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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27452
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| Title: | Economic Determinants of Audit Committee Composition and Activity |
| Authors: | Klein, April |
| Issue Date: | Mar-1998 |
| Series/Report no.: | April Klein-3 |
| Abstract: | In this study, I examine possible reasons behind observed differences in
audit committee composition and activity. Although 97.9% of all audit
committees for large U.S. firms have at least one outside, independent
director, more than one-half of the sampled firms also have at least one
affiliated, interested director and nearly 5% have a member of the
firm's upper management. These percentages fly in the face of the
Treadway Report which advocates that audit committees be comprised
solely of independent directors. In addition, contrary to the Treadway
Commission's explicit recommendation, only 38.9% of audit committees
meet four or more times per year. Two possible explanations for these
observed variations are put forth and examined. The first is that boards
with dominant CEOs are reluctant to have active, independent audit
committees whose sole purpose is to act as a monitor on upper
management's actions. The second explanation is that audit committees
are constructed and act according to the economic needs of the firm. The
evidence presented throughout this paper supports both points of views.
The governance structures of audit committees appear to be sensitive in
meeting the monitoring and litigation risk needs of the parent firm.
However, there is also some evidence that boards with strong CEOs have a
higher probability of placing insiders and interested directors than
boards with relatively weaker CEOs. Audit committees of strong-CEO firms
also tend to meet less frequently than their counterparts. These results
suggest that there may be room for firms to better structure their audit
committees to fulfill their needs. In this paper, I examine possible
reasons behind observed differences in audit committee composition and
activity. The governance structures of audit committees appear to be
sensitive in meeting the monitoring and litigation risk needs of the
parent firm. However, boards with stronger CEOs also have a higher
probability of placing insiders and interested directors on their audit
committees than boards with relatively weaker CEOs. Audit committees of
strong-CEO firms also tend to meet less frequently than their counterparts. |
| URI: | http://hdl.handle.net/2451/27452 |
| Appears in Collections: | Accounting Working Papers
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