The Impact of Audit Committee Appointment and Reporting Arrangements on Audit Committees’ Independence

Abstract

This study investigates impact of audit committee appointment and reporting arrangements on audit committees’ independence in resolving auditor-management disputes. Corporate governance is one of the critical issues in business today. Corporate governance practice provides the structure through which the objectives of the company are set, the means of attaining those objectives are met and monitoring the performance of the companies is determined. Amongst the many branches of corporate governance, the financial reporting system is one which closely relates to the concept of corporate governance and accountability. The effect of sound corporate governance practices on the quality of financial reporting has recently received attention from many researchers, particularly in the U.S. (McMullen, 1996; Beasley et al., 2000; Abbott et al., 2000). In order to gain confidence in the organizations around the world, corporations must provide users with relevant, reliable and timely information in order to enhance the quality and integrity of the financial reporting process. (Imhoff, 2003). The role of auditing in the corporate governance structure is essential in the flow of quality information to the market participants. However, the governance literature has only just begun to consider the role of the audit as a component governance device (Anderson et al. 1993). Such a role emerged during the early 20th century when shareholders appointed representatives such as the board of directors, who serve their interests in the corporations. There responsibilities were to look out for the interests of the owners and to oversee the management of the entity. As part of their refinement process, these boards eventually added ‘audit committees’ as one of their sub-committees to address some of the more sensitive governance issues in these corporations.

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