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Audit committee effectiveness: An empirical investigation of the contribution of power

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The audit committee is viewed by many as an important and perhaps critical link in the financial reporting process. For example, the Treadway Commission states:

An audit committee consisting of independent directors is the primary vehicle that the board of directors uses to discharge its responsibility with respect to the company's financial reporting. (NCFFR 1987, 183)

Authorities from the public sector, the accounting profession, and the corporate establishment have delegated a wide range of responsibilities to audit committees (e.g., AICPA 1967; U.S. Congress 1976; Commission on Auditors' Responsibilities 1978; New York Stock Exchange 1977: National Association of Securities Dealers 1987). Audit and management practitioners view the Treadway Commission's recommendations as having important implications for audit practice and the financial reporting process (e.g., Herdman and Neary 1988; Kolton 1988; Bull and Sharp 1989; Marsh and Powell 1989). The public accounting profession formally views audit committees as one of several factors that "constrain improper conduct by senior management" (AICPA 1990, AU316).

Despite the status entrusted to audit committees, research on audit committee effectiveness has been limited. Whether audit committees are actually discharging their important responsibilities remains insufficiently understood. This study examines the nature and extent of audit committee power. Rather than implicitly assuming that audit committees have power by virtue of their formal organizational mandate, power is evaluated as a multifaceted construct that includes, but also goes beyond, this formal empowerment by the organization. The purpose of this approach is to link audit committee power to its effectiveness through the use of two models. The first assumes that each type of power has a similar direct effect on effectiveness. The second includes more explicit expectations regarding interrelationships among types of power.


Prior research uses different approaches to study audit committees. Some studies have compared various characteristics of...