Audit Committee Effectiveness: Did the Blue Ribbon Committee Recommendations Make a Difference?

Abstract:     
Several years prior to the 2002 passage of the Sarbanes-Oxley Act (SOX), SEC Chairman Arthur Levitt, identified problems regarding audit committee effectiveness. In response, in September 1998 the Blue Ribbon Committee (BRC) on Audit Committee Effectiveness was established jointly by the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD). The BRC issued its recommendations regarding the appropriate make-up and function of the audit committee on February 8, 1999. The current study attempts to measure the change in audit committee behavior (and presumably effectiveness) subsequent to implementing the BRC recommendations. The results of the study indicate that audit committees did become more active, thus implying a more serious effort to monitor management of their respective companies. However, questionable accounting practices and major corporate failures of 2001 and 2002, notably Enron and Worldcom, led to federal legislation, SOX, to regulate auditing and corporate financial reporting. The BRC recommendations appear to have been too little too late.

Keywords: audit committee, corporate governance, blue ribbon committee

JEL Classifications: M41, G34, G38

Accepted Paper Series