Audit committee effectiveness: Australia and Saudi Arabia

Abstract

The mere presence of the audit committee does not necessarily translate into an effective monitoring body. As a result, the search for mechanisms to enhance corporate governance and increase the quality of financial reports has mostly focused on the structure of audit committees. This thesis empirically investigates whether there is an association between audit committee effectiveness (ACE) and the selection of a high quality auditor for both Australian and Saudi listed companies using their local guidelines to enhance ACE as benchmarks. In addition, the association between ACE and non-audit services (NAS) purchases is examined only for Australian listed company as providing such services by the incumbent auditors is not allowed for Saudi listed companies. Moreover, this thesis also empirically examine the relationships between six audit committee characteristics, namely, independence, size, activity, charter, expertise and literacy and the selection of a high quality auditor for both Australian and Saudi listed companies. Also the relationships between the six audit committee characteristics and NAS purchases are empirically tested only for Australian listed companies. While there was a positive (negative) association between ACE and the selection of a specialist auditor (the magnitude of NAS purchases) for the Australian Stock Exchange (ASX) listed companies, there was no association between ACE and the selection of a specialist auditor for the Saudi Stock Market listed companies. Because both countries have very similar recommendations regarding enhancing audit committee effectiveness, the findings of this thesis indicate that there are other factors such as different audit committee framework, different market development and cultural factors that might affect ACE. In addition, the findings indicate that audit committee independence is the most important determinant of both audit quality and NAS purchases for the ASX listed companies. Because complying with audit committee recommendations is costly especially for small companies, which have limited resources, audit committee independence should have the priority when locating the limited resources.