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Testing for bias in the audit committee
Abstract
Establishing an audit committee presumably strengthens the external auditor’s independence. Several studies have examined how audit committees affect the selection of the company’s external auditor, negotiate audit fees and enhance the auditor’s independence. But what of the independence of the audit committee members themselves? Do audit committee members exhibit biases when they select their company’s auditors? The relationship between the entity’s external auditor and the audit committee member’s affiliated company’s auditors has not been examined. For example, are audit committee members prone to select or remain with audit firms with which they have developed a formal relationship within their own company? This study of 247 New York Stock Exchange firms finds significant relationships (at the 0.05 level of significance) between CPA firms selected by audit committees and by the CPA firm which audits the audit committee member’s own organization. Results indicate that audit committee members exhibit conscious or unconscious biases in their selection or retention of their companies’ auditors.
... Many large companies have used the audit committee to protect themselves from fraud, mismanagement and financial liability. Audit committee that generally comprised of outside directors serves as an intermediary between the external and internal auditors and the board of directors in their monitoring role of the financial reporting process (Reinstein and Weirich, 1996), because the audit committee is a board sub-committee of non-executive directors concerned with audit, internal control and financial reporting matters (Spira, 1998). The audit committee should be independent from management to be able to perform the oversight effectively (Zgarni et al., 2016). ...
Purpose: The current study aims at formulating the stock market segmentations as an independent variable. As well, the study develops a conceptual framework that aims to employ the agency theory in providing evidence concerning earnings management practices in particular free cash flow situation and stock market segmentations in Jordanian public firms. Design/methodology/approach: The study uses a detailed review of current empirical studies and literature (journal papers and publications) in both developing and developed countries, to establish framework from the perspective of agency theory and to develop the propositions. Expected findings: It's expected to document a positive relationship between free cash flow and earnings management, and this relationship is moderated by independent audit committee and audit quality. Likewise, it's expected to report a positive relationship between stock market segmentations and earnings management. Research limitations/implications: This is a conceptual paper. Future research is needed to validate the proposed propositions empirically. Practical implications: The results of the study will provide beneficial information to shareholders, investors, creditors, managers and members of boards of directors of public firms, internal and external auditors, tax department, regulators and policy makers. Originality/value: This article adds value to scholarship by formulating the stock market segmentations variable for the first time in the literature. Besides, the current article is employing the agency theory framework to postulate the interactions between the variables. To date, this is the first study that attempts to explorer the moderating roles of Independent audit committee and audit quality between stock market segmentations, free cash flow and earnings management, which provides a valuable evidence for companies seeking to understand and reduce agency problems in Jordanian context.
... Reform to improve the transparency of audit committee focuses on the audit committee's independence members. Because the audit committee is one of a sub-committee of the board of directors containing non-executive members who are concerned with audit and internal control matters and with preparing financial reports (Spira, 1998), the audit committee acts as an intermediary among external and internal auditors and the board of directors to the supervisory role for the process of the financial reporting (Reinstein & Weirich, 1996). Additionally, the audit committee must be independent of the administration to be able to exercise effective oversight (Zgarni et al., 2016). ...
The current study aimed to explore the moderate effected of independence of the audit committee on the connection between board structure (i.e. size, independence and CEO duality) and real earnings management (REM) in listed companies in Jordan. The current study covered 910 firm-year observations of the industrial and service sector listed companies in the Amman Stock Exchange (ASE) from 2009 to 2018. Using the Fixed Effect approach, the results of the data analysis show a negative and significant impact of board size and CEO duality on REM. There was, however, a significant positive correlation between board independence and REM. In general, the findings showed that the structure of the board is a determinant of REM. In the case of the moderate effect, found the audit committee independence have moderately affected the relationship between board structure and REM. In short, the findings of this study indicate that the moderate effect of audit committee independence weakens the effect of board size and CEO duality on the determination of REM while increasing the effectiveness of board independence to control of REM. Furthermore, the findings of the current study have significant implications for audit practitioners, policymakers, investors and regulators in their efforts to limit REM activities and increase the quality of Jordanian firms' financial reporting.
... In addition, researchers documented that the level of interaction between the audit committee and auditors is highly variable (DeZoort, 1998), hence, it is pivotal to know how audit committees operate and fulfill their responsibilities (Kalbers and Fogarty, 1998). Reinstein and Weirich (1996) found that selection and retention of audit firms were influenced by relationships between the audit firms and the companies of the committee members. Similar type of situation exists in Pakistan. ...
Corporate governance (CG) is often split among rule and principle-based approaches to control in idiosyncratic institutional contexts. This split is often primed by the types of institutional conformations, their potencies, and the complementarities within them. Drawing on the theoretical foundation of institutional theory, this study theorizes CG practices and structures as institutionally resoluted and directed and explores the key institutional determinants of good CG practices in an emerging economy. Based on qualitative method, this study presents eight specific antecedents of good corporate governance practices in weak institutional settings (Pakistan). In particular, the study explores the extent to which certain underlying formal and informal institutional determinants, such as the auditing, political, legal, board, shareholders awareness, voting, culture and values play a determining role in corporate governance. This study advocates how each of these precursors must be implied, enunciated and hitched, on the basis of pertinent institutional peculiarities, in order to address contextual corporate governance challenges. This study contributes to the institutional theorizing of good corporate governance, by paying attention to the context, efficacy (instrumentality) and legitimacy (symbolic) in expounding the good corporate governance practices in an international business environment.
... Haka and chalos (2003) indicated that auditing committee needed to be open and ready to tackle emerging risks as they occurred and arouse the corporate sensitivity in financial presentations of reports that indentified anticipated risks. A study by Haka and Chalos (1990) cited by Reinstein (1996), found evidence of agency conflict between management and the audit committee chair. ...
The purpose of this study is to present a case for the need for audit committee in Constituency Development Fund to promote corporate governance and accountability in constituency development fund management in Nairobi Province, Kenya. The study provides an analysis and critique of the extent of engagement research in the field of corporate governance and accountability in constituency Development Fund management and present case for further research that may be directed to outside Nairobi province. The study found that the extent of literature in the field of corporate governance and accountability and reporting in contrast to the field to management CDF in Nairobi had largely ignored the practice within CDF organizations. The study arguesthat CDF can benefit from the methodological and theoretical insights of audit committee and other disciplines. The study suggests where further contributions might be made by future research endeavors engaging with audit committees with organizations. Engaging audit committee in CDF governance and accountability has the potential to improve theorizing practice and the sustainability performance with organizations. Drawing on the methods and theories of other disciplines and the papers in the special issues (of audit committee) the study presents away forward for researchers engaging with audit committees in organizational practicing corporate governance and accountability.
... Haka and chalos (2003) indicated that auditing committee needed to be open and ready to tackle emerging risks as they occurred and arouse the corporate sensitivity in financial presentations of reports that indentified anticipated risks. A study by Haka and Chalos (1990) cited by Reinstein (1996), found evidence of agency conflict between management and the audit committee chair. ...
The purpose of this study is to present a case for the need for audit committee in Constituency Development Fund to promote corporate governance and accountability in constituency development fund management in Nairobi Province, Kenya. The study provides an analysis and critique of the extent of engagement research in the field of corporate governance and accountability in constituency Development Fund management and present case for further research that may be directed to outside Nairobi province. The study found that the extent of literature in the field of corporate governance and accountability and reporting in contrast to the field to management CDF in Nairobi had largely ignored the practice within CDF organizations. The study argues that CDF can benefit from the methodological and theoretical insights of audit committee and other disciplines. The study suggests where further contributions might be made by future research endeavors engaging with audit committees with organizations. Engaging audit committee in CDF governance and accountability has the potential to improve theorizing practice and the sustainability performance with organizations. Drawing on the methods and theories of other disciplines and the papers in the special issues (of audit committee) the study presents away forward for researchers engaging with audit committees in organizational practicing corporate governance and accountability.
... For example, Eichenseher and Shields (1985), Pincus et al. (1989) and Collier (1993) describe how audit committees reduce information asymmetries between executive and non-executive directors. As a consequence of this, Reinstein and Weirich (1996) note that many large firms use audit committees as protection against fraud, mismanagement and financial liability. To achieve these goals a major part of an audit committee's work involves asking questions (Ecton and Reinstein, 1982; Sommer, 1991; Spira, 1999). ...
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. Copyright Blackwell Publishers Ltd 2002.
This study provides evidence on the factors that currently impact audit committee members' selection of external auditors. Using a two-stage approach, we survey and interview public company audit committee members (ACMs), and find evidence that management continues to provide input into the decision process even as SOX regulations require audit committees to take responsibility for the auditor selection decision. ACMs view management as an important information source when they assess the proposing audit partner's reputation for accessibility, timeliness, and ability to liaise with the firm's national technical office, as well as the proposing audit firm's technical and industry expertise. Results of this study can help firms be more competitive in the audit bidding process, inform policy makers when considering whether to impose further audit committee regulations, and aid academics in ensuring an up-to-date understanding of the audit committee's role in the auditor selection process.
Since the early 1990s, the UK has been very active in undertaking policy reforms that includes a number of corporate governance codes, expert reports, a high level review of company law, and new regulations and legislation. These policy initiatives need to be monitored and evaluated in terms oftheir success in influencing the key drivers of 'good' corporate governance. This Report undertaken for the DTI has several aims: to identify key drivers of good corporate governance based on a review of social science literature; to describe the content of UK regulatory initiatives with regard to those drivers; and to evaluate gaps in the content and implementation of UK policy regarding corporate governance, using those drivers as benchmarks. In addition, some further implications of this study are discussed for future policy and research on UK corporate governance. The Report defines 'good' corporate governance with regard to the rights and responsibilities of company stakeholders, and the wealth-creating and wealth-protecting functions of corporate governance within this context. Based on this definition, a detailed review of the theoretical and empirical social science literature on corporate governance was undertaken across seven broad areas: boards of directors, shareholder activism, information disclosure, auditing and internal controls, executive pay, the market for corporate control, and stakeholders. The result was the identification of 18 key 'drivers' or governance mechanisms, which promote 'good' corporate governance. Key gaps in the UK regulatory framework are then explored with reference to the drivers of good corporate governance. A comprehensive review was undertaken to evaluate corporate governance related developments in UK regulation since 1990. Several potential gaps in coverage were identified in the areas of executive pay and employees stakeholders. A number of potential gaps in effectiveness were also identified with regard to other key drivers such as boards, shareholder involvement, information disclosure, auditing, and the market for corporate control. The Report also emphasises that the effectiveness of corporate governance regulation depends very much on balancing different governance demands and regulatory trade-offs. Corporate governance is shaped by a number of contingencies, complementarities, and costs. Various organisational contingencies may place different demands on corporate governance drivers, and their implementation is also associated with different sorts of costs. Looking more generally, different drivers may act as complements or substitutes for one another. Better appreciation of such interdependencies is crucial to formulating a coherent regulatory strategy and balancing important regulatory trade-offs between the following - mandatory regulation (uniform requirements) and more flexible forms of soft-law such as codes based on comply-or-explain principles and self-regulatory norms of professional groups.
Purpose
The purpose of this paper is to examine the role and function of audit committees in public companies in Barbados since the corporate scandals of Enron and WorldCom in the USA.
Design/methodology/approach
The study used a mixed‐methods approach of self‐administered questionnaires, interviews with directors, audit committee members and auditors, and a content analysis of the published annual reports.
Findings
There was no full‐scale adoption of audit committees. Membership in audit committees tended to vary between three and four, and audit committees met on average four times a year. There were mixed views on audit committees having broader roles such as business strategy, assessment and management of risks. There were also excellent working relationships among audit committees, internal and external auditors. The independence of audit committees was questionable.
Research limitations/implications
The concept of audit committee is relatively new in Barbados. Further, there are Boards dominated by directors with major shareholdings. This study also relied heavily on US‐centric literature and the perceptions of audit committee members. These factors are likely to limit its usefulness to other non‐US countries. Future research can measure stakeholders' perceptions of the role of audit committees.
Practical implications
This study is important to academics and practitioners in understanding the role and function of audit committees in a small country.
Originality/value
This study sets out a best practice model for the adoption of audit committees in small countries like Barbados.
Market regulators, commissions and accountancy bodies have recommended the establishment of audit committees as an important step in improving corporate governance. In 2002, the Kenya Capital Markets Authority required all listed companies to establish audit committees. This study examined: 1) the practices of audit committees in Kenyan listed companies; 2) how audit committees relate to other stakeholders; 3) the major achievements and challenges facing audit committees in Kenya. A questionnaire survey completed by 29 companies (60%) showed that audit committees in Kenya are more independent than audit committees of other developing countries of Africa. All the audit committees reported cordial relationships with the management, internal audit and the external auditors, and were perceived to have improved the quality of financial reporting. The findings have some implications on the Kenyan capital market as companies may now be able to attract more foreign investors.
This article reports the results of a study designed to measure whether an SEC rule requiring audit committees might have an anticompetitive impact on auditor selection. Despite concerns expressed by the American Institute of Certified Public Accountants and others, the results of this study do not substantiate the contention that such a rule would favour Big-Eight auditors. Rather, the results suggest that while movement toward Big-Eight auditors is prevalent among NASD-listed companies, the existence of an audit committee does not explain the displacement. It appears that such an SEC rule would not unfavourably impact the competition for audit services.
An important issue in the regulation of corporate behavior is its impact on the monitoring configuration selected by top management. In this article, we provide evidence consistent with the notion that the recent trend toward audit committee formation, and the movement toward Big-Eight auditors, are responses to increased legal exposure of the board of directors, notably stemming from the passage of the Foreign Corrupt Practices Act of 1977. The costs associated with changes in monitoring configurations are also considered. In particular, it is argued that auditor assistance can substantially reduce the cost of audit committee formation. Because external auditors may have differential incentives to support audit committee formation, a hypothesis linking auditor identity and audit committee formation is offered. Recent auditor changes and audit committee formations of American Stock Exchange companies are examined to provide positive evidence for the theory. The data reveal a clear trend to form audit committees, and a movement to Big-Eight auditors. Underscoring the importance of auditor involvement, it is shown that audit committees were more likely to be formed given recent selection of a new Big-Eight auditor.
Report (M.B.A.)--University of Texas at Austin. Includes bibliographical references (leaves 88-91).
This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory. The findings, which include propositions and a generic narrative model, contribute to theoretical knowledge of how institutional exceptions arise, how they are resolved, and how they typically involve three general phases: ignorance, sensemaking, and response. The findings also articulate the kinds of institutional transaction costs that an entrant incurs in each of the three phases, and the conditions that lead to the growth of these costs. Journal of International Business Studies (2008) 39, 562–588. doi:10.1057/palgrave.jibs.8400370
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