Los objetos domésticos: el bricolaje y los vínculos afectivos

As discussed in the previous chapter, audit committee development in most countries has been driven by concerns about the credibility of financial reporting as a result of the high profile corporate collapses. The US context provides great opportunity for exploring the reasons for the establishment of audit committees because they have a longer history of development than elsewhere (Spira 1999).

Pomeranz (1977) argued that the popularity of audit committees is due not only to the fact that they protect shareholders’ interests, but also because they help guide management and enhance corporate credibility. In addition, the author highlighted the important role of audit committees in the selection and protection of external auditors. Finally, the author emphasised that the first step in forming an audit committee is to draw up a charter broadly expressing its objectives.

Cobb (1993) investigated the purposes of the audit committee in the US during the 1980s and found some disagreement among commentators regarding such purposes. However, the author was able to identify four main objectives for the formation of such committees, namely, reduction of board liability, establishing links between the external auditor and the board, the reduction of illegal activity and the prevention of fraudulent financial reporting.

The Treadway Report (Treadway Commission 1987) had ranked the reduction of illegal activity and the prevention of fraudulent financial reporting as the primary roles of the audit committee.

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In addition, Spangler and Braiotta (1990) found that the reduction of illegal activity and the prevention of fraudulent financial reporting were described by the audit committee members and those working with them as the primary roles of audit committees.

However, a number of studies has also been conducted in other countries such as the UK, New Zealand, Australia, Saudi Arabia and Malaysia to explore the purposes of the audit committee.

Marrian (1988) conducted a survey to investigate the reasons for the formation of audit committees in the UK. The results of this survey revealed that financial collapses and the following of fashion were the most important reasons for such formation.

In addition, Collier (1992) conducted a more detailed survey to examine the incentives for the formation of the audit committee in UK firms. This study provided the following list of reasons for establishment of an audit committee ranked in order starting with the most frequent ones.

1. Good corporate practice

2. Strengthen the role and effectiveness of non-executive directors

3. Help directors in discharging their statutory responsibilities regarding the financial reporting

4. Protect and enhance the independence of internal auditors

5. Help the auditors in the reporting of any serious weaknesses in the control system or management

6. Improve communications between the board and both internal and external auditors

7. Increase the public confidence in the credibility and objectivity of the financial reports

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9. Increase the confidence of investment analysts in the credibility and objectivity of the financial reports

10. Provide an opportunity for negotiation between management and auditors 11. Possibility of legislative pressure

Despite the fact that the report of the Cadbury Committee (Cadbury Committee 1992) provided an outline of audit committee structure and a range of duties for such committees, it did not provide explicit statements regarding the purposes of the audit committee (Ezzamel and Watson 1997).

Moreover, Bradbury (1990) suggested that audit committees in New Zealand are established to increase the credibility of audited financial statements, to help boards of directors in meeting their responsibilities and to enhance auditor independence. Guthrie and Turnbull (1995) argued that audit committees in Australia were developed not only to protect investors by increasing the credibility of the financial reports, but also to protect non-executive directors on the board from being misled by management.

In Saudi Arabia, the development of audit committees was driven by concerns about the gap between the external auditor and auditee and the auditing problems of large, public companies (Al-Moataz 2003). Al-Twaijry et al (2002) indicated that the role of the audit committee and the scope of its work vary widely across Saudi public companies because of the different interpretations of the guidelines provided by Ministerial Resolve 903, which lacked clarity. Teoh and Lim (1996) also indicated that the establishment of audit committees in Malaysia was a response to corporate scandals.

On the other hand, a number of studies has described audit committee formation as a mechanism to reduce agency costs (Turley and Zaman 2004). These studies have used the agency framework to identify the incentives of the voluntary formation of audit committees (Eichenseher and Shields 1985; Pincus et al. 1989; Collier 1993; Bradbury 1990; Willekens et al. 2004). For example, using a random sample of National Association of Securities Dealers Automated Quotes (NASDAQ) over-the- counter companies, Pincus et al. (1989) identified a number of different factors that

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had direct impact on the voluntary formation of such committees. Those factors were managerial ownership, firm size, leverage, audit firm size, proportion of outside directors and participation in the National Market System.

In addition, Collier (1993) found that while there was no association between company size and the formation of an audit committee, leverage and management ownership were very important determinants of the formation of audit committees. However, using a sample of 135 firms listed on the New Zealand Stock Exchange, Bradbury (1990) analysed the incentives for voluntary formation of audit committees. The results of this study indicated that while agency costs variables and audit firm size had no associations with audit committee formation, the number of directors on the board and intercorporate ownership were found to be important determinants of voluntary audit committees.

Willekens et al (2004) investigated the associations between the voluntary formation of audit committees and some factors that could influence such formation using data from Belgian listed companies. They found that while the proportion of independent directors on the board and the size of the external audit firm were positively associated with the voluntary formation of audit committees, agency costs and board size were not related to the voluntary formation of such committees.

Eichenseher and Shields (1985) suggested that the increase in audit committee formation in the US during the late 1970s could be explained by the increase in director liability as a result of the Foreign Corrupt Practices Act (FCPA) of 1977. However, this legal protection may not be a universal explanation of the audit committee formation as it is influenced by the legal context, which differs from country to country (Turley and Zaman 2004).

In summary, despite the fact that audit committee literature has provided a long list of purposes (reasons) for audit committee formation, most of the studies in this area consider providing credible financial reports as the primary purpose or responsibility of such committee. In addition, examining the incentives of the audit committee formation has produced mixed and inconclusive results.

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