Audit Committee Importance

2.2 The importance of audit committee for a company

One major motivation for companies to form audit committees voluntarily would derive from the benefits they bring. Supporters argue that the benefits from audit committees are wide. The Cadbury Committee Report (1992) indicated that audit committees can provide a range of benefits provided they are effective in discharging their functions. The importance of ACs has been put forward by different researchers. These arguments can be summarized as saying that an Audit Committee helps to:

2.3.1 Eliminate the Agency problem (safeguarding and advancing the interests of shareholders).

Agency theory posits that, owing to the separation of corporate management and ownership, shareholders needs to be

Effective corporate governance actions would help in preventing corporate scandals, fraud, and accounting shams. Hence, the AC has lately become of prominent importance in corporate governance (Zhang et al., 2007; Anderson et al., 2004); as it plays a vital role at overseeing the quality of the financial reports, and at acting as a deterrent to management override of controls and management fraud (Carcello and Neal, 2000, Whittington and Pany, 2003). Furthermore, Caplan (1999) also underlined the significance of ACs in detecting errors, irregularities and fraudulent practices in the

Prior to the introduction of audit committees, it was infrequent for internal auditors to report to more than one board member, and certainly not to a director without management responsibilities. The AC provides an environment in which a subset of directors can consider the scope and results of internal audit work and clarify matters for consideration by the main board. This ability should give four benefits; first, it will elevate the status of the internal audit function; secondly, it may encourage internal auditors to improve the quality of their work; thirdly, it will pressure management into acting on the recommendations made; and, lastly, it will lift their esteem among the company’s managers who will be aware that the internal auditors have this line of communication. Miller (1988) advocates that the ‘best liability insurance coverage a corporate board can have is an effective internal audit department’ and contends that the AC is critical in determining the effectiveness of the internal audit department as it ensures the independence of the function and reviews the scope, results and quality of its