A proposed model of audit committee to reinforce corporate governance system in Jordan

Abstract

Audit committees are the cornerstone of corporate governance. They play a vital role in overseeing accountability, and work as a liaison between internal auditors, external auditors, executive management and the board of directors. Corporate scandals, such as the demise of Enron-Arthur Andersen in the U.S.A. and Petra Bank in Jordan, have undermined stakeholders' confidence in the capital markets. Such scandals might be caused by the lack of a corporate accountability system and by management pressure exerted on audit scope or the auditor's fee. These scandals imply a message that relying on the perceived independence of external auditors may not be sufficient and, therefore, corporate governance systems must be restructured because financial collapses may harm society and cost the government both economically and socially. This analytical research paper proposes and outlines a model of audit committee to reinforce the effectiveness of the corporate governance structure. The study recommends a Governmental Representative Member (GRM), appointed and supervised by the Audit Bureau, to be among the audit committee members of listed companies. The study model suggests that the presence of the GRM among audit committee members strengthens their effectiveness and, therefore, reinforces external auditors' independence, performance, and their ability to operate in the face of pressure from company management to issue a favourable audit opinion, thus, increasing the integrity and the soundness of the financial reporting system.

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