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Although the BRC, ASX CGC and SMC recommendations aimed at improving audit committee effectiveness (ACE) are quite similar in their requirements and their aims, differences in audit committee frameworks and market developments still exist between Australia and Saudi Arabia.

4.2.1 Audit Committee Framework

Australia's audit committee framework is sourced from a combination of statute, listing rules and industry and professional bodies' codes of practice, standards and guidelines. There is no legal requirement at present for a company or its board of directors to form an audit committee. However, the Corporations Law Economic Reform Program 9 (CLERP 9) proposals place a strong emphasis on reinforcing the Australian principle-based approach to addressing governance matters and on achieving a balance between regulation and co-regulation (Commonwealth Treasury 2002). CLERP 9 proposes mandatory audit committees for the top 500 listed companies. Other companies will be able to apply the principles to suit their

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individual circumstances. Strong support has been articulated for the ASX CGC to develop best practice standards for audit committees.

On March 2003, ASX CGC issued 10 principles aimed at enhancing corporate governance in Australia (Australian Stock Exchange Corporate Governance Council 2003). Principle 4 has focused on audit committee establishment and structure. It provides recommendations and guidelines to improve ACE. Although complying with such principles and recommendations is not compulsory, all companies are required to report any departure from ASX CGC recommendations and explain why they did not comply?

The ASX Listing Rules (Australian Stock Exchange Corporate Governance Council 2003) require that companies listed on the ASX Top 500 must comply with the CGC recommendations regarding the composition, operation and responsibilities of their audit committees by 1 January 2005. However, Australian Stock Exchange Corporate Governance Council Implementation Review Group Implementation (ASX CGC IRG) recognized that the additional costs of having an effective audit committee might be more than the benefits of such committee especially for small firms (Australian Stock Exchange Corporate Governance Council Implementation Review Group 2004).

As a result, the IRG suggested while the ASX Top 500 are required to establish a formal audit committee, only the ASX Top 300 need to establish an effective audit committee that complies with all the recommendations of the ASX CGC (Australian Stock Exchange Corporate Governance Council Implementation Review Group 2004). This indicates that in Australia only partial mandating of the establishment of an audit committee is taken place for Australian listed companies.

On the other hand, all companies listed on the ASX and not included in the ASX Top 300 are required to report if they have an audit committee or not and if not to explain why? The disclosure regarding the audit committee and other corporate governance mechanisms should be reported in a special section in the annual report called corporate governance report (Australian Stock Exchange Corporate Governance Council 2003).

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Such new disclosure requirements by the ASX provide a unique set of information that has never been available before. This information could be used to investigate not only the ACE, but also the effectiveness of other corporate governance mechanisms such as board of directors and internal audit.

On the other hand, Saudi's audit committee framework is sourced only from statute and professional bodies’ codes of practice, standards and guidelines. SMC is responsible for developing and up-dating the Corporations Law in Saudi Arabia, which should be consistent with Islamic rules.

In 1994, SMC issued its first regulation regarding audit committees known as Act 931 (Saudi Ministry of Commerce 1994). This Act required all public companies to form an audit committee and provided a set of recommendations and guidelines regarding the composition, operation and responsibilities of the audit committee. However, these recommendations were not compulsory.

Moreover, the Saudi financial market (Tadawul 2003) does not have any listing rules regarding audit committees. Most recently, the Saudi Organization for Certified Public Accountants (SOCPA) issued its first draft regarding the recommendations and guidelines aimed at enhancing the role of audit committees in corporate governance (Saudi Organization for Certified Public Accountants 2003), but it is not clear yet when the final draft will be available or who will adopt such recommendations (SMC or SSM).

Unlike US companies where audit committees have the sole authority to appoint or replace auditors, in Australia and Saudi Arabia, it is the shareholders at members' meetings that have the sole authority to appoint or replace auditors. In other words, the role of the audit committee in Australia and Saudi Arabia is only to recommend auditors, but not to appoint or replace them.

In summary, it is clear that there are differences in audit committee frameworks between the two countries. While Australian’s audit committee framework is sourced from statute, listing rules and codes of best practices and guidelines, the audit committee framework in Saudi Arabia is a combination of statute and codes of best practice and guidelines as such framework lacks any listing rules by the SSM

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regarding the establishment or the structures of audit committees. These differences justify the choice of the two countries to conduct this study.

4.2.2 Market Development

The ASX was formed in 1987 by legislation of the Australian Parliament, which enabled the amalgamation of six independent stock exchanges that formerly operated in the State capital cities (Australian Stock Exchange 1987). Each of those exchanges had a history of share trading dating back to the 19th century.

The ASX capitalization has increased from $198 billon to $1.2 trillion in the period between 1992 and 2006 (Australian Stock Exchange 2006). It is a developed market and is considered as one of the primary markets worldwide. In addition, ASX is a unified market, which means that it is a comprehensive, national market administered by a single agency (Australian Stock Exchange 1987).

On the other hand, the history of the Saudi Stock Market (SSM) could be traced to the 1930s when the first public firm, the Arab Automobile Company, was established in 1934. The SSM began to emerge in the late 1970s when the number of public companies increased considerably. However, due to the lack of trading regulation at the time, stock trading was fairly limited through the early 1980s when oil prices were increasing, which, in turn, resulted in an increase in both volume of trading and market capitalization.

In 1985, the Saudi government placed all stock trading under the supervision and control of the Saudi Arabian Monetary Agency (SAMA) and discontinued the existing broker-based stock trading system. The government then authorized the domestic commercial banks to act as brokers in order to protect the market against the adverse effects of speculation and to help it develop and mature. This was also done so that the stock market could develop in a manner that would contribute to national development and was consistent with its policy of greater private sector participation. The SSM has been listed in a database supervised by the International Finance Corporation (IFC). This supervision indicates the IFC's recognition of the importance of the SSM, which occupies an advanced position amongst new markets in many

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important indicators, including market value, the daily average of shares value, and the price percentage of the annual profit.

In 2001, Tadawul, the second generation of the electronic trading system, was launched replacing the IFC. Although the new trading system has facilitated the trading process, nothing much has been done to enhance the regulations and listing rules to reduce the risks associated with the SSM.

As a result, the Saudi Stock Exchange Commission (SSEC) was formed on July 2003 by the Saudi Council of Ministers (SCM) to review and update the regulations and listing rules of the SSM (Saudi Council of Ministers 2003). However, it is expected that this revision and updating process will take time before it will be completed and changes will be made.

Equity market growth between 1990 and 2006, the number of transactions, volume and value traded increased dramatically. Market capitalization has increased by 189% to reach AU$ 120 billion and the all share index has increased by 157%. However, the SSM is still considered as a developing market for the following reasons.

‰ It lacks a complete set of regulations and listing rules that protect investors and provide them with quality financial reports.

‰ Even though it has more than 70 years of history, it is considered as a new market in comparison to the American and Australian markets.

‰ It is still an unofficial market. However, following the establishment of the SSEC, it is expected that this market will become an official market in the near future. ‰ It has a very small size with only 73 listed companies and a capitalization of AU$

120 billion.

There is some evidence that supports the classification of the SSM as a developing market. First, although there plenty of investment chances exist in the SSM, very limited foreigner capital is involved in this market due to the high risk associated with developing markets. Second, the late establishment of the SSEC indicates the need for reviewing and updating the SSM regulations and listing rules to reduce the high risk associated with the uncertainty and to attract foreign capital.

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In summary, even though recommendations regarding the audit committee are similar in Australia and Saudi Arabia, it is expected that such differences in audit committee frameworks and market developments between the two countries may affect the efficacy of such recommendations and ultimately impact ACE. While the efficacy of BRC recommendations has been supported by a number of researchers as mentioned before, the efficacy of the ASX CGC and SMC recommendations is still unknown. Therefore, the following interesting question will be highlighted.

“Do different audit committee frameworks and market developments affect audit committee effectiveness?

However, in this thesis, the possible causes of difference have been noted but not tested because of the difficulty of measuring such factors and including them in the regression analysis.