The Audit Committee and Its Importance - Literature review Example

?The Audit Committee and Its Importance Table of Contents Table of Contents 2 Introduction 3 Discussion 3 Historical Background 3 Methodologies 5 Previous Studies on the Topic 6 Mainstream versus Alternative Viewpoints 7 Principle Questions Being Asked 8 General Conclusions that are being Drawn 9 Conclusion 9 References 10 Introduction Purposefully, structured audit committees have been set up in modern organisations, which are bestowed with the responsibility to audit the internal as well as external financial transactions conducted by the company. Among the various responsibilities from ensuring transparency in financial reporting to assessing the overall financial performances of the company, audit committees are also responsible to monitor corporate financial functioning with the purpose of assuring its long-run sustainability. The aim of this essay has been thus concentrated on reviewing selected literatures based on the importance of audit committee in the modern day business context, working as a monitor as well as a guarantor of viability in corporate financial reporting. The ultimate objective of the essay will further emphasise the power held by audit committee to affect the corporate financial operations following critical evaluation of secondary evidences. Discussion Historical Background Gendron & Be?dard (2006) revealed that it is owing to this rising pressure that organisations are driven towards maintaining transparency at every level of the managerial processes. Correspondingly, as financials hold considerable importance in managerial processes, the influence of audit committee also expands to a substantial extent. Drawing from this inference made by Gendron & Be?dard (2006), it can be affirmed that comparative to the traditional business contexts, competition and influences of external forces have increased in manifolds in the 21st century. These external forces, such as rising competition, globalisation, changing customers’ behaviour and governmental interventions further increase pressure on the organisation to perform and sustain in the industry. Emphasising the significance of audit committees, Cohen & et. al. (2002) further revealed that corporate governance, as a regulatory body of modern organisations, also imposes substantial impacts on the audit process’ significances and correspondingly on audit committees’ functioning. Notably, corporate governance itself is a modern concept of effective organisational management. Therefore, correlating the supervisory functions of corporate governance with the growing significance of auditing and audit committees shall be deemed rationale, when justifying the post modern advancements of corporate financial performances in comparison to the traditional forms. Considering these aspects, audit committees have been argued as a mosaic of corporate governance by Cohen & et. al. (2002), acting as the segment responsible for deterring fraud in the process of ensuring effective financial reporting. Making critical evaluations based on this presumption, Turley & Zaman (2007) revealed that the audit committees’ influences work stronger and more apparent outside the formal system followed when operating in alliance with corporate governance participants in an organisation. Turley & Zaman (2007) further argues that audit committees can be used for positive as well as negative intentions to gain governance control through political incentives within the organisation apart from applying its functions to raise transparency in the corporate reporting procedure. Based on the study of Turley & Zaman (2007), it can thus be inferred that on a positive note, audit committees may pressurise corporate participants to maintain transparency, but from a negative viewpoint, it also acts as a tool to obtain greater power in the authoritative construction of the organisation. However, in either ways, audit committee is signified to hold considerable power in influencing the overall organisational effectiveness. Methodologies Cohen & et. al., (2002) initiated an explanatory interview process with regard to addressing the research questions. 36 auditors participated in interview process from the US from various age groups in order to ensure better generalisability of the research findings. Giving an elaborated account of the research methodology applied by the researchers, the article revealed that the 36 selected respondents included 11 senior members in the audit committee from Big 5 firms in northeast US along with 1 national firm. These 11 senior members had approximately 3.6 years of experience on an average. The remaining 25 respondents included 12 managers with 9.3 years of average experience and 13 partners with 20.8 years of experience from the same firms (Cohen & et. al., 2002). Maintaining highest possible extent of confidentiality, the study thus ensured generalised and reliable findings. Correspondingly, Gendron & Bedard (2006) adopted the same approach of interview but with the top officials of three listed Canadian companies, which were expected to deliver a clear notion on the effectiveness of audit committee. The interview was conducted in a semi-structured format with the intention to enable the respondents to express themselves as freely as they intend to and thereby obtain a realistic understanding of the issue in concern. A detailed description of all the interviews conducted was presented through the article taking into account both the favourable and contradictory views deciphered by the respondents. Hence, even though the number of respondents was less than 50, the obtained findings can be affirmed reliable in this study. Accordingly, Turley & Zaman (2007) adopted a case study approach with regard to address the questions of the research. Based on direct meeting with the respondents, which included the external auditors, the internal auditors and the prime members of the board of directors associated with the audit committee of a UK listed international company. Notably, due consents were obtained from the related governing parties for the research conducts, about which an account is also presented in the article. Previous Studies on the Topic Based on a personal interview process, Cohen & et. al. (2002) revealed that all the auditors in an organisation use the information of corporate governance in the process of auditing. Almost all the respondents of the interview stated that corporate governance is considered as a prime factor in the planning phase, execution phase as well as in the reviewing phase of auditing. However, it would also be crucial to state that the implementation of corporate governance in an organisation among the senior management changed in accordance to their designations (Cohen & et. al., 2002). According to the study of Turley & Zaman (2007), unofficial association among the members of the audit committee leads to considerable impacts on their working process. It has also been noted from the responses that the most vital affects of the informal association of the audit committee participants and the corporate governance executors strongly and mostly in negative forms affect financial operations. Notably, the direct influence of such informal association can be witnessed on the power relations changes occurring within the organisation, having considerable influences on its financial practices (Turley & Zaman, 2007). Correspondingly, Gendron & Bedard (2006), after analysing the responses of the top level officers and internal audit members of the three top listed Canadian companies, affirmed that the effectiveness of the audit in an organisation is directly dependent on the expertise as well as independence of members of the audit committee. Contextually, the interview of the audit members in the three companies selected by the researchers also depicted that the audit committee members always seek to ensure their maximum time and energy towards reviewing financial reports in meetings, which exhibits its formal construct. These reflective interpretations among the members further ensure effectiveness of the audit committee to a certain extent (Gendron & Bedard, 2006). Mainstream versus Alternative Viewpoints Cohen & et. al. (2002), Gendron and Bedard (2006) and Turley and Zaman (2007) were quite effective in presenting both mainstream and alternative viewpoints to the concerned issue of audit committee significance and power influences. For instance, Cohen & et. al. (2002) depicted about the involvement of senior management in setting the tone of audit committee and its approaches. Accordingly, Gendron and Bedard (2006) depicted about the effectiveness of audit committee. Turley and Zaman (2007) presented a brief understanding about the power conflicts concentrating on audit committee influences in financial reporting and corporate governance practices as well. However, in contrast to this mainstream views, their studies illustrated certain alternative viewpoints as well, arguing that the role of Corporate Executive Officers (CEOs) in audit committees, the role of corporate governance and the impact of external pressures have strong influences on the actions of the internal audit committee, which can impose negative impacts and limit the advantages of the entire system. It may be argued as a major cause why in certain cases, audit committees fail to disrupt fraudulent conducts. Principle Questions Being Asked Owing to the limitation of the data availability and accessibility, the impact of organisational change and various other internal factors on the audit committee were unable to be depicted through the reviewed researches. Furthermore, it has been analysed that the answers delivered by respondents in the reviewed studies were mostly from their general experiences, which further raises question over the correctness of the gathered information. There are also certain questions associated with the aspects of client-auditor relationship, which largely remained unanswered in the referred studies. However, the main question raised in the three studies centralised on the factors that influenced the effectiveness and soundness of the audit committee along with the power held by the auditing group to encourage or mitigate fraudulent operations executing when corporate financial reporting. General Conclusions that are being Drawn The study related to the significance and power held by audit committee explains various core elements and unexplored facts concerning its influences and influencing factors as well. Hence, reviewing the studies in the above discussion, a general conclusion can be drawn that audit committee is an integral part of an organisation that works towards ensuring validity and correctness of financial reporting in organisation, which might be distorted owing to the limited transparency in power shifts observed within the organisation. Its effectiveness therefore tends to be dependent on various diverse aspects in the post-modern organisational context. Conclusion Audit committee in any organisation is made up of senior board members under the supervision of the CEO. As mentioned in the above discussion, the effectiveness of the committee would be directly depended on various internal and external factors. Moreover, owing to certain limitations associated with the studies, certain questions arise with respect to the power and importance of audit committee subjected to further investigations. References Cohen, J. & et. al., 2002. Corporate Governance and the Audit Process. Contemporary Accounting Research, Vol. 19, No. 4, pp. 573–94. Gendron, Y. & Bedard, J., 2006. On The Constitution of Audit Committee Effectiveness. Accounting, Organizations and Society, Vol. 31, pp. 211–239. Turley, S. & Zaman, M., 2007. Audit Committee Effectiveness: Informal Processes and Behavioural Effects. Accounting, Auditing and Accountability Journal, Vol. 20, No. 5, pp. 1-29. Read More