Benchmarking Audit Committee Effectiveness in the UK

Abstract

This paper adopts the benchmarking approach to study audit committee effectiveness in the UK. Using FRRP sample spanning a decade from 1990 to 2000, this paper investigates factors leading to the violation of accounting and financial reporting standards by UK firms.

Our binary logit regression suggest the following results: First, smaller boards provide better incentive for monitoring; Second, consistent with previous studies, board and committee independence enhances reduce the likelihood of financial reporting problems; Third, contrary to popular suggestions, director share ownership might cause non-compliance with standards; Forth, outside directorships seem to enable non-executive directors to gain monitoring experience more quickly and is conductive to better financial reporting; Fifth, financial literacy and audit committee meeting frequency all reduce the probability of standard violations in financial reporting.

Keywords: Financial reporting, internal governance mechanism, Corporate governance, Logit regression

JEL Classification: M49, G34