The Challenge of Improving Corporate Governance by Creating Effective Audit Committees.

Author(s)

Dr. Madan Lal Bhasin ,

Download Full PDF Pages: 25-46 | Views: 445 | Downloads: 98 | DOI: 10.5281/zenodo.3464844

Volume 5 - August 2016 (08)

Abstract

Even though there are many measures to put corporate governance (CG) in place and practice, an important tool essential for the success is the effective functioning of an audit committee (AC). As the eyes and ears of the board, the AC plays a pivotal role in helping to stop or reverse the rise in reported fraud incidents worldwide. Now-a-days, an AC is being looked upon as a distinct culture for CG and has received a wide-publicity across the globe. Regulation has bolstered the role of the AC in past years. Government authorities, regulators and international bodies all have indicated that they view an AC as a potentially powerful tool that can enhance the reliability and transparency of financial information. Being mandatory under the SEBI’s Clause 49 of the Listing Agreement, an AC can be of great help to the board in implementing, monitoring and continuing ‘good’ CG practices to the benefit of the corporation and all its stakeholders. This study performs a ‘content’ analysis on the AC reports of the top 500 listed companies in India during 2010 to 2013 to determine the information content of these reports and the extent to which these reports conform to the Clause 49 requirements of the SEBI. Also, discussed are the various trends about an AC characteristics viz., size, composition, activity, as well as, the extent of non-audit services provided by auditors in the top 500 listed Indian companies. The 2013 Companies Act in India makes comprehensive reforms to virtually all areas affecting corporate governance. Thus, an effective AC can be a key feature of a strong CG culture, bringing significant benefits to an organization. The effectiveness of the ACs is based on the characteristics of independence, financial expertise and diligence

Keywords

Improving corporate governance, effective audit committees, SEBI Clause 49, Sarbanes-Oxley Act, listing agreement, board of directors, financial reporting, India. 

References

  1. Abbott, L.J., Parker, S., Peters, G.F., and Rama, D.V. (2007), Corporate governance, audit quality, and the SOX Act: evidence from internal audit outsourcing, The Accounting Review, 82 (4), 803-35.
  2. Abdulaziz, A. (2014), Corporate Governance Role of the Audit Committees in the Banking Sector: Evidence from Libya, International Journal of Social, Behavioural, Educational, Economic, Business and Industrial Engineering, 8(2), 592-597.
  3. Afsharipour, A. (2009), Corporate governance convergence: lessons from the Indian experience, Northwestern Journal of International Law & Business, 29(1), 335-402.
  4. Agoglia, C.P., Doupnik, T.S. and Tsakumis, G.T. (2011), Principle-based versus rules-based accounting standards: the influence of standard precision and audit committee strength on financial reporting decisions, The Accounting Review, 86(3), 747-767.
  5. Aguilera, R. and Cuervo-Cazurra, A. (2009), Codes of good governance, Corporate Governance: an International Review, 17(3), 376-387.
  6. Ahmed, IM. and Anis, C. (2015), Does Corporate Governance Drive Capital Structure of Johannesburg listed companies? International Journal of Business, Economics and Law, 6(1), April, 23-34.
  7. Ahmed, H.J.A., Shaikh, J.M. and Isa, A.H. (2009), A comprehensive look at the re-examination of the re-evaluation effect of auditor switch and its determinants in Malaysia, International Journal of Managerial and Financial Accounting, 1(3), 268-291.
  8. Allen, J., (2008), Asian Corporate Governance Association: Corporate Governance Seminar, organized by Chubb Insurance and Solidarity, Bahrain, April 16, page 10.
  9. Al-Mudhaki, J. and Joshi, P.L. (2004), The role and functions of audit committees in the Indian corporate governance: empirical findings, International Journal of Auditing, 8(1), 33-47.
  10. Amran, A., Ishak, M.S., Zulkafli, A.H. and Nejati, M. (2010), Board structure and extent of corporate governance statement, International Journal of Managerial and Financial Accounting, 2(4), 383-400.
  11. Barron, B. (2015), Audit Committee Priorities for 2015, Corporate Governance Journal, Dec. Available at MAZARS.
  12. Bamahros, H.M. and Bhasin, M.L. (2016), Audit Committee Characteristics and Unexpected Accruals: An Empirical Study of Malaysia, Wulfenia Journal KLAGENFURT, 23(3), March, 161-199.
  13. Balasubramanian, B.N., Black, B.S. and Khanna, V.S. (2008), Firm-level corporate governance in emerging markets: a case study of India, Northwestern Law & Economics Research, July, Paper No. 09-14, 1-50.
  14. Balasubramanian, B.N. (2014), Strengthening Corporate Governance in India: A Review of Legislative and Regulatory Initiatives in 2013-14, June, IIMA WP 2014-06-04, 1-54.
  15. Beasley, M., Carcello, J.V., Hermanson, D.R. and Neal, T.L. (2009), The audit committee oversight process, Contemporary Accounting Research, Spring, 26(1), 65-122.
  16. Beattie, V. (2007), Lifting the lid on the use of content analysis to investigate intellectual capital disclosures, Accounting Forum, 31 (2), 129-163.
  17. Bhasin, M.L. (2010), Corporate Governance Disclosure Practices: The Portrait of a Developing Country, International Journal of Business and Management, 5(4), 150-167.
  18. Bhasin, M.L. (2011), Corporate Governance Reporting Practices: An Exploratory Study of Asia, World Review of Entrepreneurship and Sustainable Development, 7(1), January-March pp. 1-29.
  19. Bhasin, M.L. (2012), Corporate Governance through an Audit Committee: An Empirical Study International Journal of Managerial & Financial Accounting, 4(4), 339-365.
  20. Bhasin, M.L. (2012a), Audit Committee Mechanism to Improve Corporate Governance: Evidence from a Developing Country, Modern Economy, 3(7), November, 856-872.
  21. Bhasin, M.L. (2013), Audit Committee Scenario & Trends: Evidence from an Asian Country, European Journal of Business and Social Sciences, 1(11), February, 1-23.
  22. Bhasin, M.L. (2013a), Corporate Accounting Scandal at Satyam: A Case Study of India‘s Enron, European Journal of Business and Social Sciences, 1(12), March, 25-47.
  23. Bhasin, M.L. (2013b), Corporate Accounting Fraud: A Case Study of Satyam Computer Limited, Open Journal of Accounting, April, 2(2), 26-38.
  24. Bhasin, M.L. (2015), Menace of Frauds in Banking Industry: Experience of a Developing Country, Australian Journal of Business and Management Research, 4(12), April, 21-33.
  25. Bhasin, M.L. (2015a), Forensic Accounting: Perspectives and Prospects, The Pakistan Accountant, October-December, 44-48 
  26. Bhasin, M.L. (2015B), An Empirical Study of Frauds in the Banks, European Journal of Business and Social Sciences, 4(7), 1-12.
  27. Bhasin, M.L. (2015C), Creative Accounting Practices in the Indian Corporate Sector: An Empirical Study, International Journal of Management Science and Business Research, 4(10), October, 35-52.
  28. Bhasin, M.L. (2016), Contribution of Forensic Accounting to Corporate Governance: An Exploratory Study of an Asian Country, International Business Management Journal, 10(4), 479-492.
  29. Bhasin, M.L. (2016a), Survey of Creative Accounting Practices: An Empirical Study, Wulfenia Journal KLAGENFURT, 23(1), January, 143-162.
  30. Bhasin , M.L. (2016b), Strengthening Corporate Governance Through an Audit Committee: An Empirical Study, Wulfenia Journal KLAGENFURT, 23(2), 2-27.
  31. Bhasin , M.L. (2016C), Survey of Skills Required by the Forensic Accountants: Empirical Evidence from a Developing Economy, Wulfenia Journal KLAGENFURT, 23(4), April, 86-112.
  32. Bhasin, M.L. (2016D), Fraudulent Accounting Practices at Satyam: How Senior Management Abused Creative Accounting Methodology?, International Journal of Management Sciences and Business Research, 5(6), 1-24.
    Bhasin, M.L. (2016E), Forensic Accounting in Asia: Perspectives and Prospects, International Journal of Management and Social Sciences Research, 5(6), July, 25-38.
  33. Bhasin, M.L. (2016F), The Role of Technology in Combatting Bank Frauds: Perspectives and Prospects, EcoForum Journal, 5(2:9), Aug., 200-212.
  34. Bhasin, M.L. (2016G), Voluntary Reporting of Corporate Governance Information in Annual Reports: An Empirical Study of an Asian Country, International Journal of Management Sciences and Business Research, July 5(7), 71-95.
  35. Bhandari, V., Lamba, A. and Seth, R. (2014), Does Corporate Governance Increases Firm Performance and Value Among Specific Sectors in Indian Context? Business Analysist, Special Edition, March, 1-32.
  36. Bindal, C.M (2011), Audit committee: highly integral to corporate governance, Chartered Accountant in Practice, Manupatra publications, 1-9.
  37. Carcello, J.V., Hermanson, D.R. and Ye, Z.S. (2011), Corporate governance research in accounting and auditing: insights, practice implications, and future research directions, Auditing: A Journal of Practice & Theory, 30(3), August, 1-31.
  38. Caskey, J., Nagar, V. and Petacchi, P. (2010), Reporting bias with an audit committee, The Accounting Review, 85(2), 447-481.
  39. Cohen, J., Krishnamoorthy, G. and Wright, A. (2008), Form versus substance: The implications for auditing practices and research of alternative perspectives on corporate governance, Auditing: A Journal of Practice & Theory, November, 27(2), 181- 98.
  40. Cohen, J., Krishnamoorthy, G. and Wright, A. (2010), Corporate governance in the post-sarbanes-oxley era: auditors‘ experiences, Contemporary Accounting Research, 27(3), Fall, 751-786.
  41. Chatterjee, D. (2011), Audit committee observation/recommendations versus practices as a compliance of corporate governance in India, DLSU Business & Economics Review, 20(2), 67-78.
  42. DeFond, M.L., Hann, R.N. and Hu, X. (2005), Does the market value financial expertise on audit committees of Boards of Directors?, Journal of Accounting Research, 43(2), May, 153-95.
  43. Deloitte (2015), Corporate Governance: Tracking International Developments, CII, Dec. Available at ww.2.deloitte.com.
  44. Dhaliwal, D., Naiker, V. and Navissi, F. (2010), The association between accruals quality and the characteristics of accounting experts and mix of expertise on audit committees, Contemporary Accounting Research, 27(3), 787-827.
  45. Dignam, A. (2007), Capturing corporate governance: the end of the UK self-regulating system, International Journal of Disclosure and Governance, 4(2), 24-41.
  46. Emmerich, A.O., Racz, G.N. and Unger, J. (2005), Composition of the audit committee: ensuring members meet the new independence and financial literacy rules, International Journal of Disclosure and Governance, 2(2), February, 67-80.
  47. Fichtner, J.R. (2010), The recent international growth of mandatory audit committee requirements, International Journal of Disclosure and Governance, 7(3), 227-243.
  48. FICCI Grand Thornton Report (2009), Corporate governance review: India technical report, available online at http://www.wcgt.in/html/publications/ficci_gt_cgr.php.
  49. Goel, U., Bansal, N. and Sharma, A.K. (2015), Impact of Corporate Governance Practices on Working Capital Management Efficiency, Indian Journal of Finance, 9(1).
  50. Hakim, F. and Omri, A. (2009) Does auditor reputation reduce information asymmetry?, International Journal of Managerial and Financial Accounting, 1(3), 235-247.
  51. Johnstone, K., Li, Chan and Rupley, K. H., (2011) Changes in corporate governance associated with the revelation of internal control material weaknesses and their subsequent remediation, Contemporary Accounting Research. 28(1), 331-383.
  52. Jha, V.S. and Mehra, V. (2015), CG Issues, practices and concerns in the Indian Context: A Conceptual Study, ICTACT Journal of Management Studies, May 1(2), 93-102.
  53. Kumar, K. (2015), Role of Audit Committee on CG, Indian Journal of Applied Research, August, 5(8), 649-651.
  54. Krishnan, G.V. and Visvanathan, G. (2008), Does the SOX definition of an accounting expert matter?, Contemporary Accounting Research, 25(3), Fall, 827-57.
  55. Krishnan, J. and Lee, J.E. (2009), Audit committee financial expertise, litigation risk and corporate governance, Auditing: A Journal of Practice & Theory, May, 28(1), 241-61.
  56. Lassila, D. R., Omer, T.C., Shelley, M.K. and Smith, L.M. (2010), Do complexity, governance, and auditor independence influence whether firms retain their auditors for tax services?, Journal of the American Taxation Association, 32(1), 1–23.
  57. Madhani, P. (2015), Study of relationship between board comittees and corporate governancepractices of Indian firms, Sona Global Management Review, 9(3). May, 1-19
  58. Narayanaswamy, R. Raghunandan, K. and Rama, D.V. (2014), Satyam Failure and Changes in Indian Audit Committees, Working paper no. 471, IIM, Bangalore.
  59. OECD (2014), Principles of Corporate Governance 2014. Available at www.oecd.org. Paula, L. (2016), Top tips for deterring fraud: a guide for ACs, Corporate Compliance Insights. Available at www. http://corporatecomplianceinsights.com/top-tips-for-deterring-fraud-a-guide-for-audit-committees/
  60. Prentice, R.A. and Space, D.B. (2007), Sarbanes-Oxley as quack corporate governance: how wise is the received wisdom?, Georgetown Law Journal, 95(6), 1843-1909.
  61. Pucheta-Martinez, M.C. and de Fuentes, C. (2007), The impact of audit commit characteristics on the enhancement of the quality of financial reporting: an empirical study in the Spanish context, Corporate Governance: An International Review, 15(2), 1394- 1412.
  62. Puri, R., Trehan, R. and Kakkar, H. (2010), Corporate governance through audit committee: a study of the Indian corporate sector, The IUP Journal of corporate governance, 9(1&2), 47-56.
  63. PwC (2015), The Audit Committees Role in Deterring Fraud, Audit Committee Excellence Series, available at www.pwc.com. Raghunandan, K. and Rama, D. (2007), Determinants of audit committee diligence, Accounting Horizons, 21(3), 265-280.
  64. Rajput, N. and Bharti (2015), Shareholder Types, Corporate Governance and Firm Performance, Asian Journal of Finance and Accounting, 7(1), 45-70.
  65. Sarkar J. and Sarkar, S. (2010), Auditor and audit committee independence in India, Working Paper Series under Financial sector regulatory reforms project at IGIDR.
  66. Sharma, D. (2007), When audit committees do not stack up?, The Director, May, 16-17.
  67. Sharma, V.D., Sharma, D.S. and Ananthanarayanan, U. (2011), Client importance and earnings management: the moderating role of audit committees, Auditing: A Journal of Practice & Theory, August, 30(3), 125-156.
  68. Sharma, V., Naiker, N. and Lee, B. (2009), Determinants of audit committee meeting frequency: Evidence from a voluntary governance system‘, Accounting Horizons, 23(3), 245-63.
  69. Shrivastav, S.M. and Kalsie, A. (2015), A review on corporate governance in India: impact on firm performance, International Journal of Business and Administration Research Review, 1(11), July-Sept. 170-174.
  70. Taruna A.S. (2015), A Study on Corporate Governance Practices in India, International Journal of Applied Research, 1(9), 815- 821.
  71. UNCTAD (2006), Guidance on good practices in corporate governance disclosure, New York.
  72. Ward, R.D. (2009), Audit committee leaders face increasing workload, Financial Executive, March, 28-31.
  73. Zabihollah, R., Kingsley, O. and George, M. (2003), Improving corporate governance: the role of audit committee disclosures, Managerial Auditing Journal, 18(6&7), 530-537.

Cite this Article: