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Audit committees—performing corporate governance
The British Accounting Review 35 (2003) 194–196 www.elsevier.com/locate/jnlabr/ybare
Audit committees—performing corporate governance Laura Spira (Ed.); Kluwer Academic Publishers, Boston, 2002, 190 pp., (ISBN 0-7923-7649-8 £80.50 (hbk)) The research on which this book is based predates the publication of the Higgs Report (2003) and the Smith Report (2003) which have attracted attention recently for their recommendations on the role of non-executive directors (Higgs) and more specifically the responsibilities of audit committees (Smith), but it is none the less relevant to an understanding and evaluation of the approach outlined in those reports. As the adoption, structure and responsibilities of audit committees for listed companies become more codified, it is relevant to ask whether greater codification and standardisation is guaranteed to result in the intended improvements in corporate governance. The answer suggested by this study is that in practice the operation and influence of an audit committee is a lot more complicated than simply meeting the terms of certain codes. It has not gone without notice, for example, that the audit committee in Enron would have met most suggested standards in governance codes, regarding membership, expertise etc., and yet it had little impact on the apparent malpractice that occurred. The contribution of Laura Spira’s study is in this regard—it points to the need to consider the informal aspects of an audit committee’s activity, the impact on relationships within an organisation and the distinction between what she refers to as ‘ceremonial’ roles and effectiveness. Significant features of the research approach adopted for the study are the use of actornetwork theory as the main foundation for analysis and the interview basis through which the evidence for analysis was gathered. Actor-network theory is relied upon as the analytical framework for interpreting the research findings. Without going into great detail about the nature of this theory (see Chapter 4 of the book), its use in the study is summarised in the following extract: This study focuses on the negotiation space created by actors in individual companies (by drawing on the wider networks of the UK corporate governance framework) and examines the ways in which, within this space, networks form and re-form around and within the audit committee as it undertakes its allotted tasks (p. 65). Actor-network theory has its own terminology, which for those unfamiliar with it may require some assimilation (for example, the concept of translation and its component stages of problematisation, interessement, enrolment, mobilisation and disintegration). However, the main value of this analysis is not so much in whether or
Book review / The British Accounting Review 35 (2003) 194–196
195
not the actor-network theory is supported but rather what insight is offered regarding the operation of audit committees in practice. In particular the discussion of the effect of this structure on the dynamics of relationships between organisational participants, and of the way the balance of power is affected by and negotiated through audit committees, addresses important considerations when thinking about exactly what kind of governance impact should be expected. The single main source of information for the study is interviews with individuals within a number of companies. A total of 21 interviews were undertaken with finance directors, audit committee members, internal auditors and external auditors. Fourteen interviews are more frequently quoted and 12 of these are based in five companies given specific (fictitious) names. There is an inevitable mixture of information from the interviews regarding the nature of audit committee processes in a few specific companies and more generally, especially given the fact that some interviewees had experience from more than one company. In only two cases were three or more interviews conducted around the same company, and greater concentration around a small number of companies would have been desirable, but the analysis does include reference to specific incidents and the interviews do provide insight into the workings of an audit committee within companies. This kind of research is particularly valuable at the present time for at least two reasons. First, the predominant trend of research in corporate governance in recent years has involved looking for signals for the impact of audit committees with little regard to the processes through which particular effects are brought about. The story in this book, telling more of the detail of operation of audit committees in their company context shows a picture of activity from a very different perspective. Essentially, it is an attempt to look at the audit committee’s activities from the inside, through the views of actual participants. Second, at a time when so much emphasis is being placed on what effectively amount to ‘standards’ for certain aspects of audit committee operations, it is valuable to see beyond the formal structure and terms of reference to look at the more informal ways in which the presence and activity of an audit committee has an impact on other elements of organisational life. Although the book stops short of making any specific policy recommendations, an implication of the analysis is that additional codification around audit committees will not guarantee particular outcomes: …concepts of effectiveness are likely to vary between individuals, organisations, countries and over time, making generalised prescription inappropriate (p. 166). The style of writing combines somewhat formal description of the theory and research methods etc. with a rather more informal element of story telling to illustrate the underlying message, but in the main the order of presentation follows the usual conventions of questions, methods, analytical framework and findings. Researchers interested in audit committees will undoubtedly want to make reference to this book. The insight provided from the interviews may be helpful both in framing research questions to look at in other settings and in considering the collection of evidence or the development of proxy measures which might allow testing of certain ideas across a wider cross-section of companies. Not everyone will want to accept or adopt the actor-network framework
196
Book review / The British Accounting Review 35 (2003) 194–196
utilised here, but the essential contribution of the book does not entirely depend on that framework. While the basic message about the complexities that surround the operation of an audit committee is no less relevant to practitioners, the reliance on the theoretical concepts and avoidance of prescriptions for policy or best practice may limit the appeal to this audience.
References Higgs Committee, 2003. Review of the Role and Effectiveness of Non-executive Directors, Department of Trade and Industry (http://www.dti.gov.uk/cld/non_exec_review). Smith Committee, 2003. Audit Committees—Combined Code Guidance, Financial Reporting Council (http:// www.frc.org.uk/publications).
Stuart Turley The Manchester School of Accounting and Finance, University of Manchester, Crawford House Booth Street East, Manchester M13 9PL, UK
doi:10.1016/S0890-8389(03)00021-0
Audit committees—performing corporate governance Laura Spira (Ed.); Kluwer Academic Publishers, Boston, 2002, 190 pp., (ISBN 0-7923-7649-8 £80.50 (hbk)) The research on which this book is based predates the publication of the Higgs Report (2003) and the Smith Report (2003) which have attracted attention recently for their recommendations on the role of non-executive directors (Higgs) and more specifically the responsibilities of audit committees (Smith), but it is none the less relevant to an understanding and evaluation of the approach outlined in those reports. As the adoption, structure and responsibilities of audit committees for listed companies become more codified, it is relevant to ask whether greater codification and standardisation is guaranteed to result in the intended improvements in corporate governance. The answer suggested by this study is that in practice the operation and influence of an audit committee is a lot more complicated than simply meeting the terms of certain codes. It has not gone without notice, for example, that the audit committee in Enron would have met most suggested standards in governance codes, regarding membership, expertise etc., and yet it had little impact on the apparent malpractice that occurred. The contribution of Laura Spira’s study is in this regard—it points to the need to consider the informal aspects of an audit committee’s activity, the impact on relationships within an organisation and the distinction between what she refers to as ‘ceremonial’ roles and effectiveness. Significant features of the research approach adopted for the study are the use of actornetwork theory as the main foundation for analysis and the interview basis through which the evidence for analysis was gathered. Actor-network theory is relied upon as the analytical framework for interpreting the research findings. Without going into great detail about the nature of this theory (see Chapter 4 of the book), its use in the study is summarised in the following extract: This study focuses on the negotiation space created by actors in individual companies (by drawing on the wider networks of the UK corporate governance framework) and examines the ways in which, within this space, networks form and re-form around and within the audit committee as it undertakes its allotted tasks (p. 65). Actor-network theory has its own terminology, which for those unfamiliar with it may require some assimilation (for example, the concept of translation and its component stages of problematisation, interessement, enrolment, mobilisation and disintegration). However, the main value of this analysis is not so much in whether or
Book review / The British Accounting Review 35 (2003) 194–196
195
not the actor-network theory is supported but rather what insight is offered regarding the operation of audit committees in practice. In particular the discussion of the effect of this structure on the dynamics of relationships between organisational participants, and of the way the balance of power is affected by and negotiated through audit committees, addresses important considerations when thinking about exactly what kind of governance impact should be expected. The single main source of information for the study is interviews with individuals within a number of companies. A total of 21 interviews were undertaken with finance directors, audit committee members, internal auditors and external auditors. Fourteen interviews are more frequently quoted and 12 of these are based in five companies given specific (fictitious) names. There is an inevitable mixture of information from the interviews regarding the nature of audit committee processes in a few specific companies and more generally, especially given the fact that some interviewees had experience from more than one company. In only two cases were three or more interviews conducted around the same company, and greater concentration around a small number of companies would have been desirable, but the analysis does include reference to specific incidents and the interviews do provide insight into the workings of an audit committee within companies. This kind of research is particularly valuable at the present time for at least two reasons. First, the predominant trend of research in corporate governance in recent years has involved looking for signals for the impact of audit committees with little regard to the processes through which particular effects are brought about. The story in this book, telling more of the detail of operation of audit committees in their company context shows a picture of activity from a very different perspective. Essentially, it is an attempt to look at the audit committee’s activities from the inside, through the views of actual participants. Second, at a time when so much emphasis is being placed on what effectively amount to ‘standards’ for certain aspects of audit committee operations, it is valuable to see beyond the formal structure and terms of reference to look at the more informal ways in which the presence and activity of an audit committee has an impact on other elements of organisational life. Although the book stops short of making any specific policy recommendations, an implication of the analysis is that additional codification around audit committees will not guarantee particular outcomes: …concepts of effectiveness are likely to vary between individuals, organisations, countries and over time, making generalised prescription inappropriate (p. 166). The style of writing combines somewhat formal description of the theory and research methods etc. with a rather more informal element of story telling to illustrate the underlying message, but in the main the order of presentation follows the usual conventions of questions, methods, analytical framework and findings. Researchers interested in audit committees will undoubtedly want to make reference to this book. The insight provided from the interviews may be helpful both in framing research questions to look at in other settings and in considering the collection of evidence or the development of proxy measures which might allow testing of certain ideas across a wider cross-section of companies. Not everyone will want to accept or adopt the actor-network framework
196
Book review / The British Accounting Review 35 (2003) 194–196
utilised here, but the essential contribution of the book does not entirely depend on that framework. While the basic message about the complexities that surround the operation of an audit committee is no less relevant to practitioners, the reliance on the theoretical concepts and avoidance of prescriptions for policy or best practice may limit the appeal to this audience.
References Higgs Committee, 2003. Review of the Role and Effectiveness of Non-executive Directors, Department of Trade and Industry (http://www.dti.gov.uk/cld/non_exec_review). Smith Committee, 2003. Audit Committees—Combined Code Guidance, Financial Reporting Council (http:// www.frc.org.uk/publications).
Stuart Turley The Manchester School of Accounting and Finance, University of Manchester, Crawford House Booth Street East, Manchester M13 9PL, UK
doi:10.1016/S0890-8389(03)00021-0