Sample Selection

In order to evaluate the impact of different audit committee characteristics on the auditor selection process and NAS purchase decision (only in Australia), it was necessary to choose the test periods, to determine the populations of interest, to select random samples where applicable and to find out data sources.

In any study, it is essential to determine the test period, to define clearly the population of interest and to seek to ensure that the sample selected provides an accurate representation of that population (Weisberg and Bowen 1977)

5.4.3.1 Australia

The financial year 2004 was selected as the test period for Australian listed companies. This selection was made because of the following reasons.

• The new CGC recommendations were finalized and released on 31 March 2003, so it was necessary to give listed companies one year (more than 9 months for some companies) to comply with the new ASX CGC recommendations regarding audit committees.

• Although the CGC recommendations regarding audit committees were released on 31 March 2003, these recommendations will not become compulsory for companies within the S&P/ASX 300 index2 before 1 January 2005. This means that during the financial year 2004, all ASX listed

2 _{The S&P/ASX 300 index contains the largest 300 listed companies, changes over time and does not} necessary contains 300 all the time.

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companies (including the Top 300) were not required to comply with such recommendation. However, listed companies need to explain any departure of these recommendations.

As the ASX listed companies change over time, it was necessary to select a specific date during the 2004 financial year to determine the list of the ASX companies that will be the initial population for this study. Therefore, 30 June 2004 was chosen because most of the ASX listed companies have 30 June as the end of their financial year.

The researcher contacted the ASX to obtain an official list of all the ASX listed companies on 30 June 2004 through E-mail. The ASX people were very helpful and they sent back the official list on Excel file to the researcher’s E-mail. There were 1639 companies in the official list that has been received.

Despite the fact that during 2004 the GCG recommendations were not compulsory for all the ASX listed companies, these recommendations became compulsory for companies within the S&P/ASX 300 index only on 1 January 2005. This might affect the degree and time of compliance of the listed companies with the CGC during the test period. As a result and for additional and sensitivity tests analysis, it was essential to divide the initial population into two sub-populations.

The first sub-population included companies within the S&P/ASX 300 index. A list of this index was obtained on 30 June 2004 from Standard & Poor’s (S&P) Database. At that date, there were 303 companies in the index. The second sub-population consisted of the rest of ASX listed companies, which were not listed in the S&P/ASX 300 index (1336 companies).

Then each of these sub-populations was reduced for one or more of the following reasons.

• The unavailability of data for companies due to delisting, suspension or having missing data.

• The use of specialization as one of the proxies for audit quality requires that only listed companies that fall in one of the 24 industrial classifications will be included in the population. This means that all the

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listed companies that are described as having GICS (Global Industry Classification Standard) Sector Code Not Applicable will be excluded.

• Given the nature of this study which aims to evaluate the ACE in the context of auditor selection and NAS, it was necessary to reduce the population to include only these listed companies that have an audit committee for the full financial year.

• As this study aims to explore the ACE in the context of auditor selection and NAS, Telstra, which was audited by Auditor General, was excluded from the first sub-population because this auditor is assigned by the government which owns a majority of Telstra shares (lack of free auditor selection process).

These reductions resulted in the final first and second sub-populations of 297 and 753, respectively. Table 5-5 shows the number of companies in the initial two sub- populations, the reduction made and the final two sub-populations.

Table 5-5 the initial and final two sub-populations

ASX Top 300 ASX Non-Top 300

Initial Population 303 1336

- Suspended, delisted or not available 4 66 299 1270

- GICS Code not Available - 84 299 1186

- Companies without an Audit Committee 1 433 298 753

-Telstra 1 -

Final Population 297 753

Then a sample of 100 companies was randomly selected from 297 companies within the ASX Top 300 (ASXT sample). In addition, another sample of 200 companies was randomly selected from the 753 companies within the ASX Non-Top 300 (ASXNT sample). Then these two samples were added together to form the full Australian sample (ASX sample).

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The ASX companies are classified into 10 sectors, 24 industry groups, 65 different industries and 146 sub-industries (ASX 2005). However, most of the Australian studies that investigated variety of issues had used the ASX classification into industry groups. Therefore, Table 5.6 presents the ASX, ASXT and ASXNT classified by the ASX 4-digit industry group categories.

Table 5-6 the Three Australian Samples Classified by the ASX 4-digit industry group categories

ASX Code

Industry Groups ASX ASXT ASXNT

1010 Energy 13 6 7

1510 Materials 56 20 36

2010 Capital Goods 19 7 12

2020 Commercial Services & Supplies 17 4 13

2030 Transportation 11 3 8

2510 Automobile & Components 5 2 3

2520 Consumer Durables & Apparel 5 2 3

2530 Consumer Services 14 3 11

2540 Media 9 5 4

2550 Retailing 8 4 4

3010 Food & staples Retailing 2 1 1 3020 Food, Beverage & Tobacco 14 4 10 3030 Household & Personal Products 0 0 0 3510 Health Care Equipment & Services 23 6 17 3520 Pharmaceuticals & Biotechnology 15 4 11

4010 Banks 5 3 2

4020 Diversified Financials 28 3 25

4030 Insurance 4 2 2

4040 Real Estate 15 10 5

4510 Software & Services 17 6 11

4520 Technology Hardware & Equipment 8 2 6

4530 Semiconductors Equipment 0 0 0

5010 Telecommunications 10 1 9

5510 Utilities 2 2 0

Total 300 100 200

It should be noted that the number of companies that belong to Household & Personal Products and Semiconductors & Semiconductor Equipment were 1 and 2 companies, respectively. These very small numbers of companies along with the small value of the total audit fees for these two-industry groups have lead the researcher to exclude companies within these two-industry groups.

As mentioned in the methodology section, all the required data to conduct this study in Australia were available within the public domain. The sources of these data are The CONNECT 4 Database, ASX Database, Data Analysis Database and companies’ websites.

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5.4.3.2 Saudi Arabia

The SMC recommendations to enhance ACE have been there since 1994. However, some amendments have been made to these recommendations in the period from 1997 to 1999.

In addition, a survey must be conducted (time constraint) in 2004 to obtain data regarding different audit committee characteristics. In this survey, audit committee members will be asked to provide data about themselves and their audit committees for the financial year ended on 31 December 2003.

Moreover, as this study compares ACE in Australia and Saudi Arabia, it is important to have the same testing period for both countries or at least very close to avoid any impact of having two completely different test periods. Further, the majority of the Saudi listed companies use 31 December as their financial year-end. As a result, the financial year ended in 31/12/2003 will be used as the testing period for Saudi listed companies.

The initial population in Saudi Arabia was all the Saudi listed companies on 31 December 2003 obtained from the Tadawul Database. In order for a Saudi listed company to be included in this study, it has to meet three criteria:

1. has an existing audit committee;

2. has available data regarding different audit committee characteristics obtained using the questionnaire; and

3. does not belong to the electricity and telecommunication sectors, as both of these sectors have only one company, which make them inappropriate to model audit quality.

As the purpose of the questionnaire is to collect data regarding different audit committee characteristics in Saudi listed companies, a listed company will be included in the analysis if at least one of its audit committee members has completed the questionnaire. Despite the fact that 91 questionnaires were received (53%) from the audit committee members in the Saudi listed companies, these 91 questionnaires present only 44 listed companies. As a result, the full Saudi Sample consisted of only

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44 companies, which present approximately 62% of the Saudi listed companies at the end of 2003.

The SSM classified the listed companies into 7 different sectors. Table 5.7 shows the SSM sample classified into five different sectors, as the other two sectors were excluded from the analysis as discussed early in this section.

Table 5-7 the SSM sample classified into five different sectors

Sectors SSM Banks 4 Industrial 17 Cement 5 Services 13 Agriculture 5 Total 44 In the Saudi Arabian context, different data sources were used, namely, Tadawul

Database, public press, SMC website, companies websites and the completed questionnaires.