Public Listed Companies and Fund Managers - Academic ...

Mo’taz Amin Al –Sa’eed
increasing attention on corporate governance in general and audit committees in particular. The fall of
these companies raised concerns regarding the lack of vigilant oversight by their boards of directors
and audit committees in the financial reporting process and auditing functions (Rezaee et al, 2003).
In the surrounding of financial scandals (2002), it is increasingly understood that internal auditing is a
key component of internal control over financial reporting; (Sarens and De Beelde, 2006). Sections
404 and 302 of SOX have added internal control to the agenda of audit committees. One of the main
mandatory responsibilities of the AC established by new regulations relates to external auditing
oversight. That is, SOX and other regulations signal that the external auditor is accountable to the
audit committee. In particular, the audit committee is directly responsible for the appointment and
compensation of the auditor and the oversight of her/his work, including the resolution of
disagreements over financial reporting between management and the auditor. Also, the audit
committee now has to pre-approve all non-audit services to be provided by the accounting firm which
employs the company’s external auditor. (Bedard et al., 2008). Many board members serve by virtue
of their position as management of the shareholder and not necessarily because of their qualification
and experience. The primary function of the audit committees is to assist the board in fulfilling its
oversight responsibilities by reviewing the financial information that will be provided to the
shareholders and other stakeholders, the systems of internal controls, which management and the
board of directors have established, and all audit processes (Bean 1999). (Bean, 1999) outlined the
general responsibilities as: 1. the audit committee provides open avenues of communication among
internal auditors, the independent auditor and the board of directors. 2. The audit committee must
report actions to the full board of directors and make appropriate recommendations. 3. The audit
committee has the power to conduct or authorize investigations into matters within the committee's
scope of responsibilities. The committee is authorized to retain independent counsel, accountants or
others if needed to assist in an investigation. 4. The committee will meet at least four times each year
or more frequently if circumstances make it preferable. Audit committees in developing countries may
have difficulties in performing this role since they suffer from a shortage of accounting skills. Several
studies have been undertaken on the audit committees’ oversight responsibilities. The effectiveness
of the audit committee depends on the background of the members which should consist of both
financial and non-financial people. Several studies have examined how “financial expertise” relates to
the identification of financial accounting reporting issues and the assessment of financial reporting
quality (McDaniel et al., 2002). Information from a more credible auditor, manager or director will have
a greater influence on AC decisions (DeZoort et al., 2002). The audit committee would appear to
perform an extensive role in safeguarding shareholders’, and stakeholders’ interests. In addition, it
would create a responsibility of the committee, which they would be bound by law to perform. (Saad et
al, 2006). (Tackett ,2004) stated that although the audit committee represents the interests of
stockholders, current procedures make it difficult for an individual stockholder to become a candidate
for the board of directors without the blessings of corporate management. He also stated that under
normal circumstances, senior management or other directors nominate board candidates. One of the
main responsibilities of the AC is to oversee the external audit function, including the selection,
compensation, work and independence of the external auditor. Effective oversight is expected to
strengthen “audit quality”. The main criteria used to measure “audit quality” relate to auditor, level of
work, and independence. (Bedard and Gendron, 2009).
This study differs from that other reviews in its emphasis on international and local systematic
analysis of the AC features that expected to effectively influence the financial reporting in the sharetraded
companies in Jordan; by formalise a broader range of indicators of effectiveness that we group
into four categories (internal control effectiveness, financial expertise and literacy, compliance with
rules and regulations; audit quality; and members understanding of the AC's functions).
4. Research model and hypothesis development
From the research model (figure 1); the following null hypotheses can be derived:
Hº1: Internal Control Effectiveness does not effectively influence the Financial Reporting.
Hº2: Financial Expertise and Literacy does not effectively influence the Financial Reporting.
Hº3: Compliance with Jordan Securities Commission Requirements does not effectively influence the
Financial Reporting.
12