Strengthening the Financial Reporting System: Can Audit Committees Deliver?

Strengthening the FinancialReporting System: Can AuditCommittees Deliver?ija_413 174..210

Jean Bédard and Yves GendronUniversité Laval

This paper reviews the literature on audit committees in orderto evaluate the extent to which committees are effective interms of strengthening financial reporting. The paper aims toachieve two goals: first. to provide updated information aboutthe effectiveness of the audit committee, and second to identifyresearch opportunities. Compared with other reviews on thematter, we cover a broader spectrum of theoretical perspectivesfrom various fields, methods, and countries. In particular,our review investigates from a meta-perspective the resultsreported in studies which examine the relationship betweencertain audit committee characteristics and measures of auditcommittee effectiveness. It is hoped that this work willsensitize accounting researchers about the appropriateness ofextending the boundaries of research on audit committees,from methodological, theoretical, and geographical points ofview.

Key words: Audit committee, corporate governance,effectiveness, regulation, review of literature

SUMMARY

This paper reviews the literature on auditcommittees in order to evaluate the extent to whichcommittees are effective in terms of strengtheningfinancial reporting. Specifically, we examineacademic research on the topic of audit committeeeffectiveness published in a variety of accountingjournals from 1994 until 2008. In particular, our

review investigates from a meta-perspective theresults reported in studies which examine therelationship between certain audit committeecharacteristics and measures of audit committeeeffectiveness. A large proportion of the studiesreport a positive association between effectivenessand the following characteristics: presence ofthe audit committee; audit committee members’independence; and members’ competencies.However, the number of meetings and the size ofthe committee are not frequently associatedpositively with audit committee effectiveness.Our review also highlights important gaps in the

Correspondence to: Jean Bédard, École de comptabilité,Université Laval, Québec City, Canada, G1V 0A6. Email:[email protected]

International Journal of Auditing doi:10.1111/j.1099-1123.2009.00413.xInt. J. Audit. 14: 174–210 (2010)

ISSN 1090-6738© 2010 Blackwell Publishing Ltd

literature. Most studies are relational andexplanatory; very few studies are exploratory,descriptive or transformative. Psychological andsociological perspectives of analysis are neglected.Knowledge is scant on audit committees injurisdictions which do not follow the Anglo-Saxonmodel of corporate governance. Further, researchon dynamics surrounding audit committeeprocesses is scarce. As a result of these gaps in theliterature, our review aims to sensitize accountingresearchers about the appropriateness of extendingthe boundaries of research on audit committees –methodologically, theoretically, and geographicallyspeaking. Further, by summarizing research resultson the effectiveness of various audit committeeattributes, our review can be useful for regulatorsin terms of assessing the impact of extant regulationor in terms of implementing new regulation.Regulators and practitioners, however, should becareful in interpreting the results; 59% of thestudies we reviewed focus on US public companiesand most of the other studies rely on data gatheredin countries characterized by the Anglo-Saxonmodel of corporate governance.

INTRODUCTION

The accounting scandals of the last decade haveput the audit committee (AC) at the forefront ofthe battle against fraudulent financial reporting.In particular, the Sarbanes-Oxley Act of 2002(SOX) and the related rules promulgated by theUS Securities and Exchange Commission (SEC)prescribe a broad range of measures includingrequirements regarding ACs. Thereafter,regulators in many countries have enactedlegislation and rules that mimic or adapt USregulatory prescriptions, including those that relateto ACs. To a large extent, this regulatory movementis consistent with a ‘compliance approach’(Canadian Securities Administrators (CSA), 2004)in which regulators put more and moreresponsibilities on the shoulders of corporategovernance actors – in contrast with the traditionaldeterrence approach, where regulators are activelyinvolved in verifying enforcement. Questions havebeen raised, however, regarding the pace at whichnew regulations have been introduced as well astheir usefulness (e.g., Cunningham, 2003; Cullinan,2004; Romano, 2005; Gerding, 2006).

This paper reviews the literature on ACs inorder to evaluate whether ACs can deliver. Thisevaluation is crucial and timely given the

increasing level of regulatory responsibilitiesassumed by ACs, and the expectations thatregulators and other stakeholders have regardingthe abilities of ACs in meeting theseresponsibilities. In particular, the paper reviewsacademic research on AC effectiveness publishedin 18 accounting journals from 1994 until 2008.This time range allows us to take a first look atthe impact that the Blue Ribbon CommitteeReport (BRC) (1999) and SOX (US House ofRepresentatives, 2002) may have had on ACpractices. The paper aims to reach two goals:first to provide updated information about theeffectiveness of the AC, and second to identifyresearch opportunities. Not only does the papertake into account research that investigatesmanifestations of AC effectiveness (e.g., throughmeasures of financial reporting quality) but alsoit considers studies which examine effectivenessfrom a perceptual perspective, that is to say fromthe viewpoint of the actors involved. Significantinsights can be gained through both types of study,and indeed one feature of this paper is toemphasize the respective benefits of traditionaland perceptual research, and to promotecross-fertilization between the two.

Previous studies have reviewed some of theliterature on ACs. For example, DeZoort et al.(2002) review 37 empirical studies publishedbetween 1987 and 2002. They provide a frameworkwith four fundamental determinants of ACeffectiveness (composition, authority, resources,and diligence) and discuss each study accordingto these dimensions. They conclude that while eachof the four dimensions has been examined tosome degree, significant opportunities exist in eacharea and provide specific research opportunitiesfor each of them. Instead of focusing on thedeterminants of AC effectiveness, Turley andZaman (2004) analyse the effects of ACs using aframework composed of three dimensions (auditfunction, financial reporting quality, and corporateperformance). Based on their review of selectedstudies from 1981 to 2002, they argue that thereis only limited and mixed evidence of effects tosupport claims and perceptions about the value ofACs for the three dimensions. They suggest futureresearch examines the processes associated withthe operation of ACs and the manner in which theyinfluence organizational behaviour.

Differing from previous reviews on ACeffectiveness, which focus on economics-basedempirical studies with US firms (e.g., DeZoort et al.,

Strengthening the Financial Reporting System: Can Audit Committees Deliver? 175

Int. J. Audit. 14: 174–210 (2010)© 2010 Blackwell Publishing Ltd

2002; Romano, 2005), we cover a broader spectrumof theoretical perspectives from various fields (e.g.,law, economics, psychology, sociology), methods(archival, survey, laboratory case, and interviewbased), and countries. Our review differs from thatof Turley and Zaman (2004) in its emphasis oninternational comparisons and a more systematicanalysis of the association between ACcharacteristics and a broader range of indicators ofeffectiveness that we group into four categories(information quality, audit quality, internal controleffectiveness, and investors’ perceptions of thesedimensions). We also differ from other reviews inthat we systematically selected AC articles froma relatively large set of academic journals (18),between 1994 and 2008. Finally, we updateprevious reviews by examining AC studiespublished after 2002, after SOX-type regulationhad been implemented.

In the text below, inconsistencies regardingcertain research results are sometimes brought tothe fore. Inconsistencies are not surprising giventhe complexity of the phenomenon under study.Measurement of AC effectiveness is a complicatedmatter. Moreover, a variety of factors can play a rolein influencing AC effectiveness, such as groupdynamics and cultural beliefs and practices. Itwould therefore be illusory to believe that researchcan, in the long run, produce results which areentirely consistent. That being said, however,reviews can be helpful in bringing in the field ofvisibility general tendencies in results produced bya variety of studies on AC effectiveness.

The rest of the paper is organized as follows.Section 2 presents our methodology while Section3 sets the stage for our analysis by examining

the objectives of the studies, their theoreticalperspectives, and their data gathering mechanisms.Section 4 identifies and discusses the series ofcriteria which have been used in research toevaluate AC effectiveness. Drawing on thesecriteria, Sections 5 to 9 present research resultsalong the following dimensions: presence of anAC, composition of the AC, its authority, itsresources, and its processes. Sections 5 to 9therefore aim to describe what we know aboutthe impact that certain features of ACs can havein terms of effectiveness. For each dimension,best practices proposed by regulators andquasi-regulators are described, and evidenceregarding effectiveness is provided. Of course,opportunities for research are discussed whenappropriate. Section 10 deals with the impact ofthe broader environment on AC effectiveness.Finally, Section 11 presents our conclusions.

2. METHODOLOGY

This section presents the framework upon whichour review is predicated, and describes the scope ofour work.

Audit committee framework

In general, for regulators, the desired effect or goalof the AC is to strengthen the quality of financialinformation and to maintain/strengthen investorconfidence in the quality of financial reportingand financial markets (BRC, 1999; CSA, 2004). Asindicated in Figure 1, the AC can improve thequality of information directly, by overseeing thefinancial reporting process, and indirectly through

Internal

Control

External

Audit

Financial

Reporting

Audit Committee

COMPOSITION

Investors’

PerceptionsAUTHORITY

RESOURCES

PROCESS

Dimensions of Effectiveness Board of Directors

Figure 1: Audit committees and dimensions of effectiveness.

176 J. Bédard and Y. Gendron


the oversight of internal control and externalauditing. In the end, improved information qualityas well as strengthened controls may result ininvestors being more confident about the quality offinancial reporting and the functioning of financialmarkets. Investors’ perceptions may also be affectedby the adoption of practices that are considered asbest practices for ACs. In Figure 1 the four outcomesensuing from audit committees’ processes areconceived of as dimensions of effectiveness.

Traditionally, regulators have focused on thecomposition, authority (responsibilities) andresources dimensions in trying to strengthen therole of ACs in the corporate governance mosaic(Cohen et al., 2004). Accordingly, and similar toDeZoort et al. (2002), we view AC effectiveness asa function of AC composition, responsibilities,and resources. However, while having the ‘rightpeople’ as AC members and providing themwith concrete responsibilities and resources areimportant inputs to AC effectiveness, they are notsufficient to ensure effectiveness. We must alsoconsider the processes by which AC membersassess information and oversee activities, bothwithin and outside AC meetings. Taking intoaccount AC processes is key in developing a betterunderstanding of AC effectiveness (Gendron et al.,2004). Finally, as the AC comes under the board ofdirectors, the latter can affect AC effectiveness.

Scope

To carry out our review, we identified AC studiespublished between 1994 and 2008 in 18 journals.Ten of these journals are accounting journals listed,as of January 2009, on the Social Sciences CitationIndex (SSCI): Accounting and Finance (A&F), Abacus(AB), Accounting, Organizations & Society (AOS),Auditing: A Journal of Practice & Theory (AJPT),Contemporary Accounting Research (CAR), EuropeanAccounting Review (EAR), Journal of Accounting andEconomics (JAE), Journal of Accounting Research(JAR), Journal of Business Finance & Accounting(JBFA), and The Accounting Review (TAR). To ensurea broader geographical coverage and diversityin objective, perspective and method, we alsoincluded seven other accounting journals:Accounting, Auditing & Accountability Journal(AAAJ), Accounting Horizons (AH), The BritishAccounting Review (BAR), Critical Perspectiveson Accounting (CPA), International Journal ofAccounting (IJAC), International Journal of Auditing(IJA), and Journal of Accounting and Public Policy

(JAPP). For the same reasons, we also included ageneral corporate governance journal: CorporateGovernance: An International Review (CGIR).

For each journal, we searched for the words‘audit committee’ in the title or the abstract of thepaper. Because our objective is to evaluate whetherACs can deliver, we only include studies whichdeal with the issue of effectiveness. Our reviewcomprises 103 articles.1 As shown in Figure 2, thenumber of articles increases quite sharply from2002, moving from four in 2001 to more than ninein the following years. This trend is consistent withthe attention devoted by regulators to the AC (BRC,1999; SOX, 2002), thereby indicating that a numberof accounting researchers work on objects of studywhich are of interest to auditors, regulators, andother members of society; their research thereforeconveys some potential usefulness (Gendron &Bédard, 2001). The delay between regulators’interest and publication suggests that researchmay not be timely enough to have an impact onregulation in the making – although, from a longerterm perspective, research can provide informationrelevant for policy-making purposes.

Table 1 presents the distribution of the papersby journal and country. Five journals account for62% of the papers published (AJPT, CAR, CGIR,IJA, and TAR). Perhaps unsurprisingly, two ofthem are devoted to auditing (AJPT and IJA) andone to corporate governance (CGIR). As indicatedin Panel B, only 16 countries are covered by thearticles. The USA is the most studied terrain (60articles), followed by Europe (17), Australia & NewZealand (9), Asia (8), Canada (6), and Africa (1).One article studied multiple countries. NorthAmerican journals have only published research

Figure 2: Frequency of audit committee articles peryear.



Tab

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Freq

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cyof

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itco

mm

itte

ear

ticl

es

Pan

elA

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equ

ency

ofA

Car

ticl

esb

yjo

urn

al*

Total

A&F

AAAJ

AH

AJPT

AOS

AB

BAR

CAR

CPA

CGIR

EAR

IJA

IJAC

JAE

JAPP

JAR

JBFA

TAR

103

81

814

32

211

012

414

02

52

213

Pan

elB

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equ

ency

ofA

Car

ticl

esb

yco

un

try

anal

ysed

and

jou

rnal

edit

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ed**

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lsN

orth

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eric

anjo

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ls(A

H,A

JPT

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AR

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E,J

AP

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JAR

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R)

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ls

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[11]

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3,64

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8,89

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6059

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210

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4810

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CG

IR:

Cor

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nanc

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Acc

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Rev

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,IJ

A:

Inte

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iona

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Aud

itin

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AC

:Int

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tion

alJo

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ourn

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Acc

ount

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and

Eco

nom

ics,

JAPP

:Jou

rnal

ofA

ccou

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gan

dP

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Pol

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JAR

:Jou

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ccou

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predicated on North American data, while articlespublished in journals located other than in NorthAmerica have a broader geographical coverage.

3. AUDIT COMMITTEE RESEARCH: AMETHODOLOGICAL PERSPECTIVE

Audit committee researchers have differentobjectives, draw from different theoreticalperspectives, and use different data gatheringmethods. This section sets the stage for our analysisby discussing these elements.

Research objective

We classify the objective of AC research intofive categories: descriptive, exploratory, relational,explanatory, and transformative (Palys & Atchison,

2008). As indicated in Table 2, we identified sevenstudies that are mainly descriptive and providestatistics on AC characteristics such as theadoption, composition, and functions of the AC.Eleven studies are categorized as exploratory.While descriptive studies aim to answer ‘what’type of questions by providing descriptivestatistics about AC characteristics, exploratorystudies seek to answer ‘how’ type of questions,such as how do auditors consider the AC in theaudit process, how do ACs operate, or how do ACmembers construct meanings of effectiveness.

Relational and explanatory studies explorerelationships between measurable characteristicsof ACs and some indicators of effectiveness. Themain distinction between the two relates to thenature of the relationship; explanatory impliescausality while relational only entails association.

Table 2: Methodological analysis

Categories* Method*

Total Analytic Archival Survey Laboratorycase

Interview

(108)** (1) (63) (22) (14) (8)

Freq. (%) Freq. (%) Freq. (%) Freq. (%) Freq. (%) Freq. (%)

ObjectiveDescriptive [22, 25, 40, 61, 81,

86, 92]7 (7%) 0 3 (5%) 4 (18%) 0 0

Exploratory [6, 19, 33, 51, 52, 53,55, 90, 94, 95, 97]

11 (10%) 0 1 (1%) 1 (5%) 1 (7%) 8 (100%)

Relational [1–5, 7–12, 14–18, 20,21, 23, 24, 26–32, 34–39, 41–48,50, 56–58, 60, 62, 63–68, 70–78,80, 83–85, 87–89, 93, 96, 98, 99,101, 102, 103]

76 (74%) 0 56 (89%) 15 (68%) 9 (64%) 0

Explanatory [13, 49, 54, 59, 69,79, 82, 91, 100]

9 (9%) 1 (100%) 3 (5%) 2 (9%) 4 (29%) 0

Transformative 0 0 0 0 0 0103 (100%) 1 (100%) 63 (100%) 22 (100%) 14 (100%) 8 (100%)

Perspective***Legal 66 1 40 16 5 4Economics 66 1 52 9 4 0Psychology 20 0 6 5 9 0Sociology 5 0 0 0 1 4None 4 0 0 3 0 1

*Objective is the main research purpose that can be descriptive, exploratory, relational, explanatory, ortransformative; perspective refers to the discipline (legal, economics, psychology, sociology) on which thearticles draw to elaborate their conceptual framework; method is the method of gathering data which can beanalytic, archival, questionnaire survey, laboratory case, and interview. The numbers in brackets in the ‘objective’column refer to the individual articles included in our review, as listed in the Appendix.**Because some of the articles use multiple methods, the total for the research methods (108) is larger than thenumber of articles (103).***Because some studies rely on theories from different perspectives (e.g., legal and economics), the total is largerthan the number of articles (103).



These studies typically rely on a ‘black box’approach to investigate the link betweenAC characteristics and various measures ofeffectiveness (e.g., audit quality, financialstatements reliability). They are by far the mostfrequent studies (85). None of the articles reviewedhad a transformative objective, i.e. to bring changeand empowerment for an individual or socialgroup (Palys & Atchison, 2008).2

Theoretical foundations

Research on ACs has been guided by varioustheoretical perspectives from four fields: legal,economics, psychology, and sociology. Assuggested in Table 2, the legal and economicperspectives are the most common ones with 66studies each. Psychology is third with 20 studiesand sociology is last with five. Legal perspectivessuggest that AC effectiveness ensues from thefulfillment of responsibilities mandated by law andregulation. Given the flow of new regulation onACs it is not surprising to see that many studiesare guided by legal perspectives.3 Studies basedon economic perspectives draw mainly on agencytheory, which suggests that ACs strengtheninformation quality through the monitoring oftop management and auditors. From this angle,agency problems engendered by the separationof ownership and control constitute the primarymotivation for the existence of corporategovernance mechanisms and ACs.

Studies using psychological perspectives relyon expertise, source credibility, negotiation,persuasion, and accountability theories to studyACs. The expertise literature suggests that expertsand non-experts differ in their problem-solvingbehaviour and the decisions they make (Bédard,1989; Bédard & Chi, 1993). The expertise paradigmhas been used to investigate the link betweenAC members’ financial expertise and variousconsequents of ACs. In particular, several studieshave examined how ‘financial expertise’ relates tothe identification of financial accounting reportingissues and the assessment of financial reportingquality (McDaniel et al., 2002). Source credibilitytheory suggests that the credibility of providersof information depends on their perceivedcompetence and trustworthiness/bias (Birnbaum& Stegner, 1979). Information from a more credibleauditor, manager or director will have a greaterinfluence on AC decisions (DeZoort et al., 2003a).Negotiation and persuasion theories have

been used to investigate AC members’ role inauditor–management disagreements (DeZoortet al., 2003b; Gibbins et al., 2007). Accountabilitytheory suggests that accountable individualsconsider more information, think more deeply,engage in more critical and less biased evaluationsof decision choices, and consider the preferences ofthose they are accountable to in their decisions(Tetlock et al., 1989; Lerner & Tetlock, 1999). GreaterAC accountability to third parties throughregulation and disclosure may therefore result in amore critical and thorough evaluation of decisionchoices, as well as decisions closer to investors’preferences (Gaynor et al., 2006).

The few studies using sociological perspectiveshave relied on interpretive, power, andorganizational theories. Interpretive researcherspay attention to how situations are perceived andinterpreted by actors in context and action (Palys,1992: 431) – seeking, for example, to understandthe variety of meanings surrounding a given object,and the ways in which conflict among meaningstakes place (e.g., Sikka et al., 1998). Gendron andBédard’s (2006) study illustrates how interpretiveresearch can be carried out in the corporategovernance domain. Instead of viewing ACeffectiveness as an objective reality, they centre theanalysis on the processes by which meaningsregarding AC effectiveness develop, within thesmall group of people who attend AC meetings.Theories on power (e.g., Clegg, 1989; Hardy, 1996)suggest that ACs are likely ‘to have an impact on,and be affected by, the exercise of power by avariety of participants drawing their power froma variety of sources’ (Turley & Zaman, 2007: 769).Finally, organization theories propose that informalprocesses play an important role in AC operationsand effectiveness.

Research methods

Palys (1992) categorizes data gathering methodsbased on two criteria, (1) contact between theresearcher and the participant and (2) participantanswer. Each criterion has two levels: contact/no contact, direct answer/no answer. Directcontact/no answer methods include observationaltechniques, direct contact/direct answer methodsinclude surveys, laboratory cases and interviews,while no contact/no answer methods includearchival, simulation, and analytical modeling. Assuggested in Table 2, non-interaction methods aredominant with 64 studies (1 analytic, 63 archival).



Surveys and laboratory cases have been used in22 and 14 studies, respectively. Interview-basedstudies are less frequent with eight studies. Nostudies used observational methods.

As can be expected, data gathering methodsare strongly associated with the study’s objective.Relational studies use mainly archival methods,exploratory studies interviews, and descriptivestudies surveys and archival methods.

Discussion

These methodological features have importantimplications for practice and research. The rarityof exploratory and explanatory studies alongwith the numerous relational studies suggest thatwhile we have a certain level of information on theassociation between AC characteristics and somemeasures of effectiveness, our understanding ofwhy and how the association happens is limited.Regulators and practitioners should therefore becareful when interpreting relational results. Thescarcity of exploratory and explanatory articlessuggests opportunities for researchers to carry outstudies that help increase our understanding of thewhy and how of AC effectiveness.

A theoretical perspective provides a lens thatboth highlights and conceals some aspects of theAC. By adopting legal and economic perspectives,researchers view the AC as a monitoring deviceand emphasize the committee’s structuralcharacteristics as specified in regulation(independence, expertise, responsibilities). Legaland economic perspectives also stress conflicts ofinterests between stakeholders, and emphasizetheir self-interested behaviour – instead of, say,their dedication to perform their working activitiesthe best they can.

In order to broaden our understanding ofACs, researchers need to adopt other theoreticalperspectives. Like the board of directors (Leblanc &Gillies, 2005), the AC is a small decision-makinggroup. In addition to the expertise paradigm whichhighlights the role of individual competence,the organizational and group decision-makingliterature (Brown, 2000: 448) can be used to betterunderstand behavioural dynamics within andaround AC meetings. Also, institutional theory(Meyer & Rowan, 1977; Powell & DiMaggio, 1991)can shed light on how companies may strategicallycomply with ACs’ regulatory prescriptions whilesubtly limiting their effectiveness.

Our analysis of data collection methodsunderlines the need for researchers to get closerto ACs, directors and other participants to collectprimary data about AC processes, power, andinfluence. This can be achieved via interviews andobservational methods. While it is one thing tostress the need to open the ‘black box’ (Bédard et al.,2004), it is another to open it. Getting organizationsto allow access to AC members and meetingsis certainly challenging but not impossible(Gendron et al., 2004; Gendron & Bédard, 2006).Interview-based studies have been carried out.However, none of the studies reviewed relies onthe observation of AC meetings in constitutingdata. Nonetheless, as illustrated by Leblanc andGillies (2005), gaining access to board andcommittee meetings is possible. For researcherswho want to get closer to the field, Bédard &Gendron (2004) as well as Leblanc and Gillies(2005) provide relevant information on strategies toget access to the field and on the research processin relation to boards of directors and ACs.

4. AUDIT COMMITTEE EFFECTIVENESS

The Merriam-Webster Online Dictionary defineseffective as follows: ‘means producing a decided,decisive, or desired effect.’ In general, forregulators, the desired effects or goals of the ACconsist of providing quality financial reporting andstrengthening investor confidence in the quality offinancial reporting and financial markets (BRC,1999; CSA, 2004). ACs can improve the quality ofinformation directly by overseeing the financialreporting process and indirectly through theiroversight of internal control and external auditing(Figure 1). Investors’ perceptions complicate theprocess as, for example, ACs can improve publicconfidence in the quality of financial reportingby adopting practices that are considered bythe market as best practices – no matter theirsubstantive impact on information quality.

This section examines the criteria that havebeen used in academic research to evaluate ACeffectiveness. A total of 85 of the 103 articlesreviewed rely on some criteria to measure ACeffectiveness.4 In our review, when a given articlereports distinct results using specific effectivenesscriteria, we treat each set of results as a distinctanalysis. We identify 24 criteria that are used in atotal of 113 analyses (85 articles). We group thesecriteria into four dimensions (Figure 1): financialreporting, external auditing, internal control, and



investors’ perceptions. As indicated in Table 3,financial reporting and external auditing criteriaare the most frequent with 39 analyses each.Twenty-five analyses use criteria related to internalcontrol while 10 analyses rely on criteria linked toinvestors’ perceptions.

Financial reporting

Out of 39 analyses which employ financialreporting criteria, 32 pertain to financial statements

(28 annual, four quarterly), three to financialforecasts, and four rely on other information. Mostof the financial statements criteria aim to measurereliability as indicated by the absence of earningsmanagement (15) or misstatements (13). Earningsmanagement is measured by the level of abnormalaccruals (Klein, 2002; Bédard et al., 2004; Davidsonet al., 2005), the presence of small earningsincreases, and the avoidance of small losses(Vafeas, 2005). Misstatements include seriousproblems such as fraudulent financial reporting,

Table 3: Measuring audit committee effectiveness

Measures of effectiveness* Number ofanalyses

FINANCIAL REPORTING 39Financial statements (F/S) – Earnings management – Avoiding negative earnings surprise,

small earnings increase, abnormal accruals [16, 28, 36, 46, 48, 66, 68, 71, 74, 84, 85, 98, 100]15

F/S – Misstatements – Misstatements caused by errors or fraud (adverse rulings by agency,SEC actions, allegations of fraud, restatements) [2, 9, 12, 13, 19, 38, 74, 80, 81, 87, 93]

13

Voluntary disclosure – Management earnings forecasts, interim reports, impact of IFRS [11, 31,63, 64, 65, 77]

7

F/S quality – Directors’ assessment of financial reporting quality [57, 79] 2Forecast – Reliability – Precision and accuracy of earnings forecasts [17, 63] 2EXTERNAL AUDITING 39Selection – Specialist auditors, Big4, voluntary review, shareholder ratification [1, 30, 32, 73, 75,

76, 78]8

Level of work – Amount of audit fees [3, 20, 23, 35, 54, 67, 83] 7Level of work – Planned audit hours, billing rate, extent and timing of substantive testing [18,

34, 96]4

Independence – Nonaudit services (nonaudit services ratio, provision of nonaudit services) [4,5, 49]

3

Independence – Auditor’s ability to resist pressure, auditor resignation [57, 75, 82] 3Independence – Audit committee support to auditor (audit adjustment, accounting policy) [42,

43, 44, 45, 53, 59, 87]7

Independence – Receiving a going-concern report [26, 50] 2Independence – Auditor switching (after disclosure of a reportable event, receiving an unclean

audit opinion, recent auditor switches, going-concern reports) [8, 27, 80]3

Other [31, 96] 2INTERNAL CONTROL 25Internal audit – Meetings with the chief internal auditor (CIA) [56, 58, 89, 91] 6Internal audit – Involvement in hiring and firing the CIA, internal audit budget and work [10,

24, 56, 58, 89, 91, 101, 102]11

Internal audit – Investor perception about internal auditing [60] 3Problems – Internal control problems and weaknesses [70, 74, 103] 3Report – Voluntary disclosure of a report on internal control [21] 1AC judgment – AC members’ judgment about the strength of an internal control system [41] 1INVESTORS’ PERCEPTIONS 10Cost of capital – Cost of equity or debt [7, 17, 47] 3Market reaction – Market’s reaction to earnings forecasts and earnings reports [29, 37, 39, 63,

99]5

Shareholders’ vote – Shareholders’ ratification of the selected external auditor [88] 1Investors – Perception of auditor independence [62] 1TOTAL 113

*The numbers in brackets refer to the individual articles included in our review, as listed in the Appendix. Somepapers comprise more than one measure of effectiveness.



adverse rulings by agencies (Song & Windram,2004), and restatements of annual results withoutallegations of fraud (Abbott et al., 2004). Sevenanalyses examine the voluntary disclosure ofinformation such as management forecasts, interimfinancial statements, corporate social disclosures,as well as board and senior managementinformation. Finally, two analyses examinedirectors’ perception of financial reporting quality,and two analyses examine the precision andaccuracy of management earnings forecasts(Karamanou & Vafeas, 2005; Bédard et al., 2008).

External auditing

One of the main responsibilities of the AC is tooversee the external audit function, including theselection, compensation, work, and independenceof the external auditor. Effective oversight isexpected to strengthen ‘audit quality’. The maincriteria used to measure ‘audit quality’ relate toauditor selection (8 analyses), level of work (11analyses), and independence (18 analyses).

Regarding auditor selection, researchers haveexamined the voluntary use of auditors, the natureof the audit firm selected, and voluntary seekingratification from shareholders on auditor selection.Two criteria are used to discriminate audit firmswhich are selected: type of firms (Big 4/5, national,local) and industry specialization, the latter beingdefined in terms of clients’ sales (Abbott & Parker,2000) or auditor fees and number of clients byindustry (Chen et al., 2005).

Since the level of work cannot be easily observedby outsiders, researchers generally assume that thecosts of more comprehensive audits are billed tothe client and use the amount of audit fees as anindicator of quality (Carcello et al., 2002b; Abbottet al., 2003a; Bedard & Johnstone, 2004).5 Otherresearchers solicited auditors’ judgment on theextent and timing of substantive testing (Cohen &Hanno, 2000).

Researchers operationalized independence interms of the provision of non-audit services (NAS)and auditor position in an auditor–managementdisagreement/conflict. The three analysesexamining independence issues related to NASuse measures such as the ratio or amount ofNAS to audit fees, the amount of NAS, andwhether or not NAS are provided to auditees(Abbott et al., 2003b). Two main methods are usedto measure auditor position when there is anauditor–management disagreement/conflict. Some

researchers use direct measures, by asking auditorstheir perception about the outcome of a negotiationsituation between management and the auditor(e.g. DeZoort et al., 2003b; Hunton & Rose, 2008).Other researchers use indirect measures such asthe issuance of a going-concern report andauditor change following an auditor–managementdisagreement/conflict (e.g. Archambeault &DeZoort, 2001; Carcello & Neal, 2003). The issuanceof a going-concern report is viewed as the outcomeof a negotiation between management and theauditor because of the negative consequences ofsuch reports for the company and their potentiallyadverse effects on the auditor. Researchers alsomeasure independence through the probability ofissuing going-concern reports (Carcello & Neal,2000; Geiger & Rama, 2003) and the consequencesoften associated with such reports: auditor’sdismissal (Archambeault & DeZoort, 2001; Carcello& Neal, 2003) or resignation (Lee et al., 2004).

Two analyses examined other measures. Onedirectly asked auditors about the AC’s effect onthe overall quality of the audit (Stewart & Munro,2007) while the other examined the effect on thevoluntary communication of assurance levelsprovided on interim financial statements (Chenet al., 2007).

Internal control

One of the primary functions of the AC is theoversight of internal control (BRC, 1999; Carcelloet al., 2002a; Smith Committee, 2003). Sections 404and 302 of SOX add internal control (includinginternal auditing) to the agenda of the AC. Effectiveoversight is assumed to strengthen internal controlquality.

A total of 20 out of the 25 analyses on internalcontrol relate to internal auditing. Six analysesexamine the meetings between the AC and thechief internal auditor in terms of frequency andthe occurrence of private meetings. Eight analysesexamine the internal audit budget, work, andresults while three analyses focus on thecommittee’s involvement in hiring and firingthe chief internal auditor. Finally, three analysesstudy lending officers’ perceptions of thelikelihood of internal auditing to deter, detect,and report financial statement fraud (James, 2003).

Three analyses measure internal control qualityvia the absence of reported internal controlproblems (e.g., Krishnan, 2005) and illegal acts(e.g., McMullen, 1996). Finally, two analyses



respectively centre on the voluntary disclosureof internal control reports and AC members’judgment about the strength of their company’sinternal control systems.

Investors’ perceptions

Investor confidence in the quality of financialreporting and financial markets is an importantobjective for regulators. Of the ten analysesexamining investors’ perceptions, eight analysesmeasure AC effectiveness via perceptions of thefinancial market regarding the quality of financialreporting. The line of reasoning behind thesemeasures is that better financial informationquality reduces the firm’s cost of capital andtranslates into information being more relied uponby the market. Specifically, researchers have usedthe cost of equity and debt financing as measuredrespectively by stock returns (Farber, 2005) andyield spreads (Anderson et al., 2004). Marketreliance on financial information varies along thequality of financial information; the higher thequality the larger the reaction. Five analysesmeasure market reaction to financial informationor AC appointments via indicators such as theearnings response coefficient. Finally two studiesdirectly examine investors’ perceptions of ACeffectiveness by looking at the ratification rateof the selected auditor (Raghunandan & Rama,2003) and by asking non-professional investorsabout auditor independence (Kaplan & Mauldin,2008).

Discussion

Although the 113 analyses under study measureAC effectiveness through a range of indicatorswhich reflect the four basic dimensions ofeffectiveness as emphasized in Figure 1, somedimensions have been relatively neglected (i.e.,investors’ perceptions and internal control). Evenwithin the financial reporting dimension, there aresignificant gaps (e.g., pro forma earnings). Thesegaps have important implications for practiceand research. For example, it has been proposed(Boritz, 2006) to extend ACs’ oversightresponsibilities regarding financial statements toall required financial filings (e.g., managementdiscussion and analysis (MD&A), earningsreleases, and information circulars). However, asindicated before, only seven analyses (out of 39)

investigate filings other than financial statementsand mostly in terms of voluntary disclosure.Information on the role of ACs regarding thesefilings is therefore quite limited. More research isalso needed on the role and effects of the AC onother types of information, such as quarterlyfinancial statements and pro-forma earnings.

Regarding external auditing, it is worthnoting that one aspect of independence has beenparticularly neglected from scrutiny, that is to saystakeholders’ perceptions of auditor independence.Only one analysis examines the matter. Giventhe importance of perceived independence (SECOffice of Chief Accountant, 2004) in AC oversightof auditors’ independence, more research isneeded on AC effectiveness regarding this facet ofindependence.

In a post-Enron environment, it is increasinglyunderstood that internal auditing is a keycomponent of internal control over financialreporting; internal auditors are even consideredby some as ‘rock stars’ (Sarens & De Beelde, 2006).Sections 404 and 302 of SOX have added internalcontrol to the agenda of ACs. Now that internalcontrol reports are available, at least for US firms,we should expect more papers to examine thisdimension (e.g., Zhang et al., 2007; Bedard et al.,2009). Finally, given that boards in manycompanies have given the AC responsibilities forrisk oversight (Beasley et al., 2008), researchersshould examine AC effectiveness in terms of thisdimension.

Given the importance of investor confidence inthe quality of financial reporting and financialmarkets, more research is needed as to the effectsof ACs’ practices on investors’ perceptions. Theremay even be a decoupling between perceptionsand the inherent effectiveness of AC practices. Assuggested by Zajac and Westphal (2004), marketreaction to such practices is not only a function oftheir inherent effectiveness, but is also a functionof the prevailing institutional logic and thepractices’ degree of institutionalization.

In the next five sections we review the literatureregarding ACs. Section 5 presents the literaturewhich has examined the effect of adopting an AC,while the following four sections respectively coverthe main features of ACs which are emphasizedin Figure 1 (composition, authority, resources,and processes). For each feature, best practicesproposed by regulators and quasi-regulators aredescribed, and evidence regarding effectiveness isprovided.



5. PRESENCE OF AN AUDITCOMMITTEE

Audit committees are not new. The SECrecommended them in 1940 in the aftermath ofthe McKesson and Robins fraud (SEC ASR No. 19,1940). Canada was a regulatory forerunner withthe Ontario Business Corporation Act requiringthem in 1970. In the USA, the NYSE has requiredthem since 1978, the AMEX since 1992, andNASDAQ since 1989. In the UK, the LondonStock Exchange has required them since 1998 andtheir establishment was recommended by theCadbury Committee in 1992. In some otherjurisdictions (e.g., France), while not requiredby regulation in the period we study, theestablishment of ACs were strongly encouraged(Baker et al., 2008). In Australia, only the top 500companies listed on the ASX are required to havean AC (CLERP 9, Commonwealth of Australia,2002).

Association with effectiveness

As indicated in Tables 4 and 5, out of the 113analyses under study, 26 examine whether havingan AC has an effect in terms of financial reporting,external auditing, and investors’ perceptions.Eighteen analyses (69%) find that ACs arepositively associated with these dimensions ofeffectiveness while eight find no significantassociation.

Regarding financial reporting, nine analyses(69%) find that the adoption of an AC is positivelyassociated with effectiveness measures. Theadoption of an AC is associated with fewermisstatements, less earnings management, andhigher voluntary disclosure of information.Regarding external auditing, seven analyses (70%)find that the adoption of an AC is positivelyassociated with effectiveness measures regardingauditor selection, extent of audit work, and auditorindependence. Of the three analyses that examine

Table 4: Summary of effectiveness results

Concept/Indicator POS NEG NS TOTAL

n % n % n % n %

Existence 18 69% 0 0% 8 31% 26 100%Presence of an AC 18 69% 0 0% 8 31% 26 100%

Independence 47 57% 1 1% 35 42% 83 100%Non-executive 16 64% 0 0% 9 36% 25 100%

Non-executive % 9 75% 0 0% 3 25% 12 100%Non-executive >50% 2 100% 0 0% 0 0% 2 100%Non-executive 100% 5 45% 0 0% 6 55% 11 100%

Non-related 26 51% 0 0% 25 49% 51 100%Non-related % 14 48% 0 0% 15 52% 29 100%Non-related >50% 1 20% 0 0% 4 80% 5 100%Non-related 100% 11 65% 0 0% 6 35% 17 100%

Other 5 72% 1 14% 1 14% 7 100%Competence 40 51% 7 9% 31 40% 78 100%

Financial literacy 1 50% 1 50% 0 0% 2 100%Acct., Auditing, & Finance (AA&F) 22 57% 4 10% 13 33% 39 100%AA&F + CEO 8 50% 0 0% 8 50% 16 100%Governance 8 50% 2 12% 6 38% 16 100%Other 1 20% 0 0% 4 80% 5 100%

Responsibilities 5 71% 0 0% 2 29% 7 100%Written charter 5 71% 0 0% 2 29% 7 100%

Size 6 22% 5 19% 16 59% 27 100%Number of members 6 26% 5 22% 12 52% 23 100%At least 3 members 0 0% 0 0% 4 100% 4 100%

Meetings 13 30% 1 2% 30 68% 44 100%Number of meetings 12 32% 1 3% 25 66% 38 100%At least 4 meetings 1 17% 0 0% 5 83% 6 100%



Tab

le5:

Su

mm

ary

ofre

sult

sb

yd

imen

sion

ofef

fect

iven

ess

Exi

sten

ceC

ompo

siti

onR

espo

nsib

ilit

ies

(Cha

rter

)R

esou

rces

(Siz

e)P

roce

sses

(Mee

ting

s)In

depe

nden

ceC

ompe

tenc

e

Fin

anci

alre

por

tin

gPo

s.9

69%

1647

%9

35%

110

0%2

13%

638

%N

eg.

00%

00%

519

%0

0%4

27%

00%

NS

431

%18

53%

1246

%0

0%9

60%

1062

%T

otal

1310

0%34

100%

2610

0%1

100%

1510

0%16

100%

Ext

ern

alau

dit

ing

Pos.

770

%16

57%

1755

%1

100%

343

%4

21%

Neg

.0

0%1

4%2

6%0

0%0

0%0

0%N

S3

30%

1139

%12

39%

00%

457

%15

79%

Tot

al10

100%

2810

0%31

100%

110

0%7

100%

1910

0%In

tern

alco

ntr

olPo

s.0

1271

%8

67%

360

%0

0%2

33%

Neg

.0

00%

00%

0%0

0%1

17%

NS

05

29%

433

%2

40%

310

0%3

50%

Tot

al0

1710

0%12

100%

510

0%3

100%

610

0%In

vest

ors’

per

cep

tion

sPo

s.2

67%

375

%6

67%

00%

150

%1

33%

Neg

.0

0%0

0%0

0%0

0%1

50%

00%

NS

133

%1

25%

333

%0

0%0

0%2

67%

Tot

al3

100%

410

0%9

100%

210

0%3

100%

All

Pos.

1869

%47

57%

4051

%5

71%

622

%13

30%

Neg

.0

0%1

1%7

9%0

0%5

19%

12%

NS

831

%35

42%

3140

%2

29%

1659

%30

68%

Tot

al26

100%

8310

0%78

100%

710

0%27

100%

4410

0%



the effects of voluntary adoption from theviewpoint of investors, two find a positiveassociation with earnings response coefficients andthe other no significant association with theunderpricing of IPOs.

Discussion

Overall, these 26 analyses present overwhelmingsupport for the adoption of ACs. However, thisconclusion is limited mainly to countries with anAnglo-American corporate system, with only fouranalyses from Latin corporate systems (France,Belgium, and Spain). It would be interesting toexamine further the effects of adopting an AC incountries with Latin and Germanic corporatesystems given the peculiarities of their governancestructures where, in the case of Germany forexample, creditors tend to be involved inborrowers’ boards of directors.6 Also, all 26analyses use data pertaining to periods where ACswere not mandatory. Because mandatory rulescan result in the symbolic display of conformity,a promising area of future research is to examinewhether ACs are more effective when they arevoluntary than when they are mandatory. Indeed,drawing on institutional theory (Meyer & Rowan,1977; DiMaggio & Powell, 1983), it can be arguedthat companies may ritualistically comply with theregulatory demands for ACs while subtly limitingtheir effectiveness.

6. COMPOSITION OF THE AUDITCOMMITTEE

According to Sabia and Goodfellow (2005: 512),an AC cannot be effective if it does not have the‘right people’ as members. Two main facets ofmember qualifications are examined in this section:independence and competencies.

Independence

Because of ACs’ oversight role, independence isoften considered as an essential quality of ACmembers. As indicated in Table 4, analyses can bedifferentiated along two dimensions (which are notunrelated to one another): degree of independenceof individual AC members (non-executive,non-related) and the proportion of independentmembers on the AC (percentage, majority, all).

Degree of independence of individualAC members

Members’ independence is generally defined as theabsence of relationship with the company that mayinterfere with the exercise of their independencefrom management and the company (BRC,1999). Such relationships are labelled materialrelationships by regulators. Three main categoriesof relationships are identified in the regulatoryliterature: employment, personal, and businessrelationships.1. Employment relationships – Employment

relationships include being currentlyemployed by the firm or having been withinthe last three years employed by the firm (BRC,1999). There is disagreement as to whether ornot a company’s directors are independentwhen they also sit on the board of affiliatedentities. For example, in Canada, toaccommodate controlling shareholders, theregulation (CSA, 2004) provides an exemptionfor AC members who sit on the board ofdirectors of affiliated entities of the issuer,while in the USA, the same persons will notbe considered independent.

2. Personal relationships – Personal relationshipssuch as family membership and friendshipwith members of the management teammay impair AC members’ objectivity.While regulation can control for familyrelationships, social relationships betweendirectors and managers are very difficult toregulate.

3. Business relationships – In general, regulatorsagree that receiving any consulting, advisoryor other compensatory fee from the companyor its affiliates constitutes a materialrelationship (SEC, 2003d). Some regulators aremore stringent and take into account additionaltypes of relationships. For example, the NYSE(2004) considers as material relationship anybusiness over a certain amount between thelisted company and the company wherethe director is a current employee. In theUK, the Combined Code on CorporateGovernance (Smith Committee, 2003) includesparticipating in the company’s share options,performance-related pay, or pension scheme asmaterial relationship.

While in the past recommendations andregulations defined independence in terms ofthe absence of employment relationships (e.g.,



National Commission on Fraudulent FinancialReporting, 1987; Public Oversight Board (POB),1993), currently best practice and regulatoryemphasis is on all three types of relationships(CSA, 2004; SEC, 2003d; NYSE, 2004). Researchers’operationalizations reflect these regulatorypractices. Twenty-five analyses define ACmembers’ independence solely in terms ofemployment relationships while 51 rely on thethree types of relationships (Table 4). Data aboutthese relationships are collected from the firms’public disclosures or are elicited throughquestionnaire.

Of the 25 analyses that define independencein terms of employment relationships (i.e.,non-executive directors), 16 (64%) find a positiveassociation with AC effectiveness while ninefind no significant association. For the broaderconcept of independence (non-related directors),26 (51%) analyses show a positive link withAC effectiveness while 25 find no significantlink. Moreover, out of the eight analysesinvestigating both concepts, six find similarresults while two find a non-significant resultwith independence defined in terms of non-executive directors but a significant one usingthe broader conception of independence (nottabulated). This suggests that the weakerfrequency of positive association for the broaderdefinition (51% versus 64%) might be caused byother factors.

Finally, seven analyses examine otheroperationalizations of independence and fiveof them find a positive association. For example,Bédard et al. (2004) and Archambeault et al. (2008)examine AC members’ participation in shareoption pay schemes and find that lowerparticipation is associated with a lower level offinancial reporting quality as measured by thelevel of abnormal accruals or restatementlikelihood. DeZoort and Salterio (2001) examineAC members’ empathy toward managers. Theyfind that AC members who are also managers inother companies are more likely to supportmanagement in accounting policy disputes. Incontrast, in an archival study of 252 US firms,Vafeas (2005) finds that the percentage of ACmembers who are active business executives inother firms is positively associated with one ofthe measures of earnings quality he employs.Overall, these results support regulators’ viewthat AC members should be independent frommanagement.

Proportion of independent members on the AC

The second dimension of independence is theproportion of independent members. Historically,there has been disagreement as to the idealproportion; some jurisdictions requiring only amajority of independent directors while othersmaking it compulsory to have all membersindependent. Today, the tendency amongregulators is to require all members of theAC to be independent (e.g., SOX, 2002; CSA,2004).

Out of the 41 analyses using the proportion ofindependent members (non-executive percentageand non-related percentage in Table 4), 23 (56%)find a positive association with AC effectivenessand 18 no significant association. The results areweaker when a majority threshold is used withthree (43%) of the seven analyses finding a positiveassociation. The results with the 100% thresholdindicate a positive association for 16 (57%) of the28 analyses. Three analyses directly compare theeffect of these indicators. Davidson et al. (2005)find a significant relation for the presence of amajority of non-executive directors on the ACand a non-significant effect for 100%. However,when they refine their measure of independenceby removing non-executive directors withrelated-party transactions, their results areinversed. Klein (2002) examines the influence of thethree variables. She finds a significant positiveassociation on effectiveness for the proportion ofindependent members and for the majority, but nomeaningful relation for 100%. Bédard et al. (2004),however, find that a majority of independentdirectors on the AC is not related to effectiveness,but that an entirely independent committee ispositively linked with effectiveness.

Overall, these results suggest that a greaterproportion of independent members improveseffectiveness, and that the rate of improvementseems to increase somewhere between 50% and100%. Unfortunately, current research resultsdo not provide information as to the idealproportion.

Association with dimensions of effectiveness

A total of 83 analyses examine the associationbetween independence and effectiveness (financialreporting (34), external auditing (28), internalcontrol (17), and investors’ perceptions (4)).Among these analyses, 47 (57%) find that



independence is positively associated witheffectiveness, while 35 (42%) show no significantassociation. Further, as indicated in Table 5, the rateof positive association varies along the dimensionof effectiveness examined; the lowest rate beingfor financial information (47%), followed byexternal auditing (57%), internal control (71%) andinvestors’ perceptions (75%).

Members’ competencies

Contemporary best practices and regulationrecommend that AC members should possesscertain personal characteristics. Interest regardingmembers’ competencies was especially arousedas a result of the BRC (1999) report. US stockexchanges’ rules and SOX have institutionalizedcompetencies by requiring every AC member tobe financially literate and companies to disclosewhether at least one of their AC members is an‘audit committee financial expert’ (SEC, 2003c).7 Wereview below research regarding financial literacy,financial expertise, as well as governance expertiseand other competencies.

Financial literacy

According to the BRC (1999), a director’s abilityto ask and intelligently evaluate the answersto probing questions on financial risks andaccounting requires basic ‘financial literacy.’ Thelatter can be defined as the ‘ability to read andunderstand a set of financial statements thatpresent a breadth and level of complexity ofaccounting issues that are generally comparableto the breadth and complexity of the issues thatcan reasonably be expected to be raised by theissuer’s financial statements’ (CSA, 2004). Wefound only two analyses that examine basic‘financial’ competencies (Table 4) and they arecontradictory. Experimental evidence fromDeZoort and Salterio (2001) indicates that greateraudit knowledge is associated with higher ACmembers’ degree of support for the auditor in adispute with client management. Benston andHartgraves’ (2002) review of the role of Enron’s ACsuggests that financial literacy is not a guaranteeagainst financial fraud.

Financial expertise

Defining what constitutes an ‘audit committeefinancial expert’ caused considerable controversy

in developing SOX regulation.8 Section 407 of SOXrequires the SEC, in defining the term ‘financialexpert’, to consider whether a person has thefollowing attributes: ‘(1) an understanding ofgenerally accepted accounting principles andfinancial statements and (2) experience in (a) thepreparation or auditing of financial statementsof generally comparable issuers; and (b) theapplication of such principles in connection withthe accounting for estimates, accruals, andreserves, (3) experience with internal accountingcontrols, and (4) an understanding of auditcommittee functions’ (emphasis added). Theseattributes are presumed to be acquired througheducation and experience as (1) a publicaccountant or auditor, or (2) a principal financialofficer, controller, or principal accounting officerof an issuer, or (3) from a position involving theperformance of similar functions.

The SEC provided the definition of financialexpertise shortly after SOX was officially adopted.The SEC’s original proposal in defining financialexpertise is similar to SOX’s prescriptions, exceptthat expertise is further restricted to experience inpublic companies. The SEC’s proposed definitionof financial expertise was, according to the SEC, themost controversial feature of the newly proposedSOX rules (SEC, 2003c). Many comments receivedby the SEC argued that the proposed definition wastoo restrictive regarding the attributes of financialstatements experience and the means by which aperson could acquire the required expertise toqualify as a financial expert. In addition, it wasfeared that the definition could drastically limitthe pool of qualified directors and reduce boarddiversity (SEC, 2003c). In response to intensecriticisms, the SEC compromised by broadeningthe definition of financial expertise in its final rules,allowing financial analysts, regulators and CEOsto be considered as ‘audit committee financialexperts’.

The disclosure of the number and names of ACfinancial experts was also a source of controversy.In its original proposal, the SEC requiredcompanies to disclose the number and names offinancial experts. Critics feared that this couldresult in increased legal liability for the individualsdesignated as experts and therefore discouragequalified individuals from serving on ACs. TheSEC responded to these comments by requiringcompanies to determine whether at least onefinancial expert sits on the AC, and to disclose thename of one such individual. However, companies



are not required to determine whether additionalAC members qualify as experts. In addition, thefinal regulation comprises a safe harbour rulestating that the designation of a director as financialexpert does not impose on the person any duties,obligations or liability that are greater than thoseof other members (SEC, 2003c).

The research studies reflect the abovecontroversy regarding the definition of ‘financialexpert’. Some 39 analyses (Table 4) adopt a morerestrictive view of financial expertise and constrainexpertise to directors who are auditors,professional accountants, CFOs, accountingacademics, investment advisors, and bankers.Sixteen other analyses are predicated on a broaderview which also considers CEOs as experts.Regarding the former set of analyses, 22 (57%) finda positive association with effectiveness, four anegative association, and 13 (33%) no significantassociation. With regard to the broader view, theresults are relatively similar with eight positiveassociations (50%) and eight (50%) non-significantones. Of the six analyses examining both views(not tabulated), four find similar results whiletwo find a positive association for accountingfinancial experts and no significant association fornon-accounting financial experts (e.g., DeFondet al., 2005).

Governance expertise and other competencies

In addition to ‘financial’ competencies, researchershave examined other competencies such asgovernance experience (as measured by number ofother directorships, AC memberships), knowledgeof the company (as measured via tenure), andbeing an academic. Regarding governanceexperience, the basic line of reasoning is thatmultiple directorships (including AC service)provide directors with more experience inmonitoring management and the auditors. Inaddition, multiple directorships may increasedirectors’ sensitivity to their reputation therebyrendering them more diligent (e.g., Yermack, 2004).Consistent with these arguments, half of the 16analyses of other directorships find a positiveassociation with effectiveness (Table 4). Sixanalyses find no significant associations and two anegative association. While multiple directorshipsis assumed to improve monitoring, Hunton andRose’s (2008) results regarding acceptance of anauditor’s restatement recommendation suggest that

it might have the contrary effect because theseAC members suffer greater reputation harm andfinancial losses when there are signals of ineffectivemonitoring.

Five analyses examine two other types ofcompetencies: knowledge of the company (asmeasured by tenure) and being an academic.Tenure may help AC members develop theirmonitoring competencies while providing themwith some firm-specific expertise such asknowledge of the company’s operations and itsexecutive directors. Thus, as directors’ experienceincreases they may become more effective atoverseeing the firm’s financial reporting process.Out of the four analyses examining tenure, onefinds a positive association while the other threefind no association, therefore suggesting thatlengthy board service may also compromiseindependence (Vafeas, 2001). Finally, one studyfinds that considering academics as financialexperts is not associated with effectiveness.


A total of 78 analyses examine the associationbetween measures of competence and effectiveness(financial reporting (26), external auditing (31),internal control (12), and investors’ perceptions(9)). Forty of these analyses (51%) find a positiveassociation, seven a negative association, and 31no significant association (Table 5). The proportionof positive associations varies according to thedimension of effectiveness examined; the lowestrate being for financial reporting (35%), followedby external auditing (55%), while the rate is 67% forthe other two dimensions.

Regarding financial reporting, higher ACcompetencies are found to be positively associatedwith voluntary disclosure, earnings management,and financial statement misstatements. However,higher AC competencies are negatively associatedwith management earnings forecasts’ precisionand accuracy, one instance of fraudulent financialreporting, and voluntary disclosure in fiveanalyses. While most of the studies provide noinformation as to how AC competencies impactfinancial reporting, McDaniel et al. (2002) providesome evidence on how AC competenciesmay strengthen financial reporting quality byexamining how financial experts (audit managersand executive MBAs) vs. literate individuals(students) differ in their evaluation of financialreporting quality. They find that experts are more



likely to raise concerns about accounting policiesrelated to less prominent activities in the media,whereas literates are more likely to be influencedby fashionable issues highlighted in the businesspress. Drawing on these results, the authorssuggest that the addition of a financial expert islikely to ‘add structure to the discussion of overallfinancial reporting quality’ and to ‘bring a focus onissues that may be accorded lower priority’ byfinancially literate members.

With regard to the external auditing dimension,more than half of the analyses show that higherAC competencies are positively associated withhigher audit fees, greater auditor independenceand selection of a higher quality auditor.However, two find a negative association betweenhigher competencies and AC members’ supportfor a proposed audit adjustment. Three analysesprovide some evidence on how AC competenciesmay strengthen audit quality. DeZoort andSalterio (2001) and DeZoort et al. (2003a) providecontradictory evidence regarding the effect of ACmembers’ financial competencies in disputesbetween auditor and management. DeZoort andSalterio (2001) find that directors with a higherlevel of financial accounting knowledge aremore likely to support the auditor’s position,whereas DeZoort et al. (2003a) find that ACmembers who are CPAs are less likely to supportthe auditor’s position. According to DeZoort et al.(2003a), CPAs appear to view proposed auditor’sadjustmentsas immaterial or too subjective to be recorded.

Regarding internal controls, eight analysesindicate that AC competencies are associated with‘better’ internal control. Seven find that ACcompetencies are negatively associated with thedisclosure of material weaknesses and positivelyassociated with processes related to internalauditing (3 out of 5 analyses examining internalauditing). Another analysis provides some resultsregarding how AC competencies may reinforceinternal control. DeZoort (1998) examines ACmembers’ judgment about the quality of a payrollinternal control system, a task generally performedby junior auditors. He finds that AC memberswith auditing experience make internal controljudgments more in line with those of experts (i.e.practising auditors) in the area than do memberswithout auditing experience.

Finally, AC competencies are positivelyperceived by the financial market in six analysesand not significantly associated in three analyses.

Discussion

Overall, our examination indicates that ACindependence is often (but not always) positivelyassociated with effectiveness as defined byregulators, supporting to some extent the pushtowards greater AC members’ independence.There are, however, a number of issues thatdeserve further investigation.

Regulators define independence in terms ofthe absence of conflict arising from employment,personal, and business relationships. However,certain potential sources of conflict are still largelyunregulated; directors’ stock options are one ofthem. Stock options may create incentives thatconflict with AC members’ responsibilitiesregarding the quality of information. Although theUK Combined Code on Corporate Governance(Smith Committee, 2003) states that directors’remuneration should not include stock options,only two studies have examined the matter (Bédardet al., 2004; Archambeault et al., 2008) and bothof them find that stock options are negativelyassociated with financial reporting quality. Giventhe recent options backdating scandal in theUSA, there is clearly a need for more research onthe effects of stock options on AC members’independence.

While tenure might improve directors’competencies (knowledge about the firm’soperations), it might also increase the risk tobefriend management (Vafeas, 2005) and be lesscritical of the quality of financial reports (Beasley,1996). Indeed, the UK Combined Code onCorporate Governance (Smith Committee, 2003)limits AC appointments to a maximum of nineyears. More research is needed to betterunderstand the effects of tenure and evaluatewhether such guidance is warranted.

Although the research results suggest that agreater proportion of independent memberstends to increase AC effectiveness, we have noknowledge about the functional form of therelationship or about the benefits of having onlyindependent members instead of a majority. WhileNorth American regulators currently fix thisproportion at 100% (e.g. NYSE, 2004: 303A 5(a);NASDAQ, 2004: 4350d; CSA, 2004), there is stilla need to evaluate the appropriateness of theirdecision. Although the proportion, logicallyspeaking, has to be 100% in terms of employmentrelationships, there is a need to examine therelationship between independence and



effectiveness when the former is defined in termsof personal and business relationships. Also,because of alleged difficulties for smaller issuersto comply with the independence requirements,the pros and cons of exempting them from theindependence requirements need to be furtherstudied.

Fundamentally speaking, independence is morethan the absence of conflicts, it is about attitude andbehaviour. As indicated by Leblanc and Gillies(2005: 146): ‘while a director may be viewed andclassified as independent, he or she may notnecessarily behave independently within theboardroom’. Drawing on Power’s (Power, 1997:132–3) characterization of the independentauditor, it can be argued that the independent ACmember has the capability to identify aproblematical issue, challenge management or takepositions that are contrary to those of managementon that issue, and is willing to take up escalatoryoptions if necessary. Also, the AC being a group, itsindependence is also a function of the interactionbetween its members. For example, anon-independent member may influence theopinion of the other independent members.Further, AC members who are ‘independent’ basedon current regulation may find it difficult to dissentwith executives – because they consider that theyare part of the same team or tend to manifestempathy with executives (DeZoort & Salterio,2001). There is a need to study the linkages betweenAC independence and effectiveness using datacollection mechanisms which allow researchersto focus on behaviour dynamics, such asobservation and interviews. This is especiallywarranted given that 42% of the analyses find nosignificant association between independence andeffectiveness.

Also, the results suggest that AC competencies(financial and governance) are not as stronglyassociated with effectiveness as independence is.Some 51% of the 78 analyses show a positiverelationship with effectiveness while 9% of themindicate a negative association. While appointing‘competent directors’ on the AC may have apositive effect on effectiveness, the resultsnonetheless are not entirely consistent withregulators’ hopes on the matter. Also, the analysesprovide little insight into other types ofcompetencies that can improve AC effectiveness,the impact of disclosure regulation on ACcompetencies, and the effect of having more thanone AC financial expert.

In particular, the studies under review do notprovide information as to whether experienceas CEO, principal accounting officer, publicaccountant, or auditor provides similar levelsof financial expertise. Fundamentally speaking,there is also a need to better understand howcompetencies can strengthen AC effectiveness.The work of DeZoort and Salterio (2001),McDaniel et al. (2002), and DeZoort et al. (2003a)is a good start, but more is needed. We need tobetter understand how members with certaincompetencies act before, during, and after ACmeetings, i.e. how competencies affect ACprocesses.

Given that recent regulation regarding thedisclosure of AC expertise aims to encourageboards to appoint financial experts on theirACs, it would be interesting to study how boardsreact to the new requirements. Do boards appointmore AC experts? Do detailed disclosures ofmembers’ competencies result in a lower numberof AC experts being appointed than merelydisclosing whether there is one financial experton the AC? Do boards take the opportunitiescreated by the enlarged definition of AC financialexpertise to show symbolic compliance with bestpractices? Agency and institutional theories mightprovide relevant frameworks to explore thesequestions.

Finally, do financial expertise requirementsresult in ACs being less diversified in terms ofmembership? Many companies appoint more thanone financial expert (Huron Consulting Group,2007). Some companies even have their ACcomposed entirely of financial experts. Not onlywould it be interesting to understand motivationsin increasing the proportion of financial expertson the AC (expertise needs, reduction inperceived differential AC members’ liability, andsymbolic conformity with governance ratingmetrics), it would also be relevant to study thepros and cons of having more than one ACfinancial expert. The risk is having more ACfinancial competencies at the expense of othercompetencies (general management, operations,regulatory, law) and board diversity. For example,given the role of the AC in evaluating risk (e.g.,NYSE, 2004: 303A 6d), knowledge of the industryand competencies in corporate law may fostereffectiveness. Finally, more research is needed onthe role of other competencies such as the abilityto work in small groups, negotiate, and assumeleadership.



7. AUTHORITY OF THE AUDITCOMMITTEE

Formal responsibilities consist of areas wherethe AC is made accountable and endowed withthe authority to intervene. The scope of thecommittee’s responsibilities and how it carriesout those responsibilities are generally statedin a formal written charter. Formalizing ACs’responsibilities in a charter provides legitimatecapacity to intervene (Kalbers & Fogarty,1993). ACs’ responsibilities can be grouped intothree categories: (1) oversight of externalcommunications, (2) monitoring of the internalcontrol system, and (3) oversight of the externalauditor (Wolnizer, 1995). While the requirementsof laws and regulations have traditionallyemphasized the oversight of financial reportingand external auditing, recent regulatory reformshave extended AC responsibilities to internalcontrol systems and expanded its oversightresponsibilities regarding externalcommunications and external auditing.

One of the main mandatory responsibilitiesof the AC established by new regulations relatesto external auditing oversight. That is, SOX andother regulations (e.g., CSA, 2004; FinancialReporting Council, 2008b) signal that the externalauditor is accountable to the AC. In particular, theAC is directly responsible for the appointmentand compensation of the auditor and theoversight of her/his work, including theresolution of disagreements over financialreporting between management and the auditor.Also, the AC now has to pre-approve all non-audit services to be provided by the accountingfirm which employs the company’s externalauditor.


Seven analyses investigate the association ofAC responsibilities inscribed in AC charterswith effectiveness. Five of them find a positiveassociation with effectiveness while the other twofind no significant association. AC responsibilitiesis positively associated with the quality of financialstatements (Bédard et al., 2004) and external auditorindependence (Abbott et al., 2007). Regardinginternal control, three out of the five studies finda positive association between internal auditingquality and AC responsibility regarding theoversight of the internal audit function.

Discussion

Written charters constitute relevant data forresearchers. For instance, they provide a way toassess whether responsibilities conferred to theAC beyond regulation are positively related witheffectiveness. However, our knowledge about ACcharters is quite limited. Carcello et al. (2002a)provide a detailed analysis of the content of ACcharters in a period preceding SOX. They finda high level of compliance with mandateddisclosures but more variability in the level ofvoluntary disclosures. For example, 91% of the ACshad some formal responsibilities regarding internalcontrol, while less than 20% had responsibilitiesregarding internal auditing. In addition, assuggested by institutional theory (Meyer & Rowan,1977), assuming mandatory responsibilities alwaysruns the risk of becoming ritualistic.

8. RESOURCES

Because of the scope of ACs’ responsibilitiesand the complex nature of the accounting andfinancial matters reviewed, it is widely agreedthat the committee needs significant resources(PricewaterhouseCoopers, 2005), in terms of thefollowing: number of directors involved on thecommittee, monetary resources to hire consultantsfor advice, and informational resources.

Number of audit committee members

The number of directors appointed on the AC isoften perceived by regulators as an importantfactor which influences its effectiveness. Recentregulations (e.g., CSA, 2004; NYSE, 2004; FRC,2008a) stipulate that ACs should comprise at leastthree members. This minimal threshold is seen asensuring appropriate monitoring through diversityof expertise. Of course, the literature stresses thatthe benefits of additional members need to beweighed against the incremental costs of poorercommunication, coordination, involvement, anddecision-making associated with larger groups(Steiner, 1972; Hackman, 1990). The objective isto have a committee not so large as to becomeunwieldy, but sufficiently large to ensureappropriate monitoring.

Monetary resources

SEC rules (2003d) require companies to provideappropriate funding, as determined by the AC, to



pay the auditor, any outside advisers, and ordinaryadministrative expenses of the AC that arenecessary or appropriate in carrying out its duties.According to the SEC (2003d), AC effectivenessmay be compromised when the committeeis dependent on management’s discretion tocompensate auditors and advisors employed bythe committee, especially when potential conflictsof interest with management may be apparent.

Informational resources

AC members’ capacity to play their monitoringrole depends, in large part, on the quality of theinformation they receive. This information shouldbe of high quality, complete, accurate, and timely(Sabia & Goodfellow, 2005). Participants inGendron et al.’s (2004) study report that theyreceive documents about one inch thick in advanceof the meetings. These documents include draftsof financial reports and proxies, press releases,reports from internal and external auditors,balanced scorecard information, listing ofcomplaints and legal proceedings against thecompany, minutes of last meeting, etc. In thecompany they studied, Turley and Zaman (2007)find that the AC does not appear to create asignificant demand for additional informationin that the information that is reported to the ACis in most cases also required for executivemanagement purposes.

As independent board members, AC membersare faced with an information asymmetry problem;they have less information about the elements theyare overseeing than management. As indicated byHooghiemstra and van Manen (2004), in obtaininginformation non-executives are dependent on theexecutives they are expected to supervise and beindependent from. AC members, however, benefitfrom two other important sources of information:the external and internal auditors. The importanceof information provided by the auditors isrecognized by SOX and current auditing standardswhich require auditors to report on a timely basiscertain types of information to the AC (e.g., ISA260, International Standards on Auditing, 2008).


Of the three types of resources previouslydiscussed, only the number of directors involvedon the AC has been examined in the studies we

reviewed. As indicated in Table 4, out of the 27analyses that examine size, only six find a positiveassociation with effectiveness, five a negativeone, and the 16 others no significant association.Four analyses examine the minimum requirementof three members specified in most corporategovernance best practices; none of them showsa significant association with effectiveness.Regarding the remaining 23 analyses, whichemploy the number of AC members, six find apositive association with effectiveness, five anegative association, and 12 no significantassociation.

As indicated in Table 5, the effectivenessdimension that is least associated with size isfinancial reporting, with only 13% of the 15analyses finding a positive association and 27% anegative one. Examples of studies include Yangand Krishnan (2005), who find that larger ACsare associated with lower level of discretionaryaccruals and forecasts, as well as Karamanouand Vafeas (2005), who find a negative associationwith the disclosure of management earningsforecasts but no significant association with regardto their reliability. With regard to the externalauditing dimension, the association is a littlestronger with 43% of the seven analyses finding apositive association. All three analyses examininginternal control find a non-significant association,while for investors’ perceptions, the results arecontradictory: larger ACs are associated with alower cost of debt (Anderson et al., 2004), whereassmaller ACs are associated with greater marketreaction to earnings forecasts (Karamanou &Vafeas, 2005).9

Discussion

The reviewed analyses suggest that, contrary tothe assumption upon which AC regulation ispredicated in many countries, size of the AC isnot an important determinant of effectiveness.In addition, the high rate of negative associationsuggests that the incremental costs associated withlarger groups might outweigh the benefits. Moreresearch on the benefits and costs associated withAC size is needed to evaluate whether regulationsregarding AC size are well founded.

Compared to size, monetary and informationalresources are under-researched. Only two of thereviewed studies provide some evidence onthe information received and requested by ACmembers. We lack information about its timeliness



and quality. In addition, recent frauds cast doubtabout the quality of information that managementand even auditors provide to ACs. For example,Hollinger’s management is blamed for themisrepresentations and partial information it sentthe AC (Paris et al., 2004). The SEC claims throughits enforcement regarding Xerox (SEC, 2003b) thatthe auditors did not communicate their concernsregarding Xerox’s tendency to frequently changeestimates at the end of reporting periods. Similarclaims were made against Tyco’s auditors (SEC,2003a). While such situations can be obtained fromcomplaints issued by the SEC, interviews with ACmembers can provide information on less dramaticsituations where this type of behaviour occurs.

9. AUDIT COMMITTEE PROCESS

An implicit assumption between the requirementfor having independent and competent ACmembers with the necessary resources to monitorexternal communications, the external auditor, andinternal control, is that through some processesmembers will be collectively able to accomplishtheir monitoring task. It is therefore importantto examine the mechanisms by which ACcharacteristics are translated into organizationaloutcomes. This section examines what is knownabout the role of formal and informal processes inaffecting AC effectiveness. Six process dimensionsare discussed: agenda, meetings, questioning,relationships, power, and leadership.

Agenda

Current best practices and regulation recognizethat the agenda is an important tool for ACmeetings to be effective (Sabia & Goodfellow,2005), for instance in ensuring that committeemembers are regularly made aware of theircommittee’s specific responsibilities. Researchfound that the agenda plays an important role inthe constitution of AC effectiveness in the eyes ofAC meeting participants (Gendron & Bédard,2006). It is also known that agendas, in general, canact as institutional filters (Lukes, 1974). Researchalso emphasizes that the agenda constitutes asignificant stake in the eyes of stakeholders. Forexample, Pahl and Winkler (1974: 102) find thatmany company boards in their study are noteffective, with senior managers often manipulatingthe board. The issue of who sets the agenda istherefore important. For example, respondents to a

survey carried out by the KPMG Audit CommitteeInstitute (2006) were asked to answer the followingquestion: ‘Who truly “owns” the agenda-settingprocess and has the most influence over the finalagenda for audit committee meetings?’ Theiranswers suggest that the CFO plays an importantrole with 13% of the respondents designating theCFO as the individual having the most influence.

Audit committee meetings

The AC must meet as often as its role andresponsibilities require. For example, in the UKwhere interim financial information is semi-annual,the Guidance on Audit Committees (FRC, 2008b)recommends that there should be no fewer thanthree meetings a year. North American bestpractice currently suggests at least four meetings ayear and even more for large public companies(Sabia & Goodfellow, 2005). For example, a recentsurvey by the KPMG Audit Committee Institute(2006) indicates that the ‘typical audit committeestill meets 6 to 10 times per year (with largercompanies meeting slightly more often) eitherface-to-face or via teleconference. Face-to-facemeetings generally last up to four hours.Teleconference meetings are typically about onehour in length’. Qualitative research indicates thatmeetings are attended by about ten individuals(Gendron et al., 2004): AC members, the internaland external auditors, the CEO, CFO, andcorporate secretary. Gendron et al.’s (2004) studysuggests that ACs commonly follow best practicesregarding private meetings with the external andinternal auditors, without management beingpresent, to discuss matters such as the quality ofthe relationship that they have with corporatemanagement and the competencies of the latter.

Questioning

According to Sabia and Goodfellow (2005), askingdemanding questions during meetings and beingdemanding in the quality of the answers provided,are perhaps the most important traits that ACmembers should have. This statement seems tobe supported by public inquiries and recentqualitative research. Thus, Enron’s AC did not‘probe the [external auditor] independence issue,nor did it initiate the type of communicationswith Andersen personnel that would have led toits discovering Andersen concerns with Enronaccounting practices’ (United States Senate, 2002:



57). Gendron and Bédard (2006) show thatquestioning skill is key in establishing directors’self-confidence in their role as effective ACmembers and in constructing their legitimacy inthe eyes of the other individuals who attend ACmeetings (especially auditors, CEO and CFO).

Relationships

According to Sabia and Goodfellow (2005),achieving independence from managementdoes not guarantee the effectiveness of the AC.Effectiveness is only fully achieved when theAC is surrounded by channels of communicationpermitting the sharing of information and mattersof concern to be discussed candidly. Recentqualitative research finds that a great deal of ACactivity occurs outside of formal meetings throughinformal communications with management,internal auditors, and external auditors (Gendron &Bédard, 2006; Turley & Zaman, 2007; Beasley et al.,2009).

Power

Power is at the core of board and AC processes(Kalbers & Fogarty, 1993). Pettigrew and McNulty(1995) have identified various sources of powermobilized by independent directors inside andbeyond the boardroom. Such sources includeexternal stature and prestige, knowledge of thehost sector and/or business, quality and extentof personal networks, residual power to rewardand sanction, and the threat of public or privateresignation. While outside the period covered inour review, Kalbers and Fogarty (1993) haveinnovated in studying ACs’ sources of power andtheir association with AC effectiveness. Turley andZaman (2007) provide some field evidence as tohow ACs are used (as a threat, as an ally, or as anarbiter) to modify the nature of power relationshipswithin the company while influencing governanceoutcomes. This influence ‘appears to be linkedto the perceived standing of the members of theAC, and the personal power of the AC chair’(Turley & Zaman, 2007: 781).

Leadership

Best practices recognize that leadership qualities ofchairpersons constitute a significant determinant ofboard governance effectiveness (Leblanc & Gillies,2005). As for the chair of the board of directors, the

leadership of the AC chair is ‘the defining elementin audit committee effectiveness’ (2005: 110). Forthese authors, the chair must have the credibility,ability, authority and force of personality to ensurethat he or she clearly controls the agenda, meeting,and discussions, that he or she builds theappropriate relationships with auditors andmanagement, and that he or she develops the rightchemistry among AC members. While no studieshave examined AC chairpersonship, Leblanc andGillies’s (2005) study of board of directors’ chairssuggests that competent chairs can encouragedirectors to ask penetrating questions, and developan environment where wide-ranging and frankdiscussion about issues is the norm.


Only one visible characteristic of processes hasbeen examined in the studies we reviewed: thenumber of meetings, which is considered as anindicator of diligence (fewer meetings indicatinglack of commitment and/or insufficient time foreffective monitoring). As indicated in Table 4, 44analyses examine the relationship between thenumber of meetings and AC effectiveness. In all,30% of the analyses find a positive associationbetween the two, 2% a negative association, whilethe remaining analyses (68%) find no significantassociation. Results are a little stronger for thenumber of meetings than for the threshold of atleast four meetings a year. All four dimensionsof effectiveness have been examined (Table 5) andthe results are relatively similar to those displayedin Table 4, except perhaps regarding the weakerassociation between meetings and effectiveness interms of external auditing.

Discussion

The reviewed analyses suggest that meeting morefrequently is to some extent associated with thedimensions of effectiveness. The large proportionof analyses with non-significant results suggests,however, that the number of meetings may bea crude indicator of diligence; meeting morefrequently does not necessarily translate intoeffective monitoring. In addition, the number ofmeetings is not necessarily a high-quality indicatorof effectiveness as meeting frequently may alsoreflect a lack of effectiveness. For example, moremeetings may be required in order to approve high



amounts of non-audit services or to discuss issuesensuing from the requirement to disclose internalcontrol weaknesses.

Given the non-public nature of AC processes andthe predominance of archival data in our sample,it is not surprising that process features suchas agenda setting, meeting dynamics, members’questioning, relationships, and chairpersonshiphave not been systematically studied. Groupdecision-making behaviour, such as groupthink,pluralistic ignorance, and social distancing, mightprovide useful lenses to examine ACs’ dynamics.Groupthink is a reduction in decision-makingcapability resulting from group members trying tominimize conflict and reach consensus withoutcritically testing, analysing, and evaluating ideas(Janis, 1982). Pluralistic ignorance also reducesgroup members’ capabilities to voice what areperceived to be dissenting opinions because theymisperceive each others’ beliefs about an issue(Westphal et al., 2005). AC members may alsorefrain from expressing their views for fear ofbeing subjected to social distancing, a kind ofinformal social sanctioning. Indeed, Westphal andKhanna (2003) find that board members whosupport actions which threaten top managementpower tend to be subject to social distancing.

Studying AC processes will require researchersto interact with AC members through the use ofmethods such as surveys, interviews, laboratorycases, and observation. Methods mixing surveysand archival data might also be considered. Forexample, Westphal and Khanna (2003) use surveydata along with archival data from a sample ofdirectors and CEOs at Forbes 500 companies, tostudy processes of social control that can bedeployed on directors.

Finally, sociological perspectives can beespecially relevant in studying dynamicssurrounding AC processes. For example, the AC isincreasingly relied upon as a key surveillancemechanism in regulators’ quest to harness privatecontrol activities for public regulatory purposes,in accordance with contemporary philosophicaltrends within regulatory circles (Power, 2004).In particular, SOX formalizes the role of the ACin overseeing the degree of morality prevailingwithin the corporation through the handlingof complaints. Drawing on the work of MichelFoucault (1977) on surveillance systems and powerin modern society, it would be particularlyinteresting to examine how ethical surveillance isactually carried out by ACs and their allies, the type

of information which is gathered on the targetsof surveillance, and the impact that surveillanceregimes can have on organizational members(Gendron, 2009).

10. ENVIRONMENT

Corporate governance structure

Corporate governance structures vary a great dealaround the world reflecting differences in legaland economic systems (Weimer & Pape, 1999) aswell as differences in political and historicalprocesses (Fligstein & Choo, 2005). Variousclassification schemes based on characteristics suchas shareholder rights, capital market orientation,market for corporate control, ownership structure,senior management autonomy, employeeparticipation, bank-orientation, and stateintervention are used to classify nationalgovernance systems. For example, Weimer andPape (1999) propose that national governancesystems can be classified along the following fourcategories: Anglo-Saxon, Germanic, Latin, andJapanese. Although these four groups share somecharacteristics they diverge on others in importantrespects. For example, the Germanic and Latinsystems are characterized by the presence ofseveral large dominant shareholders and thepresence of civil law rather than a common lawsystem. However, the Germanic and Latin systemsdiverge on the degree of relative influence exertedby banks, employees, families, financial holdingcompanies, and cross-shareholdings. Anglo-Saxoncountries are characterized by a strong capitalmarket orientation, a market for corporate control,and a dispersed ownership structure.

Remarkably, corporate governance reformsaround the world are often informed by theprinciples underlying the US model of corporategovernance (Jackson & Moerke, 2005). AC bestpractices also tend to reflect the US model.Accordingly, in an analysis of corporate governancecodes issued by 20 European countries, Collierand Zaman (2005) find ‘convergence towards theAnglo-Saxon model of corporate governance asthe audit committee concept is widely acceptedin 16 countries with both unitary and two-tiergovernance systems.’ However, they find somedifferences in the codes’ specifications of the ACstructure concerning independence, competencies,responsibilities, size, and frequency of meetings.10

As indicated in Table 1, 59% of the articlesreviewed involve US public companies, an



environment characterized by a low concentrationof ownership, stringent regulatory enforcementby the SEC, and high exposure to lawsuits. Also,except for Belgium, France, Italy, and Spain, whichhave a Latin system of corporate governance, all ofthe countries studied belong to the Anglo-Saxongovernance system. It is therefore difficult tocompare the results along corporate governancesystems. Instead, we compare the results of the 71analyses with US data with the results of the 42analyses with data from other countries. As shownin Table 6, for each category, the results are weakerin non-US countries than in the US, therebysuggesting that the effectiveness of governancepractices may vary with the environment.However, given the relatively small number ofnon-US studies examining the dimensions ofeffectiveness, it is presently too speculative to gofurther in interpreting cross-country variations –although this constitutes a key topic for futureresearch.

Post Sarbanes-Oxley Act of 2002 changes

While in the past various reports have suggestedways to improve the effectiveness of ACs (NationalCommission on Fraudulent Financial Reporting,1987; POB, 1993), it is really with the BRC (1999)that more formalized approaches were taken todevelop and publish explicit AC recommendations

(Myers & Ziegenfuss, 2008). The BRC directed tenrecommendations regarding ACs, most of whichwere made mandatory by SOX (2002) and SEC(2003c) regulation afterwards.

One way to evaluate the effects of theserecommendations/requirements is to comparethe results of studies before and after theirenactment. Figure 3 presents the distribution ofthe years which are covered in the studies wereviewed. For example, seven studies examinedata from 1990. In particular, Figure 3 shows thatdata pertaining to post-SOX years has not beenwidely examined. Because of the small numberof post-SOX studies, we do not compare, from

Table 6: Summary of the results by countries (USA, Non-US)

Concept/Indicator USA Non-US

Existence POS 7 88% 11 61%NEG 0 0% 0 0%NS 1 12% 7 39%

Independence POS 31 61% 16 50%NEG 0 0% 1 3%NS 20 39% 15 47%

Competence POS 31 53% 9 47%NEG 5 8% 2 11%NS 23 39% 8 42%

Responsibilities POS 5 83% 0 0%NEG 0 0% 0 0%NS 1 17% 1 100%

Size POS 6 33% 0 0%NEG 2 11% 3 33%NS 10 56% 6 67%

Meetings POS 9 31% 4 27%NEG 1 3% 0 0%NS 19 66% 11 73%

Figure 3: Distribution of years covered in studiesreviewed.



a meta-analytic perspective, the results for the twoperiods.

However, two studies specifically compare thepre-SOX and post-SOX period. Using experimentalmaterials identical to those used in DeZoort et al.(2003a) in the pre-SOX period, DeZoort et al. (2008)compare AC members’ judgments with respect to aproposed audit adjustment, post-SOX, with thoseof DeZoort et al.’s (2003a) findings. Their resultsindicate that AC members who are CPAs (versusnon-CPAs), in the post-SOX sample, are more likelyto support auditors’ proposed adjustments than inthe original pre-SOX sample. Members appear tobe more conservative post-SOX. While Gendronand Bédard’s (2006) main data collection focusedon the years 1999–2000, they nonetheless re-interviewed three AC Chairs in 2004. They find thatchairpersons’ sense of AC effectiveness was notfundamentally fractured in the aftermath ofthe collapse of Andersen. Their trust in externalauditors appears to be the same as before thecollapse of Enron.

Discussion

As for corporate governance research (Aguileraet al., 2008), most AC research neglects howinterdependencies between the firm and diverseenvironments may affect the effectiveness ofdifferent AC practices. Several implications forpractice and research are generated from ouranalysis. First, while regulators and companiesaround the world are mimicking US practicesregarding ACs (Tafara, 2006), they should becareful since our analysis indicates cross-nationaldifferences in the relationship between ACcomponents and effectiveness. Second, there is acrucial need for research on AC effectiveness indifferent regulatory environments, in order toallow the examination of the interaction betweenAC effectiveness and certain characteristicsof corporate governance systems, such as thepresence of a large dominant shareholder (bank,family) and second-tier boards. Finally, moreresearch is needed on AC effectiveness in thepost-Enron era. Given that many of thecharacteristics studied in the past are nowmandatory (e.g. having an AC, independence,financial literacy) archival studies will be of limitedvalue to examine linkages between committeecharacteristics and dimensions of effectiveness.Surveys, laboratory cases, and interviews might bemore appropriate.

11. CONCLUSION

This paper reviews 103 audit committee studiespublished between 1994 and 2008 in 18 journals.For each study, we identified its main objective,theoretical perspective(s), data gatheringmethod(s), and country studied. Afterwards,focusing on the 85 studies that seek to evaluate ACeffectiveness through quantitative measurement,we identified the criteria they use and groupedthem into four dimensions of effectiveness:financial reporting, external auditing, internalcontrol, and investors’ perceptions. Drawing onthese dimensions, we then reviewed the studies’findings along certain characteristics of ACs, suchas the committee’s composition and resources. Ourexamination of the 113 distinct analyses ensuingfrom the 85 articles indicates that the proportionof studies finding a positive associationwith effectiveness varies greatly along thecharacteristics. In decreasing order of proportion,the results (Table 4) are as follows: presence ofan audit committee (69%), independence (57%),competence (51%), number of meetings (30%), andsize (22%).

Regarding the research objective, relational andexplanatory studies, which explore relationshipsbetween measurable characteristics of ACs andindicators of effectiveness, are by far the mostfrequent studies (85 out of 103 studies; see Table 2).We found only 11 exploratory and 7 descriptivestudies. It is worth noting that the journals weconsidered did not include any transformativeor critical studies, which aim to bring into lightstructural deficiencies and propose modifications.This type of research should be encouraged;Shapiro (2006) provides ideas that may be useful ininforming this kind of work.

Also, studies are guided mainly by economic(66 analyses) and legal (66 analyses) perspectives(Table 2). Psychological perspectives are third with20 analyses and sociology is last with five analyses.The rarity of exploratory and explanatory studiesalong with the numerous relational studies suggestthat, while we have a certain level of informationon the association between AC characteristics andsome measures of effectiveness, our understandingof why and how the association happens (or not)is limited.

Our study is subject to certain limitations. First,to keep the project tractable, we limited our reviewto 18 journals (17 accounting journals and onegovernance journal) – although our selection



translated into a quite extensive geographicaland methodological coverage. Second, in orderto take into account studies using various typesof methods (archival, experimental, surveys, andinterview-based field study), our review relieson an informal approach to analyse the results ofthe variety of studies devoted to AC effectiveness.Also, the analyses we investigated varysignificantly along their sample size. Because of thereduced statistical power in studies with smallersample sizes, our results may be biased againstfinding a significant association. Further, we onlyexamine published studies. While such anapproach ensures a certain quality level, it mightbias results in favour of studies having producedstatistically significant results because of the biasthat accounting journals tend to have towardsignificance (Francis, 2004).

Our review has implications for regulationand future research. Regarding regulation, thereview suggests that certain types of regulatorymechanisms tend to be effective or neutral interms of measurable outcomes. A majority of theanalyses examining the presence of the AC as wellas AC members’ independence and competenciesfind a positive association with severaldimensions of effectiveness. On the other hand,the number of meetings and the size of the ACappear less effective in impacting effectiveness.Regarding size, the proportion of analyses with anegative association is almost as high as theproportion of analyses reporting a positiveassociation.

Before going further, it is worth stressing thatregulators and practitioners should be carefulwhen interpreting the results of our analyses fortheir country or company. Seventy of the 113analyses (62%) we reviewed focus on US publiccompanies and most other studies rely on datagathered in countries characterized by theAnglo-Saxon model of corporate governance. Theresults may be contingent on environmental factorssuch as concentration of ownership, enforcementlevel, and exposure to lawsuits.

This review also highlights several gaps in ourunderstanding of ACs. Regarding the dimensionsof AC effectiveness, we note the lack ofinformation concerning the association of ACswith certain types of regulatory filings such asMD&As, earnings releases, annual informationforms, and information circulars. Also, giventhe importance of investor confidence in thequality of financial reporting and financial

markets, more research is needed as tostakeholders’ perceptions regarding the workcarried out by ACs. Finally, while we haveknowledge about the effectiveness of some ACs’recommendations/regulations, there is a need tocompare their costs and benefits.

Regarding AC practices, our review highlightsthe need for more research on process dynamicssurrounding ACs. Only three of the reviewedstudies have examined AC dynamics taking placeinside and outside AC meetings. While we areaware of some other studies outside our population(e.g., Beasley et al., 2009), their number is still verysmall. A large part of governance being about smallgroup dynamics and decision-making (Leblanc &Gillies, 2005), the behavioural and sociologicalperspectives can be very useful in enhancingour understanding of ACs in action. This type ofresearch will require access to AC members andother participants, and the use of contact methodssuch as surveys, interviews, laboratory cases, andobservation.

In conclusion, we believe that viewing ACprocesses from a variety of theoretical andmethodological angles cannot but enrich theliterature. Advocates of multivocality maintain thatmultiple perspectives are needed to understandsocial objects whose degree of ambiguity andcomplexity is high, such as accounting or corporategovernance (Shapiro, 2006; Williams et al., 2006).Some even argue that the value of the socialsciences does not lie in their predictive power,but in their capacity to provide multivocalityto the study of social objects through diverselanguages, lens and metaphors (Abbott, 2001: 248;Flyvbjerg, 2001: 104). This review not only presentsresearch results from a meta-analysis perspective,but it is also hoped that it will sensitizeaccounting researchers about the appropriatenessof extending the boundaries of research on ACs –methodologically, theoretically, and geographicallyspeaking.

ACKNOWLEDGMENTS

The authors appreciate the helpful commentsfrom two anonymous referees and workshopparticipants at Griffith University, UniversitéParis-Dauphine, and the University of New SouthWales. We gratefully acknowledge the financialsupport of the Social Sciences and HumanitiesResearch Council of Canada.



NOTES

1. As an indication of the extent of our coverage,we searched on ABI Inform/Global scholarlyarticles, published between 1994 and 2008,comprising the words audit committee andeffective in the field ‘citation and abstract’. Thesearch resulted in 150 articles. On this basis, itcan be argued that the 18 journals we selectedallowed us to examine a significant proportionof articles published on the topic of ACeffectiveness.

2. While all research might lead to social change(McSweeney, 2000), a number of social researchstudies have as a specific goal the creation ofactive plans for social change (Baker, 2000). ForACs, transformative objectives are importantgiven that ACs have been described asineffective and lacking sufficient power (Cohenet al., 2002; Spira, 2002). Helping empoweringAC members or helping various stakeholdershaving their voice heard constitute importantand legitimate purposes of AC research.

3. We consider that a study is guided by a legalperspective when it discusses or explains a keyissue by referring to laws and regulations.

4. Descriptive and exploratory articles are notconsidered because they do not examine therelationship between AC characteristics andeffectiveness.

5. Bedard and Johnstone’s (2004) study is anexception. They were able to obtain firms’information about planned audit hours andbilling rate to measure the level of work.

6. Differences in the systems of corporategovernance are described in Section 10.

7. Both the NYSE and NASDAQ havelisting requirements demanding each auditcommittee to have at least one member withexperience in accounting or finance.

8. Although the term ‘financial’ generally relatesto matters such as capital structure, valuation,cash flows, risk analysis, and capital-raisingtechniques rather than accounting, auditingand internal control, the SEC kept theexpression ‘financial expert’ in its final rulingbut qualified it with ‘audit committee’.‘Accounting expert’ is probably not asmarketable as ‘financial expert’.

9. Anderson et al. (2004) also use two binaryvariables that denote committees as eitherlarge (top quartile of AC size) or small (bottomquartile of AC size) and find the same results.

10. Of course, from 1994 to 2009 audit committeeregulations have evolved in the countriesstudied. As for European countries (Collier &Zaman, 2005), audit committee regulation isincreasingly influenced by the Anglo-Saxonaudit committee concept (for a review ofregulatory changes in various countries seeSaucier, 2001; Walker, 2004; Collier & Zaman,2005).

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Williams, P. F., Jenkins, J. G. & Ingraham, L. (2006),‘The winnowing away of behavioral accountingresearch in the US: The process for anointingacademic elites’, Accounting, Organizations andSociety, Vol. 31, No. 8, pp. 783–818.

Wolnizer, P. W. (1995), ‘Are audit committees redherrings?’, Abacus, Vol. 31, No. 1, pp. 45–66.

Yang, J. S. & Krishnan, J. (2005), ‘Audit committeesand quarterly earnings management’, InternationalJournal of Auditing, Vol. 9, No. 3, pp. 201–19.

Yermack, D. (2004), ‘Remuneration, retention, andreputation incentives for outside directors’, TheJournal of Finance, Vol. 59, No. 5, pp. 2281–308.

Zajac, E. J. & Westphal, J. D. (2004), ‘The socialconstruction of market value: Institutionalizationand learning perspectives on stock marketreactions’, American Sociological Review, Vol. 69, pp.433–57.

Zhang, Y., Zhou, J. & Zhou, N. (2007), ‘Auditcommittee quality, auditor independence, andinternal control weaknesses’, Journal of Accountingand Public Policy, Vol. 26, No. 3, pp. 300–27.

AUTHOR PROFILES

Jean Bédard is Professor of Accounting atUniversité Laval in Québec City. His presentresearch deals with corporate governance, auditcommittees, and audit markets.

Yves Gendron is Professor of Accounting atUniversité Laval in Québec City. His work onauditing has been published in journals such asAccounting, Organizations and Society, Auditing: AJournal of Practice & Theory, and ContemporaryAccounting Research. Most of his research is focusedon the examination of auditing and corporategovernance phenomena, informed by sociologicalperspectives of analysis.



APPENDIX: LIST OF REVIEWED ARTICLES

No. Article

1 Abbott, L. J. & Parker, S. (2000), ‘Auditor selection and audit committee characteristics’, Auditing: AJournal of Practice & Theory, Vol. 19, No. 2, pp. 47–66.

2 Abbott, L. J., Parker, S. & Peters, G. F. (2004), ‘Audit committee characteristics and restatements’,Auditing: A Journal of Practice & Theory, Vol. 23, No. 1, pp. 69–87.

3 Abbott, L. J., Parker, S., Peters, G. F. & Raghunandan, K. (2003), ‘The association between auditcommittee characteristics and audit fees’, Auditing: A Journal of Practice & Theory, Vol. 22, No. 2, pp.17–32.

4 Abbott, L. J., Parker, S., Peters, G. F. & Raghunandan, K. (2003), ‘An empirical investigation of audit fees,nonaudit fees, and audit committees’, Contemporary Accounting Research, Vol. 20, No. 2, pp. 215–34.

5 Abbott, L. J., Parker, S., Peters, G. F. & Rama, D. V. (2007), ‘Corporate governance, audit quality, and theSarbanes-Oxley Act: Evidence from internal audit outsourcing’, Accounting Review, Vol. 82, No. 4, pp.803–35.

6 Al-Twaijry, A. A. M., Brierley, J. A. & Gwilliam, D. R. (2002), ‘An examination of the role of auditcommittees in the Saudi Arabian corporate sector’, Corporate Governance: An International Review, Vol. 10,No. 4, pp. 288–97.

7 Anderson, R. C., Mansi, S. A. & Reeb, D. M. (2004), ‘Board characteristics, accounting report integrity,and the cost of debt’, Journal of Accounting and Economics, Vol. 37, No. 3, pp. 315–42.

8 Archambeault, D. & DeZoort, F. T. (2001), ‘Auditor opinion shopping and the audit committee: Ananalysis of suspicious auditor switches’, International Journal of Auditing, Vol. 5, No. 1, pp. 33–52.

9 Archambeault, D. S., Dezoort, F. T. & Hermanson, D. R. (2008), ‘Audit committee incentivecompensation and accounting restatements’, Contemporary Accounting Research, Vol. 25, No. 4, pp.965–92.

10 Asare, S. K., Davidson, R. A. & Gramling, A. A. (2008), ‘Internal auditors’ evaluation of fraud factors inplanning an audit: The importance of audit committee quality and management incentives’, InternationalJournal of Auditing, Vol. 12, No. 3, pp. 181–203.

11 Barako, D. G., Hancock, P. & Izan, H. Y. (2006), ‘Factors influencing voluntary corporate disclosure byKenyan companies’, Corporate Governance: An International Review, Vol. 14, No. 2, pp. 107–25.

12 Beasley, M. S. (1996), ‘An empirical analysis of the relation between the board of director compositionand financial statement fraud’, Accounting Review, Vol. 71, No. 4, pp. 443–65.

13 Beasley, M. S., Carcello, J. V., Hermanson, D. R. & Lapides, P. D. (2000), ‘Fraudulent financial reporting:Consideration of industry traits and corporate governance mechanisms’, Accounting Horizons, Vol. 14,No. 4, pp. 441–54.

14 Beattie, V. & Fearnley, S. (1998), ‘Audit market competition, auditor changes and the impact oftendering’, The British Accounting Review, Vol. 30, No. 3, pp. 261–89.

15 Beattie, V., Fearnley, S. & Brandt, R. (2000), ‘Behind the audit report: A descriptive study of discussionsand negotiations between auditors and directors’, International Journal of Auditing, Vol. 4, No. 2, pp.177–202.

16 Bédard, J., Chtourou, S. M. & Courteau, L. (2004), ‘The effect of audit committee expertise,independence, and activity on aggressive earnings management’, Auditing: A Journal of Practice &Theory, Vol. 23, No. 2, pp. 13–35.

17 Bédard, J., Coulombe, D. & Courteau, L. (2008), ‘Audit committee, underpricing of IPOs, and accuracyof management earnings forecasts’, Corporate Governance: An International Review, Vol. 16, No. 6, pp.519–35.

18 Bedard, J. C. & Johnstone, K. M. (2004), ‘Earnings manipulation risk, corporate governance risk, andauditors’ planning and pricing decisions’, Accounting Review, Vol. 79, No. 2, pp. 277–304.

19 Benston, G. J. & Hartgraves, A. L. (2002), ‘Enron: What happened and what we can learn from it’,Journal of Accounting and Public Policy, Vol. 21, No. 2, pp. 105–27.

20 Boo, E. F. & Sharma, D. (2008), ‘Effect of regulatory oversight on the association between internalgovernance characteristics and audit fees’, Accounting & Finance, Vol. 48, No. 1, pp. 51–71.

21 Bronson, S. N., Carcello, J. V. & Raghunandan, K. (2006), ‘Firm characteristics and voluntarymanagement reports on internal control’, Auditing: A Journal of Practice & Theory, Vol. 25, No. 2, pp.25–39.

22 Carcello, J. V., Hermanson, D. R. & Neal, T. L. (2002), ‘Disclosures in audit committee charters andreports’, Accounting Horizons, Vol. 16, No. 4, pp. 291–304.

23 Carcello, J. V., Hermanson, D. R., Neal, T. L. & Riley, R. A. (2002), ‘Board characteristics and audit fees’,Contemporary Accounting Research, Vol. 19, No. 3, pp. 365–84.



APPENDIX: ContinuedNo. Article

24 Carcello, J. V., Hermanson, D. R. & Raghunandan, K. (2005), ‘Factors associated with US publiccompanies’ investment in internal auditing’, Accounting Horizons, Vol. 19, No. 2, pp. 69–84.

25 Carcello, J. V., Hollingsworth, C. W. & Neal, T. L. (2006), ‘Audit committee financial experts: A closerexamination using firm designations’, Accounting Horizons, Vol. 20, No. 4, pp. 351–73.

26 Carcello, J. V. & Neal, T. L. (2000), ‘Audit committee composition and auditor reporting’, AccountingReview, Vol. 75, No. 4, pp. 453–67.

27 Carcello, J. V. & Neal, T. L. (2003), ‘Audit committee characteristics and auditor dismissals following“new” going-concern reports’, Accounting Review, Vol. 78, No. 1, pp. 95–117.

28 Carcello, J. V. & Neal, T. L. (2003), ‘Audit committee independence and disclosure: Choice for financiallydistressed firms’, Corporate Governance: An International Review, Vol. 11, No. 4, pp. 289–99.

29 Chen, J., Duh, R.-R. & Shiue, F. N. (2008), ‘The effect of audit committees on earnings-return association:Evidence from foreign registrants in the United States’, Corporate Governance: An International Review,Vol. 16, No. 1, pp. 32–40.

30 Chen, K. Y. & Zhou, J. (2007), ‘Audit committee, board characteristics, and auditor switch decisions byAndersen’s clients’, Contemporary Accounting Research, Vol. 24, No. 4, pp. 1085–117.

31 Chen, L., Carson, E. & Simnett, R. (2007), ‘Impact of stakeholder characteristics on voluntarydissemination of interim information and communication of its level of assurance’, Accounting &Finance, Vol. 47, No. 4, pp. 667–91.

32 Chen, Y. M., Moroney, R. & Houghton, K. (2005), ‘Audit committee composition and the use of anindustry specialist audit firm’, Accounting & Finance, Vol. 45, No. 2, pp. 217–39.

33 Cohen, J., Krishnamoorthy, G. & Wright, A. M. (2002), ‘Corporate governance and the audit process’,Contemporary Accounting Research, Vol. 19, No. 4, pp. 573–94.

34 Cohen, J. R. & Hanno, D. M. (2000), ‘Auditors’ consideration of corporate governance and managementcontrol philosophy in preplanning and planning judgments’, Auditing: A Journal of Practice & Theory,Vol. 19, No. 2, pp. 133–46.

35 Collier, P. & Gregory, A. (1996), ‘Audit committee effectiveness and the audit fee’, European AccountingReview, Vol. 5, No. 2, pp. 177–98.

36 Davidson, R., Goodwin-Stewart, J. & Kent, P. (2005), ‘Internal governance structures and earningsmanagement’, Accounting & Finance, Vol. 45, No. 2, pp. 241–67.

37 Davidson, W. N., Xie, B. & Xu, W. (2004), ‘Market reaction to voluntary announcements of auditcommittee appointments: The effect of financial expertise’, Journal of Accounting and Public Policy,Vol. 23, No. 4, pp. 279–93.

38 Dechow, P. M., Sloan, R. G. & Sweeney, A. P. (1996), ‘Causes and consequences of earningsmanipulation: An analysis of firms subject to enforcement actions by the SEC’, Contemporary AccountingResearch, Vol. 13, No. 1, pp. 1–36.

39 Defond, M. L., Hann, R. N. & Hu, X. (2005), ‘Does the market value financial expertise on auditcommittees of boards of directors?’ Journal of Accounting Research, Vol. 43, No. 2, pp. 153–93.

40 DeZoort, F. (1997), ‘An investigation of audit committees’ oversight responsibilities’, Abacus, Vol. 33,No. 2, pp. 208–27.

41 Dezoort, F. T. (1998), ‘An analysis of experience effects on audit committee members’ oversightjudgments’, Accounting, Organizations and Society, Vol. 23, No. 1, pp. 1–21.

42 DeZoort, F. T., Dana, R. H. & Richard, W. H. (2008), ‘Audit committee member support for proposedaudit adjustments: Pre-SOX versus post-SOX judgments’, Auditing: A Journal of Practice & Theory, Vol.27, No. 1, pp. 85–104.

43 DeZoort, F. T., Hermanson, D. R. & Houston, R. W. (2003), ‘Audit committee member support forproposed audit adjustments: A source credibility perspective’, Auditing: A Journal of Practice & Theory,Vol. 22, No. 2, pp. 189–205.

44 DeZoort, F. T., Hermanson, D. R. & Houston, R. W. (2003), ‘Audit committee support for auditors: Theeffects of materiality justification and accounting precision’, Journal of Accounting and Public Policy, Vol.22, No. 2, pp. 175–99.

45 DeZoort, F. T. & Salterio, S. E. (2001), ‘The effects of corporate governance experience andfinancial-reporting and audit knowledge on audit committee members’ judgments’, Auditing: A Journalof Practice & Theory, Vol. 20, No. 2, pp. 31–47.

46 Doyle, J. T., Ge, W. & McVay, S. (2007), ‘Accruals quality and internal control over financial reporting’,Accounting Review, Vol. 82, No. 5, pp. 1141–70.

47 Farber, D. B. (2005), ‘Restoring trust after fraud: Does corporate governance matter?’ Accounting Review,Vol. 80, No. 2, pp. 539–61.




48 García Osma, B. & Noguer, B. G.-d.-A. (2007), ‘The effect of the board composition and its monitoringcommittees on earnings management: Evidence from Spain’, Corporate Governance: An InternationalReview, Vol. 15, No. 6, pp. 1413–28.

49 Gaynor, L. M., McDaniel, L. S. & Neal, T. L. (2006), ‘The effects of joint provision and disclosure ofnonaudit services on audit committee members’ decisions and investors’ preferences’, AccountingReview, Vol. 81, No. 4, pp. 873–96.

50 Geiger, M. A. & Rama, D. V. (2003), ‘Audit fees, nonaudit fees, and auditor reporting on stressedcompanies’, Auditing: A Journal of Practice & Theory, Vol. 22, No. 2, pp. 53–69.

51 Gendron, Y. & Bédard, J. (2006), ‘On the constitution of audit committee effectiveness’, Accounting,Organizations and Society, Vol. 31, No. 3, pp. 211–39.

52 Gendron, Y., Bédard, J. & Gosselin, M. (2004), ‘Getting inside the black box: A field study of practices in“effective” audit committees’, Auditing: A Journal of Practice & Theory, Vol. 23, No. 1, pp. 153–71.

53 Gibbins, M., McCracken, S. A. & Salterio, S. E. (2007), ‘The chief financial officer’s perspective onauditor–client negotiations’, Contemporary Accounting Research, Vol. 24, No. 2, pp. 387–422.

54 Goodwin-Stewart, J. & Kent, P. (2006), ‘Relation between external audit fees, audit committeecharacteristics and internal audit’, Accounting & Finance, Vol. 46, No. 3, pp. 387–404.

55 Goodwin, J. (2002), ‘Auditors’ conflict management styles: An exploratory study’, Abacus, Vol. 38, No. 3,pp. 378–405.

56 Goodwin, J. (2003), ‘The relationship between the audit committee and the internal audit function:Evidence from Australia and New Zealand’, International Journal of Auditing, Vol. 7, No. 3, pp. 263–78.

57 Goodwin, J. & Seow, J. L. (2002), ‘The influence of corporate governance mechanisms on the quality offinancial reporting and auditing: Perceptions of auditors and directors in Singapore’, Accounting &Finance, Vol. 42, No. 3, pp. 195–223.

58 Goodwin, J. & Yeo, T. Y. (2001), ‘Two factors affecting internal audit independence and objectivity:Evidence from Singapore’, International Journal of Auditing, Vol. 5, No. 2, pp. 107–25.

59 Hunton, J. E. & Rose, J. M. (2008), ‘Can directors’ self-interests influence accounting choices?’Accounting, Organizations and Society, Vol. 33, No. 7–8, pp. 783–800.

60 James, K. L. (2003), ‘The effects of internal audit structure on perceived financial statement fraudprevention’, Accounting Horizons, Vol. 17, No. 4, pp. 315–27.

61 Jawaher Al-Mudhaki, P. L. J. (2004), ‘The role and functions of audit committees in the Indian corporategovernance: Empirical findings’, International Journal of Auditing, Vol. 8, No. 1, pp. 33–47.

62 Kaplan, S. E. & Mauldin, E. G. (2008), ‘Auditor rotation and the appearance of independence: Evidencefrom non-professional investors’, Journal of Accounting and Public Policy, Vol. 27, No. 2, pp. 177–92.

63 Karamanou, I. & Vafeas, N. (2005), ‘The association between corporate boards, audit committees, andmanagement earnings forecasts: An empirical analysis’, Journal of Accounting Research, Vol. 43, No. 3,pp. 453–86.

64 Kelton, A. S. & Yang, Y.-W. (2008), ‘The impact of corporate governance on Internet financial reporting’,Journal of Accounting and Public Policy, Vol. 27, No. 1, pp. 62–87.

65 Kent, P. & Stewart, J. (2008), ‘Corporate governance and disclosures on the transition to InternationalFinancial Reporting Standards’, Accounting & Finance, Vol. 48, No. 4, pp. 649–71.

66 Klein, A. (2002), ‘Audit committee, board of director characteristics, and earnings management’, Journalof Accounting & Economics, Vol. 33, No. 3, pp. 375–400.

67 Knechel, W. R. & Willekens, M. (2006), ‘The role of risk management and governance in determiningaudit demand’, Journal of Business Finance & Accounting, Vol. 33, No. 9–10, pp. 1344–67.

68 Koh, D. D., Laplante, S. K. & Tong, Y. H. (2007), ‘Accountability and value enhancement roles ofcorporate governance’, Accounting & Finance, Vol. 47, No. 2, pp. 305–33.

69 Kornish, L. J. & Levine, C. B. (2004), ‘Discipline with common agency: The case of audit and nonauditservices’, Accounting Review, Vol. 79, No. 1, pp. 173–200.

70 Krishnan, G. V. & Visvanathan, G. (2007), ‘Reporting internal control deficiencies in thepost-Sarbanes-Oxley era: The role of auditors and corporate governance’, International Journal ofAuditing, Vol. 11, No. 2, pp. 73–90.

71 Krishnan, G. V. & Visvanathan, G. (2008), ‘Does the SOX definition of an accounting expert matter? Theassociation between audit committee directors’ accounting expertise and accounting conservatism’,Contemporary Accounting Research, Vol. 25, No. 3, pp. 827–57.

72 Krishnan, J. (2005), ‘Audit committee quality and internal control: An empirical analysis’, AccountingReview, Vol. 80, No. 2, pp. 649–75.




73 Krishnan, J. & Ye, Z. (2005), ‘Why some companies seek shareholder ratification on auditor selection’,Accounting Horizons, Vol. 19, No. 4, pp. 237–54.

74 Larcker, D. F., Richardson, S. A. & Tuna, I. (2007), ‘Corporate governance, accounting outcomes, andorganizational performance’, Accounting Review, Vol. 82, No. 4, pp. 963–1008.

75 Lee, H. Y., Mande, V. & Ortman, R. (2004), ‘The effect of audit committee and board of directorindependence on auditor resignation’, Auditing: A Journal of Practice & Theory, Vol. 23, No. 2, pp. 131–46.

76 Lennox, C. S. & Park, C. W. (2007), ‘Audit firm appointments, audit firm alumni, and audit committeeindependence’, Contemporary Accounting Research, Vol. 24, No. 1, pp. 235–58.

77 Mangena, M. & Tauringana, V. (2007), ‘Corporate compliance with non-mandatory statements of bestpractice: The case of the ASB Statement on Interim Reports’, European Accounting Review, Vol. 16, No. 2,pp. 399–427.

78 Mangena, M. & Tauringana, V. (2008), ‘Audit committees and voluntary external auditor involvement inUK interim reporting’, International Journal of Auditing, Vol. 12, No. 1, pp. 45–63.

79 McDaniel, L., Martin, R. D. & Maines, L. A. (2002), ‘Evaluating financial reporting quality: The effects offinancial expertise vs. financial literacy’, Accounting Review, Vol. 77, No. 4, pp. 139–67.

80 McMullen, D. A. (1996), ‘Audit committee performance: An investigation of the consequences associatedwith audit committees’, Auditing: A Journal of Practice & Theory, Vol. 15, No. 1, pp. 87–103.

81 Melis, A. (2005), ‘Corporate governance failures: To what extent is Parmalat a particularly Italian case?’Corporate Governance: An International Review, Vol. 13, No. 4, pp. 478–88.

82 Ng, T. B. P. & Tan, H. T. (2003), ‘Effects of authoritative guidance availability and audit committeeeffectiveness on auditors’ judgments in an auditor–client negotiation context’, Accounting Review, Vol.78, No. 3, pp. 801–18.

83 O’Sullivan, N. (1999), ‘Board characteristics and audit pricing post-Cadbury: a research note’, EuropeanAccounting Review, Vol. 8, No. 2, pp. 253–63.

84 Peasnell, K. V., Pope, R. F. & Young, S. (2005), ‘Board monitoring and earnings management: Do outsidedirectors influence abnormal accruals?’ Journal of Business Finance & Accounting, Vol. 32, No. 7–8, pp.1311–46.

85 Piot, C. & Janin, R. (2007), ‘External auditors, audit committees and earnings management in France’,European Accounting Review, Vol. 16, No. 2, pp. 429–54.

86 Porter, B. A. & Gendall, P. J. (1998), ‘Audit committees in private and public sector corporates in NewZealand: An empirical investigation’, International Journal of Auditing, Vol. 2, No. 1, pp. 49–69.

87 Pucheta-Martínez, M. C. & de Fuentes, C. (2007), ‘The impact of audit committee characteristics on theenhancement of the quality of financial reporting: An empirical study in the Spanish context’, CorporateGovernance: An International Review, Vol. 15, No. 6, pp. 1394–412.

88 Raghunandan, K. & Rama, D. V. (2003), ‘Audit committee composition and shareholder actions:Evidence from voting on auditor ratification’, Auditing: A Journal of Practice & Theory, Vol. 22, No. 2, pp.253–63.

89 Raghunandan, K., Rama, D. V. & Read, W. J. (2001), ‘Audit committee composition, “gray directors”,and interaction with internal auditing’, Accounting Horizons, Vol. 15, No. 2, pp. 105–18.

90 Sarens, G. & De Beelde, I. (2006), ‘The relationship between internal audit and senior management: Aqualitative analysis of expectations and perceptions’, International Journal of Auditing, Vol. 10, No. 3, pp.219–41.

91 Scarbrough, D. P., Rama, D. V. & Raghunandan, K. (1998), ‘Audit committee composition andinteraction with internal auditing: Canadian evidence’, Accounting Horizons, Vol. 12, No. 1, pp. 51–62.

92 Solomon, J. F., Lin, S. W., Norton, S. D. & Solomon, A. (2003), ‘Corporate governance in Taiwan:Empirical evidence from Taiwanese company directors’, Corporate Governance: An International Review,Vol. 11, No. 3, pp. 235–48.

93 Song, J. & Windram, B. (2004), ‘Benchmarking audit committee effectiveness in financial reporting’,International Journal of Auditing, Vol. 8, No. 3, pp. 195–205.

94 Spira, L. (1998), ‘An evolutionary perspective on audit committee effectiveness’, Corporate Governance:An International Review, Vol. 6, No. 1, pp. 29–38.

95 Spira, L. F. & Bender, R. (2004), ‘Compare and contrast: Perspectives on board committees’, CorporateGovernance: An International Review, Vol. 12, No. 4, pp. 489–99.

96 Stewart, J. & Munro, L. (2007), ‘The impact of audit committee existence and audit committee meetingfrequency on the external audit: Perceptions of Australian auditors’, International Journal of Auditing, Vol.11, No. 1, pp. 51–69.




97 Turley, S. & Zaman, M. (2007), ‘Audit committee effectiveness: Informal processes and behaviouraleffects’, Accounting, Auditing & Accountability Journal, Vol. 20, No. 5, pp. 765–88.

98 Vafeas, N. (2005), ‘Audit committees, boards, and the quality of reported earnings’, ContemporaryAccounting Research, Vol. 22, No. 4, pp. 1093–122.

99 Wild, J. J. (1994), ‘Managerial accountability to shareholders: Audit committees and the explanatorypower of earnings for returns’, The British Accounting Review, Vol. 26, No. 4, pp. 353–74.

100 Yang, J. S. & Krishnan, J. (2005), ‘Audit committees and quarterly earnings management’, InternationalJournal of Auditing, Vol. 9, No. 3, pp. 201–19.

101 Zain, M. M. & Subramaniam, N. (2007), ‘Internal auditor perceptions on audit committee interactions: Aqualitative study in Malaysian public corporations’, Corporate Governance: An International Review, Vol.15, No. 5, pp. 894–908.

102 Zain, M. M., Subramaniam, N. & Stewart, J. (2006), ‘Internal auditors’ assessment of their contributionto financial statement audits: The relation with audit committee and internal audit functioncharacteristics’, International Journal of Auditing, Vol. 10, No. 1, pp. 1–18.

103 Zhang, Y., Zhou, J. & Zhou, N. (2007), ‘Audit committee quality, auditor independence, and internalcontrol weaknesses’, Journal of Accounting and Public Policy, Vol. 26, No. 3, pp. 300–27.



Documents

Strengthening the Financial Reporting System: Can Audit Committees Deliver?