The Audit Committee as a Key Corporate Governance Mechanism Essay Example

and tests different meeting frequencies and auditor attendance levels. We aim to assess how these factors affect various aspects of the external audit such as perceived audit risk, efficiency, testing, conflict resolution between auditors and clients, quality of audit work, and audit fees.

Between November 2003 and February 2004, a study was conducted to examine the perceptions of auditors in Australia. This period was significant because it coincided with the implementation of stronger governance legislation in Australia through CLERP 9 by the Commonwealth of Australia in 2004 and the enactment of the Sarbanes-Oxley Act by US Congress in 2002. Despite being an important issue, there is limited research on the impact of audit committees on the external audit process. Previous studies indicate that auditors view audit committees as ineffective and lacking power, playing a passive role instead of an active one (Turley & Zaman, 2004).

The exchange with auditors is discussed in Munro Int. J. Audit. 11: 51-69 (2007) by The Author(s). The journal compilation is © Blackwell Publishing Ltd. in 2007, as referenced by Cohen et al.

Previous studies (Turley & Zaman, 2004; Goodwin-Stewart & Kent, 2006; Abbott et al. , 2003; Sharma, 2003; Carcello et al.) have explored the correlation between audit committees and audit fees through traditional audit fee models. However, given the current emphasis on audit committees, these findings may not be applicable and further investigation is required.

, There have been previous studies on the relationship between audit fees and audit committee characteristics, conducted by Coulton et al. in 2001, Goddard & Masters in 2000, and Collier & Gregory in 1996. These studies have produced mixed results, but have generally suggested that a

positive correlation between audit fees and audit committee characteristics means an increase in the demand for higher quality audits by committee members. Our study focuses on the supply of audit services and the views of auditors involved with audit committees, making it a unique contribution to the field.

Like all experimental designs, manipulating variables is limited by the number of available participants. In our study, this issue was compounded by the need for individuals with audit committee experience at partner or managerial level, a group which is not widely available. To address this challenge, we kept audit committee independence and expertise constant while altering the frequency of committee meetings and auditor attendance at these meetings. We opted for this approach for three distinct reasons.

Recent Australian evidence (Goodwin-Stewart & Kent, 2006) suggests a positive correlation between audit fees and the presence of an audit committee as well as the frequency of audit committee meetings. This finding requires further exploration to understand the supply-side perspective. Additionally, numerous studies (Turley & Zaman, 2004) have identified a link between higher financial reporting quality and audit committee meetings. Since financial reporting quality is a product of high-quality audits, investigating the effect of audit committee activity on the audit process is essential. Thirdly, DeZoort et al. revealed that...

(2002), achieving effectiveness of the audit committee relies primarily on diligence as a process factor, which is built on inputs related to composition, authority, and resources. In our study of the impact of the audit committee on the audit process, we focused on manipulating the meeting frequency as a proxy for diligence with the goal of determining how the audit committee process affects various

aspects of the audit. Our findings indicate that auditors anticipate a reduction in audit risk with the establishment of an audit committee, particularly when the committee meets frequently and includes auditor participation. Although the impact on audit efficiency is predicted to be slight, variances exist depending on how often meetings are held.

The audit testing and budgeted audit hours for junior members of the audit team are not expected to be impacted. However, the manager and partner may experience an increase in hours due to meeting frequency and attendance. The audit committee is anticipated to aid in resolving conflicts with management, but neither meeting frequency nor auditor attendance affects the committee's impact. Although the existence of an audit committee is expected to result in improved audit quality, this is not influenced by meeting frequency or auditor attendance. Expectations suggest that audit fees will rise as a result of both meeting frequency and audit partner participation in the meetings.

Although it is unclear whether our research findings can be applied to other scenarios, they present preliminary evidence on the impact of audit committees, their meeting frequency, and auditor attendance on external audits. This study holds significance for regulators, boards, audit committee members, and external auditors as they strive to balance various corporate governance mechanisms to enhance accountability. The following sections of this paper are organized as such: the second section discusses the study background, previous research results, and development of our research questions. The third section outlines our research methodology.

The study's findings and their discussion are presented in the fourth section, followed by drawing conclusions, discussing the study's implications, and noting opportunities for further research in the final

section.