The formation of an audit committee would improve financial statements’ credibility and reliability through providing assurance on the objectivity of financial statements to shareholders (AICPA, 1967; Auerbach, 1973; FCCG, 1999). Lam (1976) found that the appearance of independence of the committee would enhance auditor independence and improve transparency in financial reporting.
Beattie et al. (1999) reported that audit partners, finance directors and financial journalists believed that audit committee with independent non-executive directors strongly encourage auditor independence. Independent directors of audit committees are expected to increase the quality of monitoring because they are not associated with the company either as officers or employees; thus, they would act as the shareholders’ watchdog. Raghunandan et al. (2001) and DeZoort and Salterio (2001) revealed that audit committees that consist of qualified independent directors are better able to contribute towards auditor independence.
Shamsher et al. (2001) found that a large majority of companies listed on the Malaysian stock exchange tend to comply with all regulations imposed on them, such as the requirement to disclose audit committee reports, without much concern for the quality of these reports. This implies adversely on the corporate governance practice, auditor independence and hence quality of financial reporting.
3. Methodology
To gather the required information, 300 questionnaires (that were pre-tested) were distributed to senior managers of finance and accounting division of Malaysian public listed companies. The questionnaires were designed to collect information on five main aspects of audit committees that are perceived to be associated with auditor independence, such as the composition of the committee, the level of activeness, the preparation of reports, the activities relating to audit fees reviews and approval. The response rate was 36%, which is considered adequate and consistent with recommendation made by expert in prior studies (see Table 1). The respondents selected were responsible for the auditing, accounting and finance function in their firm. The seniority of the respondents provides better validity to the information gathered for analysis.
Table 1: Analysis of Responses by Respondent's Category
Category Total Questionnaires Issued Usable
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2 Total Usable Response Total
Usable Response Rate
Frequency Frequency Frequency Frequency Frequency %
Public ListedCompanies 30042 16 49 107 36
Structured interviews were also conducted with senior managers to further clarify issues, seek their perception and insights on the relationship between audit committee activities and the impact on auditor independence (see Table 2).
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