Impact of the Audit Committee’s Characteristics on Enterprise Risk Management, Internal Audit, External Audit and Firm Performance in Saudi Arabia
Creators: name: Almodawi, Abdulkareem
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350103
subject: Financial accounting

description: Highly visible corporate collapses in the early twenty-first century, such as those experienced by Enron and WorldCom in the United States, as well as OneTel and Harris Scarfe in Australia, were the catalysts for a simultaneous decline in investor confidence (Robins 2006). Concerns regarding the ideal composition of corporate boards and their committees have become more pronounced among various stakeholders, including investors, scholars, practitioners, and global regulatory bodies. This increased level of scrutiny aims to ensure effective decision-making processes and the creation of value (Kim et al. 2014; Masulis et al. 2012). In the broader discussion on board composition and its committees, a notable aspect that has emerged is board diversity (Bernile et al. 2018).
One of the primary justifications for emphasizing board members' diversity is to advance social justice principles (Van Dijk et al. 2012). Nevertheless, scholars and governing bodies have also put forth arguments grounded in the realm of economics. To illustrate, the presence of a varied collection of individuals within a specific group can counteract the occurrence of 'groupthink', a phenomenon associated with the Enron collapse (O'Connor 2002) and the Volkswagen emission problems (Glebovskiy 2019). Analyzing this matter through a lens of reliance on resources (Salancik and Pfeffer 1978), diversity expands the array of skills, capabilities, and expertise that a board and its committees can access.
One important facet of corporate governance is the audit committee (AC), which oversees internal and external auditing and enterprise risk management. The enactment of the US Sarbanes-Oxley Act of 2002 brought about more stringent requirements regarding the AC's independence. Consequently, there was a decrease in the traditional ties between the board of directors and their committees or with executive management (CEOs). Nonetheless, in organizations where audit committees witnessed a reduction in members who had established ties to the CEO, approximately 24% of these vacancies were filled by individuals who possessed social affiliations. This emerging pattern raises concerns regarding the escalating significance of these informal associations within AC as an alternative, unregulated channel through which influence may be exerted on the AC's activities (Hwang and Kim, 2012). Bernileet al. (2018) Chen et al. (2017) found that diversity in the board of directors and its committees positively impacts the companies and reduces the agency problem.
In Saudi Arabia, customary practices privilege familial and friendly relationships, which subsequently could impact an organizations' operational mechanisms (Common 2013). The bestowal and receipt of ‘wasta’ (roughly translated as nepotism) occurrs within networks of extended kinship and frameworks of organizations. Saudi Arabian managers exist within a cultural milieu in which social and professional ties assume significant and influential roles in institutional and group dynamics. Besides tribal, clan, and family loyalties, religion is the primary authority source in Saudi Arabia (Nevo 1998). The Muslim world is a society characterized by deep-rooted conflicts surrounding the notions of patriotism and territoriality (Nevo 1998).
It is deemed that in all Arab nations, Wasta is deeply ingrained in the culture and influences every choice (Cunningham and Sarayrah 1993). Several academics have written about the Wasta phenomenon in Arab nations in the last ten years (Alenzi 2017; Alreshoodi 2016; Barnett et al. 2013; Cunningham and Sarayrah 1993; Harbi et al. 2017; Hutchings and Weir 2006; Tlaiss and Kauser 2011). According to Hutchings and Weir (2006), Wasta may be of utmost relevance regardless of an organization's objectives and track record. Strong social bonds have been established in Saudi Arabia through personal relationships and family status. Wasta access has a direct bearing on the hiring and advancement of individuals who have strong ties to their families (Alreshoodi 2016).
This study aims to examine the impact of Saudi's unique socio-cultural relationships (social ties), namely regionalism and tribalism, kinship, and wasta, and professional ties among AC members on AC responsibilities (ERM, IA, EA) and then the impact of AC performance on firm performance.
The researcher presents the perspectives, opinions, and experiences of AC members regarding their social and professional ties and how they affect AC performance. Then, the researcher considers how AC performance affects firm performance (FP). The study employs a mixed methodology of semi-structured interviews and surveys.
This study contributes to the knowledge and literature on audit committees and corporate governance. It may have implications for policymakers, regulators and other government and business officials responsible for corporate governance and its implementation in Saudi Arabia.
The findings indicate that pre-existing social ties among AC members, as opposed to a merit-based selection procedure, have a negative effect on AC performance. In contrast, professional ties have a positive impact on AC performance. Moreover, AC performance has a significant positive effect on firm performance.
The findings provide insights into social and professional networks among AC members in Saudi Arabia. The most common ties among members are found to be professional and Wasta ties in the first place, then regionalism. Family ties follow this, and the last place is tribalism. Moreover, the findings uncovered that these social and professional ties are exclusive among AC members and extend to members of the company's board of directors and major investors. The analyses revealed that professional ties among members make them perform their duties professionally.
In contrast, family relations and tribe relations negatively impact ACA, mainly because of social compliments among them. The regionalism among members is noticeable; most participants prefer sharing the same region among members. Furthermore, the critical reasons behind using social and professional ties among members were found to be trust and loyalty, merit: expertise, qualifications and experience, Legal loopholes, lack of databases for choosing a new member recruitment procedure, increased job satisfaction, financial benefits, pressure from society on members/chairs and control over the committee.
Also, Family, Region, Tribe, and Wasta have a significant negative indirect effect on Firm Performance through (ACA). In contrast, professional ties significantly positively and indirectly affected Firm Performance through ACA.
This study addresses the gaps in the literature concerning Social and professional ties within AC and, Their effect on ACA and then firm performance. To the researcher’s knowledge, this is the first project that brings the issue of socio-cultural relationships to corporate governance studies and explores the implications of such ties on ACA.