The contributions of this research study can be assessed from two perspectives – empirical and methodological. The empirical contribution provides an understanding of what gives rise to an effective audit committee, seen through the lenses of actual audit committee members in New Zealand, extending the literature, as this domain has not previously been examined. The
methodological contribution enriches the qualitative paradigm of audit committee research studies, which are largely dominated by quantitative research methods.
7.3.1 The empirical contribution
There is disagreement in the corporate governance literature about the extent to which an audit committee is associated with the integrity of corporate financial reporting. Since the Cadbury Committee Report (1992), establishing an audit committee in an organisation with public accountability has become globally accepted practice. Both rules-based and principles- based corporate governance regimes in the world’s major securities markets either prescribe or promote the establishment of independent and financially competent audit committees in publicly listed companies, for example, the OECD Principles of Corporate Governance (2004) and the Sarbanes-Oxley Act (2002). The audit committee quantitative literature, however, has failed to conclude that the presence of an independent, competent, and diligent audit committee is correlated with a better quality of corporate financial reporting and audit function (Turley & Zaman, 2004). This research study has provided qualitative evidence about why the actual performance of audit committees has not conformed to the theoretical framework on which the preceding empirical hypotheses were based.
Firstly, according to the evidence provided by the interviewees in the study, when performing the audit committee role, the independent status required by most of the corporate governance rules or principles, is not of concern to individual members. On the one hand, such
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independent status is superficial in nature, as firms with public accountability usually disclose the independent status by satisfying a ‘relationship test’. For example, according to the NZX listing rules, one of the attributes of an independent director is that he/she must not hold more than five percent of the voting securities of the issuer. This study argues that independence in appearance does not automatically – or necessarily - lead to objectivity as a state of mind for an audit committee member.
On the contrary, as shown from the interview data, when evaluating the performance of audit committees, members tended to justify the effectiveness of an audit committee by
identifying concrete changes in their firms as a result of the efforts of the audit committee. Since audit committees are delegated an overseeing, rather than an executive, responsibility, the
outcome of an audit committee’s work is attested to by an assurance opinion. The study demonstrated that audit committee members conclude their accomplishment of the board’s delegation by reporting or recommending to the board the acceptance of the financial statements and the audit report. It is noteworthy that the audit committees’ assurance opinions (the
recommendations to accept the reports) were never questioned or turned down by the board. Before this reporting process, however, numerous significant changes, initiated or influenced by the audit committee, may already have been accepted and implemented by the management. Although in some cases, interviewees justify these changes as being contrary to management’s wishes and therefore reaffirming the ‘independent’ status of the audit committee, this level of influence nevertheless extends beyond the overseeing and assurance scope of audit committees. Furthermore, in some cases, audit committee members/chairpersons may also be involved in selecting and mentoring executives. It is arguable whether such a substantial influence by the audit committee is of benefit to the overall integrity of a firm’s financial reporting, which relies on the individual audit committee member’s judgement and integrity. Nevertheless, it is evident that independent status, as one of the public expectations of an audit committee, may well stop at disclosure, as it is not evident in audit committee members’ accounts.
Secondly, if audit committees are expected to oversee the process of financial reporting and auditing, it is expected that audit committee members will be competent in financial reporting-related issues. As discussed in Chapter Two, the evidence provided by qualitative research studies on audit committees has not confirmed such expectations conclusively. In 2003, the New Zealand Securities Commission implemented the revised Corporate Governance Principles and Guidelines. In the same year, the NZX amended the listing rules, requiring all
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listed issuers to include a chartered accountant in their audit committee. This research study revealed that corporate directors with a chartered accountant’s qualification and an independent status, formed a group of ‘professional audit committee members’ compared to the conventional corporate directors, who seemed more concerned with the general direction of firms. As
discussed previously, the ‘professional audit committee members’ tended to justify their
existence in firms in terms of conforming to public expectations by establishing and operating a formal audit committee. By contrast, the other group of corporate directors serving on the audit committee, who were usually not chartered accountants, tended to be sceptical about the increased emphasis on the contribution of audit committees. These audit committee members justify their performance according to their interpretation of ‘good directorship’.
The two groups of audit committee members rely on each other for financial accounting expertise and firm-specific experience. Furthermore, ‘professional audit committee members’, although they usually acted as chairpersons, did not express any willingness to accept additional accountability, except for the collective accountability of the board as whole. That is the reason why almost all of the interviewees concluded that their duties were a fulfilment of the board’s delegations. This study argues that these ‘professional audit committee members’ do not represent audit committees as a whole, as there is another group of directors who serve on the committee. This is a possible reason why qualitative research on audit committees cannot conclusively prove that audit committee financial expertise is associated with the integrity of financial reporting and the auditing function.
Finally, audit committee qualitative research studies have attempted to establish the association between the frequency of audit committee meetings and the effectiveness of audit committees in terms of better quality financial reporting. In addition to the criticism against adopting meeting frequency as the only measure of audit committee diligence (DeZoort et al 2002), the qualitative research results are inconsistent and inconclusive. Several qualitative research studies have provided evidence that audit committee members work on audit committee-related issues outside formal audit committee meetings (Gédron & Bédard, 2005; Turley & Zaman, 2007). Some of the findings of this research suggest that when describing audit committee responsibilities and activities, several interviewees blurred the boundary between their audit committee responsibilities and other board responsibilities. This raises the question of whether, without audit committee meeting formalities and documentation, an audit committee can indeed exist or be separated from the board of directors’ general activities. The audit
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committee meeting formalities and documentation made audit committees visible and created a sense of serious purpose when financial reporting and auditing issues were discussed by
directors. However, it is arguable whether such a sense of seriousness could, by itself, increase the accountability of audit committee members.
Spira (1998; 2002) suggested that the audit committee is engaged in a private performance for a public audience. This research study provides evidence that this private performance is carried out by two categories of audit committee members, each of which, in its own way, is striving to fulfil a public expectation. The two distinguishable styles or approaches that audit committee members use to carry out their daily work provide a further possible explanation for the inconsistent testing results of previous qualitative audit committee studies.
This research study concludes that recent years’ emphasis on audit committees in organisations with public accountability may have enhanced the formal settings of audit
committees and created a new category of directors who are specialists in arranging formal audit committee structures. Meanwhile, other directors, who have a more conventional perspective, also played an important role in performing their audit committee’s responsibilities. It is uncertain whether the abovementioned intentionally in conforming to the public’s expectations, or either of the perspectives by itself, gives rise to an effective audit committee.
These research results and conclusions should be of value to corporate governance stakeholders. Clearly, the integrity of the financial reporting of an organisation cannot be assumed. This study recommends that the evaluation of an audit committee should be based on an assessment of the individual audit committee members within the context of their particular firms. Furthermore, it is evident that an open, qualitative, and transparent explanation and justification of audit committee actions and intentions by an audit committee member has the potential to be of more value for corporate governance stakeholders than stringent, rules-based disclosures.
7.3.2 The methodological contribution
The methodological contribution of this study will be discussed firstly by considering the issue of research reflectivity and secondly by comparing the study to previous audit committee qualitative research. Reflectivity is usually discussed from two perspectives: the researcher’s personal reflectivity, and methodological reflectivity. ‘Personal reflectivity’ involves reflecting
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upon the ways in which the values, experiences, interests, and identity of the researcher have shaped the interpretation of the research results. Personal reflectivity will be discussed first, with ‘methodological reflectivity’ discussed in the next section, when identifying limitations of the research design.
Researchers have long expressed concern with the limited vision provided by the existing measures for audit committee effectiveness, such as independence, financial expertise, and meeting frequency (DeZoort et al, 2002; Gendron & Bédard, 2005). This research study addresses the need for a qualitative research study to broaden the understanding of audit committees - not by measuring them through disclosed data, but rather by investigating what happens in real-life situations.
The study analysed and interpreted interview data from 21 audit committee members of New Zealand listed companies. The conclusions revealed two clearly distinguishable intentional orientations of audit committee members when performing and justifying their roles in their audit committees. Furthermore, the results and conclusions provide possible explanations for the inconsistent testing results of existing audit committee qualitative research studies. This research study is one of only four qualitative studies which have been constructed using a sociological theoretical framework. It has developed a new avenue, namely, to investigate the intentional processes of individual audit committee members, rather than to focus on interpreting the
interactions within the group of people who attend audit committee meetings (Spira, 1998; 2005; Gendron & Bédard, 2005; Turley & Zaman, 2007). As it is the intentional orientation that ultimately explains and justifies behaviours, it is to be hoped that future research will develop this approach further, to investigate and interpret the intentional factors of other corporate governance stakeholders.
In a study of this nature, it can be argued that the researcher’s values, beliefs, experiences, and characteristics may affect the interpretation of the research results. In this respect, the following two aspects, in particular, may result in a misunderstanding or misinterpretation of the interview data.
Firstly, it could be asked: ‘would the research results have been different if the researcher or the interviewer was a different person?’ This was addressed in the study, during the process of analysing and interpreting the interview data, by constantly asking: ‘whose voice is this – the interviewee’s or mine?’ For example, one interviewee stated that she would accept a nomination
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to serve on the audit committee again, because that was where her expertise lay and that was where she could contribute. Quoting the text of the interview transcript is an illustration of speaking in the interviewee’s voice. The researcher interpreted this statement as a representation by a ‘professional’ audit committee member, who believes in audit committees, and conforms to public expectations. Such interpretation represents the researcher speaking in her voice. In summing up the research results and conclusions, the researcher put considerable effort into distinguishing between the voices of the interviewees and the voice of the researcher.
Secondly, during the process of interpreting the interview data, the researcher maintained a critical stance towards the ‘genuine’ nature and legitimacy of the interviewees’ responses. In other words, the interviewer was alert to the possibility of the interviewees saying what they thought should be said. Although there may well be subjectivity and bias embedded in the interview data, deliberately rejecting the interviewee’s perceived subjectivity and bias could result in the injection of the researcher’s own bias. For example, several interviewees expressed satisfaction with their level of remuneration for serving on the audit committee, although the level of their remuneration did not reflect the actual workload. The researcher did not interpret these interviewees’ motivation for serving on the audit committee as being because of a passion or conscientiousness, but rather linked the discussion towards the interviewees’ serving on two or more audit committees, enabling them to generate sufficient annual income.
From the above examples, it is evident that if the interviewer or the researcher were a different person, the research results and conclusions could have been different. This fact should not, however, be used to undermine the validity of the research, but should rather be regarded as a limitation of the research findings.