The Voluntary Formation of an Audit Committee

Abstract:     
Audit committees are increasingly viewed as a key element of good corporate governance. In some countries their formation is mandatory, and in others it is voluntary. In the Australian setting, only the largest listed companies are required to form an audit committee, although many smaller companies do so voluntarily. There are few regulations over smaller companies, and the operations of audit committees. In a jurisdiction which combines mandatory and voluntary regulatory regimes, this study examines the relative impact of the regimes on audit committee diligence, on corporate governance and on board decision-making. It finds that mandatory audit committees are more diligent than voluntary ones, in terms of meeting frequency, but trade-offs are made between meeting frequency and the use of a Big 4 auditor, and the board’s decision-making is not consistently better. There is evidence that voluntary audit committees are established for legitimacy.

Number of Pages in PDF File: 34

Keywords: audit committee, corporate governance

JEL Classification: M42

working papers series