Audit Committee Characteristics

Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

“Audit committee members or their agents may proactively examine areas, functions, and personnel where collusive fraud risk is reasonably likely to be perpetrated,” (Zmags). The search for fraud, even if performed in the same location multiple times, may continue until the audit committee feels confident that they have ruled out the probability that fraud is prevalent. One of the biggest risks of fraud is management override of controls, requiring the extensive search for risk in, “journal entries and other adjustments and reviewing accounting estimates for possible biases that could result in material misstatements,” (Nysscpa).

Therefore a policy proposed is that auditing firms not be paid by corporations but rather by tax payers. This will place additional burdens on taxpayers, but rather than experience another bailout, this easy to fall into conflict of interest relationship needs to be prevented from ever occurring. Board of directors can create a conflict of interest on their own by accepting large stock options from the corporations they serve (PBS, 2002). These large incentives to serve can actually work to blind corporate board members to unethical acts being carried out by corporate officials.

An audit committee is a subcommittee of the board of directors that oversees the financial reporting process of a company including its audit procedures. In general, the audit committee’s responsibilities are to monitor the financial reporting process, oversee the internal control systems and to oversee the internal audit and independent public accounting function (Doupnik & Perera, 2012). Another requirement for publicly traded companies in the United States is that the committee must be made up of independent directors, meaning that no committee member can work for the company, with one committee member being a financial expert in accounting and auditing.

However, Sharma and Iselin (2012) found that there is a significant direct relationship between multiple-directorships and the extent of financial misstatements in the post-Sarbanes-Oxley environment. They argued that as the number of additional directorships increases, the demanding commitment of each role reduces the director’s available time to effectively fulfil its monitoring responsibilities at each company. In addition, both Beasley (1996) and Persons (2005) reported a significant positive relationship between the likelihood of financial statement fraud and the number of additional directorships held with other firms.

Firstly, the proportion of non-executive directors would be a significance independent variable from this research. Zhang and Yu (2016) indicates that independent directors means that there is no material connection among directors and companies, shareholder and officer of a related company. According to their research, it can be illustrated that if the firm is operating within a lower information environment, the connection between board independence and audit fees would be significantly. On the contrary, when the information environment is strong, there will be a positive relationship between the board independence and external audit fees (Zhang and Yu, 2016). Nevertheless, Moradi et al (2012) had received a significant and negative

This paper contributes to the auditing literature by investigating empirically auditors’ responses to overlapping membership on audit and compensation committees (overlapping committees) and the equity holdings by overlapping audit committee members. Boards of directors are at the helm of corporate governance and work through sub-committees (Adams, Hermalin, & Weisbach, 2010; Hermalin & Weisbach, 1998; Hermalin & Weisbach, 2003). Delegating different board functions to distinct committees represents a separation of tasks and functions, and has been strongly recommended as a suitable mechanism for improving corporate governance (Kesner, 1988; Spira & Bender, 2004). Two important sub-committees found in modern organisations are the audit and compensation committees. The audit committee is a subcommittee of the board of directors with delegated authority to oversee the auditing and financial reporting-related matters of the firm. The compensation committee, on the other hand, is entrusted with responsibility for setting managerial pay, including an optimal amount of performance-based incentive pay. The question of whether overlapping membership, where at least one audit committee member is also on the compensation committee, is desirable from a governance perspective has received increasing attention from professionals and researchers (Chandar, Chang, & Zheng, 2012; Habib & Bhuiyan, 2014; KPMG, 2008; Liao & Hsu, 2013).

Internal controls of companies are to ensure the reliability of financial reporting, which are developed by companies ' managements, thus, if a company has deficiencies in their internal control, it will have a high risk of material misstatement over their financial reporting. Generally, the likelihood in big firms that errors or frauds are appeared in accounting system is higher than the likelihood in small firms (Hoitas, Hoitash, & Bedard, 2008). Audit risk

Based on prior studies, there are other corporate governance features which are considered important for the monitoring mechanism. Besides, there are other motivational and conditional factors that are perceived to be able to affect board of director composition. Hence, controls variables identified from Persons (2005) and Beasley (1996) will be included in this study to investigate the relationship between board composition and the likelihood of corporate fraud.

Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).

Through the study carried out by Ge and McVay, the relationship between firm size and material weaknesses is revealed. For purposes of this study, the term ‘large audit firm’ refers to the Big 6 accounting firms of: BDO Seidman, Deloitte & Touche, Ernst & Young, Grant Thornton, KPMG, and PricewaterhouseCoopers. Ge and McVay reasoned that larger audit firms are expected to have more expertise and higher exposure to legal liability than smaller firms (Ge et al., 151). The research findings validated this hypothesis, proving large accounting firms to be positively correlated with internal control deficiencies. This asserts to the fact that larger firms have a greater depth of resources and are subjected to greater oversight, as exemplified by the PCAOB’s annual reviews (Ge et al., 153).

suggestions on how members of the Audit Committee of an organization can effectively meet their responsibilities. Background The collapse of Enron and the bankruptcy of WorldCom, representing stunning lapses of corporate governance, were compelling forces behind the passage of the Sarbanes-Oxley Act. By stipulating increased reporting requirements and imposing stiff penalties for non-compliance, the Act attempts to increase the accountability of an entity’s Chief Financial Officer, Chief Administrative Officer, its Board of Directors, its Audit Committee, and the external auditors. Exhibit 1 summarizes entities and people who may play a role in corporate governance. [Insert Exhibit 1 about here] In effect, the Sarbanes-Oxley Act is yet another attempt to lessen the “expectations gap” – the difference (gap) between auditors’ beliefs as to their required standards of performance and public expectations of auditors’ performance (ABREMA 2002; Lee 1994). For example, many members of the public believe that auditors in effect “guarantee” the accuracy of financial statements when an unqualified audit opinion is expressed; they contend that auditors should accept prime responsibility for the accuracy of

This report aims to investigate the role Internal Auditors (IA) plays in certain aspects of corporate governance. The report also aims to investigate what is considered as good corporate governance.

Amidst all the debate over corporate governance and the board’s supervision of internal control mechanisms, surprisingly little attention has been given to the role of internal audit, and particularly to whom it is ultimately responsible. While several high level reviews by regulators and others have acknowledged that the internal audit function and the oversight of internal controls has become an important responsibility of boards, the implications of this for internal audit have not always been followed through. Thus in the US, the Sarbanes-Oxley Act of 2002 makes no mention of internal audit, or of any equivalent role other than the board’s role generally in the preparation of the accounts and the setting of accounting standards.