Role effectiveness of audit committees' governance characteristics: impacts on internal and external auditing of listed companies
Creators: name: Ng, Shir Li
Publisher: name: RMIT University
Year: 2024

description: Audit Committees (ACs) have become more important and prevalent since the initial corporate governance reforms of the mid-2000s. In their expanded roles, ACs have become a key player in their entity’s suite of corporate governance mechanisms which are intended to protect the interest of the shareholders and reduce the shareholder-manager agency conflicts. The aim of this study is to examine the role effectiveness of ACs’ governance characteristics in achieving desired levels of quality and independence for the internal and external auditing functions of listed companies in Australia. However, achieving this role effectiveness of ACs will require agency costs. So this study also investigates whether higher audit-related agency monitoring costs result in higher returns to shareholders. <br><br>This study uses cross-sectional data and mainly applies multiple regressions to test the five hypotheses. The sampling frame for this study is top 300 companies listed on the Australian Stock Exchange (ASX) for the financial year ending in 2010. A total of 255 companies are drawn from the sampling frame on an elimination basis. There are two stages of data collection employed. Questionnaires are administered to the Chief Internal Auditors (CIA) of the sampled companies while financial, accounting and market data are obtained from online databases. <br><br>There are several findings from this study. First, in terms of AC’s governance characteristics and the role of AC overseeing the quality of the internal audit function, only AC size is significantly positively associated with financial resources devoted to the internal audit function while both AC expertise and AC size are significantly related to internal audit function labour hours. Second, in terms of AC’s governance characteristics and the AC’s role of ensuring the independence of the internal audit function, no attributes of AC’s governance characteristics have a significant impact on internal audit function independence. Third, in terms of AC’s governance characteristics and the role of AC facilitating the quality of the external audit, AC size and AC frequency of meetings are significantly related to external audit fees. Fourth, in terms of AC’s governance characteristics and the role of AC ensuring the independence of external auditors, both AC size and frequency of meetings are significantly negatively related to non-audit fees. Finally, in terms of audit-related agency monitoring costs and total shareholders return, AC fees are significantly related to total shareholders return. To provide a more in-depth analysis of the key AC’s governance characteristics that are found in the regression analysis to be significant, a comparative case study between two different companies is performed. The results are generally supportive.<br><br>In conclusion, the various findings of this study have important implications for regulators of corporate governance, professional accounting/auditing bodies, shareholders, board of directors and scholarly researchers. This study highlights the significant relationship between an AC’s governance characteristics and its effectiveness in fulfilling its roles in the internal audit function and also external auditing. Finally, this study contributes to current auditing-related governance literature by introducing a comprehensive empirical model along with statistical measure for AC’s governance characteristics.