Purpose

This paper seeks to investigate the conditions and processes affecting the operation and potential effectiveness of audit committees (ACs), with particular focus on the interaction between the AC, individuals from financial reporting and internal audit functions and the external auditors. 

Design/methodology/approach

A case study approach is employed, based on direct
engagement with participants in AC activities, including the AC chair, external auditors, internal auditors, and senior management. 

Findings

The authors find that informal networks between AC participants condition the impact of the AC and that the most significant effects of the AC on governance outcomes occur outside the formal structures and processes. An AC has pervasive behavioural effects within the organization and may be used as a threat, an ally and an arbiter in bringing solutions to issues and conflicts. ACs are
used in organizational politics, communication processes and power plays and also affect interpretations of events and cultural values. 

Research limitations/implications

Further research on AC and governance processes is needed
to develop better understanding of effectiveness. Longitudinal studies, focusing on the organizational
and institutional context of AC operations, can examine how historical events in an organization and
significant changes in the regulatory environment affect current structures and processes. 

Originality/value

The case analysis highlights a number of significant factors which are not fully recognised either in theorizing the governance role of ACs or in the development of policy and regulations concerning ACs but which impinge on their governance contribution. They include the importance of
informal processes around the AC; its influence on power relations between organizational participants;
the relevance of the historical development of governance in an organization; and the possibility that the
AC’s impact on governance may be greatest in non-routine situations.

Audit committee effectiveness : informal processes and behavioural effects

With the European Commission making global leadership claims in the field of audit regulation, the content of its 2010 Green Paper on ‘Audit Policy: Lessons from the Crisis’ warrants careful scrutiny. Important issues raised in the Green Paper include regulatory oversight, competition in the audit market, the dangers of having very few firms with the capacity to audit global transnational corporations, professional judgement, innovative audit practices and, last but not least, social responsibility. This article analyses the principal perspectives and assumptions underpinning the construction of the Green Paper. The aims are threefold: to enhance understanding of the contemporary regulatory mindset of the European Commission, contribute to policy debate and inspire future research.

Regulating Audit beyond the Crisis: A Critical Discussion of the EU Green Paper

An economic model by DeAngelo shows that the existence of client-specific quasi-rents impairs auditor independence. The provision of non-audit advisory services (NAS) increases quasi-rents, and thus it is a threat to independence. Recently, a number of changes have been made not only to the relevant international and US regulations, but also to the German regulations related to NAS. A large number of empirical studies have investigated the influence of NAS on the perceived auditor independence. Most of these studies were performed in Anglo-Saxon countries, particularly in the US, and a majority found a negative impact. Six studies are based on data from Germany. Most of them failed to find a significant negative impact on auditor's independence. German investors have not been surveyed so far. Thus an empirical investigation of the impact of NAS on investors' perceptions of auditor independence in Germany seemed promising. It was found that shareholders generally perceive a negative effect on auditor's independence if NAS are provided. The effects of 19 different services have been analysed. For most of them a negative effect was found, even if these services are not explicitly prohibited in Germany. Furthermore, it was shown that the type of NAS influences the degree to which auditor independence is perceived to be impaired. Thus, independence rules related to NAS could be differentiated. Additionally, the study ascertained that perceived auditor independence does increase if NAS are provided by a separate department of the audit firm.

/pdf/auditor-independence-and-the-provision-of-non-audit-services-1vy0wx0joh.pdf

Auditor Independence and the Provision of Non-Audit Services: Perceptions by German Investors

Recent regulatory initiatives targeting the statutory audit regime support the notion that the audit expectation gap is still a driver of change. This study seeks to analyse causes of the gap as well as the impact of proposed changes to the current statutory audit regime using an approach that differs from those used in prior literature. This approach allows us to attribute the audit expectation gap under the current regime to a failure of the public, the standard-setter, or the auditor. Based on a questionnaire survey conducted in 2011 in Germany, we find the public to have exaggerated expectations of auditors' responsibilities under current standards. Other causes of the gap relate to the public's difficulty in assessing the performance of auditors, but also to deficiencies in auditors' performance. In addition, we find that auditors are not fully aware of their responsibilities. Increasing the information content of the audit opinion is expected to narrow the gap. By contrast, recent proposed changes, ...

The audit expectation gap: existence, causes, and the impact of changes

This paper analyses audit as an exemplar of an expert system. The paper explores the premise that systemic trust in audit has been damaged and requires repair, looking specifically at the role of the institutionalized mechanism of the public inquiry. This is examined empirically in relation to the interaction between the heads of the Big Four accounting firms in the UK and the House of Lords Economic Select Committee in the course of the recent parliamentary investigation into the UK audit market, prompted by the global financial crisis. In particular, the paper seeks to understand how there can be transfer of trust, following Sztompka (1999), between different levels and between agents in a system. In this case, the Big Four – as privileged market participants – require re-legitimation from agents that are part of the political and legal apparatus. We therefore argue that re-legitimation of the Big Four’s privileged market position is dependent on transfer of trust.

/pdf/can-audit-still-be-trusted-4t79bnv8u7.pdf

Can Audit (still) be Trusted

Research on Audit Quality

We investigate the effect of key audit matters (KAM) in the auditor’s report as required by the new ISA 701. We consider investment professionals and non-professional investors in our experiments, ...

https://findresearcher.sdu.dk:8443/ws/files/172895306/Koehler_Ratzinger_Sakel_Theis_2020_accepted_manuscript.pdf

The Effects of Key Audit Matters on the Auditor’s Report’s Communicative Value: Experimental Evidence from Investment Professionals and Non-professional Investors

Die aufgrund der Verabschiedung des Bilanzrechtsreformgesetzes seit 2005 verfugbaren Honorare fur Abschlussprufungen belegen eine auserordentlich hohe Anbieterkonzentration auf dem deutschen Markt fur Abschlussprufungen kapitalmarktorientierter Unternehmen Damit liegt die Annahme von Wettbewerbsverzerrungen zulasten von Unternehmen und insbesondere von Honoraren oberhalb des Gleichgewichtspreises auf Polypolen nahe Auf Basis einer multivariaten Regressionsanalyse, der eine fur Deutschland bislang einmalige Vollerhebung der relevanten Unternehmens- und Honorardaten zugrunde liegt, lasst sich allerdings zeigen, dass mit einem Pruferwechsel im Jahr 2005 ein 24 %iger und in den beiden Folgejahren durchschnittlich ein 15 %iger Honorarruckgang einhergeht Dies kann als Indikator fur einen funktionierenden Preiswettbewerb interpretiert werden Ferner lasst sich anhand der Honorardaten auf Mandantenebene zeigen, dass der Honorarruckgang nur sehr beschrankt durch nachfolgende Honorarerhohungen konterkariert wird, d h derzeit kein Hinweis auf Lowballing vorliegt Gleichwohl sind langere Zeitreihen notwendig, um Aussagen zur Nachhaltigkeit der gegenwartigen Tendenzen treffen zu konnen

Prüfungshonorare in Deutschland – Determinanten und Implikationen

This paper shows that due to legal restrictions, audit committee formation in Germany is not only a matter of enhancing monitoring effectiveness, but also a means of increasing Supervisory Board efficiency. This result is linked to some empirical findings derived from a questionnaire developed especially for the survey and sent out to 100 German Supervisory Board/audit committee chairpersons in April 2004. The questionnaire covered the motivation, composition, qualification, organisation, and responsibilities of current German audit committees. The results show that free float, perceived independence of members, and the size of audit committees significantly influence audit committee composition, and that tasks that are mainly auditor-related are treated as supplementary.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID778905_code374147.pdf?abstractid=778905&mirid=1

Audit Committees in Germany - Theoretical Reasoning and Empirical Evidence

This paper shows that due to legal restrictions, audit committee formation in Germany is not only a matter of enhancing monitoring effectiveness, but also a means of increasing Supervisory Board efficiency This result is linked to some empirical findings derived from a questionnaire developed especially for the survey and sent out to 100 German Supervisory Board/audit committee chairpersons in April 2004 The questionnaire covered the motivation, composition, qualification, organisation, and responsibilities of current German audit committees The results show that free float, perceived independence of members, and the size of audit committees significantly influence audit committee composition, and that tasks that are mainly auditor-related are treated as supplementary

Annette G. Köhler

Papers

Research on Audit Quality

The Effects of Key Audit Matters on the Auditor’s Report’s Communicative Value: Experimental Evidence from Investment Professionals and Non-professional Investors

Prüfungshonorare in Deutschland – Determinanten und Implikationen

Audit Committees in Germany - Theoretical Reasoning and Empirical Evidence

Audit Committees in Germany — Theoretical Reasoning and Empirical Evidence