EXPLORATORY FACTOR ANALYSIS

Exploratory Factor Analysis in the form of Principal Components Analysis was undertaken identifying the measures and clusters from all responses of the items for the selected factors i.e. role, attributes and functions under their appropriate headings according to the responses. SPSS analysed 33 items performing a forced three factor structure using Varimax rotation and found 38.32% of the variance was identified. The proposed performance factor structure investigated, that of roles, attributes and functions was identified. Three factors emerged that predominantly aligned with the proposed factors of Role (14.26%), Attributes (13.82%) and Functions (10.22%), giving a total variance explained of 38.23%.

Some cross loadings did occur. The rotated components matrix found 3 items r7 (Role 7. Do audit committees improve communication between internal organisation committees and the external auditor?), r8 (Role 8. Do audit committees improve communication between management and the external auditors?), and r9 (Role 9. Do audit committees provide a forum for arbitration between management and auditors (internal and external?) With

communalities >0.31 cross loaded on the latent construct of Roles as

hypothesised as well as on the construct of Functions. There were also some items that appeared in the alternate category. The items were Attribute att3 (Member attribute 3.Knowledge of auditing) loaded on the construct of Role; Function fun5 (Function 5.Review accounting principles, practices, and

significant changes during the year) on the construct of Attribute; Role r16 (Role 16.Does it respect the difference between oversight and line management?) on the construct of Attribute; Role r3 (Role 3.Is it strengthened by the inclusion of non-executive (independent) members?). On the construct of Attribute Role r15 (Role 15. Does it engage outside experts when appropriate?) loaded on the Attributes construct; and finally Attribute att1 (Member attribute 1.Knowledge of the organisation's business.) loaded on the Function construct.

Table 7.1

Factor loadings for the three factors of Performance and their communalities (h2)

AC = Audit Committee Roles Attributes Functions h2

Does AC discharge their responsibilities for

preventing fraud, irregularities & errors? r4 0.77 0.60

Does AC increase the confidence of Parliament and Public in the credibility and objectivity of financial statements?

r10 0.74 0.56

Does AC assist auditors in reporting serious

deficiencies? r11 0.66 0.44

Does AC assist management discharge statutory responsibilities on financial reporting?

r13 0.63 -0.59 0.63

Does AC assist management to discharge

statutory responsibilities on internal control? r12 0.60 -0.48 0.51 Does AC scrutinise compliance with

legislative requirements? r2 0.58 0.51

Does AC assist management on good

governance practices? r1 0.57 0.35

Does AC challenge management, internal

auditors and external auditors? r14 0.54 -0.50 0.45

Does AC preserve and enhance the

independence of internal auditors? r6 0.53 0.28

Does AC preserve & enhance the

independence of external auditors? r5 0.52 -0.45 0.41

Does AC improve communication between

management & the external auditor? *r8 0.51 0.35 0.34

AC Members knowledge of the business *att3 0.40 0.19

Does AC improve communication between internal organisation committees and the external auditor?

*r7 0.39 0.37 0.26

AC Members understanding of the purpose

and responsibilities of auditing att8 -0.85 0.73

AC members have sound judgement att7 -0.78 0.62

AC members available to devote the

necessary time att6 -0.64 0.42

AC review accounting principles? *fun5 -0.60 0.38

AC members chaired by enthusiastic

chairman att5 -0.57 0.33

Does AC respect the difference between

oversight and line management? *r16 -0.52 0.33

Is AC strengthened by the inclusion of non-

executive (independent) members? *r3 -0.49 0.40

AC members composed of variety of

backgrounds att4 -0.42 0.18

AC members independent from management att9 -0.39 0.24

Does AC engage outside experts when

appropriate? *r15 -0.35 0.14

AC members has knowledge of finance and

accounting. att2 -0.32 0.17

AC reviews prior to external release of

information fun7 0.73 0.55

AC reviews entire annual report fun2 0.64 0.46

AC members make sound judgement *att1 0.63 0.42

AC reviews financial reports fun4 0.57

0.40

AC review audited financial reports fun1 0.53

0.28

AC review interim reports fun3 -0.38 0.52

Does AC provide a forum for arbitration between management and auditors (internal & external)?

*r9 0.36 0.47

0.32

AC monitor compliance with FMA 1994 fun6 0.45

0.30 AC has authority to engage staff and

consultants as required? fun8 0.43 0.19

*= item either cross loading or emerged as loading on the incorrect sub factor. r = Role

att = attribute of members

fun = function, activity/ies, procedures AC = Audit Committee

The communalities indicate the degree of variance explained by each item within the emergent factor (Hills 2008).The cross loadings of r7 (Role 7 Do audit committees improve communication between internal organisation committees and the external auditor?), r8 (Role 8 Do audit committee improve communications between management and the external auditor?) and r9 (Role 9 Do audit committees provide a forum for arbitration between management and auditors[internal and external) that loaded correctly on the factor of Roles but also loaded on the sub factor Functions may suggest that the participants in this study acknowledged the wording correctly as synonymous, meaning that a Role is also interpreted, in these three questions (see Table 7.1) as a Function. i.e. These items are both practiced as an expected legislated role and also applied as processes and procedures within the respondents’ audit committee. To clarify misallocation of items into non-hypothesised constructs, the following may be explained as follows;

Attribute 1Knowledge of the organisation (att1) loaded on the factor of Function and for the majority of respondents, this item relates to knowledge of the organisation’s business. While it is assumed audit committees should be independent, the respondents were mainly actually internal and in practice apply these principals in their daily work.

Attribute 3 Knowledge of auditing (att3) loading on the factor of Role suggests that a majority of respondents may not have responded or were not auditors.

Role 3 Strengthening of the audit committee with independent members

(r3) loaded on the factor of Attributes, suggesting these respondents evaluated whether it is a requirement of the standing directions of non-executive standing members, which are organic to an audit committee. The respondents in this

sample viewed this question as a Role more than as an Attribute. In practice the majority of respondents are non-independent.

Function 5 Review accounting principles, practices and significant changes during the financial year (fun5) loaded on the factor of Attributes

suggesting the respondents rely on a specialist area to provide this review them rather than putting it into practice in their own audit committee. This may be a resulting factor relating to the diversity of respondents within this survey. Therefore, for some of the respondents, this is not perceived as their duty.

Role 15 Engagement of outside experts when appropriate (r15) and

Role 16 Respecting the difference between oversight and line management

(r16) loaded on the factor of Attributes. Both these responses indicate that the participants related the items within the questionnaire as being related as a quality they should possess rather than a role. Decision making quality appears to be aspired towards rather than as a requirement under the standing

directions and this may be due to the diversity among respondents in the way they define their role as part of the audit committee.

7.5 SUMMARY