Acquah 2016

EFFECTIVENESS OF AUDIT COMMITTEES AND FINANCIAL
REPORTING QUALITY IN SELECTED COMPANIES IN GHANA
ANTHONY AGYEMAN ACQUAH
2016
1
UNIVERSITY OF CAPE COAST
ROLE EFFECTIVENESS OF AUDIT COMMITTEES AND FINANCIAL
REPORTING QUALITY IN SELECTED COMPANIES IN GHANA
BY
ANTHONY AGYEMAN ACQUAH
A dissertation submitted to the College of Distance Education,
University of Cape Coast, in partial fulfillment of the
requirements for the award of Master of Business
Administration degree in Accounting
APRIL 2016
DECLARATION
Candidate’s Declaration
I hereby declare that this dissertation is the result of my own original research
and that no part of it has been presented for another degree in this university or
elsewhere.
Candidate’s Signature:……………………... Date:……………………
Name: Anthony Agyeman Acquah
Supervisor’s Declaration
I hereby declare that the preparation and presentation of the dissertation were
supervised in accordance with the guidelines on supervision of dissertation
laid down by the University of Cape Coast.
Supervisor’s Signature:……………………… Date:……………………
Name: Dr Anokye Mohammed Adam
ii
ABSTRACT
The aim of this study was to examine the role effectiveness of Audit
Committees and financial reporting quality in selected companies in Ghana.
The study adopted the case study research design. A total of fifty-four
respondents participated in the study. The convenience sampling method was
used in selecting the respondents for the study. Data was collected using
questionnaire. Spearman Rank Order (rho) correlation, frequencies and
percentages, pie charts, and mean and standard deviation were employed in
analysing the data gathered. The Statistical Packages for Social Sciences
(SPSS) version 21.0 was the software that was used for the data analysis. The
findings of the study revealed that the Audit Committees (ACs) in the
companies studied were generally not effective in the performance of their
duties. Additionally, the study found out that the effectiveness of ACs is
affected principally by poor management support; low level of management
interest in the activities of the audit committee; poor commitment of
management toward the implementation of audit committee’s findings;
lack/inadequate resources for the audit committee to effectively perform its
function, among others. Last but not least, the study found out that the quality
of the companies’ financial reporting did not have any significant relationship
with Audit Committees’ frequency of meetings, size, degree of independence,
and financial expertise. Based on the findings of the study, it was
recommended among other things that management of the companies should
provide the needed support to the Audit Committee and should be more
committed in implementing the recommendations by the committee.
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ACKNOWLEDGEMENTS
I have benefited significantly from the expertise, guidance, and encouragement from a number of
people during the conduct of this dissertation for which I would like to acknowledge.
First of all, I would like to express my deepest appreciation to my senior supervisor, Dr. Anokye
Mohammed Adam, for his patience, time, guidance and the academic advice he provided
throughout the study.
Secondly, I am very grateful to my dear wife, Mrs. Irene Agyeman Acquah, for the support,
encouragement and moral affection she gave to me in the course of this study.
Also, I am grateful to all the Audit Committee members who took a time out of their busy
schedules to participate in the study. This study would not have been possible without their
willingness and cooperation.
Finally, I want to express my appreciation for the support and encouragement of all those who
contributed in diverse ways towards the success of this study.
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Digitized by Sam Jonah Library
© University of Cape Coast https://erl.ucc.edu.gh/jspui
DEDICATION
This work is dedicated to Irene, my lovely wife, Paul, Prerna and Praman, my
dear children.

TABLE OF CONTENTS
Page
CHAPTER ONE: INTRODUCTION 1
Background to the Study 1
Statement of the Problem 4
Purpose of the Study 6
Research Questions 7
Significance of the Study 7
Delimitations of the Study 8
Limitation of the Study 8
Organization of the Study 8
CHAPTER TWO: REVIEW OF RELATED LITERATURE 10
Introduction 10
Conceptual Review 10
The Concept of Auditing 10
The Concept of Audit Committees 12
Roles of Audit Committees 18
Factors that Affect the Effectiveness of Audit Committees 25
Effectiveness of Audit Committees 31
Relationship Between Audit Committees’ Frequency of Meetings, Size,
Independence, and Financial Expertise and Companies’ Financial
Reporting Quality 34
Summary of Literature Review 42
Conceptual Framework 44
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CHAPTER THREE: METHODOLOGY 47
Introduction 47
Research Design 47
Study Area 48
Population 49
Sample and Sampling Procedure 49
Research Instrument 50
Data Collection Procedure 51
Ethical Considerations 52
Pre-testing 52
Data Analysis Procedure 52
CHAPTER FOUR: RESULTS AND DISCUSSION 56
Introduction 56
Demographic Information 56
Roles that Audit Committees Perform in Companies in Ghana 58
Effectiveness of Audit Committees in the Performance of Their Roles 64
Factors that Affect the Effectiveness of Audit Committees 67
Reporting Quality 70
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CHAPTER FIVE: SUMMARY, CONCLUSIONS AND
RECOMMENDATIONS 76
Introduction 76
Summary of the Research Process 76
Key Findings 76
Conclusions 78
Recommendations 79
Suggestion for Further Research 80
REFERENCES 81
APPENDIX(Questionnaire) 105
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LIST OF TABLES
Page
1. Other Demographic Information of Respondents 57
2. Roles that Audit Committees Perform in Companies in Ghana 58
3. Effectiveness of Audit Committees in the Performance of Their Roles 65
4. Factors that Affect the Effectiveness of Audit Committees 67
5. Relationship Between Audit Committees’ Frequency of Meetings,
Size, Independence, and Financial Expertise and Companies’
Financial Reporting Quality 71
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LIST OF FIGURES
Page
1. Conceptual Framework 45
2. Sex of Respondents 56

CHAPTER ONE
INTRODUCTION
Background to the Study
The challenging economic environment has brought an increased risk
of unethical behaviour and a great potential for fraud (Ernst & Young, 2007).
Besides, financial reporting within corporate governance in contemporary
times has become very technical and complex due to the emergence of new
regulations and statutory requirements (Green & Gregory, 2005; Ernst &
Young, 2007; Marx, 2008). This has consequently put the independence of
external and internal auditors under constant threat (Bailey, 2007; Marx,
2008). Regardless of this, governing bodies of firms are expected to produce
good results (Marx, 2008). This has resulted in company boards increasingly
looking for better ways to help them function effectively.
According to Marx (2008), a small, highly skilled and independent
committee will greatly assist the board of directors in discharging their various
duties effectively. As emphasized by Klein (2002), one of such important
independent committees that can assist board of directors in this regard is the
audit committee. An audit committee is a subcommittee of the board of
directors that consists of a number of independent non-executive directors
tasked with an oversight role to assist the directors in meeting their financial
reporting, risk management and control as well as other audit-related
responsibilities (Marx, 2009). The committee acts as a liaison between the
company's management, the board of directors, and the internal and external
auditors.
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According to Al-Lehaiden (2006), the search for mechanisms to
enhance corporate governance and increase the quality of financial reports has
mostly focused on the structure of audit committees. Again, studies have
highlighted the role of the audit committee as an important mechanism in
strengthening the overall corporate governance practices in companies (Turley
& Zaman, 2007; Osma & Noguer, 2007; Chen, Duh & Shiue, 2008; Mallin,
2010; Bedard & Genron, 2010). An effective audit committee will be
beneficial to the shareholders and stakeholders alike. According to Park
(1998), companies with effective audit committees are less likely to have
financial and auditing problems. Also, such companies tend to perform
creditably on the various capital markets.
Ernst and Young (2006) posit that an effectively functioning audit
committee will greatly assist the board of directors in their activities,
particularly when it comes to the organization’s financial reporting practices.
In a like manner, KPMG (2005) asserts that an audit committee assists
corporate board of directors in discharging its fiduciary responsibility. An
audit committee that operates effectively is a key feature in a strong corporate
governance culture, and can bring significant benefits to the company.
Audit committees are not a new concept. However, it is only in the last
10 to 15years that audit committees have really come to the forefront (Brewer,
2011). Among the prominent factors that have given rise to renewed emphasis
being placed on audit committees are major corporate collapses and business
failures, and the issuing of various corporate governance codes and new or
amended legislation (Payne, 2002; KPMG 2005; Agulhas, 2006; Ernst &
Young, 2006; Terry, 2007; Marx, 2008). Ernst and Young (2007) opine that
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the challenging economic environment which is associated with an increased
risk of unethical behaviour and the potential for fraud have also resulted in
company boards increasingly looking to their audit committees to provide
them with assurance that these risks are adequately addressed.
The modern audit committee is usually faced with significant
challenges, threats and limitations, which might negatively impact on its
effectiveness. These include tasking the audit committee with responsibilities
that fall outside its responsibility, unrealistic expectations of audit committees,
the unavailability of suitable candidates to serve on audit committees and
greater risk exposure, to name but a few (Casarino & Van Esch, 2005;
Aghulhas, 2006; Marx, 2008). All these factors can greatly hinder the
effectiveness of the audit committee.
Notwithstanding, it is essential for audit committees to be effective in
their functioning and not merely be formed as window-dressing or to meet
legislative or regulatory requirements. Carroll and Buchholtz (2006) have,
however, warned of a possibility of an audit committee existing merely in
appearance and not being effective in their governance oversight role.
According to the authors, a number of audit committees in various
organizations are gradually turning out to be toothless tigers, a situation which
undermines the effective of these audit committees.
Despite its increasing importance, very limited empirical studies have
been conducted to examine the role effectiveness of audit committees in
Ghana. This could probably be due to the fact that the concept is now gaining
much prominence as revealed by Brewer (2011).This study therefore seeks to
contribute to existing body of knowledge by investigating the roles
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effectiveness of audit committees and financial reporting quality in selected
companies in Ghana.
Statement of the Problem
Ghana has so far witnessed a number of corporate failures as evidenced
by the collapse of a number of major companies. Notable among them are
Ghana Airways Limited, Juapong Textiles Limited, Bonte Gold Mines, Divine
Sea Foods Limited, Ghana Cooperative Bank Limited, Aboso Glass Factory,
Bonsa Tyres, and Bank for Housing & Construction Limited. A critical review
of the circumstances that led to the collapse of these firms shows that most of
these corporate failures could have been prevented if effective audit
committees were in place to check on the activities of management,
particularly when it comes financial reporting and other accounting practices.
For instance, Yeboah (2009) in his study on the factors that led to the collapse
of Ghana Airways indicated that government interference, lack of working
capital, poor management practices, and poor accounting practices were the
major factors that brought the corporation to its needs.
Audit committees help organizations to strengthen their internal audit
and external audit functions, financial management, financial reporting,
internal controls system, and overall governance (David, 2009). They help to
mitigate corporate fraudulent or poor accounting practices and further enhance
reliable, dependable, effective and efficient corporate governance (Owolabi &
Dada, 2011).
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According to Marx (2009), although audit committees are well
established in companies across the world, they are not always effective as
they should be in their governance oversight role. Marx (2009) further
indicates that the ineffectiveness of most audit committees has, in part,
contributed to corporate scandals and business failures, fraudulent financial
reporting, audit failures, internal control breakdowns and other irregularities in
organizations across the globe.
As reiterated by Quigley (2012), it is essential that the effectiveness of
audit committees be evaluated from time to time so as to deal with any
possible hindrances to their effectiveness. However, empirical research on the
effectiveness of audit committees remains scant. According to Mohiuddin
(2012), there is a general limited research on audit committee practices
although the concept has been widely recognized as a very effective
mechanism for ensuring good governance in corporate affairs.
Also, most of the few available studies on the subject were conducted
in the context of developed countries such as the United States of America, the
United Kingdom, Canada, and Australia, thus minimal research has been
conducted in developing countries (Pomeranz, 1997; Tsamenyi, Enninful-Abu
& Onumah, 2007; Bedard & Genron, 2010). This implies that the scenario of
audit committee practices in emerging economies is still under-researched. In
Ghana for instance, it is quite surprising to note that no attempts have so far
been made by any researcher to find out the role effectiveness of audit
committees in companies in Ghana. This might be due to the fact that the
concept is new in the Ghanaian business setting.
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Nonetheless, given the important roles that the audit committee plays
in the governance structure of an organization, there is the need for empirical
data that can be used to assess current audit committee responsibilities and
effectiveness in order to provide a foundation for future recommendations. As
reiterated by Marx (2009) as well as Unegbu and Kida (2011), an audit
committee will be of value only if it functioning effectively and when its roles
are clearly understood by all the parties concerned.
It is therefore against this backdrop that this study attempts to examine
the role effectiveness of audit committees in companies from the Ghanaian
perspective.
Purpose of Study
The main purpose of this study was to examine the role effectiveness
of audit committees in selected companies in Ghana. Specifically, the study
sought to:
1. examine the roles that audit committees perform in companies in Ghana.
2. assess the effectiveness of audit committees in the performance of their
roles.
3. determine the factors that affect the effectiveness of audit committees.
4. examine the relationship between audit committees’ frequency of
meetings, size, independence, and financial expertise and companies’
financial reporting quality.
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Research Questions
The study was guided by the following research questions:
1. What are the roles that audit committees perform in companies in Ghana?
2. How effective are audit committees in the performance of their roles?
3. What are the factors that affect the effectiveness of audit committees?
4. What is the relationship between audit committees’ frequency of
meetings, size, independence, and financial expertise and companies’
financial reporting quality?
Significance of Study
The findings of this research will be important to policy makers,
stakeholders and the management of the various companies in a number of
ways. First of all, the findings of this research will help the management of the
various companies to formulate practical guidelines to enhance the corporate
governance practices in their respective companies, particularly with respect
to their audit committee. Additionally, the study will provide valuable
information on audit committees’ practices and their effectiveness in the
selected companies. The findings of the study will also serve as guidelines for
best practice standards for audit committees in the selected companies as well
as other companies and institutions that may find the findings valuable.
Moreover, this research will contribute to existing body of knowledge
regarding the role effectiveness of audit committees and the impact of audit
committees’ characteristics on companies’ financial reporting quality. Finally,
the study will serve as a guide to future studies on audit committees.
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Delimitations of the Study
The study essentially focused on the role effectiveness of audit
committees in selected companies in Ghana. It also touched on factors that
affect the effectiveness of audit committees as well as the relationship between
an audit committee’s frequency of meetings, size, independence and financial
expertise and financial reporting quality of a company. The study made use of
only fifty-four companies drawn from the various regions in Ghana.
Limitations of the Study
The primary constraint that was encountered in the course of this
research was time. As a result, the research was confined to only fifty-four
companies in Ghana. This, in addition the case study design that was adopted
for the study, could decrease the generalizability of the findings. Also, the
reliability of the findings hinges on how sincerely the respondents were in
answering the various questions that were raised in the study. In order to
overcome this, the respondents were educated on the main essence of the
study. Also, they were encouraged to be as honest as possible in their
responses.
Organization of the Study
The study is organized into five chapters. The first chapter deals with
the background to the study, statement of the problem, purpose of the study,
research questions, significance of the study, delimitations of the study,
limitations of the study, and ends with the organization of the study. The
second chapter also discusses the relevant literature relating to the study. The
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third chapter focuses on the methodology adopted in obtaining the necessary
data for the study. It comprises the research design, population, study area,
sample and sampling procedure, research instrument, data collection
procedure, ethical consideration, and data analysis procedure. Chapter four
covers the results of the data collected and their discussions. Chapter five
touches on the summary, research findings, conclusions, and
recommendations. It also offers a suggestion for further research.
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CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
In this chapter, existing literature relating to the topic were reviewed
under conceptual and empirical perspectives. The conceptual review entails
the concept of auditing, and audit committees. The empirical review dwells on
roles of audit committees, effectiveness of audit committees, factors that affect
the effectiveness of audit committees and impact of audit committees’
characteristics such as frequency of meeting, size, degree of independence,
and financial expertise on companies’ financial reporting quality. The chapter
also presents the conceptual framework that guided the study.
Conceptual Review
The Concept of Auditing
Auditing is an independent, objective assurance and consulting activity
designed to add value and improve an organization’s operations. According to
Clement (2012), auditing is a means of evaluating the effectiveness of a
company’s internal control, maintaining an effective system of internal
control, preventing fraud and misappropriation of assets and minimizing a
firm’s cost of capital. According to the author, all these activities are geared
towards obtaining reliable financial reporting on a firm’s activities or
operations.
Okezie (2008) also sees auditing as an independent examination of and
expression of opinion on the financial statements of an enterprise by an
appointed auditor in pursuance of that appointment and in compliance with
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any relevant statutory obligation. It involves an independent evaluation of
financial and operating information of systems and procedures with the view
to providing useful recommendations for improvements, where necessary. It
consists of a searching investigation of the accounting records and other
evidence supporting the financial statement in order to provide a fair and
reasonable picture of financial details of the company.
Auditing plays an important role in developing and enhancing the
global economy and business firms (Ecaterial, 2007). It plays an essential role
in serving public interest in order to strengthen accountability and reinforce
trust and confident in financial report. Uwota (2012) opines that auditing plays
a vital role in accounting of a system’s internal control; it seeks to provide a
reasonable assurance that the financial statements are free from material
misstatement and error.
According to the Institute of Internal Auditors (2002), effective
auditing helps an organization to accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of
risk management, control, and governance processes. Auditing ensures that all
activities of an organization are carried out by employees according to laid
down procedures. Auditing serves as a key factor in controlling every kind of
organization, its financial and economic aspects. In other words, it serves as a
sort of checks and balances in the financial and administrative procedure of
any organizational setup.
According to Delathe (2012), the major reasons for auditing include
evaluation and risk management, control and governance processes, and
investigative and advisory services. Clement (2012) notes that audit system is
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important for a company because it enables the company pursue and attain its
various corporate objectives. It facilitates supervision and monitoring,
prevents and detects irregular transaction, helps to measure on-going
performance, maintains adequate business records and promotes productivity.
Auditing helps to review the design of the internal control, propose
improvement and document any material irregularities to enable further
investigation by management if it is warranted under the circumstances.
Manguis (2011) observed that auditing helps top management to
manage corporate affairs through the provision of guidance on various issues
ranging from financial accuracy to internal control to regulatory compliance. It
also helps department heads to identify tools and methodologies to improve
operational activities, putting companies on a more sustainable path.
According to Okezie (2008), auditing helps to attest to the truth and fairness of
financial statement of companies.
The Concept of Audit Committees
An Audit Committee is a committee of the board of directors
responsible for oversight of the financial reporting process, selection of the
independent auditor, and the receipt of audit results from both internal and
external auditors. It is a standing committee established to enhance corporate
accountability by working with the internal auditors and management to
improve and strengthen the financial reporting practices of an entity and to
also ensure proper conduct of corporate affairs in accordance with generally
accepted ethical and legal standards (Ayinde, 2002). According to Marx
(2009), an audit committee consists of independent non-executive directors
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tasked with an oversight role to assist the board of directors in meeting their
financial reporting, risk management and control and audit-related
responsibilities. The audit committee is usually made up of an equal number
of directors and shareholders. This enables the committee to be more effective
in checking the powers of the executive directors, particularly in their
accounting and financial reporting functions (Marx, 2009).
Audit Committees have been seen as a useful mechanism of corporate
governance (Spira, 2002; US Securities and Exchange Commission, 2003; UK
Financial Reporting Council, 2006). The committee assists the Board in
fulfilling its corporate governance and oversight responsibilities in relation to
an entity’s financial reporting, internal control system, risk management
system and internal and external audit functions. The Audit committee is
recognized as the cornerstone of a successful and credible financial reporting
system. According to the US Securities and Exchange Commission (2003), the
role of the Audit Committee is to provide advice and recommendations to the
board within the scope of its terms of reference/charter. The committee lends
creditability to the integrity of the internal control and financial reporting
system, and boost confidence in a company’s financial reporting. It performs
an oversight function over internal controls and risk management and provides
an authoritative avenue for the resolution of divergence in views between the
various parties.
According to the Canadian Institute of Chartered Accountants [CICA]
(1992), the specific responsibility of an audit committee is to review the
annual financial statements before submission to the board of directors. The
American Institute of Certificate Public Accountants [AICPA](2009) posits
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that an audit committee is responsible for oversight of the financial reporting
process, selecting of independent auditor, and receiving and reviewing audit
results.
According to Wong (2007), the Audit Committee has a lead oversight
role in financial governance and financial reporting matters. It is actively
involved in the monitoring of financial management compliance issues,
particularly in the identification of risk areas and the monitoring of associated
rectification plans. It also reviews the integrity of the financial reporting and
internal control structures and oversees the financial performance of the entity.
According to Abbott, Parker & Peters (2003), the audit committee is a
vital cog in a firm’s control environment and corporate governance structure.
Abott et al. (2003) further state that the audit committee together with the
internal auditing function helps to detect and prevent fraudulent financial
reporting. As reiterated by Al-Lehaiden (2006), audit committees ensure
reliable, high quality financial reporting and thus an effective audit committee
is needed to enhance the integrity of companies’ financial reports. Audit
committee forms an integral part of the governance structures of a board of
directors of a company (or other entities) and acts as the financial watchdog of
the shareholders and all the stakeholders at large (Marx, 2009).
Audit committee internally audits the auditors and provides reports that
are usually included in the financial statement of a publicly quoted company
(Enofe, Aronmwan, & Abadua, 2013). Audit committees serve as a bridge in
the communication network between internal and external auditors and the
board of directors. Audit committee helps to check the activities of auditors
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(both internal and external) and top management resulting to the bridging of
the gap among users of financial statements.
According to Marx (2009), factors such as the various corporate
collapses and business failures and fraudulent financial reporting practices are
among the major reasons for the establishment of Audit Committees in recent
times in companies. Similarly, Khamidullina (2012) opines that publicly
traded companies across the world now maintain an Audit Committee.
According to the author, the idea of having Audit Committees has largely
arisen in recent years greatly due to the notorious corporate scandals in recent
years that have hit big companies like Enron, WorldCom, Adelphia, and Tyco.
Audit committees are expected to enhance board of directors’
oversight of management performance and financial reporting processes, thus
providing additional protections to shareholders and public investors or
creditors (DeZoort, Hermanson, Archambeault & Reed, 2002; Hemraj, 2003;
Abbott et al., 2003; Pergola, 2005). The wide acceptance of audit committees
underpins their importance as part of corporate accountability and
transparency, thus audit committees are expected to serve as the overseer of
stakeholder interests (Blue Ribbon Committee, 1999). Prior studies have
demonstrated a positive relationship between audit committee formation and
earnings quality (Wild, 1996; Baxter & Cotter, 2009). According to Ho and
Wong (2001), firms with audit committee are less likely to manipulate
earnings and are more likely to voluntarily disclose information.
The Canadian Institute of Chartered Accountants (2001) asserts that
Audit Committees make it easier for auditors to retain their independence with
clients. They also serve as an important communication link between the
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auditor and the board of directors. In a similar note, Enofe et al. (2013) assert
that an Audit Committee helps in preserving auditor independence by
resolving contentions issues between the auditor and the company’s
management.
Audit committees are an essential element of corporate governance
(Green, 1994). Audit committees serve as the “keystone” of corporate
financial governance (Vanasco, 1994). Many audit committees have over the
years been formed voluntarily, both in the private and public sector, with the
view to utilizing the benefits they bring to an entity’s control environment
(‘tone at the top’) and its governance structures. According to McMullen
(1996), one response to the main concern expressed by users of financial
statements and the various governments over the incidence of fraudulent
financial reporting is the establishment of audit committees. Similarly, Woolf
(1997) mentioned that the appointment of an audit committee is an important
development intended to enhance the communication between the board of
directors and both internal and external auditors.
Dilworth (2000) argues that audit committees are one mechanism
through which auditors are held accountable for the scope, nature and quality
of their work. Audit committees can thus exert a powerful influence on
auditors through their role in conducting a specific inquiry into the scope,
nature and quality of the audit work done.
According to a Treadway Commission Report (1997), the reduction of
illegal activities and prevention of fraudulent financial reporting are the
primary roles of the audit committee. Similarly, a study conducted by Spangler
and Braiotta (2000) revealed that the reduction of illegal activities
26

and the prevention of fraudulent financial reporting were the primary roles of
audit committees. Further, Cobb (2003) investigated the purposes of the audit
committee in the US during the 1990s. His investigation revealed four main
objectives for the formation of audit committees viz: reduction of board
liability, establishing links between the external auditor and the board, the
reduction of illegal activity, and the prevention of fraudulent financial
reporting.
Pomeranz (2001) argued that the popularity of audit committees is due
not only to the fact that they protect shareholders’ interests, but also because
they help guide management and enhance corporate credibility. In addition,
the author highlighted the important role of audit committees in the selection
and protection of external auditors. According to the Institute of Directors
(2002), the benefits of audit committees include improving the quality of
entities’ accounting and internal controls, strengthening the objectivity and
credibility of their financial reporting, strengthening the independence of their
internal and external auditors and creating a climate of discipline and control
in entities which will reduce the opportunity for fraud. KPMG (2005, p.82)
asserts that “corporate board of directors establishes an audit committee to
assist in discharging its fiduciary responsibility. An audit committee that
operates effectively is a key feature in a strong corporate governance culture,
and can bring significant benefits to the company”.
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Roles of Audit Committees
According to the Treadway Commission (1997), reduction of illegal
activity and the prevention of fraudulent financial reporting are the primary
roles of the audit committee. Marrian (1988) conducted a survey to investigate
the reasons for the formation of audit committees in the UK. The results of his
survey revealed that financial collapses was the most important reasons for
such formation. In addition, Spangler and Braiotta (2000) in their study also
found that the reduction of illegal activity and the prevention of fraudulent
financial reporting were the primary roles of audit committees.
Collier (2002) conducted a more detailed survey to examine the
incentives for the formation of the audit committee in UK firms. This study
provided the following list of reasons for establishment of an audit committee
ranked in order starting with the most frequent ones: good corporate practice;
strengthen the role and effectiveness of non-executive directors; help directors
in discharging their statutory responsibilities regarding the financial reporting;
protect and enhance the independence of internal auditors; help the auditors in
the reporting of any serious weaknesses in the control system or management;
improve communications between the board and both internal and external
auditors; increase the public confidence in the credibility and objectivity of the
financial reports; assist management to discharge its responsibilities to prevent
fraud and errors; increase the confidence of investment analysts in the
credibility and objectivity of the financial reports; provide an opportunity for
negotiation between management and auditors; and possibility of legislative
pressure.
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Another study conducted by Cobb (2003) to investigate the purposes
of audit committees in the US identified four main objectives for the
formation of such committees. These include reduction of board liability,
establishing links between the external auditor and the board, the reduction of
illegal activity and the prevention of fraudulent financial reporting.
The Blue Ribbon Committee [BRC] (2013) maintains that the audit
committee, as a representative of the entire board, is charged with the
responsibility for overseeing the financial reporting process of a company.
DeZoort et al. (2002) opine that audit committee literature has experienced a
rapid growth in the recent years as a result of the rising concerns about
corporate governance and the emphasis on the importance of audit committees
to enhance the quality of financial reporting.
According to the European Commission [EC] (2006), the primary
duties and responsibilities of the audit committee in a company include
monitoring of the financial reporting process; monitoring of the effectiveness
of the company's internal control, internal audit where applicable, and risk
management systems; monitoring of the statutory audit of the annual and
consolidated accounts; reviewing and monitoring of the independence of the
statutory auditor or audit firm, and in particular the provision of additional
services to the audited entity; and proposing and recommending the statutory
auditor to the board of directors.
Lin (2006) also states the roles and responsibilities of ACs include
lifting the image of good corporate governance, enhancing communication
between board of directors (BoD) and auditors, and mediating conflict
between management and auditors. Pomeranz (2001) argues that the
29

popularity of audit committees is due not only to the fact that they protect
shareholders’ interests, but also because they help guide management and
enhance corporate credibility. In today’s business environment, Audit
Committees are required to deal with diverse emerging issues in today’s
business environment though their traditional role has been the oversight of
the financial reporting process with the aim of ensuring that accurate, credible
and reliable financial reporting is provided to the shareholders (Marx, 2009).
According to Khamidullina (2012), one of the primary roles of AC as
indicated by many international and national regulatory requirements is to
monitor the integrity of the financial statements. The Audit Committee
typically assists the board of directors with the oversight of the integrity of the
entity's financial statements; the entity's compliance with legal and regulatory
requirements; the independent auditors' qualifications and independence; the
performance of the entity's internal audit function and that of the independent
auditors; and compensation of company executives (in absence of a
remuneration committee).
Many audit committees also have oversight of regulatory compliance
and risk management activities. Audit Committees have the responsibilities of
measuring performance of the internal audit function, appointment and
dismissal of the heads of internal audit, recommending the appointment and
dismissal of external auditors, support and promote the audit function within
various organizations such as independence and objectivity (Davies, 2009).
The UK Financial Reporting Council (2006) presents a comprehensive
roles of Audit Committees under the following sub-headings: role in oversight
of financial reporting and accounting, role in oversight of internal control; role
30

in oversight of internal audit, role in oversight of the external auditor, role in
oversight of regulatory compliance, role in oversight of risk management, and
reporting responsibilities. The main roles under each of the aforementioned
sub-headings are elaborated in the ensuing paragraphs:
Under role in oversight of financial reporting, the Audit Committee is
expected to perform the following roles: review of annual financial statements
and consider whether they are complete, consistent with information known to
committee members, and reflect appropriate accounting principles; review
with management and external auditors the results of the audit, including any
difficulties encountered; review other sections of the annual report and related
regulatory filings before they are released and consider the accuracy and
completeness of the information; review with management and the external
auditors all matters required to be communicated to the committee under
generally accepted auditing standards; review how management develops
interim financial information, and the nature and extent of internal and
external auditor involvement; review interim financial reports with
management and the external auditors before filing with regulators, and
consider whether they are complete and consistent with the information known
to committee members; monitor the choice of accounting policies and
principles; review and recommend the financial statements prior to finalization
and submission to the appropriate quarters; review significant accounting and
reporting issues, including recent professional and regulatory pronouncements,
and understand their impact on the financial statements; ensure accounting
policies are consistently applied and any new accounting standards
requirements that relate the company are appropriately adhered to; meet with
31

management and the external auditors to review the financial statements and
the results of the audit; ensure that any significant adjustments, unadjusted
differences, disagreements with management and critical accounting policies
and practices have been discussed with the external auditor; and review all
sections of the annual report before its release and consider whether the
information is understandable and consistent with members’ knowledge about
the company and its operations.
Under role in oversight of internal control, the Audit Committee is
expected to assess the effectiveness of the company's internal control system
including information technology security risks and control; monitor the
effectiveness of internal audit and risk management systems; monitor the
internal control process; and review the findings of external audit on the
internal control system.
Under role in oversight of internal audit, the Audit Committee is
expected to review and approve the appointment and dismissal of the head of
internal audit; review the co-operation between internal and external audit;
ensure that the internal auditor has unrestricted access to the chair of the audit
committee; review whether or not the internal auditor has unrestricted access
to the chair of the board, review with management organizational structure of
the internal audit function; review and approve the annual internal audit plan
and all major changes to the plan; review the effectiveness of the internal audit
function, including compliance with the appropriate regulatory standards;
assess the health of relationship between external and internal audit teams;
meet separately with the head of internal audit to discuss any matters that the
committee or the internal auditor believe should be discussed privately; ensure
32

significant findings and recommendations made by the internal auditors are
received, and discussed with a course of action agreed and implemented on a
timely basis; review the proposed internal audit plan for the coming year,
ensure that it covers key risks and that there is appropriate co-ordination with
the external auditor; ensure any internal control recommendations made by the
internal and external auditors, and approved by the Committee, have been
implemented by management; and evaluate the process the entity has in place
for assessing the effectiveness and efficiency of, and continuously improving
internal controls, particularly those related to areas of significant risk such as
fraud, code of ethics, etc.
Under role in oversight of the external auditor, the Audit Committee is
expected to review the external auditors' proposed audit scope and approach,
including coordination of audit effort with internal audit; oversee the hiring,
performance and independence of the external auditors; review with
management and the external auditors the results of the audit, including any
difficulties encountered; on a regular basis, meet separately with the external
auditors to discuss any matters that the committee or auditors believe should
be discussed privately; ensure significant findings and recommendations made
by the external auditors are received and discussed on a timely basis; ensure
that external auditors get unrestricted access to the audit committee; ensure
management responds promptly to recommendations made by the external
auditors; and discuss with the external auditor the quality of accounting
policies applied in the company’s financial reporting.
Under role in oversight of regulatory compliance, the audit committee
is expected to review the effectiveness of the system for monitoring
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compliance with laws and regulations and the results of management's
investigation and follow-up(including disciplinary action) of any instances of
noncompliance; review the findings of any examinations by regulatory
agencies, and any auditor observations; review the process for communicating
the code of conduct to the company’s personnel, and for monitoring
compliance therewith; and obtain regular updates from management and the
company legal counsel regarding compliance matters.
Under role in oversight of risk management, the Audit Committee is
expected to review the company’s policy for the oversight and management of
business risks; oversee management’s overall risk management strategy and
ensure the required actions are taken; discuss risk management policies and
practices with management; oversee the establishment and implementation of
the company’s risk management system; review trends on the company’s risk
profile, reports on specific risks and the status of the risk management process;
monitor performance of management in implementing risk management
responses and internal control rectification activities; ensure that there are
appropriate systems for identifying and monitoring risks in place and that
these are operating as intended; review the current areas of greatest financial
risk and how these are being managed in the company; assess whether
management has appropriate controls in place for unusual types of
transactions and/or any particular transactions that may carry more than an
acceptable degree of risk; review the effective functioning of the risk
management system; review the effectiveness of the risk management
processes and procedures applied; review the findings of internal audit on risk
management; and review the findings of external audit on risk management.
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Under reporting responsibilities, the Audit Committee is expected to
regularly report to the board of directors about committee’s activities, issues,
and related recommendations; provide an open avenue of communication
between internal audit, the external auditors, and the board of directors; report
annually to the shareholders, describing the committee's composition,
responsibilities and how they were discharged, and any other information
required by rule, including approval of non-audit services; and review any
other reports the company issues that relate to committee responsibilities.
Other responsibilities expected of the Audit Committee include
performing other activities related to the Audit Committee’s charter as
requested by the board of directors; instituting and overseeing special
investigations; reviewing and assessing the adequacy of the committee charter
annually, requesting board approval for proposed changes, and ensure
appropriate disclosure as may be required by law or regulation; confirming on
annual basis that all responsibilities outlined in this charter have been carried
out; and evaluating the committee's and individual members' performance on a
regular basis.
Factors that Affect the Effectiveness of Audit Committees
The mere presence of the audit committee does not necessarily
translate into an effective monitoring body. As a result, there is the need to
find out the factors that affect the performance of audit committees in order to
put in place appropriate measures to ensure their effective functioning.
According to Dittenhofer (2001), for an audit committee to be
effective, its roles and objectives must be stated in clear terms and the means
35

for achieving such objectives should also be provided. The effectiveness of
audit committees is found to be affected by a number of factors. These among
others include audit committee independence (Carcello & Neal, 2000; Klein,
2002), audit committee diligence (Abbott, Parker& Peters, 2004;
Raghunandan, Rama, & Scarbrough, 2007), and audit committee financial
expertise (Krishnan, 2005; Zhang, Zhou, & Zhou, 2007).
According to Chan and Li (2008), audit committees may be established
but not function properly for a number of reasons. First, the board of directors
may not fully recognize the importance of an audit committee. Second, an
audit committee may have difficulties in coordinating with related parties.
Third, an audit committee may be comprised of members who are not fully
qualified and independent.
Empirical evidence (Hooghiemstra, 2000; Klein, 2002; Xie, Davidson
& DaDalt, 2003; Abbott et al., 2004; Croes, 2013) suggest that the presence of
independent/outside directors serving on the audit committee is related to
higher audit committee performance in monitoring the financial reporting and
internal control processes. A study by Chan and Li (2008) found out that
independence of the audit committee (i.e. the presence of at least 50 percent
independent directors on the audit committee) has a positive effect on its
effectiveness.
The number of audit committee meetings in a year is considered to be
an important attribute for their monitoring effectiveness (Lin, Li & Yang,
2006). According to Xie et al. (2003), an audit committee that meets more
frequently with the internal auditors is better informed about auditing and
accounting issues. When an important auditing or accounting issue arises, the
36

audit committee can direct the proper level of internal audit function to address
the problem promptly. Therefore, an audit committee that meets frequently can
reduce the possibility of financial fraud and are more effective (Raghunandan,
Read, & Rama, 2001; Abbott et al., 2004). Inactive audit committees with
fewer numbers of meetings are unlikely to supervise management effectively
(Menon & Williams, 1994). According to Beasley, Carcello, Hermanson, &
Lapides (2000), fraudulent firms with earning misstatements have fewer audit
committee meetings than non-fraud firms. An active audit committee with
more meetings has more time to oversee the financial reporting process,
identify management risk and monitor internal controls. As a result, firm
performance increases with audit committee activity.
The size of the audit committee is another characteristic considered to
be relevant to the effective discharge of its duties (Cadbury Committee, 2002).
A minimum of three audit committee directors has been proposed by a number
of corporate governance reports (BRC, 1999; New York Stock Exchange,
2002; Capital Market Authority [CMA], 2006). It is argued that a larger
committee has greater organizational status and authority (Kalbers & Fogarty,
1993; Braiotta, 2000) and a wider knowledge base (Karamanou & Vafeas,
2005).
On the expertise of the audit committee members, empirical evidence
(McDaniel, Martin, & Maines, 2002; Xie et al., 2003; Carcello,
Hollingsworth, Klein, & Neal, 2006) suggest that the presence of financially
literate (both accounting and non-accounting types) members on the
committee is related to higher monitoring performance of the committee.
37

Additionally, studies conducted by DeZoort (1998) and DeZoort and Salterio
(2001) suggest that greater financial expertise of audit committee members
leads to a more effective audit committee. Audit committee members who are
financially literate are more effective in monitoring the integrity of a firms’
financial report (Carcello et al., 2006; Carcello, Hollingsworth, Klein, & Neal,
2006).A study conducted by Cohen, Krishnamoorthy, & Wrigh (2002)
revealed that the lack of financial expertise of audit committee members
negates the effectiveness of the committee. For example, one manager in that
study stated (p.19) “Sometimes members of the audit committee might not be
the most appropriate people to be on the audit committee because they lack
experience on financial matters.”
In a similar note, Song and Windram (2000) posit that the financial
literacy of audit committee members helps to reduce fraud in corporate
financial reporting. A high degree of financial literacy is necessary for an audit
committee to effectively oversee a company’s financial control and reporting.
Wong (2007) opines that the role of an audit committee in overseeing
accountability of the management covers a wide scope to include the overall
process of corporate reporting. This therefore requires the audit committee to
have accounting knowledge in order to acquire an in depth understanding of
financial reporting and improve compliance with regulatory requirements.
According to DeZoort and Salterio (2001), audit committee members
with accounting and financial knowledge are more likely to understand auditor
judgment. A study conducted by Gendron, Bedard and Gosseline (2006)
revealed that audit committee members’ extensive financial and accounting
38

background was significant in making their respective audit committees
effective. The study therefore concluded that audit committee financial
expertise was a major determinant of audit committees’ effectiveness in the
three firms studied. Another study conducted by Chon and Zhou (2012) to
examine the effectiveness of audit committees in selected government firms in
China also revealed a statistically significant relationship between financial
background of audit committee members and the effectiveness of the various
audit committees.
According to Atu, Omimi-Ejoor, Atu, & Abusomwan (2013), audit
committees require the assistance and support of other stakeholders such as
management together with pertinent information and resources to be efficient
and effective in the performance of their duties. Audit committees rely on
others to provide the financial reports, internal control assurance and
independent audit opinion (Wong, 2007). It is only when major stakeholders
play their part that it can be assured that the oversight function of the audit
committee is effectively achieved. Being a sub-committee of the Board, its
main partners include management, internal audit and external audit. It is
essential that management, internal and external auditors as well as audit
committees themselves work with a common purpose of improving financial
reporting and greater effectiveness in internal controls. An informed, diligent
and probing audit committee can enhance confidence in the integrity of
business process by which entities are directed and controlled (Atu et al.,
2013).
According to Mihret and Yismaw (2007), support from management in
the form of resources and commitment towards the implementation of audit
39

committee’s recommendations is essential in attaining committee’s effectiveness.
Also, the organizational setting in which audit committee operates, that is, the
organizational status of the office, its internal organization and the policies and
procedures applying to auditing in the organization can affect the smooth
operations of the audit committee. Further, the capability, attitude, and level of
cooperation among the audit committee members and other parties in the
organization such as internal auditors can have significant impact on the
effectiveness of the audit committee. Mihret and Yismaw (2007) further posit that
the introduction of new technologies such as the invention of new computerized
audit system poses challenges to audit staff. Therefore, the update of their
knowledge to meet with these challenges is desirable. More so, the requirement of
new auditing standards underpins the need for audit staff to update their
knowledge and adjust to the current practice.
Krishnamoorthy, Wright, and Cohen (2012) conducted a study to
examine the effectiveness of audit committees and financial reporting quality
among the Big-5 firms in the United States using a total of forty-two auditors.
The study revealed that although the audit committees in the various firms had
enough power to confront management on contentious issues, management
were, however, not committed in helping to resolve financial reporting issues
and disputes. Thus, lack of management support was identified as a key factor
that hindered the nature, extent and quality of the audit committee functions.
According to the Institute of Internal Auditors (2003), the goals of
audit committees and internal auditing are closely intertwined and the ability
of the audit committee and internal auditing to work together significantly
40

impacts the effectiveness of the audit committee in fulfilling its responsibility
effectively to the board of directors, shareholders, and outside parties.
According to MacRae, and van Gils (2014), factors that promote the
effectiveness of audit committees include independence of the committee in
the conduct of its activities in accordance with set standards without
management interference; clear terms of reference; complete and unrestricted
access essential records and other resources on timely basis; sufficient
staffing; competent leadership, thus a professionally qualified leader who has
sufficient knowledge of applicable audit standards; objective staff, thus staff
who have impartial attitudes and avoid any conflict of interest; competent
staff; and support from other stakeholders.
Effectiveness of Audit Committees
Effective audit committees are not merely formalities to receive lip
service. They can be of significant help to governing boards in effectively
performing their fiduciary and oversight roles in ensuring reliable financial
reporting, reducing risk, and maintaining donor and public confidence (e.g.
avoiding legal problems and preventing the negative consequences that
inevitably result from financial fraud or irregularities).
More researchers have recently focus their attention on audit
committee as one of the component of corporate governance (Chen, Duh &
Shiue, 2008; Davies, 2009; Barua, Rama & Sharma, 2010; Alkdai & Hanefah,
2012), because an effective audit committee plays an important role in
reducing corporate inefficiency (Owolabi & Dada, 2011). Consideration
therefore needs to be given, particularly toward encouraging the effectiveness
41

of audit committees so as to enhance corporate effectiveness as the committee
has been found to be one of the powerful bodies that can be used to bring
better changes in an organization setting (Owolabi & Dada, 2011).
The effectiveness of audit committees has recently been a subject of
increasing interests due to increased concerns about the quality of corporate
financial reporting process caused by recent accounting scandals (Soliman &
Ragab, 2010). According to Alhaji & Yusoff (2012), the role of audit
committees and audit quality in ensuring the quality of corporate financial
reporting has come under considerable scrutiny due to recent high-profile
earnings management case in the world.
Also, the role of auditing, especially in ensuring the quality of reported
earnings has come under considerable scrutiny due to recent corporate
accounting scandals (Balsam, Haw& Lilien, 2003). According to Mihret and
Yismaw (2007), an audit committee is considered to be effective when it is
able to meet the intended outcome that it is supposed to bring about. Similarly,
Badara and Saiden (2013) posit that audit committee effectiveness is the
ability of the audit committee to achieve established objective within the
organization. Owolabi and Dada (2011) emphasize that effective audit
committee will definitely enhance reliable, dependable, effective and efficient
corporate governance. According the authors, the introduction of audit
committees in the corporate governance has led to reduction of corporate
ineffectiveness.
Previous researchers have sought to find out the effectiveness of Audit
Committees in the performance of their various roles. However, their results
have so far been inconsistent. To start with, a study conducted by Lin (2006)
42

among listed Chinese firms revealed that various audit committees effectively
performed their ceremonial roles and responsibilities in terms of lifting the
image of good corporate governance, enhancing communication between
board of directors (BoD) and auditors, and mediating conflict between
management and auditors. However, the audit committees were found to be
ineffective in the performance of their oversight roles and responsibilities in
relation to improving internal control, legal compliance, sound corporate
financial reporting and auditing processes. The study again revealed that most
audit committees in the Chinese listed companies held no or few meetings
with a very short meeting during the year. Further, it was revealed that audit
committees in the Chinese listed companies were rarely involved in the
decisions of appointing auditors or determining audit fees, and kept little
contact with internal and external auditors. Overall, the study concluded that
even though a large portion of Chinese listed companies (62 percent of the
responding companies) have set up audit committees, the majority of the audit
committees did not function effectively as their actual operations were far
behind the standards in the USA, the UK and other western countries.
Another study conducted by Bartov, Gul and Tsui (2000) to examine
the determinants of audit committee effectiveness revealed that firms with
independent and financial literate audit committee members had their audit
committees to be more effective than those with less independent and financial
literate members. Krishnamoorthy et al., (2012) also conducted a study to
examine the effectiveness of audit committees and financial reporting quality
among the Big-5 firms in the United States using a total of forty-two auditors.
Their findings of their study indicated that the audit committees of the various
43

firms were more effective in their oversight roles of financial reporting,
external audit and internal audit compared to other roles.
Marx (2009) conducted a study in Ethiopia to assess the effectiveness
of audit committees. The results of his study indicated that the audit
committees of the selected companies were performing their traditional
responsibilities of overseeing external audit, internal audit, financial reporting,
internal control and risk management reasonably well, while to a lesser extent
dealing with emerging issues such as sustainability reporting and ethics
compliance
Chon and Zhou (2012) also conducted a study to examine the
effectiveness of audit committees in selected government firms in China.
Their results of their study revealed that 56.4% of the firms investigated did
not have effective audit committees.
Reporting Quality
Audit committees are increasingly taking responsibility for the quality
of corporate financial statements. This has consequently directed research to
focus on the performance of audit committees by examining the relationship
between audit committees’ characteristics (e.gs. audit committee’s
independence, financial expertise and frequency of meeting) and financial
reporting quality of firms (Beasley et al., 2000).
The main elements that determines a company’s financial reporting
quality as indicated by existing literature are the extent of alleged fraud and
44

misstatements and/or restatements (Song & Windram, 2000; Farber, 2005;
Abbott et al., 2004; Archambeault & Archambeault, 2008); and earnings
quality, thus quality of the reported financial figures (Kent, Routledge, &
Stewart, 2010; Baxter & Cotter, 2009; Vafeas, 2005). However, with regard to
this study, financial reporting quality refers to the extent to which financial
reports are truthful and reliable.
Audit committees enhance the quality of financial reporting through
the choice of quality auditors (Abbott et al., 2004). According to Medawaki
(2013), the search for a mechanism to ensure reliable and high quality
financial reporting has largely focused on the structure of audit committees
whose function is to oversee the financial reporting process and audit financial
statements. Prior studies have demonstrated a positive relationship between
the existence of an audit committee and an organization’s earnings quality.
For instance, a study conducted by Baxter and Cotter (2009) in Southern
Queensland revealed that earnings quality increased after the year of audit
committee formation in the selected firms. Dechow, Sloan, and Sweeney
(2006) also posit that firms with audit committee are less likely to manipulate
earnings and are more likely to voluntarily disclose information. Improved
financial reporting quality has also been cited as one of the major benefits for
companies’ establishing audit committees (Blue Ribbon Committee, 1999; Ho
& Wong, 2001)
Evidence from the earnings management literature shows that an audit
committee degree of independence and financial expertise have positive
relationship with a firm’s financial reporting quality (Klein, 2002; Xie et al.,
2003; Bedard, Chtourou, & Courteau, 2004; Vafeas, 2005; Yang & Krishnan,
45

2005; Davidson, Goodwin-Stewart & Kent, 2005; Krishnan & Visvanathan,
2008; Koh & Woo, 2010; Kent, Routledge & Stewart, 2010; Croes, 2013).
Other studies also suggest a positive relationship between the financial
knowledge of audit committee members and the quality of firms’ financial
reports (McMullan, 1996; Beasley et al., 2000; DeZoort & Salterio 2001;
Abbott et al., 2004; DeChow et al., 2006).
Abbott et al. (2004) assert that a more active and independent audit
committee is associated with a decreased incidence of financial statement
fraud. Beasley et al. (2000) in their 10-year span study to evaluate documented
incidents of financial fraud found that firms that were involved in frauds
generally had audit committees that were typically inactive and less
independent of management. As reiterated by Krishnamoorthy et al. (2012),
for the financial reporting process to be more effective, auditors’
independence must be vigorously monitored. Independence of an audit
committee helps to ensure that management is transparent and will be held
accountable to stakeholders (Treadway Commission, 1987; Blue Ribbon
Committee, 1999; Cadbury Committee, 2002).
Empirical studies by Davidson, Godwin-Stewart, and Kent (2005);
Yang and Krishnan (2005); and Abbott et al. (2004) found that independent
audit committee members are more objective and less likely to overlook
possible deficiencies in the manipulation of financial reports, hence improving
the financial reporting quality of a firm. Beasley et al. (2000) also posit that
financial reporting quality is significantly related with an audit committee’s
independence and that financial statement fraud is more likely to happen in
firms with less audit committee independence. However, other studies have
46

indicated the contrary. For instance, Xie et al. (2003) found no evidence of a
significant relationship between the level of discretionary accruals and the
independence of an audit committee. Similarly, Lin, Li, and Yang (2006)
reported an insignificant and weak positive relationship between audit
committees’ independence and earnings quality. Additionally, Park and Shin
(2004) in their study did not find any significant relationship between financial
reporting quality and audit committees’ independence for Canadian firms.
More so, Abdulrahman and Ali (2006) did not also find any significant
association between audit committees’ independence and financial reporting
quality of Malaysian firms.
Another characteristic of audit committees that has been found to be
associated with financial reporting quality is the level of financial knowledge
of the audit committee members. Song and Windram (2000) suggest that high
level of financial literacy is needed for audit committee to effectively perform
it oversight function of monitoring. The role of an audit committee in
overseeing accountability of the management covers a wide scope, which
include the overall process of corporate reporting. This demands the audit
committee to possess accounting knowledge in order understand the financial
report and make positive contribution that will lead to improved financial
report. Financial literacy of audit committee member will go a long way to
help in reducing fraud in corporate financial reporting.
Also, DeZoort and Salterio (2001) assert that audit committee
members with accounting know-how are more likely to make better
professional judgments than those without. Similarly, Xie et al. (2003), Abbott
et al. (2004) and Bédard et al. (2004) posit that audit committee financial
47

expertise reduces financial restatements or constrains the tendencies of
manager manipulating financial report. In effect, all of these authors suggest
that financially knowledgeable audit committee members are more likely to
prevent and detect material misstatements.
A study conducted by Madawaki (2013) to examine whether audit
committees were associated with improved financial reporting quality for a
sample of 70 companies listed on the Nigerian Stock Exchange revealed that
formation of audit committees was positively associated with improved
financial reporting quality. The study also found out that audit committees
having an independent chair and audit committee members’ financial literacy
had a positive relationship with financial reporting quality. Similarly, Carcello
et al. (2006) studied the association between financial expertise and earnings
management proxy by abnormal accruals and found that high accounting and
financial knowledge of audit committees’ members are consistently associated
with less earnings management. Dhaliwal, Naiker, and Navissi (2010) in their
study also found a positive relationship between accounting/financial expertise
of an audit committee and a firm’s financial reporting quality.
According to Krishnan (2005), an audit committee that has financial
expertise has greater interaction with their internal auditors and is less likely to
witness internal control problems. Such an audit committee is more likely to
understand external auditors and support them in conflict situations with the
management. Krishnamoorthy et al. (2012) conducted a study to examine the
effectiveness of audit committees and financial reporting quality among the
Big-5 firms in the United States using a total of forty-two auditors. Their
findings revealed that financial literacy/expertise, independence, and a strong
48

commitment to perform the job effectively were identified by the respondents
as important attributes played a greater role in ensuring financial reporting
quality in the firms. Nonetheless, a study conducted by Yang and Krishnan
(2005) and Lin et al. (2006) did not find any significant positive relationship
between an audit committee’s financial expertise and financial reporting
quality measured as the level of earnings management. Also, Baxter and
Cotter (2009) investigated the relationship between audit committee expertise
and financial reporting quality in Austral and US. They both found negative
relationship between the audit accounting expertise and financial reporting.
The number of audit committee meetings has also been found to be an
indicator of audit committee effectiveness. According to Ghafran (2013),
financial statement users perceive fewer meetings as an indicator of less
commitment and insufficient time to oversee the financial reporting process. It
is also argued that effective control is unlikely to occur if an audit committee
holds a single yearly meeting, or none at all (Deli & Gillan, 2000; Klein &
Garcia, 2007). Abbott et al. (2004) opine that an audit committee that is
independent, meets at least four times a year, and includes at least one member
with financial expertise is negatively associated with the occurrence of
earnings management. The authors therefore recommend that that an effective
Audit committee should meet at least four times annually
Bryan, Liv, and Tiras (2004) posited that audit committees that meet
regularly improve the transparency and openness of reported earnings and
therefore improve earnings quality. Audit committees’ members who meet
regularly are often able to monitor a firms’ financial reporting processes
effectively and vice versa. Zhang, Zhou and Zhou (2007) in their study that
49

sought to examine the relationship between the number of meetings of an
audit committee within a year and financial reporting quality found a positive
correlation between the two variables. Vafeas (2005) also found a positive
relationship between the number of meetings of audit committees and earnings
quality.
Another study conducted by Ghafran (2013) to examine the impact of
audit committee characteristics on financial reporting quality in the context of
a large sample of UK companies over the period 2007-2010 showed that audit
committee meetings and financial expertise have a significant positive
relationship with financial reporting quality. That is, audit committees that
meet three or more times per year and fully independent had a significant
positive with the quality of reported earnings.
A recent study conducted by Dabor (2015) to examine the relationship
between audit committee characteristics, board characteristics and financial
reporting quality in the Nigerian banking sector revealed positive relationship
between audit committee meetings and financial reporting quality. However
the study revealed no significant relationship between audit committees’ size
and expertise and financial reporting quality. Dabor (2015) concluded that
more frequent the audit committee meets, the more opportunity it has to
discuss current issues faced by the company. However, studies conducted by
Bedard et al. (2004) and Lin et al. (2006) did not find any significant positive
association between the frequency of audit committee meetings and financial
reporting quality.
Moreover, the size of an audit committee has been found to be an
effective mechanism for monitoring and controlling financial reporting. Jensen
50

(2001) asserts that having a small number of audit committee members
improves the efficiency of audit committee monitoring and control. In a
similar vein, Lipton and Lorsch (2002) argue that large audit committees gives
room for rowdiness which in turn lowers the monitoring function of the
committee. Goodstein, Gautam, and Boeker (2004) posit that large audit
committee size is associated with delays and administrative bottlenecks.
Smaller audit committees are usually less encumbered with bureaucratic
problems.
Notwithstanding, Anderson and Orsagh (2004) posit that large audit
committees can devote more time and resources to monitor the financial
reporting process and the internal control systems. That is, a large audit
committee size enables members to distribute the workload and commit more
time and resources to monitor management and detect fraudulent behaviour.
Similarly, Monks and Minow (2011) are of the view that larger audit
committees are able to commit more time and effort to monitor management.
Also, Adams and Mehran (2002) argue that some organizations need larger
audit committees for effective monitoring. Empirical evidence, however,
suggest that audit committee’s size is inversely related to a firm’s financial
reporting quality. For instance, studies conducted by Carcello and Neal (2004)
and Farber (2005) found negative relationship between financial quality and
audit committee size. Xie et al. (2003) in their study also reported an inverse
relationship between the size of the audit committee and the quality of
financial reporting
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Summary of Literature Review
The agency problem which is associated with the separation of
ownership and control in addition to the formation asymmetry between
management and absentee owners create the demand for an independent
auditing body such as the audit committee. Audit committee is widely
recognized as a senior board committee with "front line" governance
responsibilities related not merely to financial reporting, but also to the
oversight of continuous disclosure and corporate reporting. Audit committees
are responsible for verifying that the financial statements are fairly stated in
conformity with the appropriate regulatory standards and that these statements
reflect the true economic condition and operating results of the entity. Thus,
the independent auditor verification adds credibility to the company’s financial
statements. Therefore, a quality audit is expected to constrain opportunistic
earnings management (Lin et al., 2006). From the above it is obvious that
accurate, reliable and detailed reporting on the work undertaken by audit
committees is essential in order for shareholders and stakeholders alike to
obtain assurance from the audit committee function.
Although audit committees are already well established locally as well
as overseas, limited empirical research has been done to date on the
responsibilities and disclosure practices thereof in Ghana. In other words,
there is paucity of research on AC’s roles, responsibilities, and actual
operations in Ghana, although much greater study efforts have been evidenced
in the USA, the UK and other western countries over the last two decades. As
indicated by Spira (2002), most of the studies that have been conducted in the
area of audit committees used American data and, as a result, audit committee
52

literature could be described as a U.S. based literature. Marx (2008) as well as
Kamel and Elbana (2012) assert that empirical evidence on the roles and effect
of audit committee effectiveness and financial reporting quality in African so
far been incredibly little.
In order to promote effective functioning of the AC system in
companies in Ghana, an empirical study on the effectiveness of audit
committees is not only necessary but also worthwhile. Also, given the
important role that an audit committee can play in the governance structure of
the board regarding financial reporting, and control and risk management and
other related aspects, there is a need for empirical data that can be used to
assess current audit committee responsibilities and disclosure practices in
order to provide a foundation for future recommendations. Moreover,
members of the audit committee must clearly know and understand their roles
within the organization to enable them function effectively.
Accordingly, the study seeks to examine the role effectiveness of audit
committees in selected companies in Ghana.
53

Conceptual Framework
As revealed by the extant literature, the effectiveness of an audit
committee is influenced by a number of factors. These factors include the
financial literacy of its members, number of meetings, the size of the
committee, management support and commitment to the audit committee, the
relationship between the audit committee and other auditing bodies like the
internal audit and external audit, the organizational policies and procedure
among others.
The organizational setting is also identified as one of the factors that
affect the effectiveness of audit committees (Ghafran, 2013). Organizational
setting refers to the organizational profile, internal organization and budgetary
status of the internal audit office; and also the organizational policies and
procedures that guide operation of the audit committee. It provides the context
in which the audit committee operates. Thus, organizational setting can exert
influence on the level of effectiveness that internal audit could achieve
(Ghafran, 2013). The effectiveness of an audit committee is a dynamic process
that results from the effect of each of the aforementioned factors. This is
illustrated in Figure 1
54

Organizational Factors:
1.Organizational policies
and procedures;
2.Availability of needed
resources/ budgetary
status of the office of the
audit committee, etc.
Audit Committee Management

Characteristics: Factors:
1.Financial literacy Audit 1. Management
of members; Committee support and
2.Size of the Effectivenes commitment;
committee; s 2. Management
3.Number of response to audit
meetings in a year, findings, etc.
Other Factors:
1. Quality of the internal
audit function
Financial Reporting 2. Cooperation
Quality between the audit
committee and
internal audit office
Figure 1: Conceptual Framework
Source: Adapted with modification from Ghafran (2013)
As shown in Figure 1 (with boldface arrows), management support and
commitment affect audit committee’s effectiveness. Also, management
commitment to implement recommendations by the audit committee improves
the operations of the committee and thus makes them effective. Additionally,
55

favourable organizational setting characterized by policies and procedures that
facilitate the operations of the audit committee will also add to the
effectiveness of the committee and vice versa. Moreover, a good relationship
between the audit committee and other stakeholders like the internal auditor(s)
as well as audit committee members’ financial literacy and other
characteristics is also seen as having an effect on the audit committee’s
effectiveness. This study thus seeks to examine the effects of the
aforementioned factors on the effectiveness of audit committees in the
selected companies. The study will further determine the relationship between
audit committees' frequency of meetings, size, independence, and financial
expertise and companies’ financial reporting quality.
56

CHAPTER THREE
METHODOLOGY
Introduction
This chapter deals with the research design, study area, population of
the study, sample and sampling procedure, research instrument, data collection
procedure and data analysis procedure.
Research Design
A research design is a conceptual structure which the researcher
applies to the collection, measurement and analysis of data that is meant to be
used in the investigation of the study problem (Kothari, 2004). It is needful for
a researcher to have a research design as it facilitates the smooth sailing of the
various stages within the research (Kothari, 2004). A research design tells
whether the interpretations that are obtained can be generalized to a larger
population or to different situations (Nachmias & Nachmias, 1996).
The case study research design adopted for this study. According to
Yin (1984, p.23), “the case study research method is an empirical enquiry that
investigates a contemporary phenomenon within its real-life context; when the
boundaries between and context are not clearly evident; and in which multiple
sources of evidence are used.” In other words, the case study research design
excels at bringing people to an understanding of a complex issue or object and
can extend experience or add strength to what is already known about a
phenomenon or subject. The case study method involves the collection and
presentation of detailed information about a particular participant or small
group, frequently including the accounts of subjects themselves. A case study
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looks intensely at an individual or small participant pool, drawing conclusions
only about that participant or group and only in that specific context.
According to Cohen, Manion & Morrison (2007), case study as a
research design focuses on individual actors or groups of actors, and seeks to
understand their views of events. This study adopted the case study research
design because the researcher wanted to really focus on respondents and seek
their views and understanding regarding the issue considered in the study.
Also, the case study research design helped the researcher to assess the real
situation on the ground through an in depth study of the problem to find out in
detail the main roles of audit committee and how effective they were in
discharging their duties. More so, the case study research design was adopted
because it enabled the conduct of a detailed analysis of a phenomenon (Soy,
1997).
Study Area
The study was conducted among fifty-four (54) companies in Ghana. The
companies were Ghana Commercial Bank Ltd; AngloGold Ashanti; Ghana Oil
Company; Accra Brewery Company; Golden Star Resources; Fan Milk
Limited; Goldfields Ghana Limited; Produce Buying Company; HFC Bank
(Ghana); PZ Cussons Ghana; Unilever Ghana Limited; SIC Insurance
Company; UT Bank; GN Bank; Total Petroleum Ghana; The Trust Hospital;
RLG Communications; Zenith Bank Ghana Limited; Prudential Bank Limited;
Azar Chemical Industries Limited; Benso Oil Palm Plantation Limited;
Cadbury Ghana Limited; Ernest Chemist; Ghacem Ghana Limited; Ghana
Rubber Estate Limited; Gihoc Distillery; Guinness Ghana Breweries Limited;
58

Kasapreko Company Limited; Kinapharma Limited; Latex Foam Rubber
Products Limited; Nestle Ghana Limited; Norpalm Ghana Limited; Tarkoradi
Gas Limited; Fiaseman Rural Bank Limited; Amenfiman Rural Bank Limited;
Lower Pra Rural Bank Limited; Ahantaman Rural Bank; West African Mills
Company Limited; Tema Lube Oil Company Limited; Tema Steel Company
Limited; Amponsah Effah Pharmaceuticals; Special Ice; Ecobank Ghana
Limited; Enterprise Life Insurance; Star Assurance Company Limited;
Fidelity Bank Ghana Limited; Melcom Limited; First Allied Savings and
Loans Limited; Guaranty Trust Bank; Glico Life; Quality Life Assurance
Company Limited; Societe Generale Ghana; Regency Alliance Insurance
Limited; and SBC Beverages Ghana Limited.
Population
Best and Khan (1993) define a population as a “group of individuals
that have one or more characteristics in common that are of interest to the
researcher.” The population is “a group of people who are the focus of a
research study and to which the results would apply” (Cardwell 1999, p.179).
Thus, the population is the group to which the researcher would like to make
inferences. It refers to all those who could possibly take part in a study. The
target population for the study was all companies in Ghana that have audit
committees.
Sample and Sampling Procedure
A sample is a small set of a population that is used to draw conclusions
about the bigger group. Sampling is the process of selecting a number of
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individuals for a study in such a way that individuals represent the larger
group from which they were selected. The study made use of a total of fifty-
four (54) companies. The convenience sampling technique was adopted in
obtaining the sample size for this study. This sampling technique was adopted
due to insufficient time on the part of the researcher at the point of data
collection. Hence, only more accessible companies whose audit committee
members were available and willing to take part in the study were used as
sample for the study. By using the convenience sampling technique, the
researcher was able to achieve the desired sample size within the expected
time frame. This further helped the researcher in gathering useful data and
information that would not have been possible using probability sampling
techniques, which have more rules governing how the sample should be
selected.
Research Instrument
Questionnaire was the instrument that was used for the study.
Questionnaire was seen as an appropriate instrument for the data collection
because of its ability to obtain large amount of information within an expected
period of time without affecting the validity and reliability of the instrument
(Gray, 2004). Also, questionnaire was considered appropriate because it is
economical and requires less time to administer compared to other methods
like face to face interview. Also, questionnaires were adopted because the
respondents were all literate and could respond to the various questions
without difficulties. It also gave the respondents adequate time to give well-
thought out answers.
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According to Oppenheim (1992), questionnaire is the best method by
which reliable information can be obtained in a research of this kind; where
the variable under investigation requires statement of fact and high level of
confidentiality. Also, questionnaires helped in reducing bias that might result
from the personal characteristics which is normally associated with interviews.
One set of questionnaire was be used for the study. The questionnaire divided
into six sections, thus Section A, B, C, D, E, and F. The items in Section A
sought to obtain information on the demographic characteristics of the
respondents. The other sections focused on the various research questions that
guided the study. The questionnaire contained both open and close-ended
questions. Respondents were required to respond by ticking the appropriate
column and write their responses, where applicable.
Data Collection procedure
The researcher obtained an introductory from the College of Distance
Education, University of Cape Coast and presented it to the Chief Executive
Officers or the head of the selected companies. This helped in clearing any
doubt that the respondents might have developed about the research. With the
help of the introductory letter, the research sought permission of the heads of
the various companies to administer the questionnaire. Each respondent was
given a copy of the questionnaire to complete at their own convenient time
within a period of two days. This was to ensure that the respondents get
enough time to respond to the questions. Completed questionnaires were
collected by the researcher two days after it was given to a respondent. The
collection was done during the companies’ working hours.
61

Ethical Considerations
Institutional approval for the study was sought from the companies
before the study was conducted. Also, verbal consent was obtained from each
respondent before he or she was made to take part in the study. The
respondents were also assured of their anonymity as well as the confidentiality
of the information they provided. The researcher further informed the
respondents that the study was solely for academic purposes.
Pre-testing
Pretesting of instrument was done using two companies not included in
the study sample. pre-testing was done to check whether or not the various
scales used in the questionnaire were reliable. It is also aimed at finding out
the internal consistency of the various scales, thus the degree to which the
various items measure the characteristics of interest. Apart from checking the
reliability of the various scales, the pre-testing helped in making all the
necessary corrections in the research instrument before the actual study takes
place.
Data Analysis Procedure
Data analysis is a whole process which starts immediately after data
collection and ends at the point of processing and interpretation of results. The
data that were collected from the respondents with the help of the
questionnaires were first of all coded. In other words, numeric values were
assigned to the various responses to the items on the questionnaire. After the
coding, the data were then entered into computer-based statistical software,
62

Statistical Package for Social Sciences (SPSS) Version 21.0 for the windows
operating system. The SPSS software was then used to analyse the data based
on the objectives and research questions that guided the study. Tables and
Figures were used to summarize the results that were obtained. The data were
basically analysed through the following processes:
The first research question which sought to examine the roles that audit
committees perform in companies in Ghana was analysed using descriptive
statistics statistical procedure, precisely using frequencies and percentages.
Frequencies and percentages were used to analyse this research question
because the researcher was just interested in finding out the number and
percentage of the respondents who responded YES or NO to the various roles
of audit committees that were found on the questionnaire. This was to help in
determining the roles that majority of the audit committees in companies in
Ghana perform.
Also, the second research question which sought to assess the
effectiveness of audit committees in the performance of the roles was also
analysed using means and standard deviations. With this research question, the
respondents were asked to rate the effectiveness of their company’s audit
committee on a scale of 1-10. The cut-point of the scale revealed a value of
5.5. Therefore, the decision rule was that any mean value less than 5.5 for a
particular role implied that majority of the audit committees were ineffective
when it comes to the performance of that role. On other hand, a mean value of
5.5 or more implied that majority of the audit committees were effective when
it comes to the performance of that role. To determine the overall
effectiveness of the audit committees when it comes to the performance of
63

their various roles, the mean of means value was also computed. With this
also, a value less 5.5 meant that, in general, the audit committees were
ineffective in the performance of their roles, while a mean value of 5.5 or
more meant that the audit committees were generally effective in the
performance of their various roles.
The third research question which sought to determine the factors that
affect the effectiveness of audit committees was also analysed using means
and standard deviations. Here also, the respondents were presented with a
number of factors deem to affect the effectiveness of audit committees. They
were then asked to rate on a scale of 0-10, the extent to which each of the
factors affects the performance of their company’s audit committee. The cut
point of the scale showed a value of 5. Hence, the decision rule was that any
mean value less than 5 implied that majority of the respondents did not agree
that a given factor affects the performance of their company’s audit
committee. On the other hand, a mean value of 5 or more implied that majority
of the respondents agreed that a given factor affects the performance of their
company’s audit committee.
The last research question which sought to examine the relationship
between audit committees’ frequency of meetings, independence, and
financial expertise and companies’ financial reporting quality was analysed
using the Spearman Rank Order (rho) correlation. The Spearman Rank Order
(rho) correlation analyses was deemed appropriate for this research question
because the data that were collected failed to meet some of the assumptions of
parametric tests such normality, linearity and homoscedasticity. Also, almost
all the data that were collected in relation to this research question were
64

ranked, making the Spearman Rank Order (rho) the most appropriate
statistical procedure. Statistical significance of the relationship was tested at
0.05 level of significance. An alpha level of .05 or a confidence interval of
95% was adopted for testing the statistical significance of the relationship
between the variables as it the level that is generally accepted for studies of
this nature.
65

CHAPTER FOUR
RESULTS AND DISCUSSION
Introduction
This chapter presents and discusses the results of the study. The results
are presented in accordance with the research questions that guided the study.
Detailed discussion of answers to each research question has been presented.
The presentation has been organized under two main headings. These are
demographic information and analyses of the main data for the study.
Demographic Information
Section A of the questionnaire sought to obtain information on the
respondents’ demographic characteristics. The results are presented in Figure
2 and Table 1.
Females
16(30%)
Males
38(70%)
Figure 2: Sex of respondents
Results from Figure 2 show that majority 38(70%) of the respondents
who took part in the study were males while the remaining 16(30%) were
females. By implication, Audit Committee’s membership within the selected
companies is dominated by males.
66

Table 1: Other Demographic Characteristics of Respondents
Demographic Characteristic Frequency (N) Percentage (%)
Highest Educational
Qualification
First Degree 44 81
Master’s Degree 8 15
Doctorate Degree 2 4
Number of Years Served on the

Audit Committee
1-3 years 7 13
4-6years 39 72
Above 6years 8 15
Source: Field survey, Acquah (2016)
Results from Table 1 indicate that most 44(81%) of the respondents
who took part in the study were holders of First Degree certificate. Holders of
Master’s and Doctorate Degree made up 8(15%) and 2(4%) of the respondents
respectively. The results imply that majority of Audit Committee’s members
who take part in the study were First Degree holders.
Regarding the number of years served on a company’s Audit
Committee, the results from Table 1 again shows that most 39(72%) of the
respondents had served on their company’s Audit Committee for between 4-
6years. Eight respondents representing 13% had served on their company’s
Audit Committee for more than 6years while 7(13%) had served on the
committee for between 1-3years. The results means that majority of the
respondents who took part in the study were quite familiar with the activities
of their company’s Audit Committee as they had served on the committee for
quite a long time. Hence, all other factors being held constant, they were in a
67

better position to respond as accurately as possible to the various issues raised
in the study.
Roles that Audit Committees Perform in Companies in Ghana
Research question one sought to determine the roles that audit
committees generally perform in companies in Ghana. The various roles
expected of all audit committees were broadly grouped as follows: roles
regarding financial reporting and accounting; roles regarding internal control;
roles regarding internal auditor; roles regarding external auditor; roles
regarding legal compliance; and roles regarding risk management. The results
are presented in Table 2.
Table 2: Roles that Audit Committees Perform in Companies in Ghana
Role YES NO
No % No %
Role in financial reporting and
accounting
Discusses potential emerging accounting 16 30 38 70
issues
Reviews annual financial statements before 54 100 - -
submission to the board of directors
Reviews the company’s accounting policies 22 41 32 59
Monitors integrity of financial statements 42 78 12 22
Monitors choice of accounting policies and 26 48 28 52
principles
Meets with management and external
auditors to review financial statements
Role regarding internal control

Reviews effectiveness of the internal 51 94 3 6
control system
Monitors the internal control process 23 43 31 47
Monitors the effectiveness of the 52 96 2 4
company’s internal control
Review the findings of external audit on 35 65 19 35
the internal control system
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Table 2 continued
Role Regarding the Internal Auditor

Review and approve the appointment and 49 91 5 9
dismissal of the head of internal audit
Review the cooperation between internal 28 52 26 48
and external audit
Protect and enhance the independence of 40 74 14 26
internal auditors
Review and approve the annual internal 51 94 3 6
audit plan and all major changes to the plan
Review the effectiveness of the internal 54 100 - -
audit function
Role Regarding the External Auditor

Discusses the scope of external audit work 24 44 30 56
Reviews the performance of external 46 85 8 15
auditors
Oversees the hiring, performance and 49 91 5 9
independence of external auditors
Ensures that external auditors get 44 81 10 19
unrestricted access to the audit committee
Always ensures that management responds 23 43 31 57
to recommendations made by the external
auditor(s)
Roles Regarding Legal Compliance

Monitors statutory audit of annual and 24 44 30 56
consolidated accounts
Obtains regular updates from management 18 33 36 67
and company legal counsel regarding
compliance matters.
Monitors the compliance with appropriate 42 78 12 22
financial standards
Roles Regarding Risk Management

Review the company’s policy for 15 28 39 72
managing business risk
Discuss with management the company’s 20 37 34 63
risk policies
Constantly reviews areas of financial risk 28 52 26 48
Review the effective functioning of the 25 46 29 54
company’s risk management system
69

Table 2 continued
Review the findings of external audit on 28 52 26 48
risk management
Review trends on the company’s risk 30 56 24 44
profile
Results from Table 2 show that when it comes to Audit
Committees’ (AC’s) roles regarding financial reporting and accounting,
majority of the Audit Committees in the selected companies perform the
following roles: review annual financial statements before submission to the
board of directors 54(100%), and monitors integrity of financial statements
42(78%). The above findings are in tune with a submission of the Canadian
Institute of Chartered Accountants [CICA] (1992) that the specific
responsibility of an audit committee is to review the annual financial
statements before submission to the board of directors. Again, the findings
concur with an assertion by Khamidullina (2012) that one of the primary roles
of an AC is to assist the board of directors with the oversight of the integrity
of the entity's financial statements and the entity's compliance with legal and
regulatory reporting standards as well as performance and effectiveness of the
entity's internal audit function and that of the independent auditors.
With respect to the committee’s roles with respect to internal control,
the results from Table 2 shows that majority of the Audit Committees in the
selected companies review the effectiveness of their company’s internal
control system 51(94%), monitors the effectiveness of their company’s
internal control 52(96%), and review findings of external audit on the internal
control system. Similar to the findings of this study, results of a study
conducted by Collier (2002) to examine the incentives for the formation of
Audit Committees in UK firms revealed that Audit Committees were
70

established principally to review a company’s financial statements, the
effectiveness of its accounting and internal control systems and the findings of
external auditors.
The results of this study, however, show that majority of the Audit
Committees do not monitor the internal control process 52(96%) though they
do review and monitor the overall effectiveness of their company’s internal
control system. By implication, majority of the Audit Committees studied
were not interested in the processes of their company’s internal control, but
their overall performance. However, a good result or performance usually
comes from a well thought-out process; hence Audit Committees ought to be
concerned with the processes of their company’s internal control. This will
help them correct any possible deviation that has the potential of crippling
their companies.
In the area of the Audit Committee’s roles regarding internal audit,
results from Table 2 show that majority of the ACs do review and approve the
appointment and dismissal of the head of their company’s internal audit
49(91%), review the cooperation between internal and external auditors
28(52%), protect and enhance the independence of internal auditors 40(74%),
review and approve the annual internal audit plan and all major changes to the
plan 51(94%) as well as review the effectiveness of the internal audit function
54(100%). The findings corroborate findings of a study conducted by Davies
(2009) that revealed that Audit Committees are responsible for measuring
performance of the internal audit function; the appointment and dismissal of
the heads of internal audit; and recommending the appointment and dismissal
of external auditors. According to Enofe, Aronmwan, and Abadua, (2013),
71

Audit Committees serve as a bridge in the communication network between
internal and external auditors and the board of directors. Similarly, Woolf
(1997) opines that the appointment of an audit committee is intended to
enhance the communication between the board of directors and both internal
and external auditors.
When it comes to external audit, the results show that majority of the
ACs review the performance of external auditors 46(85%), oversee the hiring,
performance and independence of external auditors 49(91%), and ensure that
external auditors get unrestricted access to the audit committee 44(81%). In
line with the above findings, the American Institute of Certificate Public
Accountants [AICPA](2009) posit that an audit committee is responsible for
selecting an independent external auditor, and receiving and reviewing audit
results. In a similar note, Enofe et al. (2013) assert that an Audit Committee
helps in preserving auditor independence by resolving contentious issues
between the auditor and the company’s management. Additionally, the
Canadian Institute of Chartered Accountants (2001) asserts that Audit
Committees make it easier for auditors to retain their independence with
clients.
Nonetheless, the results indicate that majority of the ACs fail to
discuss the scope of external audit work 30(56%) and also do not always
ensure that management responds to recommendations made by the Audit
Committee 31(57%). These results are in variance with an argument by
Dilworth (2000) that audit committees conduct a specific inquiry into the
scope of and nature of work to be done by auditors.
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Under legal compliance, the major role that majority of the ACs were
found to be performing was the monitoring of companies’ compliance with
appropriate financial standards when it comes to financial reporting. Most of
the ACs were, however, found not to monitor the statutory audit of their
company’s annual and consolidated accounts 30(56%) and also did not obtain
regular updates from management and company’s legal counsel regarding
compliance matters 36(67%). Contrary to the findings of this study, European
Commission [EC] (2006), posits that the primary duties and responsibilities of
the audit committee in a company include among others the monitoring of the
statutory audit of the annual and consolidated accounts.
Regarding Audit Committees’ role vis-à-vis their company’s risk
management issues. The results from Table 2 show that majority of the ACs
studied constantly review areas of financial risk 28(52%), review the findings
of external audit on risk management 28(52%), and review trends on the
company’s risk profile 30(56%). Notwithstanding, majority of the ACs were
found not be performing the following risk management functions: review of
the company’s policy for managing business risk 39(72%), discuss with
management the company’s risk policy 34(63%), and review the effective
functioning of the company’s risk management system 29(54%). The results
imply that though most of the ACs studied were somewhat executing their
roles in relation to risk management in their respective companies, the
effectiveness of the existing risk policies and systems of their companies was
not of much of a bother to them.
According to the UK Financial Reporting Council (2006), Audit
Committees are to review a company’s policy for the oversight and
73

management of business risks; oversee management’s overall risk
management strategy and ensure the required actions are taken; discuss risk
management policies and practices with management; oversee the
establishment and implementation of the company’s risk management system;
ensure that there are in place appropriate systems for identifying and
monitoring risks and that the systems are operating as intended; review the
current areas of greatest financial risk and how these are being managed in the
company; assess whether management has appropriate controls in place for
unusual types of transactions and/or any particular transactions that may carry
more than an acceptable degree of risk; review the effective functioning of the
risk management system; review the effectiveness of the risk management
processes and procedures applied; review the findings of internal audit on risk
management; and review the findings of external audit on risk management.
Effectiveness of Audit Committees in the Performance of Their Roles
Research question two sought to examine how effective audit
committees are in performing their various roles. With this, each respondent
was asked to sincerely rate, on a scale of 1-10, the effectiveness of his or her
company’s Audit Committee (AC) in the performance of its roles with regard
to the following areas: financial reporting and accounting, internal control,
internal audit, external audit, risk management, and legal compliance. The
measure of linearity of the scale showed a cut-point of 5.5. Therefore, any
mean score which was less than 5.5 denoted that majority of the respondents
rated that particular role as ineffective while a mean score equal to or greater
74

than 5.5 denoted that majority of the respondents rated that particular role as
effective. The results are presented in Table 3.
Table 3: Effectiveness of Audit Committees in the Performance of Their
Roles
Role Mean Std.

Deviation
Financial reporting 4.78 0.945
Internal audit 7.34 0.134
External audit 5.98 0.327
Internal control 6.81 1.267
Risk management 3.50 1.290
Legal compliance 4.26 1.152
Total Mean/ Std. Dev. 32.66 5.115

Mean of Means/ Std. Dev. 5.45 0.8525
Results from Table 3 show that majority of the Audit Committees
studied were effective in the performance of their roles regarding internal
audit (Mean=7.34, SD=0.134), external audit (Mean=5.98, SD=0.327), and
internal control (Mean=6.81, SD=1.267). However, they were found to be
ineffective in the performance of their roles regarding the following areas:
financial reporting and accounting (Mean=4.78, SD=0.945), risk management
(Mean=3.50, SD=1.290), and legal compliance (Mean=4.26, SD=1.152). The
mean of means revealed a value of 5.45 with a standard deviation of 0.8525.
This means that, on the whole, the Audit Committees were ineffective in the
performance of their roles.
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In consonance with the findings of this study are findings of a study
conducted by Lin (2006) among listed Chinese firms which concluded that
even though a large portion of Chinese listed companies (62 percent of the
responding companies) had set up audit committees, the majority of the audit
committees did not function effectively as their actual operations were far
behind the standards in the USA, the UK and other western countries. Another
study conducted in China by Chon and Zhou (2012) revealed that most
(56.4%) of the firms investigated did not have effective audit committees.
Similarly, a study conducted by Bartov et al. (2000) revealed that the
Audit Committees were ineffective in the performance of their oversight roles
and responsibilities in relation to corporate financial reporting, internal
control, and legal compliance. However, unlike the findings of the study
conducted by Bartov et al. (2000), the results of this study showed that the
Audit Committees were effective when it comes to internal control. The
findings of this study again lend credence to findings of a study conducted by
Krishnamoorthy et al., (2012) among the Big-5 firms in the United States
which revealed that the Audit Committees of the various firms were more
effective in their oversight roles of external audit and internal audit compared
to other roles.
Notwithstanding, the findings of this study are inconsistent with
findings of a study conducted by Marx (2009) in Ethiopia which revealed that
that the Audit Committees studied were performing their traditional
responsibilities of overseeing their company’s financial reporting and risk
management in addition to other roles reasonably well.
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Factors that Affect the Effectiveness of Audit Committees
Research question three sought to determine the factors that affect the
effectiveness of audit committees in the selected companies. With this, the
respondents were presented with a number of factors deem to affect the
effectiveness of audit committees. Each respondent was then asked to indicate
the extent to which each of the factors as found in the questionnaire affect the
effectiveness of the audit committee of his or her company on the scale of 0-
10. The measure of linearity of the scale showed a cut-point of 5. Therefore,
any mean score less than 5 denoted that effectiveness of audit committees is
not affected by that factor while a mean score equal to or greater than 5
denoted that the effectiveness of audit committees is affected by that factor.
The results are presented in Table 4.
Table 4: Factors that Affect the Effectiveness of Audit Committees
The effectiveness of your company’s audit Mean Std.

committees is affected by the following: Deviation
Ineffective internal audit system 2.28 1.134
Few number of meetings in a year 2.52 1.328
Poor financial literacy on the part of some members 1.57 1.119

of the committee
Low level of commitment on the part of some 3.51 0.461
members of the committee
Small size of the audit committee 2.63 0.502
Poor management support 7.79 0.211
Low level of management interest in the activities 7.43 0.327

of the audit committee
Poor commitment of management toward the 7.76 0.133
implementation of audit committee’s findings
Lack/insufficient training to keep members abreast 3.23 0.290
of the current trends in auditing/accounting
77

Table 4 continued
Failure on the part of management to keep the 5.11 0.989
committee abreast of changes to its business,
regulatory environment, competitors, etc.
Lack of clear policies and procedures for the audit 1.49 0.716
committee
Poor internal organization of the audit committee 1.22 0.012
office
Lack/inadequate resources for the audit committee 6.12 0.479
to effectively perform its function
Wrong perception about the audit committee’s 5.56 1.051
function by other members in the company
Poor communication between the audit committee 1.37 0.014
and internal and external auditors
Poor access to relevant internal audit records 1.01 0.469
Results from Table 4 reveal that the effectiveness of ACs is affected by
the following factors: poor management support (Mean=7.79, SD=0.211); low
level of management interest in the activities of the audit committee
(Mean=7.43, SD=0.327); poor commitment of management toward the
implementation of audit committee’s findings (Mean=7.76, SD=0.133); failure
on the part of management to keep the committee abreast of changes to its
business, regulatory environment, competitors, etc. (Mean=5.11, SD=0.989);
Lack/inadequate resources for the audit committee to effectively perform its
function (Mean=6.12, SD=0.479); wrong perception about the audit
committee’s function by other members in the company (Mean=5.56,
SD=1.051).
The findings of this study show that most of the factors that affect the
effective functioning of the Audit Committees are management related,
principally in the area of management support and commitment. The findings
78

of this study support findings of another study conducted by Krishnamoorthy,
Wright and Cohen (2012) among the Big-5 firms in the United States which
revealed that lack of management support was as a key factor that hindered the
nature, extent and quality of the audit committee functions.
According to Chan and Li (2008), one of the reasons for the ineffective
functioning of an Audit Committee is the failure on the part of management
and other employees to fully recognize the importance of the committee. This
situation makes it quite difficult for the committee to get the needed from both
management and other members of the organization for its effective
functioning. Atu, Omimi-Ejoor, Atu and Abusomwan (2013) also opine that
Audit Committee require the assistance and support of other stakeholders such
as management together with pertinent information and resources to be
efficient and effective in the performance of their duties. It is only when major
stakeholders play their part that it can be assured that the oversight function of
the audit committee is effectively achieved (Wong, 2007). It is therefore
essential that management, internal and external auditors as well as audit
committees themselves work with a common purpose of improving financial
reporting and greater effectiveness in internal controls.
As reiterated by Mihret and Yismaw (2007), support from management
in the form of resources and commitment towards the implementation of audit
committee’s recommendations is essential in attaining the committee’s
effectiveness. Also, the level of cooperation among the audit committee
members and other parties in the organization such as internal auditors can
have significant impact on the effectiveness of the audit committee.
79

The findings of this study stand in sharp contrast with finding of
studies conducted by Xie et al. (2003) which revealed that the effectiveness of
an audit committee is directly affected by the number of meetings that the
committee holds in a year. According to the authors, an audit committee that
frequently meets with the internal auditors is better informed about auditing
and accounting issues. The findings are also in disagreement with findings of a
study conducted by DeZoort and Salterio (2001) which revealed that greater
financial expertise of audit committee members leads to a more effective audit
committee. Another study conducted by Cohen, Krishnamoorthy and Wright
(2002) revealed that the poor of financial expertise of audit committee
members negates the effectiveness of the committee. Additionally, a study
conducted by Gendron, Bedard and Gosseline (2006) concluded that audit
committee financial expertise was a major determinant of audit committees’
effectiveness in the three firms studied. However, in this study the
effectiveness of the Audit Committees was found not to be affected by the
financial expertise of the Audit Committees’ members.
Reporting Quality
Research question four sought to examine the relationship between
audit committees’ frequency of meetings, size, level of independence, and
financial expertise and companies’ financial reporting. A Spearman Rank
Order Correlation (rho) was then conducted to examine the relationship
between the aforementioned variables. A Spearman Rank Order Correlation
80

(rho) was adopted because analyses were performed showed some violation to
of the assumptions of normality, linearity and homoscedasticity under
parametric test, hence the need to adopt the non-parametric alternative. Also,
the Spearman Rank Order Correlation (rho) was deemed appropriate almost
all the data collected were in the form of ranks. The results of the Spearman
Rank Order Correlation (rho) analysis are presented in Table 5.
Table 5: Relationship Between Audit Committees’ Size, Financial Expertise,
Independence and Number of Meetings and Companies Financial Reporting Quality
Variable Companies’
financial
reporting quality
Audit committees’ size Correlation Coefficient -.017
Sig. (2-tailed) .901
N 54
Audit committees’ financial Correlation Coefficient .034

expertise Sig. (2-tailed) .805
N 54
Audit committees’ Correlation Coefficient .111

independence Sig. (2-tailed) .424
N 54
Audit committees’ number of Correlation Coefficient .053

meetings in a year Sig. (2-tailed) .706
N 54
Results from Table 5 show a weak and insignificant negative
relationship between audit committees’ size and companies’ financial
reporting quality (r=-.017, p=.901). Additionally, the results reveal a weak and
insignificant positive relationship between the following variables: audit
committees’ financial expertise and companies’ financial reporting quality
(r=.034, p=.805); audit committees’ level of independence and companies’
81

financial reporting quality (r=.111, p=.424); and audit committees’ number of
meetings in a year and companies’ financial reporting quality (r=.053,
p= .706).
The results imply that a larger audit committee size is somewhat
associated with a lower level of financial reporting quality. However, the
relationship is too weak to be considered significant (p>.05). The results
further imply that higher levels of audit committees’ financial expertise,
independence and meetings are associated with an increased financial
reporting quality. Nevertheless, the relationship cannot be considered
significant as all p-values were found to be less than .05.
The findings of this study are in incongruence with findings of a study
conducted by Carcello and Neal (2004) and Farber (2005), which revealed a
negative relationship between financial reporting quality and audit committee
size. The results are also in consonance with a report by Xie et al. (2003) that
there is an inverse relationship between the size of the audit committee and the
quality of financial reporting. According to Jensen (2001), having a small
number of audit committee members improves the efficiency of audit
committee monitoring and control. Large audit committees give room for
rowdiness which in turn lowers the monitoring function of the committee
(Lipton & Lorsch, 2002). Goodstein, Gautam, and Boeker (2004) also posit
that a large audit committee size is associated with delays and administrative
bottlenecks. Smaller audit committees are usually less encumbered with
bureaucratic problems. This, in turn, helps to improve the committee’s
effectiveness.
82

Also, the findings of this study are in tandem with findings of a study
conducted by Lin, Li, and Yang (2006) when they reported an insignificant
and weak positive relationship between audit committees’ independence and
earnings quality. Additionally, the findings lend credence to that of a study
conducted by Park and Shin (2004) which did not find any significant
relationship between financial reporting quality and audit committees’
independence for Canadian firms. More so, Abdulrahman and Ali (2006) in
their study among selected firms in Malaysia did not find any significant
association between audit committees’ independence and financial reporting
quality of the firms. Contrary to the findings of this study, studies conducted
by Klein(2002); Xie et al. (2003); Bedard, Chtourou, & Courteau (2004);
Vafeas (2005); Yang and Krishnan (2005); Davidson, Goodwin-Stewart, &
Kent, (2005); Krishnan and Visvanathan (2008); Koh & Woo (2010); Kent,
Routledge, & Stewart (2010); and Croes (2013) revealed that an audit
committee degree of independence have a significant positive relationship
with firms’ financial reporting quality.
With regard to the relationship between audit committees’ financial
knowledge/expertise and companies’ financial reporting quality, the findings
of this study are in support of findings of other studies conducted by Yang and
Krishnan (2005) and Lin et al. (2006), which did not find any significant
positive relationship between an audit committee’s financial expertise and
financial reporting quality. However, the findings of the current study disagree
with findings of another study conducted by Baxter and Cotter (2009) in
Austral and US, which revealed a negative relationship between audit
committee expertise and financial reporting quality. Also, in disagreement
83

with the findings of the current study are studies conducted by McMullan
(1996); Beasley et al. (2000); DeZoort and Salterio (2001); Abbott et al.
(2004); and DeChow et al. (2006), which suggested a significant positive
relationship between the financial knowledge of audit committee members and
the quality of firms’ financial reports (McMullan, 1996; Beasley et al., 2000;
DeZoort and Salterio 2001; Abbott et al., 2004; DeChow et al., 2006). The
findings of this study further contradict Beasley et al. (2000) claim that
financial reporting quality is significantly related with an audit committee’s
independence and that financial statement fraud is more likely to happen in
firms with less audit committee independence.
When it comes to the relationship the audit committees’ number of
meetings in a year and financial reporting quality, the findings of this study
compares well with findings of studies conducted by Vafeas (2005) and
Zhang, Zhou and Zhou (2007), which revealed a positive but insignificant
correlation between the number of meetings of audit committees and earnings
quality. Also in line with the findings of this study are studies conducted by
Bedard et al. (2004) and Lin et al. (2006), which did not find any significant
positive association between the frequency of audit committee meetings and
financial reporting quality. Notwithstanding, the findings of this study stand in
contrast with findings of a similar study conducted by Dabor (2015) which
concluded that the number of meetings of an audit committee within a year has
a significant positive relationship financial reporting quality. Also, in contrast
with the findings of this study is another study conducted in UK by Ghafran
(2013), which showed that audit committee meetings and financial expertise
have a significant positive relationship with financial reporting
84

quality. That is, audit committees that meet three or more times per year and
fully independent had a significant positive with the quality of reported
earnings. However, in the current study, the relationship that was observed
between the aforementioned variables was insignificant.
85

CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Introduction
This chapter deals with the summary of the research process, key
findings, conclusions, recommendations as well as a suggestion for further
research.
Summary of the Research Process
The main purpose of this study is to examine the role effectiveness of
audit committees in selected companies in Ghana. Specifically, the study
seeks to:
1. examine the roles that audit committees perform in companies in Ghana.
2. assess the effectiveness of audit committees in the performance of their
roles.
3. determine the factors that affect the effectiveness of audit committees.
4. examine the impact of audit committees’ frequency of meetings, size,
independence, and financial expertise on companies’ financial reporting
quality.
Key Findings
First of all, the study found out that the main roles that the Audit
Committees studied perform are as follows: reviewing the annual financial
statements before submission to the Board; monitoring integrity of financial
statements; reviewing the effectiveness of companies’ internal control system;
monitoring the effectiveness of companies’ internal control; reviewing
findings of external audit on the internal control system; reviewing and
86

approving the appointment and dismissal of the head of companies’ internal
audit; reviewing the cooperation between internal and external auditors;
protecting and enhancing the independence of internal auditors; reviewing and
approving the annual internal audit plan and all major changes to the plan;
reviewing the effectiveness of the internal audit function; reviewing the
performance of external auditors; overseeing the hiring, performance and
independence of external auditors; ensuring that external auditors get
unrestricted access to the audit committee; monitoring the companies’
compliance with appropriate financial standards when it comes to their
company’s financial report; reviewing areas of financial risk; reviewing the
findings of external audit on risk management; and reviewing trends on the
company’s risk profile.
Also, the study found out that, on the whole, the Audit Committees
studied were not effective in the performance of their duties though they were
found to be performing quite a number of roles.
Additionally, the study found out that the effectiveness of ACs is
affected by such factors as poor management support; low level of
management interest in the activities of the audit committee; poor
commitment of management toward the implementation of audit committee’s
findings; failure on the part of management to keep the committee abreast of
changes to its business, regulatory environment, competitors, etc.;
function; and wrong perception about the audit committee’s function by other
members in the company.
87

Last but not least, the study found a weak and insignificant negative
relationship between audit committees’ size and companies’ financial
reporting quality (r=-.017, p=.901). Also, a weak and insignificant positive
relationship was found between the following variables: audit committees’
financial expertise and companies’ financial reporting quality (r=.034, p=
.805); audit committees’ level of independence and companies’ financial
reporting quality (r=.111, p= .424); and audit committees’ number of meetings
in a year and companies’ financial reporting quality (r=.053, p= .706).
Conclusions
The findings of this study therefore imply that:
Reviewing the annual financial statements before submission to the
Board; monitoring integrity of financial statements; reviewing the
effectiveness of companies’ internal control system; monitoring the
effectiveness of companies’ internal control; reviewing findings of external
audit on the internal control system; reviewing and approving the appointment
and dismissal of the head of companies’ internal audit; reviewing the
cooperation between internal and external auditors; protecting and enhancing
the independence of internal auditors; reviewing and approving the annual
internal audit plan and all major changes to the plan; reviewing the
effectiveness of the internal audit function; reviewing the performance of
external auditors; overseeing the hiring, performance and independence of
external auditors; ensuring that external auditors get unrestricted access to the
audit committee; monitoring the companies’ compliance with appropriate
financial standards when it comes to their company’s financial report;
88

reviewing areas of financial risk; reviewing the findings of external audit on
risk management; and reviewing trends on the company’s risk profile are the
roles that the Audit Committees studied perform.
Also, much is left to be desired with regard to the effectiveness of the
Audit Committees studied.
Additionally, the ineffectiveness on the part of the Audit Committees
studied is essentially due to the following factors: poor management support;
low level of management interest in the activities of the audit committee; poor
commitment of management toward the implementation of audit committee’s
findings; failure on the part of management to keep the committee abreast of
changes to its business, regulatory environment, competitors, etc.;
function; and wrong perception about the audit committee’s function by other
members in the company.
More so, an audit committee’s size, financial expertise, independence
and number of meetings held in a year do have any significant relationship
with a company’s financial reporting quality.
Recommendations
Based on the findings of this study, it was recommended that:
1. Management of companies should make the needed resources available to the
Audit Committee of their company so as to enable the committee function
effectively. In addition to this, management should provide other needed
support to the committee and should be more committed in implementing the
89

recommendations by the committee. All these would help improve the
effectiveness of the committee.
2. Also, other members of a company should be educated on the importance of
having an Audit Committee within the company. This would help to dispel
any wrong perceptions that they might have formed about the company's audit
committee. When this is achieved, they would be more encouraged to throw
their weight behind the Audit Committee in the performance of its various
roles.
3. Companies should pay more attention to other factors that can affect the
quality of their financial reports other than factors such as the frequency of
their audit committee’s meetings, size of their audit committee, financial
expertise of their audit committee, and degree of independence of their audit
committee. The reason is that the study did not find any significant
relationship between companies' financial reporting quality and audit
committees' frequency of meetings, size, financial expertise and degree of
independence.
Suggestion for Further Research
Based on the findings this study, it was recommended that a study
should be conducted to determine the factors that affect the financial reporting
of companies.
90

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114

APPENDIX
UNIVERSITY OF CAPE COAST
COLLEGE OF DISTANCE EDUCATION
QUESTIONNAIRE
The purpose of this study is to examine the role effectiveness of audit
committees in selected companies in Ghana. You will be contributing to the
success of the study if could please respond to the various items of the
questionnaire as honestly as possible. Your anonymity is greatly assured.
Also, any information that you will provide will be treated with utmost
confidentiality and used for the purpose of the study only. Thank you.
General Instruction: Please tick (√) against the appropriate column or
write your response, where appropriate in the spaces provided. Thank
you.
SECTION A – Demographic Information
1. Are you a male or a female? ………………………………..……………….
2. What is your highest educational qualification? …………………….………
3. How long have you served on this company’s audit committee? ................
SECTION B: ROLES OF AUDIT COMMITTEES
Does the audit committee of this company perform each of the following roles? Please
indicate your response by ticking[√] the appropriate column.
Role YES NO
Role in financial reporting and accounting

4. Discusses potential emerging accounting
issues
5. Reviews annual financial statements before
submission to the board of directors
115

6. Reviews the company’s accounting policies

7. Monitors integrity of financial statements
8. Monitors choice of accounting policies and
principles
9. Meets with management and external auditors
to review financial statements
Role regarding internal control
10. Reviews effectiveness of the internal control
system
11. Monitors the internal control process
12. Monitors the effectiveness of the company’s
internal control
13. Reviews the findings of external audit on the
internal control system
Role regarding the internal auditor
14. Reviews/approves the appointment and
dismissal of the head of internal audit
15. Reviews the cooperation between internal and
external audit
16. Protects and enhance the independence of
internal auditors
17. Reviews and approves the annual internal
audit plan and all major changes to the plan
18. Reviews the effectiveness of the internal audit
function
Role regarding the external auditor
19. Discusses the scope of external audit work
20. Reviews the performance of external auditors
21. Oversees the hiring, performance and
independence of external auditors
22. Ensures that external auditors get unrestricted
access to the audit committee
23. Always ensures that management responds to
recommendations made by the external
auditor(s)
Roles regarding legal compliance
24. Monitors statutory audit of annual and
consolidated accounts
25. Obtains regular updates from management and
company legal counsel regarding compliance
matters.
26. Monitors the compliance with appropriate
116

financial standards
Roles regarding risk management
27. Reviews the company’s policy for managing
business risk
28. Discusses with management the company’s
risk policies
29. Constantly reviews areas of financial risk
30. Review the effective functioning of the
company’s risk management system
31. Reviews the findings of external audit on risk
management
32. Review trends on the company’s risk profile
Other roles, please specify……………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
SECTION C: EFFECTIVENESS OF AUDIT COMMITTEES
Sincerely rate the effectiveness your company’s audit committee on a scale of
1-10.
Role Rate
33. Financial reporting and accounting
34. Internal audit
35. External audit
36. Internal control
37. Risk management
38. Legal compliance
117

SECTION D: FACTORS THAT AFFECT THE EFFECTIVENESS OF
AUDIT COMMITTEES
On a scale of 0-10, sincerely rate the extent to which each of the following
factors affect the effectiveness of your company’s Audit Committee.
The effectiveness of your company’s audit committees is Rate

affected by the following:
39. Ineffective internal audit system
40. Few number of meetings in a year
41. Poor financial literacy on the part of some members of the

committee
42. Low level of commitment on the part of some members of the
committee
43. Small size of the audit committee
44. Poor management support
45. Low level of management interest in the activities of the audit

committee
46. Poor commitment of management toward the implementation
of audit committee’s findings
47. Lack/insufficient training to keep members abreast of the
current trends in auditing/accounting
48. Failure on the part of management to keep the committee
abreast of changes to its business, regulatory environment,
competitors, etc.
49. Lack of clear policies and procedures for the audit committee
50. Poor internal organization of the audit committee office
51. Lack/inadequate resources for the audit committee to

effectively perform its function
52. Wrong perception about the audit committee’s function by
other members in the company
53. Poor communication between the audit committee and
internal and external auditors
54. Poor access to relevant internal audit records
Other factors, please specify ……………………………..………………….
……………………………………………………………………………….…
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SECTION E: CHARACTERISTICS OF AUDIT COMMITTEES
55. What is the size (i.e. in terms of number) of this company’s audit
committee? ………………………………………………………………….
56. How would you describe the level of financial expertise of your
company’s Audit Committee members?
Very Low [ ] High [ ]
Low [ ] Very High [ ]
Average [ ]
57. How would you describe the degree of independence of your
company’s audit committee?
Very Low [ ] High [ ]
Low [ ] Very High [ ]
Average [ ]
58. How many times does the audit committee of this company meet in a year?
……………………………………………………………………………
SECTION F: FINANCIAL REPORTING QUALITY
On a scale of 1-10, sincerely rate the following as pertain to this company’s
financial reporting?
Item Rate
59. Accuracy and truthfulness of financial reports
60. Reliability of financial reports
Thanks for participating!
119

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EFFECTIVENESS OF AUDIT COMMITTEES AND FINANCIAL

REPORTING QUALITY IN SELECTED COMPANIES IN GHANA

ANTHONY AGYEMAN ACQUAH

ROLE EFFECTIVENESS OF AUDIT COMMITTEES AND FINANCIAL

REPORTING QUALITY IN SELECTED COMPANIES IN GHANA

ANTHONY AGYEMAN ACQUAH

A dissertation submitted to the College of Distance Education,

University of Cape Coast, in partial fulfillment of the

requirements for the award of Master of Business

Administration degree in Accounting

Candidate’s Signature:……………………... Date:……………………

Name: Anthony Agyeman Acquah

supervised in accordance with the guidelines on supervision of dissertation

laid down by the University of Cape Coast.

Supervisor’s Signature:……………………… Date:……………………

Name: Dr Anokye Mohammed Adam

Committees and financial reporting quality in selected companies in Ghana.

respondents participated in the study. The convenience sampling method was

questionnaire. Spearman Rank Order (rho) correlation, frequencies and

companies studied were generally not effective in the performance of their

affected principally by poor management support; low level of management

interest in the activities of the audit committee; poor commitment of

management toward the implementation of audit committee’s findings;

lack/inadequate resources for the audit committee to effectively perform its

with Audit Committees’ frequency of meetings, size, degree of independence,

and financial expertise. Based on the findings of the study, it was

recommended among other things that management of the companies should

committed in implementing the recommendations by the committee.

Digitized by Sam Jonah Library

CHAPTER ONE: INTRODUCTION 1

Background to the Study 1

Statement of the Problem 4

Purpose of the Study 6

Significance of the Study 7

Delimitations of the Study 8

Limitation of the Study 8

Organization of the Study 8

CHAPTER TWO: REVIEW OF RELATED LITERATURE 10

The Concept of Auditing 10

The Concept of Audit Committees 12

Roles of Audit Committees 18

Factors that Affect the Effectiveness of Audit Committees 25

Effectiveness of Audit Committees 31

Relationship Between Audit Committees’ Frequency of Meetings, Size,

Independence, and Financial Expertise and Companies’ Financial

Summary of Literature Review 42

Digitized by Sam Jonah Library

CHAPTER THREE: METHODOLOGY 47

Sample and Sampling Procedure 49

Data Collection Procedure 51

Data Analysis Procedure 52

CHAPTER FOUR: RESULTS AND DISCUSSION 56

Roles that Audit Committees Perform in Companies in Ghana 58

Effectiveness of Audit Committees in the Performance of Their Roles 64

Factors that Affect the Effectiveness of Audit Committees 67

Relationship Between Audit Committees’ Frequency of Meetings, Size,

Independence, and Financial Expertise and Companies’ Financial