Alan Kilgore

The effectiveness of audit committees for low‐ and mid‐cap firms

Purpose - The purpose of this paper is to investigate the effectiveness of recommendations made by the Australian Stock Exchange (ASX) relating to audit committees in Australia, and whether they have improved financial reporting quality for low- and mid-cap listed firms. Design/methodology/approach - The authors examine the relation between characteristics of the audit committee and financial reporting quality for listed companies not mandated to comply with these requirements, i.e. low- and mid-cap firms. For a sample of 288 firms, the authors regress measures of audit committee independence, expertise and activity and size on alternative measures of earnings management. Findings - A significant association is found between all three characteristics and lower earnings management. The significant measure for independence is the proportion of independent directors on the audit committee; for expertise, it is that at least one member of the audit committee has an accounting qualification; and for activity and size, it is the frequency of audit committee meetings. Practical implications - The results provide support for the mandatory establishment of audit committees for the top 500 (high- and mid-cap) firms introduced by the ASX and suggest those audit committee characteristics which could improve financial reporting quality for low- and mid-cap firms. Originality/value - The paper examines low- and mid-cap firms in order to complement previous similar studies done for high-cap firms. It identifies the effects on financial reporting quality of voluntarily choosing to have an audit committee and of the choice of audit committee characteristics, in the period after substantial corporate governance reform. It includes a new measure among audit committee characteristics, industry expertise, which is required in Australia and is new to the literature.

Auditor independence issues in China

China is conducting an open market policy and Chinese firms are seeking independent audit services. As a result, the Chinese accounting profession is expanding at a tremendous speed, and has played an important role in economic reform. However, Chinese auditing operates in a very different environment from those experienced in Western countries. Consequently, there is considerable concern about auditor independence in China. The purpose of this paper is to examine some reasons for a lack of independence in the Chinese audit profession. We critically review empirical evidence regarding auditor practice in China. We then make some suggestions that might improve auditor independence.

Audit committees: voluntary formation by ASX non-top 500

Purpose - This paper aims to examine the relationship between firm characteristics and incentives for the voluntary formation of audit committees by non-top 500 firms listed on the Australian Stock Exchange (ASX). Design/methodology/approach - Data are obtained from a random sample of 224 non-top 500 firms listed on the ASX for the year 2005. Logistic regression analysis is used to examine the characteristics of non-top 500 firms who have voluntarily established audit committees. Findings - The results are consistent with the hypothesis that incentives to voluntarily form audit committees increase with agency costs of debt. The results show a significant and positive association between cost of debt, firm size, number of directors on the board, the proportion of independent directors, independent board chair and the voluntary formation of audit committees. Research limitations/implications - Results indicate that firm size is not necessarily the primary influence in voluntary formation of audit committees. Board size and the proportion of independent directors and having an independent board chair also have a significant influence on the decision. These results suggest that audit committees will be established in high agency cost of debt situations, where there are economies of scale and are reflective of a desire to reduce information asymmetries and the liability exposure of outside directors. Originality/value - This study provides useful insights and direction in examining voluntary formation in an Australian context using non-top 500 firms. The results have implications for regulators in considering making audit committees mandatory for all listed companies.

Audit quality: what’s important to users of audit services

Purpose - – This paper aims to investigate the relative importance of audit-team and audit-firm attributes in perceptions of audit quality by two groups of users of audit services: audit committee chairs/members (“insiders”) and financial analysts/fund managers (“outsiders”). Design/methodology/approach - – Using a survey questionnaire, data are gathered from 39 audit committee chairs/members and 42 financial analysts/fund managers and analysed using adaptive conjoint analysis. Findings - – The findings reveal that both groups perceive audit-team attributes as relatively more important than audit-firm attributes. This is consistent with expectations for “insiders”, but inconsistent with expectations for “outsiders”. Differences are also found in the internal ratings of some of the attributes, with “insiders” and “outsiders” placing different relative importance on some attributes. Research limitations/implications - – The usual set of limitations that are present in a survey method also apply in this study, i.e. surveys rely on reports of behaviours rather than observations and are therefore susceptible to measurement error. A further limitation is that, in using adaptive conjoint analysis, the number of attributes that may be included in the survey is restricted and, consequently, the attributes selected may not be comprehensive or fully representative. Originality/value - – The study extends the scope of prior studies by examining the relative importance of audit-team and audit-firm attributes in perceptions of audit quality. In using conjoint analysis, the study makes a unique and innovative contribution by providing direct evidence on the relative importance of attributes in perceptions of audit quality for different users of audit services. The findings have implications for regulators and the accounting profession concerned with improving confidence in corporates and for audit firms in monitoring and promoting the quality of their audit services.

TOP MANAGEMENT INVOLVEMENT IN R&D BUDGET SETTING: THE IMPORTANCE OF FINANCIAL FACTORS, BUDGET TARGETS, AND R&D PERFORMANCE EVALUATION

Organizations are increasingly reliant on their top management to provide research and development (R&D) units with a strategic focus reflecting changes in their competitive environments. However, little research has specifically explored implications arising from top management involvement in R&D budget setting. This study examines empirically the extent to which such involvement is associated with first, an emphasis on financial factors in setting R&D budgets, and second, with the importance of budget targets for R&D managers. Third, the study evaluates the impact of that involvement on R&D performance evaluation. The results of the research provide evidence of the relation R&D budget setting has to these three factors.

Learning essential terms and concepts in Statistics and Accounting

This paper describes a terminological approach to the teaching and learning of fundamental concepts in foundation tertiary units in Statistics and Accounting, using an online dictionary-style resource (TermFinder) with customised termbanks for each discipline. Designed for independent learning, the termbanks support inquiring students from non-English-speaking backgrounds – including international students – in their understanding of the key concepts of their discipline. Two quasi-experimental studies of the use of these termbanks are reported here, showing the difference that they made in the performances of first-year students studying Statistics and Accounting, when compared with those from the previous year before the termbanks were available. In both units, the exam results for the experimental cohorts were significantly better than those of the cohorts in the preceding year. Higher success rates and raised levels of engagement with terminological questions were registered for all students, Australian domestic and international. Individual study patterns emerged in the trial of the accounting termbank, with international students making early use of the termbank with its translation equivalents in Mandarin Chinese, and Australian students more inclined to use it close to the final exam. The testing of the customised termbanks, developed collaboratively by lexicographers and academic staff, vindicates their use in large, diverse classes and their value to students as resources for independent learning. That apart, the research affirms the value of focusing on terminology and the nexus with disciplinary concepts in introductory courses.

The Voluntary Formation of an Audit Committee

Audit committees are increasingly viewed as a key element of good corporate governance. In some countries their formation is mandatory, and in others it is voluntary. In the Australian setting, only the largest listed companies are required to form an audit committee, although many smaller companies do so voluntarily. There are few regulations over smaller companies, and the operations of audit committees. In a jurisdiction which combines mandatory and voluntary regulatory regimes, this study examines the relative impact of the regimes on audit committee diligence, on corporate governance and on board decision-making. It finds that mandatory audit committees are more diligent than voluntary ones, in terms of meeting frequency, but trade-offs are made between meeting frequency and the use of a Big 4 auditor, and the board’s decision-making is not consistently better. There is evidence that voluntary audit committees are established for legitimacy.