
2002; Commonwealth of Australia, 2004).
However, research evidence that demonstrates the
value of audit committees is sparse, particularly
outside North America (Spira, 2003). As Spira
(2003, p. 180) notes, audit committees ‘are assumed,
with very little proof, to be an effective governance
The objective of this study is to examine the
impact of the existence of an audit committee, the
frequency of audit committee meetings, and
the auditor’s attendance at those meetings, on
various aspects of the external audit. Our focus is
on the viewpoint of external auditors. We use an
experimental design involving a company with a
newly formed audit committee and we manipulate
the frequency of meetings and the auditor’s
attendance at meetings. We measure the expected
impact of these factors on perceptions of audit
risk, audit efficiency, audit testing, auditor–client
conflict resolution, audit quality and audit fees.
The study was undertaken in Australia between
November 2003 and February 2004 and hence
reflects the perceptions of auditors after the
enactment of the Sarbanes-Oxley Act in the US (US
Congress, 2002) and during the period when the
Australian governmentwas implementing stronger
governance legislation in the form of CLERP 9
(Commonwealth of Australia, 2004).
Our study is significant for a number of reasons.
First, Turley & Zaman (2004) note that the impact of
audit committees on the external audit process is
an important issue about which there is limited
research evidence. Prior research suggests that
auditors perceive audit committees to be lacking
in effectiveness and power, playing a passive role
rather than engaging in an active two-way
52 J. Stewart and L. Munro
Int. J. Audit. 11: 51–69 (2007) © 2007 The Author(s)
Journal compilation © Blackwell Publishing Ltd. 2007
exchange with auditors (Cohen et al., 2002; Turley
& Zaman, 2004). However, these findings may not
hold in the current era of greater emphasis on audit
committees, and further research is therefore
Second, we extend prior research that has
tested associations between audit committees and
audit fees using traditional audit fee models
(Goodwin-Stewart & Kent, 2006; Abbott et al., 2003;
Sharma, 2003; Carcello et al., 2002; Coulton et al.,
2001; Goddard & Masters, 2000; Collier & Gregory,
1996). While the results of these prior studies have
been mixed, they have generally assumed that a
positive association between...
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