Articlegreen2007

Audit committee effectiveness: informal processes and behavioural effects

310 citations0/0 files storedAccounting Auditing & Accountability Journal

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose This paper seeks to investigate the conditions and processes affecting the operation and potential effectiveness of audit committees (ACs), with particular focus on the interaction between the AC, individuals from financial reporting and internal audit functions and the external auditors. Design/methodology/approach A case study approach is employed, based on direct engagement with participants in AC activities, including the AC chair, external auditors, internal auditors, and senior management. Findings The authors find that informal networks between AC participants condition the impact of the AC and that the most significant effects of the AC on governance outcomes occur outside the formal structures and processes. An AC has pervasive behavioural effects within the organization and may be used as a threat, an ally and an arbiter in bringing solutions to issues and conflicts. ACs are used in organizational politics, communication processes and power plays and also affect interpretations of events and cultural values. Research limitations/implications Further research on AC and governance processes is needed to develop better understanding of effectiveness. Longitudinal studies, focusing on the organizational and institutional context of AC operations, can examine how historical events in an organization and significant changes in the regulatory environment affect current structures and processes. Originality/value The case analysis highlights a number of significant factors which are not fully recognised either in theorizing the governance role of ACs or in the development of policy and regulations concerning ACs but which impinge on their governance contribution. They include the importance of informal processes around the AC; its influence on power relations between organizational participants; the relevance of the historical development of governance in an organization; and the possibility that the AC's impact on governance may be greatest in non‐routine situations.

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References

1989Frameworks of Power 2004Audit Committee Characteristics and Restatements 2004The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management 2000Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms 2005Audit Committee Quality and Internal Control: An Empirical Analysis 2003Auditing and the production of legitimacy 2003Audit Committee Characteristics and Auditor Dismissals following “New” Going-Concern Reports 2002Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature

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