Exploring the identity of audit committee members of New Zealand listed companies

• Author: Susan Wild,Ahsan Habib,Sidney Weil,Julia Wu
• Published date: 01 July 2018
• Date: 01 July 2018
• DOI: http://doi.org/10.1111/ijau.12111

ORIGINAL ARTICLE

Exploring the identity of audit committee members of New

Zealand listed companies

Julia Wu

1

|Ahsan Habib

2

|Sidney Weil

3

|Susan Wild

1

1

Accounting and Information Systems, College

of Business and Law, University of Canterbury,

Christchurch, New Zealand

2

School of Accountancy, Massey University,

Auckland, New Zealand

3

Department of Business, Ara Institute of

Canterbury, Christchurch, New Zealand

Correspondence

Dr Julia Wu, Accounting and Information

Systems, College of Business and Law,

University of Canterbury, Private Bag 4800,

Christchurch 8140, New Zealand.

Email: julia.wu@canterbury.ac.nz

We focus on the attributes of audit committee members at an individual level through investigat-

ing their role‐based identity; this approach represents a departure from the traditional approach of

measuring their independence and financial expertise. The data revealed that there is a wide

range of backgrounds and attributes identified by New Zealand audit committee members as

being helpful in performing their responsibilities. Members’motivation and justification for

serving on the audit committees played a significant role in verifying their identity salience in

terms of being an audit committee member. Regulators and other corporate governance

stakeholders may benefit from a further understanding of the reciprocal relationship between

an audit committee mechanism and its members’identity salience.

KEYWORDS

audit committee, auditcommittee members, identities

1|INTRODUCTION

While much research has focused on audit committee regulation, pro-

cesses, and outcomes, little has gone further to examine the underlying

factors driving the choices, actions, and decisions, both individual and

collective, of audit committee members. This paper explores the link-

age between the identity of audit committee members, acting within

a significant corporate governance mechanism, and their behavioral

choices in performing their role. Two distinct types of audit committee

members are identified in the research, being those we classified as

“professional audit committee members”and as “conventional corpo-

rate directors.”For each of these groups of audit committee members,

the paper describes the particular characteristics which denote them

with the two distinctive identities we identified, and describes how

these characteristics may have contributed to the different interpreta-

tions of the meaning of their roles and their role‐related performances.

The audit committee is a subcommittee of the board of directors,

with delegated authority for the overseeing of auditing and financial

reporting‐related matters of the firm, including financial reporting,

external auditing, regulatory compliance, internal controls, and risk

management (McDaniel, Martin, & Maines, 2002). An extensive body

of knowledge has emerged regarding the association between audit

committee members’independence and accounting expertise, meeting

frequency, and the impact of these on financial reporting and audit

quality (Bédard & Gendron, 2010). The extent of such an association,

however, is subject to notable inconsistencies in the nature of the

relationship and its measured outcomes (Turley & Zaman, 2004).

Furthermore, evidence on why and how this association does, or does

not, occur remains sparse. This has led to calls for further research on

audit committees using alternative theoretical and methodological

approaches (Bédard & Gendron, 2010; DeZoort, Hermanson,

Archambeault, & Reed, 2002; Turley & Zaman, 2004). Our paper

contributes to audit committee literature in the following ways. First,

we offer answers to three research questions: (1) how do audit

committee members perceive their identity standards and their role‐

related performance? (2) How do other identities impact on members’

perception about their audit committee's role? (3) What is the essence

of the day‐to‐day routine that sustains audit committee members’self‐

identity?

Our study reveals that there are at least two distinctive types of

directors serving on audit committees: “professional audit committee

members”and “conventional corporate directors.”The former group

tends to conform to public expectations of audit committees, while

the latter group challenges the authority and formalities of audit com-

mittees. Understanding audit committee members’identity is impor-

tant because the audit committee plays a significant role in corporate

governance processes, and thus in the wellbeing of organizations and

society at large. By providing insights into the “black box”(Power &

Gendron, 2015, p. 147) of an audit committee member's life, and into

the challenges and tensions of being an audit committee member, we

hope that this will be of interest to those who are aspiring toward

directorships and/or work with audit committee members.

Received: 27 January 2017 Revised: 7 December 2017 Accepted: 10 December 2017

DOI: 10.1111/ijau.12111

164 © 2018 John Wiley & Sons Ltd Int J Audit. 2018;22:164–184.wileyonlinelibrary.com/journal/ijau

Second, our theoretical lens is a novel addition to the existing

audit committee research. With the rapid growth in economic and

social importance of the corporation since the early twentieth century,

the link between the identity of professional practitioners and

their performance in their roles has become a major focus of

business‐oriented psychological research (Burke & Reitzes, 1981).

Little attention, however, has been devoted to the investigation of

the implications of corporate governance actors’identities on their

role‐based performances. Building on the key concepts of the identity

model (Burke, 1980), “salient identity”(Serpe & Stryker, 1987; Stryker,

1980; Stryker & Serpe, 1982), “self‐identity”(Giddens, 1991; McCall &

Simmons, 1978), and their implications for “role‐based performance”

(Burke, 1980; Burke & Reitzes, 1981; McCall & Simmons, 1978), we

examine the qualitative data obtained from 21 interviews with audit

committee members in New Zealand listed companies. Our paper is

one of a small number of qualitative research studies on audit commit-

tees compared with, and complementing, the significant volume of

quantitative research in this field. Our data, although collected nearly

10 years ago, retains its validity and is necessary for ongoing research

because it provides critical information about the way the audit com-

mittee, a component of the corporate governance system, has changed

with time. Every social system undergoes some degree of change,

whether through intrinsic evolution or under the influence of external

forces. Changes in society are largely chaotic, and observable trends

are captured statistically and then regarded by many as norms. But it

is the outliers that most often provide the detailed insights that also

contribute to refining specialist knowledge.

Third, our research critically examines the implication of corporate

governance reforms driven by regulation. In reaction to the outbreak

of corporate scandals at the beginning of the twenty‐first century

and the loss of confidence in the existing corporate governance

regimes, new regulatory requirements dealing with audit committees

have been promulgated in many countries. Regulation requires the

composition of audit committees to be based solely on independence

and expertise, despite large variations in perceptions of what precisely

these attributes mean and how they contribute to the performance of

audit committees (Bédard & Gendron, 2010; Dellaportas, Leung, &

Cooper, 2012; Wu, Habib, & Weil, 2014). When organizations are

going through a change by adopting audit committees due to external

pressure, the agreement of members is at best partial, conditional, or

even instrumental. Commonly, compliance may be reluctant or even

grudging (Kenny, Whittle, & Willmott, 2016). Thus, referring to the

adoption of audit committees as a regulatory requirement, with its

assumptions about shared and consensual acceptance is, in our view,

questionable. Audit committee members should not be viewed as pas-

sive conformers with regulations (Brennan & Kirwan, 2015), because

an audit committee is a social structure in which people interact with

each other to construct and to perform their perceived roles. Beneath

their superficial compliance with the regulatory requirements, they can

support, oppose, adapt to, or avoid certain behavioral patterns, based

on their own interpretations of what it means to effectively perform

the audit committee's role.

Our research is carried out on listed firms in New Zealand, which is

not explored as often as other countries, for instance the UK and the

USA (where the major capital markets are located). In New Zealand,

most of the regulatory requirements and guidelines explicitly calling

for the establishment of audit committees took effect on listed firms

in 2004 and 2005. Our participants would therefore have experienced

a transitional period during which the establishment of audit commit-

tee mechanisms in listed firms shifted from being voluntary to compul-

sory. We capture the interviewees’reflections on the potential

changes to audit committees caused by the pressure of compliance.

Our findings therefore provide critical evidence as to how regulatory

changes take place and their complex implications.

The remainder of the paper is organized as follows: Section 2

provides a brief reexamination of relevant audit committee literature

to set the stage for the subsequent analysis; Section 3 explains the

building blocks of the theoretical framework of our research. Key con-

cepts drawn from identity, salient identity, and self‐identity theories

are discussed. Section 4 explains the research method employed in

the study; Section 5 presents the main findings and discussions;

Section 6 displays the answers to our research questions; and Section 7

discusses the limitations and implications of our paper.

2|A REEXAMINATION OF RELEVANT

AUDIT COMMITTEE LITERATURE

Growth in recent decades of the recognition of the audit committee, as

a crucial component in the success of corporate governance,has gener-

ated a substantial body of literature focused on analyzing its structure

and behavior. DeZoort et al. (2002) provided the first systematic review

of audit committee literature, focusing on the assertion that an effec-

tive audit committee could protect stakeholders’interests by ensuring

reliable financial reporting, effective internal control, and high‐quality

risk management (outcome measures). Turley and Zaman (2004)

developed a framework to organize the audit committee empirical

research, categorizing it into (a) the expectations that led to their estab-

lishment, and (b) corporate governance effects, represented by the

audit quality, financial reporting quality, and firm performance. Bédard

and Gendron (2010) extended the DeZoort et al. (2002) framework

by incorporating the process (agenda, meetings, questioning, relation-

ships, power, and leadership) and output components (internal control,

financial reporting, and external audit functions) of the audit committee

inputs (independence and financial expertise). These inputs ultimately

have an impact on investors’perceptions about an audit committee.

Research on audit committees has predominantly been

conceptualized using agency theory (Fama & Jensen, 1983; Jensen &

Meckling, 1976), which supports the premise that the board of direc-

tors and audit committees affect financial reporting quality (Cohen,

Krishnamoorthy, & Wright, 2004), audit fees (Carcello, Hermanson,

Neal, & Riley, 2002), and firm‐level cost of capital (Anderson, Mansi,

& Reeb, 2004). Other competing, but also complementary, theories

with regard to the corporate governance implications of the board of

directors include stewardship theory (Donaldson, 1990a, 1990b;

Donaldson & Davis, 1991, 1994), the resource dependence view

(Nicholson & Kiel, 2007), and managerial hegemony theory (Cohen,

Krishnamoorthy, & Wright, 2008).

Our reexamination of the audit committee literature will not

repeat the findings of the aforementioned syntheses, but will locate

WU ET AL.165