Article1997

Economic Agency and Audit Committees: Responsibilities and Membership Composition

36 citations0/0 files storedInternational Journal of Auditing

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

Abstract

Committees, commissions, and regulatory authorities in the US, the UK, Canada and Australia have identified the corporate audit committee as a key component of effective corporate government. Categorizations of the responsibilities frequently assigned audit committees have been prepared by professional groups and by Wolnizer. However, evidence linking assigned responsibilities to the experience backgrounds of audit committee members has not previously been provided. Statements in international accounting firm publications indicate that to function effectively some audit committee members should have backgrounds in financial reporting, accounting, or auditing. The current study uses data that are publicly available to investors and others to document assigned committee responsibilities and the membership backgrounds of the audit committees of large US multinational enterprises. It provides competing explanations of the proportion of audit committee members with instrumental experience (i.e. technical skills to relate to accounting, auditing and control issues). The results indicate that the backgrounds of the chief executive officer and the audit committee chair help to explain the proportion of members with instrumental experience, while the breadth and technicality of assigned responsibilities, multinational and domestic complexity, leverage, and asset structure do not. Because these results appear to be inconsistent with the agency costs paradigm that has guided much of published research on monitoring and controls, suggestions for future research to clarify the relation between assigned audit committees responsibilities and membership background are provided.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1985Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition 1971Directors: Myth and Reality 1988The Determinants of Board Composition 1991Organizational Environments and the Multinational Enterprise 1994The use of audit committees for monitoring 1987Passing the Baton: Managing the Process of CEO Succession 1985The Economic Theory of the Multinational Enterprise

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