Audit committees' effectiveness in overseeing the integrity of company's financial reporting in the UK: Auditors view. An exploratory investigation.

Purpose – The purpose of this study is to obtain a better understanding of the types of expertise required of AC members and to see whether it is possible to identify the specific areas of expertise required of members of audit committee in monitoring the integrity of financial reporting. The study will also investigate the current level of UK audit committees’ members’ expertise, attempt to identify “knowledge gaps”. The processes related to the oversight of financial reporting will be considered as part of this research. Design/methodology/approach – The evolving and changing nature of the researched field – the changing roles, regulations, “best practice” – indicate that in order to gain a richer understanding of the factors affecting the efficiency of AC in overseeing the company’s financial reporting, an exploratory research is needed. Semi-structured interview was chosen as an appropriate method of gathering information as it allows for some flexibility for interview participants to engage in a dialogue and explore the emerging issues in-depth. Six representatives from six audit firms have been interviewed. Auditors were given preference as a source of information for this research for a number of reasons, but mainly because auditors are in the best position to assess the expertise required of AC members. Additionally, due to their regular communications with AC boards they can provide opinion on the current level of expertise of UK AC members. Findings – One of the key findings of this research is the growing role of AC members in understanding and reviewing key accounting judgements contained in company’s reporting. Other findings include: the lack of UK audit committees’ expertise in IFRS, the marked difference in financial expertise between the FTSE 100 and Mid 250 companies. Also this research found that the ability to ask the “right” questions scores highly in the hierarchy of AC skills. In terms of AC processes related to their financial oversight role, it has been found that AC involvement in the process of the annual report preparation (timing of the involvement) raised concerns of auditors. Also respondents’ views on the degree of audit committee’s reliance on external auditors and the financial management were conflicting, with one respondent stating that currently UK ACs rely too much on the financial management of the company in obtaining information. The research is inconclusive on this. Concerns have been raised about the insufficient discussion during the meeting of AC with auditors of financial reporting issues emerging from audits. Originality/value – While previous studies have drawn attention to the correlation between AC members’ characteristics and effectiveness of audit committees in their financial oversight role, there remains a lack of understanding and consensus on what should constitute financial expertise. There is limited UK-based research on AC literacy, operation and processes compared to the abundance of research in the US. UK Corporate Governance has its unique features and regulation that place some limitations on applicability of US –based research findings in the UK business context. This research explores AC operation in the UK.