Audit committee effectiveness and firm credibility: an empirical investigation of Thai-listed firms.

• Author: Akarak, Phuangthip
• Position: United States. Securities and Exchange Commission - Report

1. INTRODUCTION

   In recent years, the audit committee has become imperative for listed firms. The audit committee occurred within a corporate governance system. An audit committee member is selected from board corporate of listed firms. The large firms in capital market have audit committee to oversight operation. Then, the audit committee is a mechanism of good corporate governance. The listed firms need to continuously improve their global standards management leading to effectiveness and efficiency. The audit committee is now widely known in a mechanism of governance. They ensure the quality, credibility, and objectivity of financial reporting. The audit committee member has a role to oversight responsibility of the listed firm. The characteristics of audit committee are to enhance the effectiveness of responsibilities. In prior evident, it describes the composite of characteristics as composition, qualification, powerful, method communication with all parties as internal auditor, external auditor, management, and board of director to improve audit committee effectiveness (BRC, 1999). The duties and responsibilities of audit committee are defined clearly in audit committee charter. However, board corporate sets the audit committee and supports all needed information and resources. Moreover, the regulator encourages audit committee to improve effectiveness along with best practice guidelines, including support corporate governance rewards for good governance firm. The global public companies receive good governance such as transparency, accountability and publication information to serve stakeholders.

   In previous evidence, Asia financial crisis revealed weak corporate reasons for the sharp decline of Asian stock markets from July 1997 to October 1998 (Wolfensohn, 1999; Choi, 1998). Asia firms in five countries including Thailand, Malaysia, the Philippines, Indonesia and South Korea have concentrated on director ownership. This reason places more implications for policy maker and regulator in the Asia-Pacific region striving to improve governance and transparency. In addition to a nation crisis, the Enron is large firm failure in December 2001. It has financial reporting frauds with an unprecedented number of earning restatements (Larcker, Richardson and Tuna, 2004; Palmrose and Scholz, 2002; Wu, 2002; Loomis, 1999). That indicates failure of corporate governance. Therefore, the governance is most important for public companies.

   The prior research found association between weaknesses in governance and poor financial reporting quality, earning manipulation, financial statement fraud, and weaker internal controls (Klein 2002b; Krishnan, 2001; Carcello and Neal, 2000; Dechow, Sloan and Sweeney, 1996; Beasley 1996; McMullen 1996) leads to many questions for their competence and value of firm rating. The Securities and Exchange Commission (SEC) cites that the key questions are lack of regulatory oversight. Consequently, they reform to improve an effectiveness of audit committee. Thus, the regulators issue and force a rule for public company such as the Blue Ribbon Committee, 1999 (BRC, 1999); the Sarbanes-Oxley Act, 2002 (SOA, 202). During South East Asia after financial crisis, the Asian Develop Bank (ADB) explains opinion concerning the crisis in Thailand, Malaysia, the Philippines, Indonesia and South Korea, which stemmed from the lack of corporate governance. The factors have effects on public companies such as (i) the weakness of monitoring and management structure are not approximately as family corporation which presents sufficient disclosures (ii) the intention to make more profitability put pressure on manager to earning management (iii) the firm lacks internal control system or remains poor efficiency (iv) the capital of source mostly from outside lacks liquidity (v) the weakness of disclosure and (vi) the rule lacks re-enforcement by government (ADB, 1998). Furthermore, the regulator improves good corporate governance, which leads to forces for the listed firms, including the improvement an internal control system of firm. Additionally, the public companies set audit committee to improve firm operation within rule of corporate governance. Then, this reason brings about the increasing transparency and accountability of firm.

   During the Asia crisis, many firms in South East Asia have caused failure companies, that low level of transparency and disclosure. Thus, the governance has improved regulation corporate governance. And that provides relief to a severe environmental change (Ho and Wong, 2001b), that lacks transparency and accountability in some East Asia corporations. Consequently, the regulation related to good corporate governance of listed companies as the Stock Exchange of Thailand (SET), which forces a rule of governance for a listed firm and set audit committee in listed firm for ensuring greater corporate transparency and accountability. Moreover, audit committee can explain vision and straight opinions in financial reports. A list of audit committee responsibilities includes the financial reporting, monitoring and evaluating internal audit processes. Moreover, they review the hiring and monitoring the performance of outside auditors. Audit committee assists in board oversight of the company's compliance within legal and regulatory requirements. Including, review transactions impact conflicts interest. Therefore, audit committees have a role of oversight or review regarding financial reporting, internal accounting and auditing matters. In addition, audit committee connects to all parties both inside and outside to improve effectiveness and efficiency of firm. Hence, this paper places the emphasis on audit committee effectiveness (ACE) with a role of responsibility for mechanism of governance in corporate. In prior research, literature review in audit committee responsibility, and improved effectiveness of audit committee can enhance firm credibility. The study has an interest in audit committee effectiveness with five dimensions areas in a role of audit committee oversight responsibility as (i) financial reporting preparation reliability, (ii) internal audit effectiveness, (iii) business risk management efficiency, (iv) regulation practices achievement and (v) independence auditing process.

   Therefore, this study proposes four key research questions as follows: 1) how does audit committee effectiveness have an effect on financial reporting quality, corporate governance success, external audit efficiency and firm credibility? 2) how do financial reporting quality, corporate governance success and external audit efficiency mediate the relationship between audit committee effectiveness and firm credibility? 3) how do three of antecedents, namely, corporate board accountability, audit committee competency and regulator encouragement have an effect on audit committee effectiveness? and 4) how does the professional management orientation moderate the relationship among corporate board accountability, audit committee competency, regulator encouragement, and audit committee effectiveness? Thus, the purpose of this study is to focus on audit committee effectiveness (ACE) whole and each of five dimensions on firm credibility, financial reporting quality, corporate governance success, and external audit efficiency. Then, this study provides objectives to hypotheses testing as follows. The first is to investigate the relationship between audit committee effectiveness and financial reporting quality, corporate governance success, external audit efficiency and firm credibility. The second is to investigate the relationship between financial reporting quality, corporate governance success, external audit efficiency and firm credibility. The third is to examine the influence of corporate board accountability, audit committee competency and regulator encouragement on audit committee effectiveness. The last is to test the professional management orientation as a moderator that has a relationship among corporate board accountability, audit committee competency, regulator encouragement, and audit committee effectiveness.

   The remainder of this study is organized as follows: The second presents the theoretical framework. The third presents literature reviews and hypothesis development. The fourth describes research design, data collection and variable measurement of all construct in the study. The fifth shows the result and discuss of audit committee effectiveness. The sixth comprises three contributions, limitations and suggestions for future research directions. And, the final is the conclusion.

2. THEORETICAL FRAMEWORK

   The resources-based view of a firm (RBV) is the view point of the firm resources which is interesting in explaining many researches as strategic management, marketing, human resource management. It is employed to create capability in order to achieve firm competitive advantage (Barney, 1991). Barney (1991) lists four attributes for a resource that increases competitive advantage: valuable, rare, imperfectly imitable, and strategically equivalent substitutes for this resource. RVB concept is firms' resources and capabilities (Amit and Shoemaker, 1993; Barney, 1991; Wernerfelt, 1984). It extents to enable a firm to enhance the level and value of its stock of marketing capabilities, therefore, that leads to competitive advantage of firm (Teece, Pisano and Shuen, 1997). Firm's resources are defined as anything which could be thought of as a strength or weakness of a firm. Wernerfelt (1984) explains what including physical resources as raw material, equipment, the human resources as training, experience, skills. The organizational resources are firm image and process routines. Moreover, they include all firm assets as corporate practices, information, experience, knowledge and technology (Maijoor and Wittteloostuijn, 1996). Capability refers to the ability to deploy resources and to...