Introduction
Audit committees have an important role to play in order to uphold both perceived and actual independence of the external audit process and this role will continue to evolve going forward (Cohen, Krishnamoorthy & Wright, 2002a). KPMG's Audit Committee Institute (2003) states:
“Today, as never before, the role, responsibility, and accountability of the audit committee continue to be the focus of lawmakers, regulators, and shareholders. The audit committee's role in overseeing a company's financial reporting process, including the audits (and auditors) of the financial statements, is more visible and demanding.” (KPMG, 2003).
The widening of the role of the AC is part of a greater plan in relation to the “globalisation” of corporate …show more content…
Through surveys, they found that 64% of auditors supported the BRC’s recommendation that all audit committee members should be financially literate and 45% said that independence from client management is an essential factor for an effective audit committee (Cohen, et al., 2002a). Management can sometimes have some sort of say on the composition of the board of directors, from where the audit committee is formed. If this is the case, it can only be a negative for the firm and management should be educated as to the value of a truly independent audit committee (Cohen, et al., 2002a). Agency theory can be used to demonstrate how crucial independence is from management in order for the audit committee and board in general to effectively monitor and control management’s behaviour. Agency theory contends that management act in their own self-interest, even if it harms the shareholders interest (Jensen and Meckling, 1976). This is due to the separation of ownership and control (Fama and Jensen, 1983). Hence, the primary attributes for a board member from the agency perspective are independence from management, and expertise in monitoring and control (Cohen, Krishnamoorthy & Wright, 2002b). An effective audit committee can be a crucial tool in managing risk but if it is under the control of management then it becomes redundant. Financial reporting quality is too imperative to leave only to management and their external auditors. A strong, competent and truly independent audit committee should be the third side of this triangle (Cohen, et al.,
Audit committees have an important role to play in order to uphold both perceived and actual independence of the external audit process and this role will continue to evolve going forward (Cohen, Krishnamoorthy & Wright, 2002a). KPMG's Audit Committee Institute (2003) states:
“Today, as never before, the role, responsibility, and accountability of the audit committee continue to be the focus of lawmakers, regulators, and shareholders. The audit committee's role in overseeing a company's financial reporting process, including the audits (and auditors) of the financial statements, is more visible and demanding.” (KPMG, 2003).
The widening of the role of the AC is part of a greater plan in relation to the “globalisation” of corporate …show more content…
Through surveys, they found that 64% of auditors supported the BRC’s recommendation that all audit committee members should be financially literate and 45% said that independence from client management is an essential factor for an effective audit committee (Cohen, et al., 2002a). Management can sometimes have some sort of say on the composition of the board of directors, from where the audit committee is formed. If this is the case, it can only be a negative for the firm and management should be educated as to the value of a truly independent audit committee (Cohen, et al., 2002a). Agency theory can be used to demonstrate how crucial independence is from management in order for the audit committee and board in general to effectively monitor and control management’s behaviour. Agency theory contends that management act in their own self-interest, even if it harms the shareholders interest (Jensen and Meckling, 1976). This is due to the separation of ownership and control (Fama and Jensen, 1983). Hence, the primary attributes for a board member from the agency perspective are independence from management, and expertise in monitoring and control (Cohen, Krishnamoorthy & Wright, 2002b). An effective audit committee can be a crucial tool in managing risk but if it is under the control of management then it becomes redundant. Financial reporting quality is too imperative to leave only to management and their external auditors. A strong, competent and truly independent audit committee should be the third side of this triangle (Cohen, et al.,