The effect of the composition of the audit committee of a company on the quality of the annual report

Abstract

The audit committee of an organisation plays a critical role in the quality of the annual report, the risk management process and governance within an organisation. The annual report of an organisation is used by numerous stakeholders including investors to make investment decisions. The composition of the audit committee with respect to the type of expertise and experience represented on the committee as well as individual characteristics of the audit committee members influences the effectiveness of the audit committee and hence the quality of the annual report and the risk management process. The investigation conducted by the researcher included an analysis of the audit committees of twelve South African companies across three industries which were banking, mining and retail. In addition three Indian companies were also reviewed, one from each industry and a comparison conducted between the South African and Indian companies. The analysis looked at the expertise represented on the audit committee, the diversity of the audit committee, and the functioning of the audit committee. The researcher analysed the individual characteristics of the members of the audit committee including the independence, remuneration, tenure and number of directorships of the members. The outcome of this investigation suggested that the effectiveness of the audit committee is not only dependent on the composition of the audit committee but also on the structure of the audit committee meetings and other factors which could include leadership.