Governance characteristics and role effectiveness of audit committees

How do the collective qualities of independence, competence and diligence of Audit Committee (AC) members impact on the effectiveness of ACs in performing their roles? Two primary roles of an Additionally, this literature has developed proxy measures for the effectiveness of ACs in fulfilling their key roles of an AC are assessed in this study. They are the roles of vetting the integrity of external annual financial statements (using the incidence and severity of financial restatements as an effectiveness measure) and monitoring external auditor independence (using a non-audit to audit service fees as the effectiveness measure). Previous studies have not drawn these AC charcteristics together in a comprehensive model as done in this study. Using secondary data from Australian listed companies over the years 2004 to 2009, the results reveal that stronger AC independence and competence, but not diligence, is significantly related to a lower incidence and severity of financial restatements (i.e. to a lower integrity of financial statements). However, greater AC diligence, but not independence or competence, is significantly related to lower non-audit fee ratio (i.e., to higher external auditor independence). Consideration is given to implications of the results for the composition and functioning of ACs.