Audit Committee Charter Scope: Determinants and Effects on Audit Committee Effort

• Author: Harold F. Hassink,Laury H. Bollen,Falko Böhm
• Published date: 01 July 2016
• DOI: http://doi.org/10.1111/ijau.12060
• Date: 01 July 2016

Audit Committee Charter Scope: Determinants and Effects on Audit Committee Effort

Falko Böhm, Laury H. Bollen and Harold F. Hassink

Maastricht University

In general, it is either required or recommended that listed firms adopt, periodically update and publicly disclose a

written charter for their audit committee. The ostensible purpose of audit committee charters is to inform the investing

public about the role and responsibilities of the audit committee of a given firm and to provide authority, direction and

discipline for audit committee members. However, evidence has indicated that the audit committee charters of different

firms are boilerplate copies of each other and that firms deliberately decouple actual committee practices from the

content of their charters, perversely in those institutional settings characterized by a stringent disclosure regime. This

paper, on the other hand, provides evidence for a significant relation between the scope of responsibilities set forth in

audit committee charters of large firms and measures of actual committee activity in institutional settings characterized

by stringent disclosure regimes, and an absence thereof in voluntary disclosure settings.

Key words: Audit committee, corporate governance, disclosure, regulation.

INTRODUCTION

When the US Securities and Exchange Commission (SEC)

and the New York Stock Exchange (NYSE) first endorsed

the audit committee concept in 1940, the responsibilities

envisioned for these committees were quite narrow,

basically being limited to the nomination of the external

auditor and to setting some parameters for the auditor

engagement. More recently, though, the role and

responsibilities of the audit committee have expanded

substantially (Beasley et al., 2009) –not only in the US, but

also in all of the 30 largest economies ranked by gross

domestic product (GDP). The following excerpts from a

contemporaneous audit committee charter exemplify the

range of responsibilities that audit committees are expected

to address today.

To fulfill its responsibilities the [audit] committee shall:

Review with management and the external auditor the

Group’s financial statements, stock exchange and media

releases; Review with the external auditor the planned

scope of their audits and subsequently their audit findings;

Review the qualifications, organization, strategic focus and

resourcing of internal audit; Ensure that the company has

an effective risk management system and that macro risks

are reported at least annually to the Board; Address the

effectiveness of the Company’s internal control system;

Review the Group’s insurance cover; Review the Group’s

tax planning and compliance; Review the Group’s

whistle-blowing procedures…(Excerpts from the 2010

audit committee charter of Rio Tinto Plc.).

Yet, in spiteof the apparent and substantialexpansion of

the role and responsibilities of the corporate audit

committee, empirical evidence is scant on the existence,

causes, and consequences of cross-sectional variation in

the scope of responsibilities set forth in audit committee

charters (DeZoort et al., 2002; Bédard & Gendron, 2010). It

is surprisingthat academic research on this matterhas been

limited,given the importance that regulatorsand corporate

governanceexperts attribute to audit committeecharters as

key instruments for providing authority, direction and

discipline to audit committee members and for informing

legitimate interest groups –i.e. current and potential

shareholders, creditors, regulatory authorities –about the

committees’role and responsibilities at the firm level.

According to the Securities and Exchange Commission

(SEC) (1999), the disclosure of audit committee charters

should not only help shareholders assess the role and

responsibilities of the audit committee and thereby streng-

then investorconfidence, but also positivelyimpact the role

effectiveness of the audit committee.

However appealing these benefits may sound, practi-

tioners and scholars alike have expressed concerns that

placing coercive pressureon firms to publicly disclose their

audit committee charter may not lead to the desired

benefits for two reasons. First, institutional pressure to

disclose corporate narrative documents which fulfill the

dual purpose of providing external organizational

information as well as interna l organizational direction

can led to high levels of isomorphism in the content and

language of these documents (Holder-Webb & Cohen,

2012).

1

Second, given that it is virtually impossible for

external parties to observe consistencies between the

responsibilities disclosed in audit committee charters (the

front stage) and the actual activities of audit committees

(the back stage), firms may deliberately decouple actual

committeepractices from the charters’content(Crilly,Zollo

& Hansen, 2012; Solomon et al.,2013).

Toinvestigate the extent to which the two aforementioned

concerns are justified –i.e. the isomorphism and the de-

coupling concern –we empirically address three research

questions in this study.In a first step, we investigate whether

the scope of responsibilities disclosed in audit committee

charters differs significantly and systematically across firms.

If so, we want to test in a second step if measures of actual

audit committee activity can be associated with the scope

of responsibilities set forth in audit committee charters,

suggesting that the internal work program of audit

committees is coupled to the charters’content.

2

Finally, we

examine to what extent the answers to the aforementioned

research questions depend on the level of institutional

pressure exerted on firms to publicly disclose an audit

committee charter.

Our sample consists of 202 publicly available audit

committee charters from large-cap firms listed in countries

with different disclosure regimes. Our sample includes firms

Correspondence to: Falko Böhm, Maastricht University, School of

Business & Economics, Department of Accounting and Information

Management, P.O. Box 616, 6200 MD Maastricht, The Netherlands.

Email: F.bohm@maastrichtuniversity.nl

International Journal of Auditing doi: 10.1111/ijau.12060

Int. J. Audit. 20:119–132 (2016)

©2016 John Wiley& Sons Ltd ISSN 1090-6738