| || || Varma, Veer Singh|
| || || Effects of appointment and reporting structure on audit committee members' judgement|
Author:Varma, Veer Singh
Institution: University of the South Pacific.
Subject: Audit committees -- Fiji, Auditing, Internal -- Fiji, Corporate governance -- Fiji
Call No.: pac HF 5667 .15 .V37 2006
Copyright:10-20% of this thesis may be copied without the authors written permission
Abstract: Globalization of audit committees as a common mechanism of corporate governance is one of the most significant developments during the last two decades in several countries (including United States, Singapore, United Kingdom, Australia and Canada). Following the recent saga of corporate failures and the dramatic collapse of Enron, Worldcom, Cendant and HIH on the international arena and National Bank of Fiji locally (Fiji Islands), it provides continuing evidence of failures of corporate governance at all levels including senior management, boards of directors, the audit committee, external auditors, financial regulators and the accounting and auditing profession. Probably, at present this is the hottest issue and it provides a watershed opportunity for this study to contribute to our understanding of the value of audit committees as a governance mechanism and as a sub-committee of the board of directors by bringing together arguments associated with their appointment and reporting structure in the context of the agency theory approach. This study uses a hypothetical case to examine the perceptions of the board of directors and audit committee members from the large private sector corporations in Fiji and abroad about corporate governance practices relating to the judgment of audit committee members in the auditor-management dispute situations. This study uses agency theory to determine the relationship between the audit committees’ structure and their judgment. Two potential variable of audit committee structure is identified, the appointment and the reporting variable. These variables are then tested based on the accounting policy disagreement between the auditor and the management. Both variables were perceived to have some influence on the judgment of the audit committee members on the auditor – management dispute case. However, some interesting differences were found between the perceptions of the audit committee members appointed by (and reporting to) the board of directors and those audit committee members appointed by (and reporting to) the Independent oversight board, suggesting that appointment and reporting structure could impair audit committee independence. Four separate treatment samples are compared concurrently to determine the variances between these groups. Results of the experiment show significant differences for the two hypotheses (H1 & H2) and insignificant iv differences for the interaction effects. In particular, the experimental result support the proposition that an audit committee appointed by the board of directors will support the management in auditor – management dispute situations, while an audit committee appointed by the Independent oversight board supports the auditor in such dispute cases (H1). Similarly, the experimental result support the proposition that an audit committee reporting to the Board of directors will support the management in auditor - management dispute situations, while an audit committee reporting to the Independent oversight board supports the auditor in such dispute cases (H2). Therefore, from an agency theory perspective, experimental results support the association between the appointment and reporting variables on one hand and the judgment of the audit committee members on the other. That is, these results provide evidence that appointment and reporting variables are significant in explaining the judgment of the audit committees in corporate governance process even in the presence of other company specific variables that could affect the judgment of the audit committee members. For instance these variables include the participants’ financial accounting knowledge, financial statements analysis knowledge and the level of auditing knowledge. These variables were controlled in this research. Hence, this study proposes the need for audit committees as a means of avoiding future corporate collapses and other revelations of alleged fraud and corporate malfeasance locally. The findings of this study may also stimulate further debate and empirical research aimed at enhancing the future quality and integrity of the financial reporting process in the corporate governance arena. These results have important implications for regulators, professional accounting bodies and various stock exchanges in different countries, as they attempt to establish and to enhance their audit committees as part of their future corporate governance policy. Setting up of audit committees came about in direct response to demands like improving financial reporting and public accountability. Ultimately, this research focused on the need for greater audit committee independence in corporate governance process, and the significant effect of appointment and reporting structure on the audit committee judgment in auditor – management dispute situations.