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- Title
Audit Committee Effectiveness: An Empirical Investigation of the Contribution of Power.
- Authors
Kalbers, Lawrence P.; Fogarty, Timothy J.
- Abstract
Many official organizations and bodies have proposed an important role for audit committees in the improvement of financial reporting and control. Accordingly, audit committees have been established widely throughout the private sector. Despite this increased emphasis on the oversight responsibilities of audit committees, little empirical research has been conducted to investigate the effectiveness of audit committees and the factors associated with effectiveness. This study proposes that audit committee effectiveness is perceived as a function of the types and extent of audit committee power. A theoretical understanding of power is used to develop measures of power as it relates to audit committees and to explore audit committee effectiveness. A detailed survey instrument was sent to the partner-in-charge of the external audit, the director of internal auditing, and the chief financial officer associated with audit committees of 90 U.S. corporations. This sample offers multiple vantage points about audit committees in a variety of industries and in different sized corporations. The Linear Structural Relations model (LISREL) is used to test hypothesized relationships between audit committees' power and their effectiveness. LISREL offers a methodological enhancement over previously employed bivariate correlational and factor analytic methods by considering all hypothesized relationships simultaneously and by explicitly treating measurement error. Two models of the relationships between audit committee power and audit committee effectiveness are investigated. Two preliminary analyses confirmed the expectations regarding elements of effectiveness and power. Effectiveness consisted of three domains of oversight (financial reporting, external auditors, and internal controls). The other analysis yielded six dimensions of power (three each from institutional and personal bases). Both LISREL models used to relate power dimensions to effectiveness dimensions paint a complex picture. In terms of organizational power, formal, written authority coupled with observable support from top management play the most important roles in audit committee power as it relates to effectiveness. With regard to power sources dependent on the personal attributes of audit committee members, the will to act (diligence) constitutes the most significant power source affecting effectiveness.
- Publication
Auditing: A Journal of Practice & Theory, 1993, Vol 12, Issue 1, p24
- ISSN
0278-0380
- Publication type
Academic Journal