Encyclopedia of Law and Economics

2019 Edition
| Editors: Alain Marciano, Giovanni Battista Ramello

Audit Committees

  • Patrick VelteEmail author
Reference work entry
DOI: https://doi.org/10.1007/978-1-4614-7753-2_74

Abstract

A profound international competition between corporate governance and corporations constitutions systems has been going on since the middle of the last century (La Porta et al. 2002, p. 1147). A basic categorization has been made with regard to the ratio between internal and external corporate governance as well as to the management and supervising structure of publicly owned firms (one-tier and two-tier system). Amongst others, a partial convergence of both constitutional models indicates a high acceptance of audit committees in both systems of corporation’s constitutions. However, the committee’s competences are different in the one- and two-tier system as well as the main motives of their implementation. Within the two-tier system, the audit committee has been implemented to support and relieve the supervisory board in preparing various tasks. In addition the committee is expected to strengthen corporate governance as a consequence of the high number of supervisory board members. Moreover, the appointment of financial experts as audit committee members is to counteract the lack of respective knowledge in the supervisory board. In contrast, the one-tier system is by trend forcing a stronger personal separation between executive and nonexecutive directors in the board. In addition, major importance is placed on the independence of the committee members in the one-tier system which is usually symptomatic for the separation of functions within the two-tier system. As with the example of audit committees, it becomes clear that both models try to use the advantages of the respective constitutional systems. However, a general superiority of one system cannot be concluded.

The aim of the present analysis is to provide an overview of empirical survey results with regard to the acceptance of audit committees on the capital market and the influence of audit committees on corporate governance. Major attention is paid to a statistically proven relation between certain corporate governance variables and the implementation of audit committees, especially with regard to the independence and financial expertise of its members. The German stock corporation law will be used as an example to demonstrate the importance of audit committees within the two-tier system. Similarly, the US-American capital market with its particular regulations of the stock exchange commission will be used for the one-tier system.

This is a preview of subscription content, log in to check access.

References

  1. Abbott, Park, Parker (2000) The effects of audit committee activity and independence on corporate fraud. Manag Finance 26:55–67Google Scholar
  2. Abbott et al (2003a) The association between audit committee characteristics and audit fees. Auditing 22:17–32CrossRefGoogle Scholar
  3. Abbott et al (2003b) An empirical investigation of audit fees, nonaudit fees, and audit committees. CAR 20:215–234Google Scholar
  4. Abbott, Parker, Peters (2004) Audit committee characteristics and restatements. Auditing 23:69–87CrossRefGoogle Scholar
  5. AICPA (1967) Executive committee’s statement. JoA 163:10–11Google Scholar
  6. Altmeppen (2004) Der Prüfungsausschuss. ZGR 33:390–415CrossRefGoogle Scholar
  7. Anderson RC, Mansi SA, Reeb DM (2003) Board characteristics, accounting report integrity, and the cost of debts. Working paper, Washington, DCGoogle Scholar
  8. Ashbaugh, Collins, LaFond (2004) Corporate governance and the cost of equity capital. The University of Wisconsin, MadisonGoogle Scholar
  9. Beasley et al (2000) Fraudulent financial reporting. Consideration of industry traits and corporate governance mechanisms. Account Horiz 14:441–454CrossRefGoogle Scholar
  10. Bédard, Chtourou, Courteau (2004) The effect of audit committee expertise, independence and activity on aggressive earnings management. Auditing 23:13–35CrossRefGoogle Scholar
  11. BGH (1982) Bundesgerichtshof II ZR 27/82 vom 15.11.1982. NJW 36:991–992Google Scholar
  12. Bhagat, Black (1999) The uncertain relationship between board composition and firm performance. Bus Lawyer 54:921–963Google Scholar
  13. Carcello, Hermanson, Neal (2002) Disclosures in audit committee charters and reports. Account Horiz 16:291–304CrossRefGoogle Scholar
  14. Coenenberg, Reinhart, Schmitz (1997) Audit committees. DB 50:989–997Google Scholar
  15. DeAngelo (1981) Size and audit quality. JoAE 3:183–199Google Scholar
  16. DeFond, Hann, Hu (2005) Does the market value financial expertise on audit committees of boards of directors? JoAR 43:153–193Google Scholar
  17. Ebrahim (2007) Earnings management and board activity. An additional evidence. Rev Account Finance 6:42–58CrossRefGoogle Scholar
  18. Eichenseher, Shields (1985) Corporate director liability and monitoring preferences. J Account Public Policy 4:13–31CrossRefGoogle Scholar
  19. Karamanou, Vafeas (2005) The association between corporate boards, audit committees, and management earnings forecasts. An empirical analysis. JoAR 43:453–486Google Scholar
  20. Klein (1998) Firm performance and board committee structure. JoLE 41:275–303Google Scholar
  21. Klein (2002) Audit committee, board of director characteristics and earnings management. JoAE 33:375–400Google Scholar
  22. Knapp (1987) An empirical study of audit committee support for auditors involved in technical disputes with client management. Account Rev 62:578–588Google Scholar
  23. Krishnan (2005) Audit committee quality and internal control. An empirical analysis. Account Rev 80:649–675CrossRefGoogle Scholar
  24. La Porta et al (2002) Investor protection and corporate valuation. JoF 57:1147–1170CrossRefGoogle Scholar
  25. Lee, Mande, Ortman (2004) The effect of audit committee and board of director independence on auditor resignation. Auditing 23:131–146CrossRefGoogle Scholar
  26. McMullen (1996) Audit committee performance. An investigation of the consequences associated with audit committees. Auditing 15:87–103Google Scholar
  27. McMullen, Raghunandan (1996) Enhancing audit committee effectiveness. J Account 179:79–81Google Scholar
  28. NASDAQ (2006) Section 4350 qualitative listing requirements for Nasdaq issuers except for limited partnerships. NASDAQ, New YorkGoogle Scholar
  29. National Commission on Fraudulent Financial Reporting (1987) Report of the National Commission on Fraudulent financial reporting, Washington, DCGoogle Scholar
  30. NYSE (2004) Listed company manual. Section 303A.00 Corporate Governance Standards (Last Modified 3 Nov 2004), New YorkGoogle Scholar
  31. Quick, Hoeller, Koprivica (2008) Prüfungsausschüsse in deutschen Aktiengesellschaften. ZCG 3:25–35Google Scholar
  32. SEC (1974) SEC accounting release no 165, 20 Dec 1974Google Scholar
  33. SEC (1978) SEC accounting release no 13-346, 9 Mar 1978Google Scholar
  34. SEC (2002) Proposed rule disclosure required by 404, 406 and 407 of the Sarbanes Oxley Act of 2002, Washington, DCGoogle Scholar
  35. SEC (2003) SEC accounting release no 33-8820, Washington, DCGoogle Scholar
  36. Uzun, Szewczyk, Varma (2004) Board composition and corporate fraud. Financ Anal J 60:33–43CrossRefGoogle Scholar
  37. Vafeas, Waegelein (2007) The association between audit committees, compensation incentives and corporate audit fees. Rev Quant Finance Account 28:241–255CrossRefGoogle Scholar
  38. Velte (2009) Die Implementierung von Prüfungsausschüssen/Audit Committees des Aufsichtsrats/Board of Directors mit unabhängigen und finanzkompetenten Mitgliedern. JfB 59:123–174CrossRefGoogle Scholar
  39. Velte (2011) The link between audit committees and corporate governance quality. Corp Ownersh Control 8:5–13Google Scholar
  40. Velte, Stiglbauer (2011) Impact of audit committees with independent financial experts on accounting quality. Probl Perspect Manag 9:17–33Google Scholar
  41. Wild (1994) Managerial accountability to shareholders: audit committees and the explanatory power of earnings for returns. Br Account Rev 26:353–374CrossRefGoogle Scholar
  42. Wild (1996) The audit committee and earnings quality. J Account Audit Finance 11:247–276CrossRefGoogle Scholar
  43. Xie, Davidson, DaDalt (2001) Earnings management and corporate governance. The roles of the board and the audit committee. J Corp Finance 9:295–316CrossRefGoogle Scholar
  44. Yang, Krishnan (2005) Audit committees and quarterly earnings management. Int J Audit 9:201–219CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Leuphana UniversityLüneburgGermany