Governance characteristics and role effectiveness of audit committees

Abstract

Purpose

This paper examines the association between audit committee (AC) governance characteristics and their role effectiveness. Its objective is to contribute a more comprehensive model and new evidence from Australia that complements and extends recent studies from different country settings on characteristics, roles and effectiveness of ACs.

Design/methodology/approach

The sampling frame is Australian listed companies, over the years 2004 to 2009, consisting of 180 observations. The study applies multiple regressions to validate the hypotheses and models.

Findings

Results reveal that stronger AC independence and competence, but not diligence, is significantly related to a lower incidence and severity of financial restatements (i.e. to a higher integrity of financial statements). However, greater AC diligence, but not independence or competence, is significantly related to lower non‐audit fee ratio (i.e. to higher external auditor independence).

Practical implications

The paper highlights salient links between an AC's governance characteristics and its effectiveness in fulfilling certain governance roles. Also it expands current literature by presenting a comprehensive empirical model along with statistical measures for AC governance characteristics.

Originality/value

Previous studies have not drawn AC governance characteristics together in a comprehensive model or provided evidence beyond the North American and European setting. A further original feature is the measurement of AC competence in terms of collective members' combined financial sophistication and industry knowledge.

Citation

Lary, A.M. and Taylor, D.W. (2012), "Governance characteristics and role effectiveness of audit committees", Managerial Auditing Journal, Vol. 27 No. 4, pp. 336-354. https://doi.org/10.1108/02686901211217969