Corporate Governance in the U.K: Audit Committees and disclosure Arrangements - A Web-Based Analysis

Abstract

The main objective of this research is to assess whether UK listed companies comply with the U.K code of corporate governance regarding audit committees and disclosure arrangements. The research also aims at testing whether the companies' size and board composition affect the management's decision to comply with the requirements of the U.K code. Data was collected from the U.K listed FTSE companies. Descriptive statistics including frequency tables, mean, other central tendency measures and regression analysis were used to test the research hypotheses. The findings of the descriptive statistics show most of the listed companies comply with the U.K code. The results of the regression analysis indicate a small association between the size of the companies described by the number of employees and the degree of compliance with the code. Future research should be more directed toward testing the other requirements of the code. [PUBLICATION ABSTRACT]

Headnote

Abstract

The main objective of this research is to assess whether UK listed companies comply with the U.K code of corporate governance regarding audit committees and disclosure arrangements. The research also aims at testing whether the companies' size and board composition affect the management's decision to comply with the requirements of the U.K code. Data was collected from the U.K listed FTSE companies. Descriptive statistics including frequency tables, mean, other central tendency measures and regression analysis were used to test the research hypotheses. The findings of the descriptive statistics show most of the listed companies comply with the U.K code. The results of the regression analysis indicate a small association between the size of the companies described by the number of employees and the degree of compliance with the code. Future research should be more directed toward testing the other requirements of the code.

Keywords: Corporate Governance, Audit committees, Disclosure arrangements, nonexecutive directors, board composition.

Introduction

After a multitude of high profile business failures and accounting restatements (Enron, WorldCom and Quest) in 2001 and early 2002, the U.S Congress attempted to regain the investor confidence in the financial reporting process by issuing the Sarbanes-Oxley Act of 2002 (SOX). This law has required auditors to increase their audit work on internal control systems and placed pressures on audit firms to reconsider their audit process for publicly traded companies. In July 2003, a combined code of corporate governance replaced the combined code originally issued by the Hampel Committee on corporate governance in the U.Kin June 1998. The replacement of the 1998 code followed the collapse of a large number of companies in the US and attempted to protect shareholders and investors' interests in the Financial Times London Stock Exchange (FTSE). The code's main and supporting governance principles covered a number of important issues related to the day to day operations of the company including the management of the company by the board of directors, board members remunerations, management accountability, and management relations with shareholders, internal control and audit committee guidelines. As stated in the preamble of the code listed companies are expected to comply with the code provisions most of the time and departure from the provisions of the code may be justified in particular circumstances.

This research aims at determining whether listed companies in the U.K do comply with the provisions of the combined code of corporate governance regarding audit committees and disclosure arrangements. The area of corporate governance is an important topic especially with the current financial crisis affecting many economies and related businesses. In such circumstances, there is a need for better and more enhanced control over the operations of FTSE listed companies. In addition, the research also aims at determining whether the characteristics of some listed companies mainly the size of the companies and the composition of the board can affect management's decision to comply with the code. The size of the company can be interpreted using the companies' total turnover and number of employees while the number of non-executive directors will be used to describe the composition of the board.

The research study is composed of four sections. The first section is an introductory providing insight into the research question and related objectives. Section 2 reviews the literature related to the evolution of corporate governance in the U.K Furthermore, this section presents some of the literature that shows how companies' performance has been enhanced by issuing corporate governance principles and guidelines. The duality in roles by the chairman and CEO, board composition & non-executive directors and the role of audit committee are analyzed in this respect. Section 3 discusses the research methodology used including the design of a checklist based on the provisions of the code especially regarding the audit committees and disclosure practices. It also presents the statistical analysis and data collection methods. Section 4 presents the research conclusions, limitations and recommendations for future research.

Literature Review

Corporate governance was defined as 'a system by which companies are directed and controlled' (Cadbury report 1992, p.5). Corporate governance was also described as an ''internal system encompassing policies, processes and people, which serve the needs of shareholders and other stakeholders by directing and controlling management activities with good business sway, objectivity accountability and integrity'' (O'Donovan, 2008). Corporate governance is understood as a set of relationships between a company, its management, its board, its shareholders and other stakeholders. Corporate governance is highly rated as it not only provides the structure through which companies objectives are set but also how they are monitored, maintained and achieved. Figure (1) describes the classic the corporate governance structure.

Having a bad corporate governance structure may be disadvantageous as it can threaten the integrity of governance professionals in terms of their public reputation and their professional liability (Jones and Pollitt, 2001). Broadly speaking, corporate governance deals with external aspects such as the relationships with stakeholders as well as internal aspects such as internal controls and board structures. (Mallin et al, 2005). In fact, corporate governance is an essential tool nowadays for any corporate success and affects many aspects of the organization and business activities. In the U.K there were three major periods identified for the evolution of corporate governance. The 1st period was characterized by the dominance of the funding family and began from the industrial revolution to the 1920s. The 2nd period was mainly marked by the rise of the professional manager concept and covered the time following the 1920s to the 1970s. The 3rd period from the 1970s was characterized by the increased accountability to the society (Gomez and Korine, 2005).

Following the prolonged period of economic growth in the 1980s the economy began to show signs of overheating mainly through rises in GDP growth and asset prices. This led to major scandals in the U.K in the late 1980s and early 1990s such as the collapses of BCCI, Guinness, and Polly Beck as well as the controversy over directors pay and the lack of controls and business conduct (Jones and Pollitt, 2001).The Cadbury report was issued in 1992 as a first attempt to try and provide guidelines and foundations of a set of corporate governance codes so that scandals and business collapses could be minimized in the future and was a product of the Financial Reporting Council, the London Stock Exchange and the accountancy profession. Table 2 presents the main recommendations of the Cadbury report.

The main feature of Cadbury report was self regulation approach whereby reporting of compliance to the code was part of the listing requirements for public companies in their annual reports showing the extent of compliance with the code. However, the Cadbury report failed to achieve its objectives due to the limitations of its mandate report as it was silent on non financial aspects of governance and to the size of a firm (Boyd, 1996). There was no distinction made between large and small listed firms in terms of compliance with the code. Furthermore, Cadbury report had recommended the establishment of a remuneration committee consisting of non executive directors but details of its policies had not been precluded or examined. Moreover, Cadbury report did not go in detail about the level of executive pay (Conyon and Peck, 1998).

As a result of all such criticism, the Greenbury report was issued in 1995 covering the level of executive pay and director's remuneration (Greenbury, 1995). The report addressed the functioning of the remuneration committee made up of non executives who would determine both individual executive pay and pay policy. The remuneration committee was responsible for issuing a statement of compliance or non compliance in the annual report. The report also emphasized the importance of timely and accurate disclosure. In 1998, the Hampel report was later issued to review the progress of companies in compliance status, promote high standards of corporate governance in the interest of investors' protection and to preserve and enhance the standing of listed companies in corporate governance levels (Hampel, 1998). The main recommendation was that companies should include in their annual reports a narrative statement of how they apply the relevant principles of corporate governance to their particular circumstances. However, the report can be seen as endorsing the Cadbury report but adding nothing new to the main requirements of such report (Dahya et al, 2002).

To overcome application problems of the Hampel report, a Turnbull Report and revised Combined Codes were issued in 1999, 2003 and 2008 respectively. The Turnbull Report focused on how to implement best practice systems of internal control, the need for a board statement on internal control and discussed the appropriateness of having an internal audit function (Turnbull, 1999). The report was short and generally perceived as completed the work leftunfinished by the Hempel report in this area. At the same time, the revised Combined Code issued in 2003 aimed primarily to advance the best practice through revisions of the code and to focus more on the behaviors and relationships of the best people available, their good qualifications and relevant experience, which are essential for an effective board. Finally, the revised code issued in 2008 included guidelines of the audit committee that were separately published for listed companies (FRC, 2008).

The issuance of the first Combined Code in 1998 was not mandatory confirming the tradition characterizing the U.K regulating environment which is evident in voluntary disclosures rather than legal enforcements. The philosophy of the 'comply or explain' principle offers intelligent discretion and flexibility and allows for exceptions of the actual rules. As Higgs (2003, p.3) stated in his research study: 'The brightness and rigidity of legislation cannot dictate the behaviour or strengthen the trust I believe is fundamental to the effective unitary board and to superior corporate governance.' U.K listed companies are also required to issue a statement of compliance with the detailed principles of the combined code in their annual reports. The main role of the combined code is to shiftthe balance of power held by the company's board and its subsequent subcommittees away from the company's main executive directors and instead give greater prominence to non executive directors' independence and role in the decision making process and different companies corporate governance structures. The code also emphasizes the importance of the separation between both roles of the company's chairman and CEOs. Furthermore the code sets out provisions relating to the composition of the board of directors and its main principles and duties as well as clearly setting out the functions of the three main committees which are the remuneration, audit and nomination committees as well as stressing the importance of the need for non executive directors in the boards. In the following sections the researcher will discuss details associated with the main characteristics of the code of corporate governance.

The U.K code of corporate governance regards duality as undesirable and recommends the separation of the CEO and chairman positions i.e. no one person should hold both posts. This is to avoid concentration in the decision making in only one individual and to maintain the balance of power within the board of directors. Prior research on the impact of duality of CEOs and chairman duties has given different results. Jensen (1993) points out that when one individual holds both positions, internal control systems may fail as key functions of the board cannot effectively perform their duties which also include evaluations and firing of the existent CEO. Forker (1992) was of the opinion that duality was associated with poor disclosure which in turn results in ineffective monitoring of managerial opportunistic behaviour. Moreover, Fama and Jensen (1983) concluded that the concentration of all decisions (management and control) in one person reduces the required effectiveness needed in monitoring top management. Another study by Cosh et al (2006) found that duality has a negative impact on announcements and long run returns but a relatively positive effect on key operating performance measures. Brickely et al (1997) also found that separate CEO and chairman may engender costs in monitoring the chairman and information sharing costs between them.

On the other hand, Boyd (1995) found that combining both roles in one person is associated with higher profitability. In contrast Rechner and Dalton (1991) found that combining the roles of a chairman and CEO reduces profitability whereas Baliga et al (1996) found no effect on performance. Based upon the findings of all the above studies, the researchers believe that the separation of CEO and chairman positions is important for better management of the company and possible control effectiveness over the business operations.

The board of directors is seen as an internal mechanism whose main duties are to take some of the major decisions on behalf of shareholders and to align owners' incentives with the management by ensuring that the management behaviour is consistent with the owners' interest. In a research study by Butler (1985) he found that board of directors dominated by outside directors are more likely to behave in shareholders' interest. However this was not always the case as Holl (1975) found insignificant differences. Other studies such as the one made by Faccio and Lasfer (1999) found no specific relationship between board ownership and firm value in general. This was also confirmed in US in a study by Hermalin and Weisback (2003) as they found no association between firm performance and board composition.

However, the effects of board composition on voluntary disclosures were mixed as Beasley (1996) found that non executive directors are positively related with the board's ability to influence voluntary disclosure decisions. Dahya et al (2007) found that board composition has no meaningful impact on financial performance. It is also often believed that the smaller the boards the more effective they are specially in taking specific and important decisions. This was confirmed by Lipton and Lorsch (1992) and Jensen (1993) as they criticized the performance of large boards' problems in poor communication and decision making. According to Jensen (1993) as groups increase in size they become less effective because the coordination and process problems overwhelm the advantages from having more people to draw on. In addition to that CEO performance incentives provided by the board through compensation and threat of dismissal operate less strongly as board size increases and financial ratios related to profitability and operating efficiency appear to decline as board size grows. Also, the effect of the board size was found to have an insignificant effect on takeover by firms. This was confirmed in the U.K in a study by Conyon and Peck (1998) who examined 481 listed companies from 1992 to 1995 and found a negative effect of board size on both market and book value and profitability.

At the same time, non executive directors (NED) are defined as being independent of executive management positions or other management functions of the company and free from any relationships which may affect their judgment. Some of the advantages of having a large number of non executive directors are the valuable business experience and views they offer (Hanniffa and Cooke, 2002). In addition, non executive directors can also contribute to objectivity, impartiality as they look at decisions and issues from a wider and broader perspective than executive directors. Moreover, they are able under the new provisions of the combined code to challenge policies of the executive directors which they feel are not in the interest of the company's shareholders. The reasons for the effective monitoring of companies' board decisions by non executive directors are reputation concerns and fear of lawsuits.

Hermalin and Weisbach (1991) and Dahya et al (2007) found no relation between firm performance and function of outside directors. This was not supported in a research by Baysinger and Butler (1985) as they found that companies perform better if there are more outsiders in the board. Rosenstein and Wyatt (1990) also found out that new appointments of non executive directors are linked with company performance. Another study by Klein (2002) examines whether audit committees and board characteristics are related to earnings management to the firm. He found that firms with board committee of more than a majority of independent directors are more likely to have abnormal accruals than others. Using a Cross sectional analysis he found a negative association between abnormal accruals and the percentage of independent directors but no evidence of a systematic association between having an independent audit committee and abnormal accruals. Finally, it was tested that the proportion of non-executive directors is associated with better specific decisions including acquisitions, CEO turnover and executive compensation (Hermalin and Weisbach, 2003).

However having a large number of non executive directors may be disadvantageous as they only meet a few times during a year and hence perform their duties on an irregular basis. (Pass, 2006; Weir and Laing, 2000). Also, outside directors often lack the information necessary for decision making as they do not fully understand the business or have little time to devote to their duties. This fact was supported by Yermack (1996) as a negative relationship between the proportion of outside directors and company's performance was found. Another study by Weir and Laing (2000) showed that the number of non executive directors in the U.S have an insignificant impact on share price performance but a relatively negative impact on profitability. The results of all the above studies confirm the notion that the board of directors and its composition is an important issue in corporate governance and the success of any company is significantly measured by the board effectiveness and independence.

From the above analysis, we can identify a number of research hypotheses interpreting the decision of compliance with the U.K code. As shown in the hypotheses below, the decision of compliance may be affected by the size of the company and/or the composition of the board. The size of the company can be interpreted using the companies' total turnover and number of employees while the number of non-executive directors will be used to describe the composition of the board.

H1: The listed companies in the U.K comply with the requirements of the code of corporate governance regarding disclosure arrangements.

H2: There is a relationship between the size of the company and the level of compliance with disclosure arrangements.

H3: There is a relationship between the composition of the board and the level of compliance with disclosure arrangements.

Over the past years the role of audit committees has developed dramatically to meet the challenges of changing economic, social and business environments and is seen as a powerful device for improving value of relevant intellectual capital disclosure. The audit committee should consist mainly of non executives. The audit committee's memberships should not include directors who are current employees, former employees within the last three years, employees who have cross compensation committee links nor have immediate family members of an executive officer.

Three key provisions were stated in the U.K Combined Code of 2003 and audit committee guidelines in 2008 regarding the composition of audit committees.

* At least one audit committee member should have relevant financial experience

* Three meetings should be held annually to coincide with duties within the audit and financial reporting cycle

* only relevant members and the chairman should be present at the meetings

Different studies were carried out to test whether audit committees have a key role in the success and performance of a company. Ho and Wong (2001) found out that effective audit committees would certainly improve internal control mechanisms and act as means of minimizing agency costs and the presence of an audit committee is closely associated with more reliable financial reporting, enhanced quality and increased disclosure. This view was also shared by Olson (1999) as he concluded that inactive audit committees would merely monitor managements effectively and hence lead to a negative impact on the company. Again the issue of independence and non executive directors are crucial for audit committees.

Other studies confirmed the fact that audit committees composed of less than a majority of independent directors are more likely to have a high ratio of abnormal accruals than others. Klein (2002) argued that board independence and audit committees are positively related to market to book values past negative earnings and the size of a firm. However a different case study by Mangena and Pike (2005) found no relationship between the size and independence of audit committees and voluntary disclosure arrangements made by companies. To sum up, studies may have provided different findings associated with the role of the audit committee in enhancing the company's performance but all agreed that it is an important element of corporate governance. The more independent and qualified the members of the audit committee, the better they serve stakeholders and other users in ensuring proper control over the company's activities and performance.

From the above analysis, a number of research hypotheses can be identified to interpret the decision of compliance with the U.K code. As shown in the hypotheses below, the decision of compliance may be affected by the size of the company and/or the composition of the board.

H4: The listed companies in the U.K comply with the requirements of the code of corporate governance regarding audit committees.

H5: There is a relationship between the size of the company and the level of compliance with audit committees.

H6: There is a relationship between the composition of the board and the level of compliance with audit committees.

Research Methodology

Data was collected using a checklist constructed to test the level of compliance of U.K listed companies with the combined code concerning mainly the audit committees and disclosure arrangements. The audit committee part in the checklist included 14 sub elements discussing guidelines related to the composition and function of the committee whereas the disclosure arrangements included 15 sub elements for good disclosure practices and as a whole the checklist is about 3 pages long. The 1st part of the data collection was done manually. The researchers used the internet to access the most recent annual reports of the top (FTSE) 100 companies in the U.K which was for the year 2008. The Financial Times London Stock Exchange (FTSE) is known to be one of the most attractive stock markets in the world and an active market for IPO (Initial Public Offering) for both local and foreign companies, a matter which will require procedures or elements of corporate governance to protect the funds of those investors. The checklist was then used to examine if each company would comply with the main requirements of audit committees and disclosure arrangements. When compliance was evident a 1 was ticked otherwise it was given a Zero. This process was repeated for each of the (FTSE) 100 U.K companies. Most of the data collected was of qualitative nature.

The second part of the data was collected using the software Financial Analysis Made Easy Database (FAME). Several aspects for the size of the company and the composition of the board such as the company's latest turnover figure, number of employees and the number of non executive directors for all of the (FTSE) 100 U.K companies were collected in order to perform the detailed descriptive statistics as well as regression analysis and to test whether any of the characteristics of listed companies do have any effect on the degree of compliance with the code of corporate governance. In cases where data required was not available in specific companies, they were not replaced but instead treated as not available information and those companies with missing aspects were totally ignored in the regression analysis performed thereafter. Therefore in the regressions the number of observations were not 100 but varied between 82 and 87 according to the variables chosen for testing purposes.

Data Analysis

Several central tendency measures such as the mean, mode, median were computed to assess the average degree of compliance of all U.K companies in respect to the code of corporate governance. However, estimating the mean values had some difficulties as they are sometimes influenced by extreme values therefore other central tendency measures were also undertaken and performed to strengthen and support the analysis findings. On the other hand, data variation can be measured in three different ways: standard deviation, range (minimum and maximum values) and percentiles. The researchers computed the above measures to show the spread of the results more clearly and give a better picture of them. To be able to compare the spread of data between the financial measures, which are of different magnitudes, the coefficient of variation was also computed as its values can be easily compared and the larger the coefficient of variation the larger the relative spread of the data (Saunders et al, 2006). The researchers analyzed these variations and gave possible interpretations and explanations when evident.

Regression Analysis

The second part of the analysis covered a multiple regression analysis made in order to test whether there is any association or relationship between the three independent variables chosen: Number of non executive directors, latest turnover figure and finally the number of employees in each firm and the degree of compliance by companies in relation to the audit committees and disclosure arrangements. The researchers used the statistical software package ''Stata'' which main capabilities include data management, statistical analysis and custom programming. The researchers made several regressions of each individual variable on the degree of compliance. The three main aspects which were looked at were: first, the coefficient which mainly shows the magnitude and direction and the variation of the regression. The second and most important aspect to be considered is the p-value which shows if the test is significant or not. Finally, the R2 which mainly explains how much of the dependant variable is explained by the independent variable was calculated and the higher the percentage the better. Then, multiple regressions were performed including all 3 independent variables in order to get clearer results as each model alone was not that significant. Multiple regressions on each compliance aspect alone were made: the audit committees and the disclosure arrangements in order to test whether there might be any association between the independent variables chosen and each individual compliance aspect.

Results of Descriptive Analysis of the Disclosure Arrangements

Table 3 presents the main elements of the disclosure arrangements under the U.K code of corporate governance and the degree of compliance by listed U.K companies. The main disclosure elements cover several aspects such as the composition of the board and its members as well as the 3 main committees represented by the remuneration, audit and nomination and their respective duties. It also covers elements such as the role, names and functions of the non executive directors.

Under the disclosure arrangements there were 15 elements selected for testing. Two elements are complied with by all of the (FTSE) 100 companies. The elements are the disclosure of the names of the board, CEO and chairman and the second is the going concern element. This is expected as every company is required to include such information in their annual reports including the going concern assumption. There were 2 elements not complied with at all by the whole group of listed companies. They cover reasons should be provided if no internal audit function exist and situations where the audit committee recommendations are not accepted. These disclosures were not adhered to by companies unless matters exist or occur. However these aspects were included by the researchers in the design of the checklist to maintain the originality and the same elements as shown in the U.K code.

Out of the 15 available elements seven are complied with by a percentage of 95% or higher which is a significant figure and shows that half of the elements under the disclosure arrangements are complied with by almost all of the companies. These elements include disclosure about the nomination and remuneration committees and their responsibilities, the number of board members and subcommittee meetings and attendance by directors, the review of the internal control, a separate section describing the work of the audit committee and finally the performance evaluation of the board, its committees and directors. In addition, two third of the elements of disclosure arrangements are complied with by almost 80 companies showing significant level of compliance of the code for disclosure arrangements. Table 4 shows a summary of the descriptive statistics' results in relation to disclosure arrangements elements. The mean average compliance is almost 70% increases to 80% if we exclude the last 2 elements with a compliance of 0%. This indicates that companies are complying with the majority of the elements mentioned in the combined code and its related attachments in respect to disclosure arrangements. The above results provide evidence for the acceptance of H1.

However, the researchers noticed the wide spread of data as shown by the minimum and maximum results given by 0 and 100. Percentile statistics show that although the 25th percentile rank is 46 which are due to the 2 elements not complied with by any company it only implies that a minority of companies don't comply with the majority of the code issues selected for testing. Moreover looking at the 50th percentile rank it can be seen that about half of the elements are complied with by a very high number of companies, namely 88. Finally, the coefficient of variation is calculated and is found to be over 50% which means that there is a large spread of data and the data are uniform i.e. less dispersed.

From the results obtained we can state that the code of corporate governance is mainly used by companies as a guideline and as a help to maintain good corporate governance structures and norms but not as a strict code where all companies should comply with all its requirements.

Results of the analysis of audit committee elements

Table 5 provides the results of the descriptive analysis regarding elements of the audit committees. The findings of the descriptive analysis show that the highest element of compliance was the audit committee meetings with a minimum of 3 times a year. The majority of companies had active audit committee with some of them having 6 or more meetings per year. The majority of companies also disclosed the terms of reference of the audit committee besides giving the names of the members of the committee and their qualifications. An average of around 95% was found for all the above mentioned characteristics for the audit committee guidelines.

Moreover, 90 companies representing 90% of those listed in FTSE provided on their website separate sections to describe the work of audit committee and its responsibilities. This provides strong evidence about the willingness of the management to show an effective monitoring role of the committee of the company's internal control system, audit function and management risk models. The approval of the appointment of internal audit head by audit committee represented only 16%, a low compliance percentage indicating continued struggles between top management and the audit committee about such decision making. It is expected that with the wide recognition of the role of the audit committee this element would be enhanced and the audit committee will have a better say in the appointment of the Head of internal audit department. At the same time, the low level of compliance (only 16%) of whether audit committee approves non audit services for external auditor may not reflect non-compliance with the code in this matter but rather companies refuse to require such services from their external auditors.

In addition, the existence of any disagreements between the board and audit committee had a low percentage. This may be justified as no disputes might have occurred between the two bodies or disputes may have occurred but quickly solved through discussion and appropriate decision by both parties. Out of the 14 available elements there were 5 elements complied with by a percentage of over 90% and 9 elements were complied with by 80% of the companies which is a reasonably acceptable figures and shows that the majority of companies are complying with the code regarding audit committee requirements.

Table 6 includes a summary of the descriptive statistics results for audit committees. The mean average compliance is 65.71%, however excluding the last element which is only complied with by 1 company the mean increases to 70% which is a reasonably good figure. Such results show that companies are complying with the majority of elements in the code in respect to audit committees. It is also evident that the mean and median are not far apart which may imply that the measures can be approximated to a normal distribution. The mode value, however, shows no elements complied with by the same number of companies. Also noticeable is the spread of data as shown in the minimum and maximum values which are 1 and 97 respectively. The percentiles are also calculated to support the fact that data are spread widely however it is clear from the 50th percentile that over half of the elements are complied with by a percentage of 83% which is a relatively high number.

Finally the standard deviation is calculated and found to be 34.44601, showing the extent to which the values differ from the mean. However to get clearer results the coefficient of variation is calculated (52.41784 %) which is over 50% supporting the existence of a large spread of data and only few elements are not complied with by some companies. The coefficient of variation result of over 50% also shows that data are uniform i.e. less dispersed. The above results provide evidence for the acceptance of H4.

Results of the Regression Analysis

To test whether there is any association between the level of compliance for both audit committees and disclosure arrangements figure and the three independent variables latest turnover figure, the number of employees and the number of directors, a regression is performed for each independent variable and the total degree of compliance. The results of these three regressions obtained were that each model alone is not significant except for the regression containing the number of employees with a p-value of .006 = 0.6% which is significant at the 5% & 1% levels. The problem with such result is that the coefficient was very small. The p-values for the other two regressed variables are 0.103 and 0.754 respectively which in turn are insignificant.

Regression results for all 3 individual variables combined with compliance figure

To investigate further, we specified our model better by controlling for the three variables in the same model. The main results are as follows:

* For every 1 point increase in the latest turnover figure the percentage change in compliance changes by an increase in 1.56 x 10-8. Its accompanied p-value is 0.048 which in turn is almost insignificant.

* For every 1 point increase in the number of employees the change in the compliance figure is a decrease by 0.0000129 and a p-value of 0.012 which is significant however with a small magnitude.

* For every 1 point increase in the number of non executive directors the change in the compliance figure is an increase by 0.0960487 and a p-value of 0.531 which is insignificant at the 5% level.

Also the R2 (0.1094) obtained suggests that 10% of the regression is explained by the specified model chosen which is not a confirming figure but an acceptable one. Reasons for the low R2 obtained may be because compliance by firms with the code is discretionary and voluntary to the management's decision hence there is no obligation on firms to comply. Another reason for the low R2 may be that the 3 variables looked upon in this research are not that sufficient to find any relationship or association so there is a need for looking at other variables.

The most important finding of the regressions performed is that the variable of the number of employees although with a very small magnitude is significant at the 5 % level hence there is some association with the total compliance figure. The scientific interpretation from the above results is that as the number of employees increases the average total compliance degree decreases so it is preferable for companies to have a controlled number of employees to cover the implementation of its operations.

Regression of all 3 variables and audit committees compliance figure

The results of the regression for all 3 variables and audit committees however were very similar to the ones obtained previously with the total degree of compliance as the number of employee variable was the only one found to be significant although with an extremely small magnitude as well as the R2 figure which is approximately 10% hence both results are identical to the ones found previously.

Regression results for all 3 variables and disclosure compliance figure

In relation to the compliance figure of the disclosure arrangements the p-value of the number of employees' variable in the regression was the only figure with a significant result of 0.032 at the 95% confidence interval. This suggests that there is a reasonably fair association between the number of employees and the compliance figure relating to disclosure arrangements hence a 1 point change in the employee figure results in a change in compliance relating to disclosure arrangements by a decrease of 4.8 x 10-6. Thus, the lower the number of employees the better and more effective they can be monitored hence leading to more controlled work and better level of compliance.

In summary it can be said that although there might be a small association between the number of employees and the different compliance figures in total the 3 variables chosen have not been found to have a good relationship to the compliance figures. Thus, the degree of compliance by companies might be due to other factors or other explanations requiring further research and analysis. The above results provide evidence for rejecting H3 and H6 as no relationship was found between the composition of the board and the level of compliance with the U.K code. Furthermore, the findings also rejected H2 and H5 as no relationship existed between the size of company described by the total turnover and the level of compliance of the U.K code with some significant relationship found between the number of employees and level of compliance for both audit committees and disclosure arrangements.

Conclusion, Limitations and Recommendations

Corporate governance has become so important since 2002 as series of corporate frauds and other catastrophes led to the destruction of billions of dollars of investments, the loss of thousands of jobs, the criminal investigation and record-breaking bankruptcy filings. All these conditions beside the need to restore the good reputation of the accounting profession and protecting shareholders' interest created the need for tools and principles that increase transparency. In 2003, a combined code of corporate governance was introduced in the U.K covering several corporate governance structures and combining all main principles covered in previously published codes and laws (Cadbury (1992), Greenbury (1995), and Turnbull (1999)). Companies are required as a matter of best practice to fully comply with many of the aspects of the code and its amendments issued in 2008 and if not explanations should be provided. The current research was prepared to investigate and test the level of compliance by the (FTSE) 100 companies for two main aspects of the code mainly the audit committees and disclosure arrangements.

The research methodology included the literature review covering issues and matters relating to the nature of corporate governance with an overview of the evolution of corporate governance codes in the U.K Moreover, the research analyzed the main characteristics of corporate governance such as duality, board composition and non executive directors and audit committees and reviewed previously made researches on whether these characteristics have any effect on companies' performance. Six hypotheses were developed. Two of these hypotheses, H1 and H4, tested whether U.K listed companies comply with the code of corporate governance regarding audit committees and disclosure arrangements. The other four, H2, H3, H5 and H6, tested whether relationships existed between the size of the companies and board composition and the level of compliance with the U.K code. A detailed descriptive analysis was performed. A regression analysis was also undertaken to test whether there might be any association between the different levels of compliance and companies size and three independent variables namely turnover figure, number of employees and number of non-executive directors

The results of the descriptive analysis indicate that the average degree of compliance relating to both the audit committees and disclosure arrangements was found to be around 70%. This is a significant result and confirms the acceptance of H1 and H4. The findings showed that companies are nowadays using the code as a good base for their corporate governance structures and performance assessment. There is a need, however, for companies to place more emphasis on different elements such as internal audit work and non audit services. Only a small number of companies comply with those elements. The main findings of the regressions performed was that except for a small association found between the number of employees and compliance figure (total and for each requirement alone) there is no significant association found between the other two variables (i.e. turnover-and the number of non executive directors).

There are a number of limitations associated with the current research. First, the testing of the level of compliance by listed companies of the code of corporate governance was limited to two main elements of corporate governance namely the audit committee and disclosure arrangements. Other elements which have not been tested include the role of the board of directors, the external auditors, nomination and remuneration committees etc. Second the study examined elements of audit committee and disclosure arrangements for the FTSE 100 companies without testing for other companies listed in the FTLSE. Thus, the results of the study cannot be generalized. Third, a limited number of companies' characteristics namely the number of non executive directors, number of employees and latest turnover figure were used to assess their effects on the level of compliance by companies. Other characteristics including the size of the company, capital of the company, total assets, and type of industry have not been tested. Fourth, the limited number of non complying listed companies did not allow the researchers to make more detailed investigations about possible reasons for such non compliance using either interviews or telephone calls with the investor relation officers of specific companies, a matter which was planned to be undertaken if the results provided ways to investigate such noncompliance status.

However, a number of important recommendations can be derived from the findings of this research. First, other listed companies' characteristics mainly the type of industry, profitability and the size of the company assessed either by owners' equity or capital must be analyzed and studied to test whether there is a significant relationship between these elements and the level of compliance with the U.K code. Second, a larger sample of companies listed in the FTSE must be selected for testing compliance levels to ensure a good representation of the operating environment in the U.K coupled with an assessment of companies' characteristics to provide some insights into the reasons behind a high level of compliance with the code. Third, interviews should be made with the investor relation officers of some of these listed companies to inquire about reasons of non compliance with some of the elements of the combined code and to identify management objectives associated with high compliance with the combined code.

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