Skip to main content
SpringerLink
Log in

Audit Committees

  • Living reference work entry
  • First Online:
Encyclopedia of Law and Economics

  • 239 Accesses

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 via an institution to check access.

Access this chapter

Log in via an institution

Institutional subscriptions

References

  • Abbott, Park, Parker (2000) The effects of audit committee activity and independence on corporate fraud. Manag Finance 26:55–67

    Google Scholar 

  • Abbott et al (2003a) The association between audit committee characteristics and audit fees. Auditing 22:17–32

    Article  Google Scholar 

  • Abbott et al (2003b) An empirical investigation of audit fees, nonaudit fees, and audit committees. CAR 20:215–234

    Google Scholar 

  • Abbott, Parker, Peters (2004) Audit committee characteristics and restatements. Auditing 23:69–87

    Article  Google Scholar 

  • AICPA (1967) Executive committee’s statement. JoA 163:10–11

    Google Scholar 

  • Altmeppen (2004) Der Prüfungsausschuss. ZGR 33:390–415

    Article  Google Scholar 

  • Anderson RC, Mansi SA, Reeb DM (2003) Board characteristics, accounting report integrity, and the cost of debts. Working paper, Washington, DC

    Google Scholar 

  • Ashbaugh, Collins, LaFond (2004) Corporate governance and the cost of equity capital. The University of Wisconsin, Madison

    Google Scholar 

  • Beasley et al (2000) Fraudulent financial reporting. Consideration of industry traits and corporate governance mechanisms. Account Horiz 14:441–454

    Article  Google Scholar 

  • Bédard, Chtourou, Courteau (2004) The effect of audit committee expertise, independence and activity on aggressive earnings management. Auditing 23:13–35

    Article  Google Scholar 

  • BGH (1982) Bundesgerichtshof II ZR 27/82 vom 15.11.1982. NJW 36:991–992

    Google Scholar 

  • Bhagat, Black (1999) The uncertain relationship between board composition and firm performance. Bus Lawyer 54:921–963

    Google Scholar 

  • Carcello, Hermanson, Neal (2002) Disclosures in audit committee charters and reports. Account Horiz 16:291–304

    Article  Google Scholar 

  • Coenenberg, Reinhart, Schmitz (1997) Audit committees. DB 50:989–997

    Google Scholar 

  • DeAngelo (1981) Size and audit quality. JoAE 3:183–199

    Google Scholar 

  • DeFond, Hann, Hu (2005) Does the market value financial expertise on audit committees of boards of directors? JoAR 43:153–193

    Google Scholar 

  • Ebrahim (2007) Earnings management and board activity. An additional evidence. Rev Account Finance 6:42–58

    Article  Google Scholar 

  • Eichenseher, Shields (1985) Corporate director liability and monitoring preferences. J Account Public Policy 4:13–31

    Article  Google Scholar 

  • Karamanou, Vafeas (2005) The association between corporate boards, audit committees, and management earnings forecasts. An empirical analysis. JoAR 43:453–486

    Google Scholar 

  • Klein (1998) Firm performance and board committee structure. JoLE 41:275–303

    Google Scholar 

  • Klein (2002) Audit committee, board of director characteristics and earnings management. JoAE 33:375–400

    Google Scholar 

  • Knapp (1987) An empirical study of audit committee support for auditors involved in technical disputes with client management. Account Rev 62:578–588

    Google Scholar 

  • Krishnan (2005) Audit committee quality and internal control. An empirical analysis. Account Rev 80:649–675

    Article  Google Scholar 

  • La Porta et al (2002) Investor protection and corporate valuation. JoF 57:1147–1170

    Article  Google Scholar 

  • Lee, Mande, Ortman (2004) The effect of audit committee and board of director independence on auditor resignation. Auditing 23:131–146

    Article  Google Scholar 

  • McMullen (1996) Audit committee performance. An investigation of the consequences associated with audit committees. Auditing 15:87–103

    Google Scholar 

  • McMullen, Raghunandan (1996) Enhancing audit committee effectiveness. J Account 179:79–81

    Google Scholar 

  • NASDAQ (2006) Section 4350 qualitative listing requirements for Nasdaq issuers except for limited partnerships. NASDAQ, New York

    Google Scholar 

  • National Commission on Fraudulent Financial Reporting (1987) Report of the National Commission on Fraudulent financial reporting, Washington, DC

    Google Scholar 

  • NYSE (2004) Listed company manual. Section 303A.00 Corporate Governance Standards (Last Modified 3 Nov 2004), New York

    Google Scholar 

  • Quick, Hoeller, Koprivica (2008) Prüfungsausschüsse in deutschen Aktiengesellschaften. ZCG 3:25–35

    Google Scholar 

  • SEC (1974) SEC accounting release no 165, 20 Dec 1974

    Google Scholar 

  • SEC (1978) SEC accounting release no 13-346, 9 Mar 1978

    Google Scholar 

  • SEC (2002) Proposed rule disclosure required by 404, 406 and 407 of the Sarbanes Oxley Act of 2002, Washington, DC

    Google Scholar 

  • SEC (2003) SEC accounting release no 33-8820, Washington, DC

    Google Scholar 

  • Uzun, Szewczyk, Varma (2004) Board composition and corporate fraud. Financ Anal J 60:33–43

    Article  Google Scholar 

  • Vafeas, Waegelein (2007) The association between audit committees, compensation incentives and corporate audit fees. Rev Quant Finance Account 28:241–255

    Article  Google Scholar 

  • Velte (2009) Die Implementierung von Prüfungsausschüssen/Audit Committees des Aufsichtsrats/Board of Directors mit unabhängigen und finanzkompetenten Mitgliedern. JfB 59:123–174

    Article  Google Scholar 

  • Velte (2011) The link between audit committees and corporate governance quality. Corp Ownersh Control 8:5–13

    Google Scholar 

  • Velte, Stiglbauer (2011) Impact of audit committees with independent financial experts on accounting quality. Probl Perspect Manag 9:17–33

    Google Scholar 

  • Wild (1994) Managerial accountability to shareholders: audit committees and the explanatory power of earnings for returns. Br Account Rev 26:353–374

    Article  Google Scholar 

  • Wild (1996) The audit committee and earnings quality. J Account Audit Finance 11:247–276

    Google Scholar 

  • Xie, Davidson, DaDalt (2001) Earnings management and corporate governance. The roles of the board and the audit committee. J Corp Finance 9:295–316

    Article  Google Scholar 

  • Yang, Krishnan (2005) Audit committees and quarterly earnings management. Int J Audit 9:201–219

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Leuphana University, Scharnhorststraße 1, Lueneburg, 21335, Germany

    Patrick Velte

Authors
  1. Patrick Velte
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Patrick Velte .

Editor information

Editors and Affiliations

  1. Lehrst. Finanzwissenschaft/ Finanzsoziologie, University of Erfurt, Erfurt, Thüringen, Germany

    Jürgen Backhaus

Rights and permissions

Reprints and permissions

Copyright information

© 2014 Springer Science+Business Media New York

About this entry

Cite this entry

Velte, P. (2014). Audit Committees. In: Backhaus, J. (eds) Encyclopedia of Law and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7883-6_74-1

Download citation

  • DOI: https://doi.org/10.1007/978-1-4614-7883-6_74-1

  • Received:

  • Accepted:

  • Published:

  • Publisher Name: Springer, New York, NY

  • Online ISBN: 978-1-4614-7883-6

  • eBook Packages: Springer Reference Economics and FinanceReference Module Humanities and Social SciencesReference Module Business, Economics and Social Sciences

Publish with us

Policies and ethics

Search

Navigation