CEO Power, Internal Control Quality, and Audit Committee Effectiveness in Substance Versus in Form

Abstract

During the past decade, new regulations have been adopted to improve audit committee effectiveness. Prior research has generally provided evidence in support of these regulations and suggests that a more independent and expert audit committee is more effective. We posit that CEO power reduces or even eliminates the improvements in audit committee effectiveness resulting from independent and financially expert committee members. Thus, CEO power may result in an audit committee that appears effective in form but is not in substance. We construct a composite index for CEO power by combining ten CEO characteristics and employ the incidence of internal control weaknesses as a proxy for audit committee monitoring quality. Since all the firms in our sample have completely independent audit committees, we use financial expertise to examine the impact of CEO power on audit committee effectiveness. We find that, when CEO power is low, audit committee financial expertise is negatively associated with the incidence of internal control weaknesses. However, as CEO power increases, this association monotonically weakens. When CEO power reaches a sufficiently high level, this association is no longer negative. The moderating effect of CEO power on audit committee effectiveness is more prominent when the CEO extracts more rents from the firm through insider trading. Our results are not driven by the CEO's involvement in director selection. Our paper suggests that more expert audit committees in form do not automatically translate into more effective monitoring. Rather, the substantive monitoring effectiveness of audit committees is contingent on CEO power. * Accepted by Dan A. Simunic. The authors thank Dan Simunic, Steven Salterio, two anonymous reviewers, le pouvoir du DG r eduit, voire neutralise l'am elioration de l'efficacit e des comit es d'audit attribuable a l'ind ependance et aux comp etences financi eres de ses membres. Ainsi, le pouvoir des DG pourrait faire en sorte que le comit e d'audit donne l'impression d'être efficace sans l'être v eritablement. Les auteurs cr eent un indice compos e relatif au pouvoir du DG en regroupant dix caract eristiques des DG, et ils utilisent l'incidence des lacunes du contrôle interne a titre de variable de substitution repr esentant la qualit e de la surveillance exerc ee par le comit e d'audit. Puisque toutes les soci et es de leur echantillon poss edent des comit es d'audit totalement ind ependants, ils utilisent les comp etences financi eres pour etudier l'incidence du pouvoir du DG sur l'efficacit e du comit e d'audit. Les auteurs constatent que, lorsque le pouvoir du DG est faible, les comp etences financi eres du comit e d'audit sont en relation n egative avec l'incidence des lacunes du contrôle interne. Toutefois, lorsque le pouvoir du DG augmente, cette relation s'att enue. Lorsque le pouvoir du DG atteint un niveau suffisamment elev e, la relation n'est plus n egative. L'effet mod erateur du pouvoir du DG sur l'efficacit e du comit e d'audit est plus marqu e lorsque le DG tire...

Powerful CEOs, cash bonus contracts and firm performance

“…A negative correlation can be observed between %Independent and CEO Power Index . This is consistent with prior literature and suggests that a greater proportion of independent directors limits the ability of CEOs to influence the board of directors (Abernethy et al., ; Lisic et al., ; Morse et al., ).…”

“…Next, we report the descriptive statistics on the individual components of CEO power. The average CEO Tenure is 5.465 years, which is consistent with prior literature (e.g., Abernethy et al., ; Lisic et al., ). The mean CEO Shareholdings are 2.5% of total outstanding shares.…”

Eksplorasi Elemen Integrated Reporting Dalam Annual Reports Perusahaan Di Indonesia

“…Keterlibatan aktif anggota komite audit dalam rapat yang dijadwalkan secara rutin memungkinkan mereka untuk membahas isu-isu yang berkaitan dengan kegiatan perusahaan termasuk isu integrated reporting. Hal ini beralasan, mengingat rutinitas pertemuan memungkinkan komite audit untuk mengawasi dengan lebih efektif catatan akuntansi dan kualitas pengendalian internal (Lisic et al, 2015;Goodwin-Stewart & Kent, 2006;Hoque et al, 2013). Selain itu, frekuensi rapat komite audit dapat mendorong perusahaan untuk meningkatkan kualitas informasi akuntansi dan kualitas audit (Louis Braiotta, 2003;Song & Windram, 2004).…”

“…Karakteritik corporate governance terutama komite audit diyakini dapat mempengaruhi luas lingkup integrated reporting. Riset yang menginvestigasi pengaruh karakteristik perusahaan misalnya komite audit terhadap integrated reporting diyakini penting karena komite audit seringkali dihubungkan dengan kualitas pelaporan keuangan (Bédard & Gendron, 2010;Li, Mangena, & Pike, 2012;Lisic, Neal, Zhang, & Zhang, 2015). Komite audit harus berperan aktif dalam mereview laporan keuangan termasuk integrated reporting dan harus memperhatikan semua aspek yang mungkin berdampak pada integritas integrated reporting (Ahmed Haji, 2015).…”

“…Komite audit perlu melakukan pertemuan rutin dalam melaksanakan pengawasan atas pelaporan keuangan dan pengendalian internal. Pertemuan yang teratur dan terjadwal dengan baik akan membantu komite audit dalam memonitor catatan akuntansi dan sistem pengendalian internal (Lisic et al, 2015). Pandangan sejenis disampaikan oleh (Goodwin-Stewart & Kent, 2006;Hoque, Islam, & Azam, 2013) bahwa pertemuan rutin memungkinkan komite audit makin efektif dalam mengawasi proses pelaporan keuangan dan pengendalian internal dan meningkatkan kualitas informasi yang dihasilkan manajemen dan kualitas audit (Louis Braiotta, 2003;Song & Windram, 2004).…”