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Chapter 1
1
DOI: 10.4018/978-1-5225-9607-3.ch001
ABSTRACT
This chapter examined the linkages between audit committees’ effectiveness, audit
quality, and internal control information disclosure. Empirical evidence on the effect
of audit committee effectiveness and audit quality on internal control information
disclosure is scanty. Using a 210 firm-year sample of firms listed on the Ghana
Stock Exchange for the period 2013-2017, the chapter tried to fill the research gap.
After controlling for board size, proportion of independent directors, and leverage,
the results from univariate and multivariate analyses indicated that effective audit
committee and audit firm size play complimentary and substitution roles in ensuring
internal control information disclosure. Board size and proportion of independent
directors were also found to influence the disclosure of quality voluntary information.
Audit Committee
Effectiveness, Audit Quality,
and Internal Control
Information Disclosures:
An Empirical Study
Ben Kwame Agyei-Mensah
https://orcid.org/0000-0002-5652-1628
Solbridge International School of Business, South Korea
Otuo Serebour Agyemang
University of Cape Coast, Ghana
Abraham Ansong
University of Cape Coast, Ghana
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
INTRODUCTION
The purpose of this paper is to investigate the influence of audit committee
effectiveness and audit quality on disclosure of internal control information in
corporate annual reports. The paper wants to test whether there is a substitute or
complementary effect between the presence of Big Four auditor and effective audit
committee in influencing disclosure of internal control information.
Establishment of proper corporate governance mechanisms is essential for the
optimal application of resources, enhancement of responsiveness, transparency and
protecting the rights of the stakeholders (Sun et al., 2010; Grougiou et al., 2014).
According to Deumes, (2004) reporting on internal control improves the quality of
financial reporting and reduces governance problems. Internal control also helps to
ensure that information is reliable and that firms comply with laws and regulations
(Beretta et al., 2010; Hunziker, 2013).
Lack of proper attention to proper internal controls could either result in a direct
loss of earnings or may result in imposition of constraints on the firm’s ability to
meet its profit-making objectives. In the wake of recent corporate failures, the
necessity of establishing audit committees and engaging quality audit in enhancing
quality financial reports has been emphasized. A company that has an effective
audit committee will have less likelihood of experiencing problems with internal
control (Zhang et al., 2007; Krishnan, 2005). According to Ashbaugh-Skaife et al.
(2007), lack of internal control disclosures raises shareholders’ uncertainty about
the reliability of the reported earnings and appear to elicit a significant negative
market reaction. An effective internal control system can prevent large losses (Jaya
et. al., 2016). The interaction among corporate governance actors is crucial to the
issue of quality financial reports. This study focuses on two of these corporate
governance actors, namely audit committee and external auditors. In particular, this
study attempts to investigate the nature of relationship between audit committees
and external auditor on internal control information disclosure. Zhang et al. (2007)
posit that audit committees with financial expertise or accounting expertise have
a smaller probability of experiencing internal control issues. Ho and Wong (2001)
also argue that the presence of an audit committee influence the level of corporate
disclosure. In emerging economies, where corporate governance mechanisms are
typically weak to contain agency problems, external auditors provide assurance on
the reliability of financial statements of listed companies (Fan and Wong, 2005). This
study focused on the audit committee because it is one of the elements responsible
for overseeing the interests of shareholders and supervising financial statements.
The audit committee should be efficient and provide maximum transparency. This
organ of control needs other mechanisms, such as the quality of external auditor, to
mitigate annual report manipulation.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
Based on the aforementioned and in order to ensure clarity, the main objectives
of this paper are:
1. To measure the extent of internal control information disclosure in the listed
firms’ annual reports;
2. To study the interaction between an effective audit committee and the presence
of an external audit function to promote the disclosure of internal control
information.
After controlling for board size, proportion of independent directors and leverage,
the results from univariate and multivariate analyses indicated that effective audit
committee and audit firm size play complimentary and substitution roles in ensuring
internal control information disclosure. Board size and proportion of independent
directors were also found to influence the disclosure of quality voluntary information.
This study takes a step forward in the academic literature with contribution and
implications that are both practical and academic. The study findings contribute to
the corporate governance literature by shedding light on the role of external audit,
and audit committee characteristics, such as accounting expertise, prior experience,
size and number of meetings in the disclosure process. This paper is one of the few
to examine the association between audit committee effectiveness and audit quality,
and internal control information disclosure.
LITERATURE REVIEW
Audit Committee
The Ghana Corporate Governance guidelines on best practices issued by the Securities
and Exchange Commission require all companies to establish audit committees.
The audit committee
should comprise at least three directors, the majority of whom should be
independent directors and the chairman should be an independent director. For quality
presentation and disclosure of financial and non-financial information, companies in
Ghana are required to comply with the International Financial Reporting Standards
(IFRS) which have been adopted by the Institute of Chartered Accountants Ghana
(ICAG).
The audit committee is one of the most important board sub-committees and its
main responsibility is to oversee then effectiveness of internal control and financial
reporting quality.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
Prior research shows that financial experts within the audit committee curb
internal control weaknesses (Krishnan, 2005; Zhang et al., 2007) and ensure high
financial reporting quality (Abbott et al., 2004; Kang et al., 2011; Lary and Taylor,
2012; Sun et al., 2012).
Empirical evidence shows that audit committees’ role is very important because
it is responsible for oversight of the financial reporting process (Johl et al., 2012).
Prior studies provide mixed results on the role of audit committee size in ensuring
financial reporting quality. While a number of studies found size to be a significant
determinant of financial reporting quality (Lin et al., 2006; Cornett et al., 2009),
other studies reported insignificant impact on the financial reporting process (Abbott
et al., 2004; Bedard et al., 2004; Lary & Taylor, 2012). Alzoubi and Selamat (2012)
stated that, audit committees with financial expertise will increase the capability of
monitoring and in turn, increases the quality of financial reporting.
Krishnan (2005) provides evidence that an independent and large audit committee
reduces the likelihood of material internal control weaknesses.
According to Shah and Butt (2009), the more independent the audit committee is,
the higher quality the financial reporting. Razman and Iskandar (2004) conducted a
research on Malaysian-listed companies studying the link between financial reporting
and audit committee members’ academic background. Their results show that high-
quality financial reporting comes attached to the extent of how much the members
serving on the committee are financially literate.
Bedard et al. (2004) observe that the best way to sustain a company’s control
function is by increasing the occurrence of audit committee meetings. According
to Abbott et al. (2004), the more the audit committee meets and makes sure that its
members are doing the job required of them for the best interest of the company,
the less the possibility of fraud. Abbott et al. (2000) argue that the frequency of
audit committee meetings shows their desire to fulfil their responsibilities. Audit
committees who hold frequent meetings, despite their busy schedules, emerge as
an effective committee in enhancing corporate financial reporting quality (Abbott
et al., 2000; Kang et al., 2011).
Audit Quality
Knechel et al. (2013) defined audit quality as execution of a well-designed audit
process by properly motivated and trained auditors who understand the inherent
uncertainty of the audit and appropriately adjust to the unique conditions of the
client. This paper in consonance with prior literature, (e.g. Bepari, & Mollik, 2015)
used the size of the audit firm as a proxy for audit quality. It is assumed that Big-4
and non-Big-4 audit firms differ in terms of their audit qualities and enforcement
abilities.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
The literature suggests that firms with strong corporate governance tend to
engage high quality auditors (Big-4 audit firms) and pay larger audit fees (DeFond
& Zhang, 2014). Audit quality may also enhance the transparency of a report via
higher voluntary disclosure (Barros et al., 2013). Audit firm size is highly associated
with a greater level of disclosure, hence it can be hypothesized that audit quality
can lead to greater level of internal control disclosure. Ashbaugh-Skaife, et a.,
(2007) posit that Big-4 audit firms have a reputation to protect and are motivated to
perform high quality internal control quality and to ensure that companies disclose
weaknesses in internal control.
Audit fees can be defined as the actual cost charged to the company by the
auditor in return for their opinion regarding the financial statement of the latter
(Coffee, 2005).
Internal Control Disclosure
Effective internal control system represents an adequate assessment of earnings
quality and reliable financial reporting (Costello & Wittenberg-Moerman, 2011;
Doyle et al., 2007). Internal control can also be viewed as the process put in place
by management to provide reasonable assurance regarding the achievement of
effective and efficient operations, reliable financial reporting, and compliance with
laws and regulations.
In 1978, Cohen Commission (the Commission on Auditors’ Responsibilities),
(cited in Agyei-Mensah, 2016a), required that management should assess internal
control systems. Internal control consists of all of the related methods and measures
adopted within an organisation to:
• Safeguard assets from employee theft, robbery, and unauthorized use.
• Enhance the accuracy and reliability of its accounting records by reducing the
risk of errors (unintentional mistakes) and irregularities (intentional mistakes
and misrepresentations) in the accounting process.
The Committee of Sponsoring Organisations of the Treadway Commission
(COSO) also defines internal control as:
A process, effected by an entity’s board of directors, management and other personnel,
designed to provide reasonable assurance regarding the achievement of objectives
in the following categories: Effectiveness and efficiency of operations; Reliability
of financial reporting; and Compliance with applicable laws and regulations.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
Internal control according COSO consists of five interrelated components:
• Control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring.
Ismail and Rahman, (2011) argue that Information related to corporate governance
such as internal control and risk management system could help the companies to
fulfill the need of the investors. Verschoor (2002) suggests that the financial scandal
of Enron was mainly caused by its weak internal control system. Internal control
information has been cited as one of the most important non-financial information
items to be included in the corporate reporting domains (Guthrie & Petty, 2000;
Abeysekera, 2013). The underlying argument is that internal control resources
represent a substantial amount of a firm’s market value in the modern economy
(Edvinsson, 2013), and therefore, disclosure of internal control information reveals
“the ‘true’ value of a firm by identifying new or hidden relations between various
forms of assets” (Liu & Wang, 2012, p. 37). Hermanson (2000) posits that despite
importance of internal control investors cannot directly observe it and until the firm
discloses it voluntarily, investors will remain unaware of the level and quality of the
firm’s internal control systems (Deumes & Knechel, 2008; Michelon et al., 2009).
Ashbaugh-Skaife, Collins, and Kinney (2007) find that firms reporting internal
control deficiencies have more complex operations, greater exposure to accounting
risk, fewer resources to invest in internal control, and a higher likelihood of using
a dominant audit firm.
Poor corporate governance and low level of transparency in disclosing information
by the companies are some of the reasons to the 1997-1998 Malaysia financial crisis,
according to Norwani, Mohamad and Check, (2011).
Relationship Between Audit Committee Effectiveness,
Audit Quality, and Internal Control Disclosure
Zhang et al. (2007) provide empirical evidence that the audit committee and the
external auditor play an important role in reducing internal control weaknesses.
Abbot et al. (2004), documented that completely independent and financial expertise
of audit committee were positively related with a demand for higher audit quality.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
According to Cohen et al., (2004) the interactions between the audit committee,
the external auditors and the board of directors are crucial to improve the quality
of financial reporting. Thus, supporting the argument that the interactions between
effective audit committee and the external auditor will bring about good internal
control in organisations.
Mitchell et al. (2008) showed that the relation between an audit committee
and the quality of audit can potentially enhance the quality of financial statements
published to the external stakeholders.
As noted by Xie et al. (2003), the audit committee has the responsibility to
oversee ICFR, communicating with management, internal and external auditors, and
the board of directors to assure that appropriate controls are in place and reporting
processes are effective.
The corporate governance literature suggests that audit committee effectiveness
is positively associated with firms’ financial reporting quality (Carcello et al., 2006;
Klein, 2002) and negatively associated with the incidence of management fraud
(Carcello et al., 2009; Abbott et al., 2004). Carcello et al. (2006), Abbott et al.
(2003) declare that the existence of an independent audit committee equipped with
financial expertise is positively related with audit quality. Zhang et al. (2007) find
that internal control disclosure is negatively associated with audit committee financial
expertise, but do not find an association with other audit committee characteristics.
Based on the objectives of the study the following hypotheses would be tested:
H1. Firms with an effective audit committee and a Big Four auditor, are likely to
disclose internal control information
H2. Firms with an effective audit committee and disclose audit fee charged, are
likely to disclose internal control information
H3. Firms with an effective audit committee and a long auditor tenure are likely to
disclose internal control information
Method
The data to be used in the empirical analysis will be derived from the financial
statements of all the listed firms on the GSE during a five-year period, 2013-2017.
Five years were selected, because these were the latest financial statements. Data
for these years were selected because firms’ disclosures tend to persist across years
(Bushee et al. 2003, Skinner 2003, Graham et al. 2005). Once managers decide to
disclose internal control information in the narrative sections of the annual report,
it is unlikely that they would switch back to no disclosure.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
A disclosure index consisting of eight reportable items were used to measure
the extent of voluntary internal control reporting. This internal control disclosure
evaluation criteria have been used by Jainfei Leng and Yiran Ding (2011). The
Appendix shows the internal control disclosure evaluation criteria used in the study.
In all 210 firm-years reports for the period 2013 - 2017 were used. The annual
reports were downloaded from Africanfianncials.com web site. Each annual report
was individually examined and coded in order to obtain the disclosure of internal
control information. For the purpose of this article, dummy variables are assigned to
represent whether or not an item is used, if an item is used 1 is assigned to that item
and zero if an item is not used. The values assigned are then summed up to represent
the total score for each company. This is mathematically presented as follows:
The disclosure index = Total internal control items disclosed / Maximum (8)
items disclosed for each company. This can mathematically be stated as follows:
Disclosure Index
Actual Disclosure
Total Possible Disclosure
m
= = 1
∑∑
∑
di
di
n
1
Where:
di = 1 if the item di is disclosed (0 if not disclosed)
m = number of items disclosed;
n = maximum number of disclosure items possible
Measurement of Independent Variables
Following prior studies (Sultana, et al., 2015; Ika & Ghazali, 2012; Nelson & Shukeri,
2011; Mohamad-Naimi et al., 2010; Lin et al., 2006; DeZoort et al., 2002) this study
uses five audit committee variables best proxying audit committee effectiveness for
analysis. These are; audit committee financial expertise, audit committee previous
experience, audit committee size, independent audit committee, and audit committee
meeting.
Measurement of Effectiveness of Audit Committee
The study model includes audit committee variables such as: ACPE, a dummy variable
that is 1 where at least one director of the audit committee has prior audit committee
experience and 0 otherwise. Additionally, ACSZ: the number of members forming
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
the audit committee, and ACIND, a dummy variable that is 1 where companies
have an independent audit committee, and 0 otherwise. An audit committee is
independent when it is formed exclusively by external and independent members.
ACFE; it is a dummy variable that takes the value1 if the audit committee includes
at least one member with finance expertise in each year during the period 2013-
2017, and 0 otherwise. ACMT is a variable that measures the number of meetings
of the audit committee.
This study uses three proxy of measurement of audit quality; audit firm size
(AUDFSZ), audit fees (AUDFEE), auditor tenure (TENURE). These measures have
been used by Zgarni, Hlioui and Zehri (2016); Khlif and Samaha (2016) and Wahab
et al. (2011). Furthermore, the study tests the interaction between effectiveness of
audit committee and external auditor (ACSCORE×AUDFSZ+ACSCORE×AUD
FEE+ACSCORE×TENURE).
• ACSCORE×AUDFSZ: It is a variable to measure the interaction of the
ACSCORE and AUDFSZ and takes the value 1 if a firm-year observation
has an external audit function (Big Four auditor) and an effective audit
committee, 0 otherwise.
• ACSCORE×AUDFEE: It is a variable to measure the interaction of the
ACSCORE and AUDFEE and takes the value 1 if a firm-year observation has
disclosed an external audit fee and an effective audit committee, 0 otherwise.
• ACSCORE×TENURE: It is a variable to measure the interaction of the
ACSCORE and TENURE and takes the value 1 if a firm-year observation
has an external audit function (tenure of auditor) and an effective audit
committee, 0 otherwise.
Finally, the empirical model of the study also includes four control variables.
These control variables are; board size (BDS), profitability (ROA), proportion of
independent directors (PNED), and leverage (LEV). Prior studies suggested that these
company-specific characteristics may affect the level of internal control information
disclosure (Alsaeed, 2006; Celik et al., 2006; Aljifri & Hussainey, 2007; Wang et al.,
2008; Hassan et al., 2011; Uyar & Kilic, 2012; Orens et al., 2013; Alkhatib, 2014).
• Board size: Research by Chen and Jaggi, (2000) points out that board
composition affects the effectiveness of control on top management increasing
the quality of mandatory disclosure.
• Profitability: According Agyei-Mensah (2016b p. 85). There is a general
belief that a firm’s willingness to disclose information is related to its
profitability. Companies of strong profitability have more financial resources
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
to establish and implement internal control system and are more likely to
disclose information (Khlif & Samahak, 2016)
Proportion of independent directors (PNED):
• Leverage: Eng and Mark (2003) and Barako et al. (2006) provide evidence
that leverage is positively related to the extent of voluntary disclosure.
Xiaowen (2013) on the other hand posits that companies with high leverage
are not willing to disclose internal control information.
• Independent directors: Gul and Leung (2004) document a negative
relationship between board independence and disclosure. Haniffa and Cooke
(2005) found that, board independence improves the quality of disclosures.
A linear-multiple regression analysis will be used to test the interaction between
disclosure of internal control information (dependent variable) and effectiveness of
audit committee and audit quality (independent variables).
To test the construct validity of the scores of the effectiveness of audit committee
(ACSCORE), a factor analysis was performed on the items in their respective
measure. The aim of the factor analysis is to limit the whole of the criteria selected
to characterize various dimensions of the governance variable in a minimum number
of factors. That is, the five individual data items of audit committee; audit committee
prior experience, its size, the independence, expertise and the frequency of the
meetings of the members of audit committee, were factor analyzed to determine if
they loaded onto two factors as expected. Results given in Table 1, in the rotated
component matrix, confirm a correct loading into two factors.
Table 1. Factor analysis of items in audit committee effectiveness
Rotated Component Matrix
Component
1 2
ACFE .431 .540
ACSZ .660 .051
ACIND -.441 .702
ACPE .733 .055
ACMT -.129 -.541
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
Results
Descriptive Statistics
The descriptive statistics for the variables are presented in Table 2. The dependent
variable ICID has a mean of 41 per cent, the minimum is 19 per cent, the maximum
being 81 per cent with a standard deviation of 21 per cent. According to the results,
internal control information disclosure level is not high among listed companies
in Ghana. The findings are consistent with that of, Agyei-Mensah (2016), Cheng
and Courtenay (2006), Pateli and Prencipe (2007), Lim et al. (2007), Donnelly and
Mulcahy (2008), Chen and Jaggi (2000) and Fang et al. (2009), but is inconsistent
with the findings of Eng and Mak (2000).
Univariate Analysis
To meet the requirements of the regression analysis assumptions, the correlation
between the study variables and test for multicollinearity problems were examined.
Table 3 presents the correlation results for the study variables. The correlation
analysis shows that ICID has a significant relationship with AUDITOR at 0.05 level.
TENURE has a significant relationship with AUDITSCORE and AUDITFEE at 0.05
level. BDS also has a significant relationship with AUDITOR at 0.01 level. These
results indicate the need to pay attention to possible multi-co linearity problem in
the regression analysis.
Table 2. Descriptive statistics
Descriptive Statistics
Mean Std. Deviation Minimum Maximum
ICID 0.41 0.21 0.19 0.81
ACSCORE 7.02 7.40 0.00 24.00
AUDITOR 0.73 0.37 0.00 1.00
AUDFEE 0.80 0.30 0.00 1.00
TENURE 4.43 1.07 3.00 6.00
BDS 8.60 2.77 4.00 18.00
LEV 0.88 0.57 0.06 2.77
PROF 6.74 8.41 (8.00) 33.00
PNED 70.43 11.90 50.00 88.89
Valid N (listwise) 210
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
Multicollinearity and Autocorrelation Tests
(Assessment of the Validity of the Model)
A regression analysis (Table 4) was performed on the dependent and independent
variables to check on the existence of the multi-co linearity and serial or autocorrelation
problems. The tolerance and Variable Inflation Factor (VIF) tests revealed no
Table 3. Spearman’s rho correlation coefficient matrix
Correlations
ICID ACSCORE AUDITOR AUDFEE TENURE BDS LEV PROF PNED
ICID
Correlation
Coefficient 1.000
Sig.
(2-tailed)
ACSCORE
Correlation
Coefficient .013 1.000
Sig.
(2-tailed) .853
AUDITOR
Correlation
Coefficient .205** .047 1.000
Sig.
(2-tailed) .003 .496
AUDFEE
Correlation
Coefficient -.080 .032 -.029 1.000
Sig.
(2-tailed) .247 .643 .681
TENURE
Correlation
Coefficient .044 .180** -.022 -.214** 1.000
Sig.
(2-tailed) .523 .009 .755 .002
BDS
Correlation
Coefficient .180** .165* .153* -.029 -.015 1.000
Sig.
(2-tailed) .009 .017 .026 .675 .833
LEV
Correlation
Coefficient .058 .105 .249** .027 .051 .026 1.000
Sig.
(2-tailed) .401 .129 .000 .694 .459 .706
PROF
Correlation
Coefficient .100 .044 .248** -.027 .025 -.029 -.481** 1.000
Sig.
(2-tailed) .150 .524 .000 .700 .717 .676 .000
PNED
Correlation
Coefficient -.277** -.245** -.044 .075 -.127 -.153* .200** -.090 1.000
Sig.
(2-tailed) .000 .000 .523 .277 .065 .027 .004 .194
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
harmful correlation. According to (Pallant, 2013; Field, 2009), if the largest VIF
is greater than 10, there is cause for concern. However, the maximum VIF value
in Table 5 is 1.863 and Durbin Watson value of 1.497. In addition, the tolerance is
greater than 0.20 for the variables (the smallest tolerance is 0.471). Therefore, this
study is not subject to high collinearity problems. Overall, there are no linearity,
multicollinearity, and autocorrelation problems.
Main Findings
The table indicates R2 of 0.555, and Adj. R2 of 0. 509 (F=0.775, p = 0.000), which
shows that a good percentage (50.9%) of the variation in ICID can be explained by
variations in the whole set of independent variables.
There is a positive relationship between ICID and AUDSCORE (β=0.141) and
significant at the 5% level (p= 0.037). Thus, H1 is supported, hence accepted. The
results indicate that firms with independent audit committee, with financial expertise,
Table 4. Interaction between the effectiveness of audit committee and audit quality
on disclosure of internal control information
Regression Analysis Results
Model
Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
Collinearity
Statistics
BStd.
Error Beta Tolerance VIF
(Constant) .508 .141 3.602 .000
ACSCORE .004 .004 .141 .892 .037 .471 1.863
AUDITOR .071 .052 .127 1.349 .179 .484 1.068
AUDFEE .027 .038 .049 .719 .473 .929 1.077
TENURE .003 .014 .016 .227 .821 .861 1.162
ACSCORE×AUDFSZ .003 .005 .088 .526 .060 .511 1.616
ACSCORE×AUDFEE .031 .039 .056 .795 .427 .847 1.181
ACSCORE×TENURE .033 .032 .070 1.008 .003 .880 1.136
BDS .011 .005 .151 2.205 .029 .914 1.094
LEV .040 .028 .109 1.439 .152 .746 1.341
PROF .003 .002 .137 1.935 .054 .847 1.181
PNED -.006 .001 -.319 -4.525 .000 .859 1.164
R2 = 0.555; Adj. R2 = 0.509; F=3.314 (p=0.000), Durbin Watson =1.497; N=210
14
Audit Committee Eectiveness, Audit Quality, and Internal Control Information
prior experience and meeting frequently are likely to disclose more internal control
information. This finding is consistent with Zhang et al. (2007) who provide empirical
evidence that the audit committee and the external auditor play an important role
in reducing internal control weaknesses.
There is a positive relationship between ICID and ACS x AUDFSZ (β=0.088)
and significant at the 5% level (p= 0.060). Thus, H1 is supported, hence accepted.
This result indicate that, firms with an effective audit committee and a Big Four
auditor, are likely to disclose internal control information. The results also indicate
complementary effect between the score of audit effectiveness and audit firm size in
the disclosure of internal control information. This finding is consistent with Khlif
and Samaha, (2016) who found that in Egypt the association between audit committee
activity and internal control quality is more pronounced when an organisation is
audited by a Big 4 audit firm.
There is a positive relationship between ICID and ACSORE x AUDFEE (β
=0.056) but insignificant at the 5% level (p=0.427). Thus, H2 is not supported,
hence rejected. This result indicate that, firms with an effective audit committee and
disclose audit fee, are not likely to disclose internal control information.
There is a positive relationship between ICID and ACSORE x TENURE (β
=0.068) and significant at the 1% level (p=0.003). Thus, H3 is supported hence
accepted. This results indicate that, firms with an effective audit committee and long
auditor tenure, are likely to disclose internal control information.
With regards to the control variables the findings are as follows:
There is a positive relationship between ICID and BDS (β =0.141) and significant
at the 1% level (p=0.029). This result indicate that, board size influence disclosure
of internal control information.
There is a positive relationship between ICID and LEV (β =0.109) but insignificant
at the 1% level (p=0.152). This result indicate that, leverage does not influence
disclosure of internal control information. This is consistent with Xiaowen (2013)
who posits that companies with high leverage are not willing to disclose internal
control information.
There is a negative relationship between ICID and PROF (β =0.137) and
significant at the 1% level (p=0.054). This result indicate that, the higher a firm’s
profitability the lower the amount of internal control information disclosed. This
finding is inconsistent with Xiaowen, (2013 p. 631), who posits that, “when a
company reaches a certain level of profitability, the governance structure will be
relatively complete and internal control will be correspondingly sound, so it will
actively disclose internal control information”.
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Audit Committee Eectiveness, Audit Quality, and Internal Control Information
There is a negative relationship between ICID and PNED (β =0.255) and
significant at the 1% level (p=0.000). This result indicate that, firms with a higher
proportion of non-executive (independent) directors are not likely to disclose internal
control information.
CONCLUSION
This paper examined the linkages between audit committees’ effectiveness, audit
quality and internal control information disclosure. Empirical evidence on the effect
of audit committee effectiveness and audit quality on internal control information
disclosure is scanty. Using a 210 firm-year sample of firms listed on the Ghana
Stock Exchange for the period, 2013-2017, the paper tried to fill the research gap.
The dependent variable ICID has a mean of 41 per cent, the minimum is 19 per
cent, the maximum being 81 per cent with a standard deviation of 21 per cent. The
low level (41%) of internal control information disclosure makes it very difficult
for the firms’ stakeholders to determine future performance of the company. After
controlling for board size, proportion of independent directors and leverage, the results
from univariate and multivariate analyses indicated that effective audit committee
and audit firm size play complimentary and substitution roles in ensuring internal
control information disclosure. Board size and proportion of independent directors
were also found to influence the disclosure of quality voluntary information.
This study makes several important contributions. The analysis fills a gap
in the extant literature where very little research has examined the relationship
between effective audit committee and audit quality on internal control information
disclosure. The findings are consistent with agency theory, suggesting that effective
audit committee and audit quality tend to support the disclosure of internal control
information.
The results also have implication for managers and policy makers. With regard to
managers, findings from the study emphasize audit committee that have finance and
accounting expertise which meets regularly, cooperating with auditors from the Big
Four auditing firms can help increase the disclosure of internal control information.
With respect to policy makers, the results highlight that effective audit committee
and audit quality help promote the disclosure of internal control information. Hence,
they should encourage corporate boards to insist on audit committees having people
with finance and accounting qualification and meeting regularly with their external
auditor to ensure disclosure of voluntary information.
16
Audit Committee Eectiveness, Audit Quality, and Internal Control Information
Despite the contributions and the implications of the findings, there are some
limitations to this study. Whilst the independent and control variables included in
the regression model are all validated by prior research, there may exist other factors
influencing internal control information disclosure that were not addressed by this
study. Further researchers may consider other corporate governance variables such
as; audit committee gender, audit committee chair financial expertise and ownership
concentration, etc., in order to provide an in-depth explanation to determine the
relationship between audit committee effectiveness and audit quality on disclosure
of internal control information.
Furthermore, the same methodology can be used by other researchers using
data from other emerging markets where there is lack of evidence, to measure the
effect of audit committee effectiveness and audit quality on disclosure of internal
control information.
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APPENDIX
Table 5. Internal control evaluation sheet
Item Content Scores
Internal Environment Corporate governance structure, human resources
policies, corporate culture
Disclosing =1,
Otherwise =0
Risk Evaluation Identification of internal and external risk, risk
analysis, risk responses
Disclosing =1,
Otherwise =0
Control Activities Internal control activities based on risk evaluation Disclosing =1,
Otherwise =0
Information and
Communication
The establishment of information and
communication system
Disclosing =1,
Otherwise =0
Internal Supervision Internal supervision from internal audit department Disclosing =1,
Otherwise =0
Internal control defects The defects or abnormal items in internal control
and the improvement methods
Disclosing =1,
Otherwise =0
Internal assessment Assessment from board of directors Disclosing =1,
Otherwise =0
External assessment External auditor’s assessment Disclosing =1,
Otherwise =0
Adapted from: Jainfei Leng and Yiran Ding (2011)
