A study of Australian audit committee operations and effectiveness

Abstract

Professional and regulatory bodies in Australia and overseas have promoted audit committees as a corporate governance mechanism which the board of directors can employ to oversee the financial reporting and auditing functions of their organisation. Despite the level of responsibility entrusted to audit committees, recent research has provided limited evidence of their value. The purpose of this study is to extend the understanding of Australian audit committee operations by both providing descriptive analyses of the profile, functions, effectiveness and characteristics of Australian audit committees and by developing a comprehensive measure of audit committee effectiveness against which five audit committee characteristics outlined in normative literature as important to audit committee effectiveness will be tested. The characteristics addressed are the independence of audit committee members, the provision of adequate resources to the committee, the knowledge and experience of audit committee members, the provision of training to audit committee members and the existence of an audit committee charter. Following the method adopted by Spangler & Braiotta (1990) and Kalbers & Fogarty (1993), a composite measure of effectiveness was obtained by aggregating the responses from a survey administered to the audit committee chairperson, a non-executive director and the internal audit manager of a sample of Australian publicly listed corporations. The results of the study indicate that the majority of respondent audit committees have been formed relatively recently (l-3 years), that they have an average of 3-4 members, that the majority of members are non-executive directors, and that the committee meets on average 3-4 times a year for approximately 2 hours. The audit committee function given the greatest consideration by the committee relates to its oversight of financial reporting disclosures. Surveyed audit committees were not found to be uniformly effective with resulting composite effectiveness scores ranging from 2.3 to 4. 7 in a range of 1 -very ineffective to 5 - very effective. Results of the statistical association between the five audit committee characteristics and effectiveness indicate that the proportion of nonexecutive directors and the knowledge and experience of audit committee members are significantly associated with audit committee effectiveness