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    On the Constitution of Audit Committee Effectiveness
    research summary posted May 3, 2012 by The Auditing Section, last edited May 25, 2012, tagged 13.0 Governance, 13.06 Board/Audit Committee Processes, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
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    Title:
    On the Constitution of Audit Committee Effectiveness
    Practical Implications:

    The results of this study are important for regulators when considering corporate governance processes and governance disclosures.  This study also provides insight into the importance of small events surrounding audit committee meetings, such as members’ style of questioning and insistence on managers swiftly adopting corrective measures to solve problems highlighted in internal audit reports.  The results provide insights into the process with which audit committee attendees define their effectiveness.  The results call into question the effectiveness of recent regulatory attempts to strengthen formal disclosures.

    Citation:

    Gendron,Y., and J. Bédard. 2006. On the constitution of audit committee effectiveness. Accounting, Organizations and Society 31(3):
    211-239.

    Keywords:
    Audit committee effectiveness, social constructivist
    Purpose of the Study:

    Corporate stakeholders increasingly rely on the audit committee to constrain managers’ self-interested behavior.  Previous practitioner and academic recommendations for audit committee effectiveness have focused on the composition and responsibilities of the audit committee, as well as the expertise and independence of audit committee members.  This paper examines the meaning of audit committee effectiveness through the eyes of individuals who attend meetings: corporate managers, auditors and audit committee members.  The authors attempted to understand the process by which audit committee effectiveness is internally developed and sustained by audit committee meeting attendees.  The authors use sociological techniques to examine: 

    • how the activities of audit committees are perceived by attendees.
    • how the perceptions of audit committee effectiveness are influenced by both the symbolic and substantive layers of meaning. 
      The symbolic ceremonies and rituals of audit committee meetings include agenda items and best practices.  The substantive processes include one’s line of questioning, both during and outside of meetings, in order to become comfortable with their company’s financial reports and internal controls.   
    • how members’ backgrounds (expertise and independence) influence perceptions of audit committee effectiveness.
    Design/Method/ Approach:

    The authors collected their evidence via interviews with the CEO, CFO, internal auditor, audit partner, and audit committee members associated with 3 Canadian corporations.  Interviewees were asked to describe the process of a typical audit committee meeting, the role of the audit committee, and difficult issues faced by the committee.  The interviews were conducted primarily in 2000 and 2001 and updated for post-Enron insights in 2004. 

    Findings:
    • The authors suggest there is a heterogeneity in audit committee participants’ emotions, which varies from confidence to hopefulness to anxiety.  Attendees appeared to be comfortable with reviewing the financial statements and reviewing internal control systems and less comfortable with auditor dismissal.  This heterogeneity influences attendees’ configurations of the meaning of effectiveness, both from an intra- and between-individual perspective.
    • The authors find that audit committee members perceive extensive financial and accounting background as significant in making their audit committee effective.  Formal competencies appear to generate feelings of confidence in committee members, managers, and auditors. 
    • The ceremonial features of meetings contribute to perceptions of effectiveness among audit committee members, managers and auditors.  The “ideal” ceremonial and symbolic features include: structured and well-organized meetings, consistent and orderly agendas, and best practice suggestions from the audit firm.
    • The substantive features of meetings also contribute to perceptions of effectiveness.  Interviewees imply that demonstrations of toughness by the internal auditor and tensions and divergences between the internal auditor and corporate managers are indications of independence and effectiveness.  Committee members perceive their relevant and challenging questions as
      key to demonstrating their effectiveness and establishing their self-confidence.  Attendees expect auditors to keep them informed regarding accounting standards and governancepractices.  Thus, the effectiveness appears to be linked with the extent that the audit committee is able to require management and auditors to account for their positions on potentially sensitive topics. 
    • The meaning of audit committee effectiveness develops in large part through the interactions and ongoing reflections of attendees concerning the many small events and relatively unremarkable actions that take place within and around meetings.  Thus, regulator efforts at making corporate governance more transparent through the disclosure of input and process measures, are fundamentally limited due to the nature of activities that surround audit committee meetings. Moreover, the emotional heterogeneity that characterizes members’ effectiveness meanings are not easily translated into formal disclosures and detailed indicators of effectiveness. Because of these, the authors argue that several aspects of corporate governance may be doomed to remain in the shadows.
    Category:
    Governance, Corporate Matters
    Sub-category:
    Board/Audit Committee Processes, Audit Committee Effectiveness
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