Indicadores Financieros

The audit committee interacts with the firm’s auditors to ensure that the audited financial statements appropriately and accurately show the company’s financial position (Platt and Platt 2012). The audit committee is regarded as one of the influential mechanisms of corporate governance as it helps the board members in discharging their duties in overseeing management (Bedard and Gendron 2010)). Although the responsibility for safeguarding the financial health of the firm is borne by the board of directors, the audit committee plays a prominent role in ensuring the integrity of firms’ financial reports and that the monitoring role that the audit committee plays in firms’ financial status makes this group particularly well positioned to protect shareholders’ interest (Daily 1996). An effective audit committee leads to the enhancement of the financial reporting process thereby reducing information asymmetry between management and shareholders (Li et al. 2012). From the perspective of corporate governance, the audit committees are responsible for the financial reporting process, the internal control structure, the internal audit functions and the external audit activities of firms (Salloum et al. 2014). The audit committee also maintains and enhances public confidence in the credibility and the objectivity of the financial reporting through improving the disclosure practices of published information (Bedard and Gendron 2010; Kelton and Yang 2008). The role of the audit committee is therefore very important to stakeholders as better quality disclosed financial reporting improves firms’ market performance and reduce the probability of financial distress (Wild 1996). Daily (1996) examines the impact of audit committee composition on the incidence and form of a bankruptcy reorganisation filing for the 5-

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year period preceding the filing by sampling 53 bankrupt and 53 non-bankrupt US firms. Results from logistic regression analysis demonstrate that audit committee composition is significantly related to a pre-packaged filing and the length of time spent in reorganisation during the 5-year period preceding a bankruptcy filing. Also, in a study to examine the association between the voluntary adoption of corporate governance mechanisms and the likelihood of financial distress, Miglani et al. (2015b) sampled 171 financially distressed firms and 106 healthy firms listed in Australia over the 5-year period. Using logistic regression in the analysis, the study concludes that, the existence of a separate audit committee is associated with lower financial distress likelihood. The independence of the audit committee is significant because the presence of the independent directors in the audit committee ensures corporate accountability, reduces the likelihood of a financial problem and protects the best interests of shareholders (Salloum et al. 2014). The independence of the audit committee is determined when the domination of the independent directors is considered. Carcello and Neal (2000) observe that the audit committee should consist of a higher proportion of independent directors. Corporate governance regulators are much concerned with the independence of the audit committee and in the UK, the Corporate Governance Code (2012) recommends that an audit committee is composed of a minimum of three independent directors. Where the audit committee is fully independent, that is, when all the members of the committee are independent, it provides better monitoring of management than the existence of the executive members with objective decisions (DeFond and Francis 2005). This is because, according to Fama and Jensen (1983), independent directors are free from economic interests or personal links with corporate managers and as such are better suited to exercising their monitoring role. Further, independent directors have a stronger motivation to maintain the value of their reputational capital in the external labour market (Fama 1980). Independent directors are, therefore, deemed likely to play a more effective monitoring role and to have greater incentive to enhance the quality and transparency of financial information released to shareholders (Wu et al. 2014). Beasley (1996) posits that the presence of an audit committee does not affect the likelihood of fraud, but a higher number of independent directors on the board should reduce the possibility of fraud. Likewise, McMullen and Raghunandan (1996) acknowledge that the presence of independent directors in an audit committee reduces the likelihood of a financial problem. Carcello and Neal (2003) examine the relation between audit committee independence and disclosure choice for a sample of 138 publicly held manufacturing firms experiencing

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financial distress. Results from a logistic regression show a significant positive relation between the percentage of affiliated directors on the audit committee and optimistic disclosures for entities experiencing financial distress and that this relation holds regardless of whether the means of disclosure is financial statement notes or management discussion and analysis. Also in the US, Bronson et al. (2009) examine whether the regulatory requirements of a completely independent audit committee are necessary to obtain the monitoring benefits related to audit committee independence that has been documented in the prior literature. From the logistic regression analysis, the study establishes that the benefits of audit committee independence are consistently achieved only when the audit committee is completely independent and that these results provide support for the Sarbanes-Oxley requirement of 100% independent audit committees. The results further suggest that allowing even one non-independent member to serve on the audit committee appears to be problematic in the financial distress process. Chan and Li (2008) with a sample of Fortune 200 companies find that the independence of the audit committee results in a higher firm value when most expert-independent directors serve on the board. However, audit committee members are compensated by the company and in some cases, may be reliant on company management for their appointment (Bronson et al. 2009). Bronson et al. (2009) also find that audit committee effectiveness is reduced when the chief executive officer is involved in the director selection process after examining the relation between executive management involvement in the selection of board members and audit committee effectiveness. Moreover, having a fully independent audit committee may be costly which may place cash trap firms into disadvantageous positions.