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SYNOPSIS: The functioning of corporate audit committees was criticized in recent years by the Treadway Commission, the Public Oversight Board, the Kirk Panel, and the SEC Chairman. In response, the NYSE and NASD sponsored the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees. The BRC Report includes recommendations aimed at strengthening director independence and qualifications, and highlights the role of internal auditors in assisting audit committees in the corporate governance process. Moreover, the first three recommendations of the BRC relate to audit committee composition: absence of inside or "gray" directors, and presence of a member with financial expertise.
This study examines the association between audit committee composition and the committee's interaction with internal auditing. Our results, based on responses from chief internal auditors of 114 public companies, indicate that committees comprised solely of independent directors and with at least one member having an accounting or finance background are more likely to (1) have longer meetings with the chief internal auditor; (2) provide private access to the chief internal auditor; and (3) review internal audit proposals and results of internal auditing. These findings provide empirical support for the BRC's recommendations related to audit committee composition.
Submitted: May 2000
Accepted: January 2001
1Carcello and Neal (1999) find that the percentage of gray directors is (1) negatively associated with the likelihood of receiving a going-concern modified audit opinion, and (2) positively associated with the likelihood of auditor changes following the receipt of a going-concern modified audit report. Abbott and Parker (2000) did not find differences between companies with and without gray directors in terms of choosing an industry specialist as the auditor.
2 This study differs from Scarbrough et al. (1998) along at least three other dimensions. First, we examine U.S. companies, as opposed to Canadian companies. Second, we use a more detailed analysis of the interaction between audit committees and internal auditing, focusing more on the quality of the interaction between audit committees and internal auditing. Third, we gathered our data in the summer of 1999 while Scarbrough et al. (1998) obtained their data during...