Investigating the Relationship between Corporate Governance Mechanisms and the Effectiveness of the Audit Committee

Document Type : Research Paper

Authors

1 Accounting. Faculty of Management and Economics. Shahid Bahonar University. Kerman. Iran

2 Accounting. Shahid Bahonar University. Kerman

Abstract

Due to conflicts of interest, corporate executives may not use corporate resources to increase shareholder wealth. The experts find that the best solution to this problem is improving corporate governance. The purpose of this paper is to examine the relationship between the efficiency of the audit committee and other corporate governance mechanisms. The mechanisms of corporate governance in this research include the independence of the board, the dichotomy of the role of the CEO and the ownership structure. Following the previous research, to measure the efficiency of the audit committee, the average of the score awarded to the three criteria of expertise, independence and size of the audit committee have been used. The period of research is from 2013 to 2017, over which, applying our sampling criteria, 130 Listed Companies in Tehran Stock Exchange were sampled out. The research findings indicate that there is significantly negative relationship between effectiveness of the audit committee with independence of the board and the dichotomy of the role of the manager. The negative relationship is indicative of substitutive role of independent board for the audit committee. Also, there is a positive and significant relationship between major shareholders and the government ownership with the effectiveness of audit committee. These two mechanisms strengthen one another, enabling us to interpret complementary role for them. However, institutional ownership has not relationship with the effectiveness of the audit committee.

Keywords

References

Abbasi, M., & Ahmadi, M. (2012). Investigating the Effect of Managing Director's Duality on the Value of Listed Companies in Tehran Stock Exchange. Journal of Economic research trends, 19(60), 113-150. (In Persian).
Abdel-Meguid, A., Samaha, K., & Dahawy, K. (2014). Preliminary evidence on the relationship between corporate governance attributes and audit committee functionality in Egypt: beyond checking the box. Corporate Governance, 14(2), 197-210.
Acharya, V. V., Myers, S. C., & Rajan, R. G. (2011). The internal governance of firms. The Journal of Finance, 66(3), 689-720.
Aghaei, M. A., Etemadi, H., Azar, A., & Chalaki, P. (1388). Corporate Governance and Information Content of Profits in Tehran Stock Exchange with Emphasis on the Role of Profit Management. Journal of Management Sciences of Iran, 4(16), 27-53. (In Persian)
Aguilera, R. V., & Crespi-Cladera, R. (2012). Firm family firms: Current debates of corporate governance in family firms. Journal of Family Business Strategy, 3(2), 66-69.
Black, B. S., Jang, H., & Kim, W. (2006). Predicting firms' corporate governance choices: Evidence from Korea. Journal of corporate finance, 12(3), 660-691.
Boone, A. L., Field, L. C., Karpoff, J. M., & Raheja, C. G. (2007). The determinants of corporate board size and composition: An empirical analysis. Journal of financial Economics, 85(1), 66-101.
Bushee, B. J. (1998). The influence of institutional investors on myopic R&D investment behavior. Accounting review, 305-333.
Cremers, M., & Nair, V. B. (2003). Governance mechanisms and equity prices, 60(6), 2854-2894.
De Andres, P., Azofra, V., & Lopez, F. (2005). Corporate boards in OECD countries: Size, composition, functioning and effectiveness. Corporate Governance: An International Review, 13(2), 197-210.
Dey, A. (2008). Corporate governance and agency conflicts. Journal of accounting research, 46(5), 1143-1181.
Di Miceli da Silveira, A., Leal, R. P., Carvalhal, A., & Barros, L. A. B. D. C. (2007). Evolution and determinants of firm-level corporate governance quality in Brazil. Available at SSRN 995764.
Ellwood, S., & Garcia-Lacalle, J. (2016). Examining audit committees in the corporate governance of public bodies. Public Management Review, 18(8), 1138-1162.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. The journal of law and Economics, 26(2), 301-325.
Fernández, C., & Arrondo, R. (2005). Alternative internal controls as substitutes of the board of directors. Corporate governance: an international review, 13(6), 856-866.
García‐Meca, E., & Sánchez‐Ballesta, J. P. (2009). Corporate governance and earnings management: A meta‐analysis. Corporate governance: an international review, 17(5), 594-610.
Gillan, S. L., & Starks, L. T. (2000). Corporate governance proposals and shareholder activism: The role of institutional investors. Journal of financial Economics, 57(2), 275-305.
Gillan, S., & Starks, L. T. (2007). The evolution of shareholder activism in the United States, 19(1), 55-73.
Gillan, S., Hartzell, J. C., & Starks, L. T. (2006). Evidence on corporate governance: The joint determination of board structures and charter provisions. In AFA 2007 Chicago Meetings Paper.
Giroud, X., & Mueller, H. M. (2011). Corporate governance, product market competition, and equity prices. The Journal of Finance, 66(2), 563-600.
Gord, A., Mohammadi, M., & Goldoost, M. (2015). Investigating the Relationship between Corporate Governance Mechanism and Cash Holding. Journal of Accounting and Auditing Review, 22(2), 263-278. (in Persian).
Guest, P. M. (2009). The impact of board size on firm performance: evidence from the UK. The European Journal of Finance, 15(4), 385-404.
Hasan, A., & Butt, S. (2009). Impact of Ownership Structure and Corporate Governance on Capital Structure of Pakistani Listed Companies. International Journal of Business and Management, 4(2), 50-57. (in Persian)
Hassan, Y., Hijazi, R., & Nasser, K. (2017). Does Audit Committee Substitute or Complement Other Corporate Governance Mechanisms: Evidence from an Emerging Economy. Journal of Managerial Auditing, 32(7), 658-681. (in Persian)
Hassas Yeganeh, Y., & Ahmadi, M. (2013). Relationship between corporate governance mechanisms and Conservatism. Journal of Empirical Studies in Financial Accounting, 10(38), 21-52. (In Persian)
Hassas Yeganeh, Y., & Yazdanyan, N. (2007). The Effect of Corporate Governance on Reducing Profit Management. Journal of Empirical Studies in Financial Accounting, 5(17), 151-171. (In Persian)
Hassas Yeganeh, Y., Shoeri, S., & Khasronezhad, S. H. (2009). Relationship of Corporate Governance Mechanisms, Debt Relation, Company Size with Profit Management. Journal of Empirical Studies in Financial Accounting, 6(24), 75-115. (In Persian)
Hutchinson, M., & Gul, F. A. (2004). Investment opportunity set, corporate governance practices and firm performance. Journal of corporate finance, 10(4), 595-614.
Karim, K., Robin, A., & Suh, S. (2016). Board structure and audit committee monitoring: Effects of audit committee monitoring incentives and board entrenchment on audit fees. Journal of Accounting, Auditing & Finance, 31(2), 249-276.
Kholeif, A. (2008). CEO duality and accounting-based performance in Egyptian listed companies: A re-examination of agency theory predictions. Research in Accounting in Emerging Economies, 8, 65-98.
Krishnan, J. (2005). Audit committee quality and internal control: An empirical analysis. The accounting review, 80(2), 649-675.
Moein al-Din, M., Saeeda Ardakani, S., Yazdi, A. F., & ZainAddini, L. (2014). Investigating the Effect of Corporate Governance System on the Relationship between Capital Structure and Firm Value with Structural Equation Modeling Approach in Tehran Stock Exchange. Journal of Investment Knowledge, 3(9), 101-132. (In Persian)
Nikookar, G. H., Beyklowi, A. J., Farhadi, A., & Alidadi Talkhestani, Y. (2014). The Relationship between Corporate Governance Mechanisms and Agency Costs Including Iranian Companies. Journal of Business Management, 6(2), 401-416. (In Persian)
Peasnell, K. V., Pope, P. F., & Young, S. (2005). Board monitoring and earnings management: do outside directors influence abnormal accruals? Journal of Business Finance & Accounting, 32(7‐8), 1311-1346.
Rogers, P., Dami, A. T., Ribeiro, K. C. D. S., & Ferreira De Sousa, A. (2008). Corporate governance and ownership structure in Brazil: causes and consequences. Journal of Corporate Ownership & Control, 5(2).
Saghafi, A., Barzideh, F., & Talebi Najafabadi, A. (2016). Investigating the Relationship between Audit Committee Formation and Managing Director, Size and Independence of Board of Directors in Stock Exchange Companies in Tehran Stock Exchange. Journal of Accounting and Auditing Research, 31(31), 4-21. (In persian).
Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The journal of finance, 52(2), 737-783.
Smith, S. R. (2003). Audit Committees: Combined Code Guidance. London: Financial Reporting Council, 1-48
Sulong, Z., & Nor, F. M. (2010). Corporate governance mechanisms and firm valuation in Malaysian listed firms: A panel data analysis. Journal of Modern Accounting and Auditing, 6(1), 1.
Tušek, B. (2015). The influence of the audit committee on the internal audit operations in the system of corporate governance–evidence from Croatia. Economic research-Ekonomska istraživanja, 28(1), 187-203.
Journal of Accounting and Social Interests
Volume 10, Issue 2 - Serial Number 37
September 2020
Pages 133-153

Files

History

  • Receive Date: 22 July 2019
  • Revise Date: 19 October 2019
  • Accept Date: 04 November 2019

Share

How to cite

Statistics