A Critical Review on the Literature about the Audit Committee
Asian Tax Journal Vol. 11 No. 4 (2010), pp. 175-217
Abstract
Audit committee was first introduced to Korea in 2000 but the history of the audit committee is very long in the other countries. In the U.S., the New York Stock Exchange (NYSE) recommended the establishment of the committee since 1940s. In 1977, the NYSE mandated the establishment for all listed companies on the NYSE. The Securities and Exchange Commission (SEC) also recommends the establishment of the committee. Blue Ribbon Committee Report(1999) also describes the role of independent and effective audit committee and the responsibility of the committee in details. It is expected that the committee plays an important role in corporate governance structure, especially as a mechanism to enhance corporate financial reporting quality and corporate transparency. The Sarbanes－Oxley Act issued in 2002 also stresses and regulates a stronger role of audit committees. Korea is not an exception. In 2000, Korean government required every firms whose asset size greater than 2 trillion Won to establish audit committee, which is composed of at least 3 independent board members. There is a growing literature on audit committee, representing the importance of audit committee in corporate governance structure. However, there has been no study up to now that reviews and summarizes prior studies comprehensively and critically. This study is intended to fill this gap. This study critically reviews prior literature on audit committee, published from early 1990s to now. I divide about 50 related articles into five different topics and review them separately. The five topics are：(1) the relation with auditor (e.g., hiring, communicating, compensation, and firing auditors), (2) relation with financial reporting quality (e.g., accrual management, restatement, error correction, regulator enforcement action, and conservatism), (3) relation with other firm characteristics (e.g., market reaction, litigation, and disclosure), (4) relation with board of directors (e.g., the effect of board characteristics on audit committee), and (5) the reason to voluntarily establish the committee (e.g., the comparison between firms establishing audit committee voluntarily and the other firms). The most reviewed articles are related to how the establishment or the characteristics of audit committee (independence, expertise or competence, and activity of the audit committee) are related to certain variables. The review focuses on research papers published in the world's top accounting journals and also includes relevant Korean studies published in Korean journals. For each topic, I not only review relevant prior literature but also critically comment on them. In addition, I try to provide possible future research topics to help academic researchers. As a result, one may understand past research findings as well as strengths and weakness of them at the same time. Thus, it would be easier for readers to develop a new research idea from reading and understanding this study. This paper is expected to be helpful to various parties. For regulators, this paper summarizes past academic findings concisely. Thus, they may depend on this study to get the information on their decision－making process. Academics can also use this paper as a way to learn from past research and develop new related ideas.
Keywords
- Audit Committee
- Corporate Governance
- Independence
- Expertise
- Activity
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