Audit committee adoption and firm value: evidence from UK financial institutions

Published date05 March 2018
Date05 March 2018
AuthorPeter Agyemang-Mintah,Hannu Schadewitz
Subject MatterAccounting & Finance,Accounting/accountancy,Accounting methods/systems
Audit committee adoption and
rm value: evidence from UK
nancial institutions
Peter Agyemang-Mintah and Hannu Schadewitz
Department of Accounting and Finance,
Turun Kauppakorkeakoulu, Turku, Finland
Purpose This paper aims to examine theimpact of audit committee (AC) adoption on the nancial value
of nancial institutionsin the UK and also to examine the impact of the establishment of an AC on rm value
during the pre/post-globalnancial crisis era.
Design/methodology/approach The paper embarks on a theoreticaland empirical literature review
on AC adoption and its impact on a rmsnancialvalue. The paper uses data from 63 nancial institutions
and covers a 12-yearperiod.
Findings The empirical resultsindicate that the adoption of an AC by nancial institutions has a positive
and statistically signicantimpact on rm value. The results from the pre-crisis period also indicate that the
adoption of an AC makesa positive and signicant contribution to rm value. However,there is no impact on
rm value during the post-crisis period. The results suggest that the entire UK economy experienced an
economicdownturn after the nancial crisis (2009-2011), and nancialrms were no exception.
Research limitations/implications This study helps to ll research gaps on the relationships
between ACs and rm value as they exist in UK nancial institutions. These ndings are important for
policymakersand regulators.
Practical implications This researchwill encourage rms to establish ACs.
Social implications This new nding aboutthe importance of rms having an AC in place is important
for policymakersand regulators.
Originality/value To the best of the authorsknowledge,this research is the rst to conduct an empirical
study of the effect of AC adoption on UK nancial institutionsand rm value. Second, no single study has
been conducted on theeffects of AC adoption and its impact on either the pre- or post-nancialcrisis periods.
This is the rstpaper to provide such empirical evidence.
Keywords UK, Financial institutions, Audit committee adoption, Firms value,
Pre and post nancial crisis
Paper type Research paper
1. Introduction
Shareholders appoint a board of directorsto scrutinise the highest decisions made within a
rm (Fama, 1980;Vefeas and Theodorous, 1998). The appointment is required by state or
country incorporation laws. Boards also provide solutions to organisational problems by
monitoring and advising executives on important decisions concerning the rm (Bozec,
2005;Baldenius et al., 2014). The monitoring or advising of the board is intended to protect
shareholder interestsby providing an objective and independent review of the actionstaken
by corporate executivesto reduce agency conicts (Klein, 1998;Fama and Jensen, 1983). The
directors on the board form part of the rms internal governance mechanism, which
ensures that the interests of shareholders and managers are closely aligned (Kang et al.,
Received13 April 2017
Revised29 June 2017
Accepted4 July 2017
InternationalJournal of
Accounting& Information
Vol.26 No. 1, 2018
pp. 205-226
© Emerald Publishing Limited
DOI 10.1108/IJAIM-04-2017-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
According to the Cadbury Committee Report, 1992, the Combined Code,2003, 2006 and
the Financial Reporting Council (FRC), 2016, a board of directors should establish board
committees for auditing, remuneration nomination, etc. to help improve efciency. These
committees are classied as key committeesbecause of their contribution to organisational
success as they help to assist in the dispatch of business activities by considering more
detail than would be convenient for the whole board. Also, these committees enhance a
rms corporate governancepolicies and improve investor condence, eventuallyimproving
nancial performance (Charkham, 2005;Financial Reporting Council (FRC),2014, 2016;
Cadbury Committee Report, 1992;Combined Code,2003, 2006). All such committees
scrutinise decisions and solveorganisational problems. This research aims to narrowdown
and focus on the adoption or the establishment of an audit committee (AC) as being one of
the most important functionsof the board of directors.
Generally, there should be at least three AC members, or in the case of smaller
companies, it can be two non-executive directors. The members should be independent and
have experience and ethical repute for making the right decisions and ensuring that the
interests of shareholders areprotected in relation to nancial reporting and internal control.
The requirements for the establishment of AC in the UK are consistent with that of India,
another Commonwealthcountry (Financial Reporting Council (FRC), 2016;Khosa,2017).
In the same vein, the functions of an AC are to monitor and review the integrity of their
rmsnancial statements and audit process and risk management systems. Further
functions include the following: to ensure professional judgement and help meet audit
standards and make recommendations to the board and shareholders regarding the
appointment, and re-appointmentand removal of an external auditor. Also, the functions of
the AC are to approve the remuneration and terms of engagement of the external auditor
and review audit fees and fees paid for any non-audit work. The AC implements policy on
the engagement of the external auditor concerningthe supply of non-audit services, serving
as a bridge between the internal auditors, externalauditors and the board of directors. The
AC is involved in whistle blowing, reviewing and monitoring the external auditors
independence and objectivity, ensuring the timely release of unbiased accounting
information by managers to shareholders, as well as helping to avoid nancial fraud and
increase rm performance (Smith, 2003;Klein, 1998;Financial Reporting Council (FRC),
2014, 2016;Mallin,2006;Walker review, 2009;Chong, 2015).
Based on these AC functions, we empirically examine whether their adoption in UK
nancial institutionscan have an impact on the nancial value of rms.
The rst motivation for conducting this research is that the AC is the only committee
that requires at least one of its members to have recent and relevant nancial experience,
and that their duties should follow relevant UK professional and regulatory requirements
(Financial Reporting Council (FRC),2014, 2016;Khosa, 2017). However, there is no strict
regulatory requirementfor the adoption of a nomination process or remuneration committee
by the board. This makes the establishment of an AC crucial to the boards success and
creates an avenue by which to ascertain empirically if its establishment has a signicant
impact on rm value.
The second motivation for embarkingon this research is that there have been numerous
corporate governance reforms in the UK (Cadbury Committee Report, 1992;Greenbury,
1995;Hampel, 1998;Combined Code,2003, 2006;Turnbull,1999, 2005;Myners, 2001;
Financial Service Authority Review (FSA review), 2002;Higgs, 2003;Tyson, 2003;Smith,
2003;Turner review, 2009;Walker review, 2009;Financial Services Bill, 2010; and the
Financial Reporting Council (FRC),2014, 2016)tohelprms improve their corporate
governance policies. However, the adoption of these codes by rms is on a voluntary basis;

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