Audit Committee Effectiveness: Informal Processes and Behavioural Effects

31 Pages Posted: 12 Dec 2007

See all articles by Stuart Turley

Stuart Turley

University of Manchester - Faculty of Humanities - Manchester Business School - Division of Accounting and Finance

Mahbub Zaman

Hull University Business School

Date Written: 2007

Abstract

Purpose of this paper - This paper seeks to investigate the conditions and processes affecting the operation and potential effectiveness of audit committees, with particular focus on the interaction between the audit committee, individuals from financial reporting and internal audit functions and the external auditors.

Design/methodology/approach - A case study approach is employed, based on direct engagement with participants in audit committee activities, including the audit committee chair, external auditors, internal auditors, and senior management.

Findings - We find that informal networks between audit committee participants condition the impact of the audit committee and that the most significant effects of the audit committee on governance outcomes occur outside the formal structures and processes. An audit committee has pervasive behavioural effects within the organization and may be used as a threat, an ally and an arbiter in bringing solutions to issues and conflicts. Audit committees are used in organizational politics, communication processes and power plays and also affect interpretations of events and cultural values.

Research limitations/implications - Further research on audit committee and governance processes is needed to develop better understanding of effectiveness. Longitudinal studies, focusing on the organizational and institutional context of audit committee operations, can examine how historical events in an organization and significant changes in the regulatory environment affect current structures and processes.

Originality/value - The case analysis highlights a number of significant factors which are not fully recognised either in theorizing the governance role of audit committees or in the development of policy and regulations concerning audit committees but which impinge on their governance contribution. They include (i) the importance of informal processes around the audit committee; (ii) its influence on power relations between organizational participants; (iii) the relevance of the historical development of governance in an organization; (iv) and the possibility that the audit committee's impact on governance may be greatest in non-routine situations.

Keywords: audit committee, governance, regulation, internal control, informal processes

JEL Classification: M41, M49, G34

Suggested Citation

Turley, Stuart and Zaman, Mahbub, Audit Committee Effectiveness: Informal Processes and Behavioural Effects (2007). Available at SSRN: https://ssrn.com/abstract=1069911 or http://dx.doi.org/10.2139/ssrn.1069911

Stuart Turley

University of Manchester - Faculty of Humanities - Manchester Business School - Division of Accounting and Finance ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

Mahbub Zaman (Contact Author)

Hull University Business School ( email )

Hull, HU6 7RX
United Kingdom

HOME PAGE: http://www.mahbubzaman.com

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