Audit committee diversity and corporate scandals: evidence from the UK

• DOI: https://doi.org/10.1108/IJAIM-01-2021-0024
• Published date: 14 October 2021
• Date: 14 October 2021
• Pages: 734-763
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Craig McLaughlin,Stephen Armstrong,Maha W. Moustafa,Ahmed A. Elamer

Audit committee diversity and

corporate scandals: evidence from

the UK

Craig McLaughlin and Stephen Armstrong

Strathclyde Business School, Glasgow, UK

Maha W. Moustafa

School of Computing, Electronics and Maths, Coventry University, Coventry, UK

and Faculty of Commerce, Mansoura University, Mansoura, Egypt, and

Ahmed A. Elamer

Brunel Business School, Brunel University London, Kingston Lane, London, UK,

and Department of Accounting, Faculty of Commerce, Mansoura University,

Mansoura, Egypt

Abstract

Purpose –This paper aims to empiricallyanalyse specif‌ic characteristics of an audit committee that could

be associatedwith the likelihood of corporate fraud/scandal/sanctions.

Design/methodology/approach –The sampleincludes all f‌irms that were investigated by the Financial

Reporting Council throughthe audit enforcement procedure from 2014 to 2019, and two matched no-scandal

f‌irms. It useslogistic binary regression analysis to examinethe hypotheses.

Findings –Results based on the logit regression suggest that auditmember tenure and audit committee

meeting frequencyboth have positive associations to the likelihoodof corporate scandal. Complementingthis

result, the authors f‌ind negative but insignif‌icantrelationships amongst audit committee female chair,audit

committee female members percentage, audit committee qualif‌ied accountants members, audit committee

attendance,number of shares held by audit committee members, audit committee remuneration,board tenure

and the likelihoodof corporate scandal across the sample.

Research limitations/implications –The results should helpregulatory policymakers make decisions,

which could be crucial to future corporate governance. Additionally, these results should be useful to

investorswho use corporate governance as criteria forinvestment decisions.

Originality/value –The authors extend, as well as contribute to the growing literature on the audit committe e,

and therefore, wider corporate governance literature and provide originality in that it is the f‌irst,to the knowledge,

to consider two characteristics (i.e.remuneration and gender) in a UK context of corporate scandal. Also, the results

imply that the structure and diversity of the audit committee affect corporate fraud/scandal/sanctions.

Keywords UK, Corporate governance, Corporate scandals, Audit committee diversity,

Audit committee structure

Paper type Research paper

1. Introduction

A series of high-prof‌ile scandals of past three decades beginning with Enron, to the 2008

f‌inancial crisis, to recent cases such as Carillion, have led to a greater focus on corporate

Conf‌lict of interest statement: On behalf of all authors, the corresponding author states that there is no

conf‌lict of interest.

IJAIM

29,5

734

Received24 January 2021

Revised5 May 2021

12July 2021

11August 2021

Accepted11 August 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 5, 2021

pp. 734-763

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-01-2021-0024

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

governance to protect shareholders with a specif‌ic focus on audit committee structure

(El-Dyasty and Elamer, 2020; Elameret al.,2018,2019a,2020;Ghafran and O’Sullivan, 2017;

Karim et al.,2013;Li and Song, 2018;Yu and Wang, 2018). This study seeks to understand

further the impact and importance of the audit committeein preventing corporate scandals.

Audit committees remain trusted as a vital tool in the UK Corporate Governance Code,

which is yet to receive much focus in terms of audit committees and fraud/scandal/

sanctions. Thus, in this study, we make an effort to bridge the gap in f‌inancial reporting

quality literature by examining the relationship between audit committee diversity and

structure and the likelihoodof corporate fraud/scandal/sanctions.

The Corporate Governance Code in the “UK”has gone through several long processes

and improvements from its inception in 1992 to the current version seen today (Bufarwa

et al.,2020;Elamer and Benyazid, 2018;Elmagrhi et al.,2017;Feng et al., 2020). Originally,

the code was developed from recommendations of the Cadbury Committee, which took the

view that greater corporate governance control mechanisms were needed such as

subcommittees (e.g. audit committee) (Agyemang-Mintah and Schadewitz,2018, 2019;

Albitar et al., 2020a, 2020b; Karim et al.,2013;Li and Song, 2018;Yu and Wang, 2018).

Further developments were thenmade after UK reports such as the Higgs report and Smith

Committee in 2003, whichmade recommendations on the corporate governance processand

audit committee oversight,respectively. The last signif‌icant revisions to the code were made

in 2018, which was changed to consider The Green Paper Consultation and the Financial

Reporting Council’s(“FRC”) culture report. These changes always look to protect the

shareholders and the accountancy profession in promoting truth, fairness and transparency

(AlHares et al., 2020;Alshbili and Elamer, 2019;Elamer et al., 2020;Elmagrhi et al.,2018).

Yet, over the past few decades, there has been a long list high prof‌ile corporate scandals

with the most recent to this study being Thomas Cook. This research to a degree

investigates the effectivenessof the current 2018 UK Corporate GovernanceCode in terms of

the audit committee guidance. Recent corporate scandals have sparked debate over the

usefulness of the current versionof the UK Corporate Governance Code of which a key area

is the audit committee under “Audit, Risk and Internal Control”. One of the audit

committee’s main duties is to ensure the protection of shareholder’s interests through

overseeing the f‌irm’sf‌inancial reporting.Thus, instances where the FRC see f‌it to announce

public investigations of a f‌irm it can be seen asa failure of the audit committee’s monitoring

duties.

It is crucial to investigate the audit committee structure and diversity for several

important reasons. Firstly, manyaudit committee members suggest that lack of time is the

principal challenge to stronggovernance because of handling speedily expanding tasksand

workload demands driven by the current regulations and governance initiatives

(AbdelFattah et al., 2020). Unintentional costs of these fresh responsibilities include sharp

litigation and reputational risks and subsequently, members maybe unwillingness to

participate on audit committees, thus minimise the pool of audit committee members and

extra growing workload pressure(Linck et al.,2009;Sharma et al.,2020). Secondly, the audit

committee is a board of directors subcommittee,and therefore, a member working on several

boards may not inevitably work on those boards’auditcommittees. Thirdly, diverse boards’

audit committees instruct more general, strategic and performance-oriented experiences.

Hence, diverse boards’audit committees may mitigate the likelihood of corporate fraud/

scandal/sanctions.

This research contributes to a growing literature on the audit committee, and therefore,

wider corporate governance literature (Alnabsha et al.,2018;Alshbili et al., 2019;Elamer

et al., 2019a,2019b) and provides originality in that it is the f‌irst, to our knowledge, to

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