The audit committee effectiveness and the firm operational efficiency: ownership structures as a moderator

Subject Areas :

Allah Karam Salehi ^{1 *} , Mosa Mahmoudi ² , Ehsan Fathi Skandar ³ , Mousa Bagheri Kahkesh ⁴

1 - Department of Accounting, Masjed-Soleiman Branch, Islamic Azad University, Masjed-Soleiman, Iran
2 - MSc. of Accounting, Masjed-Soleiman Branch, Islamic Azad University, Masjed-Soleiman, Iran
3 - MSc. of Accounting, Masjed-Soleiman Branch, Islamic Azad University, Masjed-Soleiman, Iran
4 - MSc. of Accounting, Masjed-Soleiman Branch, Islamic Azad University, Masjed-Soleiman, Iran

Received: 2024-07-27 Accepted : 2024-11-07 Published : 2024-12-20

Keywords: Audit committee effectiveness, institutional ownership, managerial ownership, operational efficiency,

Abstract :

Purpose: The audit committee is one of the most important specialized committees of the board of directors that can strengthen the health and quality of financial reporting, improve performance and increase the value of the company. On the other hand, the proper establishment of corporate governance mechanisms such as ownership structure is a key step for the optimal use of resources, promoting accountability, transparency, fairness and the rights of all stakeholders that can be effective in evaluating the operational efficiency of the company.

Methodology: This study investigates the effect of ownership structure on the relationship between the audit committee effectiveness and the firm operational efficiency during 2016 to 2022 using the information of 120 selected companies. The study is applied and analytical and correlational in terms of purpose. The research hypotheses were tested using multivariate regression with panel data approach.

Findings: The results suggest that an effective audit committee increases the firm operational efficiency. Components of the ownership structure, such as institutional and managerial ownership, also increase operational efficiency and enhance the relationship between audit committee effectiveness and operational efficiency. In other words, in companies with stronger institutional and managerial ownership, the audit committee is more effective and leads to an increase in the company's operational efficiency.

Originality: These results indicate the role of agency theory in reducing information asymmetry by increasing the effectiveness of the audit committee and ownership structure.

References:

بختیاری، صادق، دهقانی زاده، مجید، و حسینی پور، سید مجتبی. (1393). تحلیل از بهره وری نیروی کار در بخش تعاونی، مطالعه موردی تعاونی‌های صنعتی استان یزد. فرایند مدیریت توسعه، 27(3)، 73-45. dor: 20.1001.1.17350719.1393.27.3.1.8
پورطاهر اقدم، فرزانه، نیکومرام،‌ هاشم، و رهنمای رودپشتی، فریدون. (1402). تبیین روابط میان کیفیت حسابرسی و کارایی عملیاتی شرکت با در نظر گرفتن معیار تداوم تصدی حسابرس در صنعت و اندازه حسابرس. حسابداری مدیریت، 16(56)، 18-1. doi: 10.30495/jma.2023.22409
جامعی، رضا و رستمیان، آزاده. (1395). بررسی تاثیر تخصص مالی اعضای کمیته حسابرسی بر ویژگی‌های سود پیش بینی شده. پژوهش‌های حسابداری مالی و حسابرسی، 8(29)، 17-1. dor: 20.1001.1.23830379.1395.8.29.1.1
خوئینی، بهداد، فقیه، محسن، و شفیعی، مهرداد. (1397). ارتباط بین ویژگی‌هاي کمیته حسابرسی و معیارهاي عملکرد شرکت‌ها. تحقیقات حسابداری و حسابرسی، 10(40)، 126-105. https://www.iaaaar.com/article_98830.html
رجبی، روح الله و محمدی خشویی، حمزه. (1387). هزینه‌های نمایندگی و قیمت گذاری خدمات حسابرسی مستقل. بررسی‌های حسابداری و حسابرسی، 15(4)، 52-35. dor: 20.1001.1.26458020.1387.15.4.3.7
فرزان کیان، مرجان و حسنی، محمد. (1399). تحلیل رابطه بین اثر بخشی کمیته حسابرسی و مکانیسم‌های مدیریتی و مالکیتی نظام راهبری شرکتی: رویکرد مکمل یا رویکرد جانشینی؟ دانش حسابرسی، 20(78)، 355-324. dor: 20.1001.1.16819691.1399.20.78.13.3
موسوی، فاطمه السادات و دستگیر، محسن. (1399). تاثیر ساختار مالکیت بر اثربخشی کمیته حسابرسی در شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران. فصلنامه چشم انداز حسابداری و مدیریت، 3(30)، 31-12. https://www.jamv.ir/article_118531.html
نجفی شریعت زاده، ایرج، شعبان زاده، مهدی، و زمردیان، غلامرضا. (1395). بررسی مولفه‌های موثر بر سودآوری بانک‌های تجاری ایران با استفاده از الگوی پنلARDL. مجله مهندسي مالي و مديريت اوراق بهادار، (۷)29، 172-151. dor: 20.1001.1.22519165.1395.7.29.8.5
Abbott, L.J., Daugherty, B., Parker, S. & Peters, G.F. (2016). Internal audit quality and financial reporting quality: the joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40. doi: 10.1111/1475-679x.12099
Abbott, L.J.; Park, Y. & Parker, S. (2000). The effect of audit committee activity and independence on corporate fraud. Managerial Finance, 26(11), 55-67. doi: 10.1108/03074350010766990
Abbott, L. J., Parker, S., & Peters, G. F. (2004). Audit Committee Characteristics and Restatements. AUDITING: A Journal of Practice & Theory, 23(1), 69–87. doi: 10.2308/aud.2004.23.1.69
Agyei-Mensah, B. K. (2019). The effect of audit committee effectiveness and audit quality on corporate voluntary disclosure quality. African Journal of Economic and Management Studies, 10(1),17-31. doi: 10.1108/AJEMS-04-2018-0102
Al-Musali, M. A., Qeshta, M. H., Al-Attafi, M. A., & Al-Ebel, A. M. (2019). Ownership structure and audit committee effectiveness: evidence from top GCC capitalized firms. International Journal of Islamic and Middle Eastern Finance and Management, 12(3), 407–425. doi: 10.1108/imefm-03-2018-0102
Alodat, A. Y., Al Amosh, H., Saleh F. A. Khatib & Mansour, M. (2023). Audit committee chair effectiveness and firm performance: The mediating role of sustainability disclosure. Cogent Business & Management, 10(1), 2181156. doi: 10.1080/23311975.2023.2181156
Alodat, A. Y., Salleh, Z., Hashim, H. A., & Sulong, F. (2022). Corporate governance and firm performance: Empirical evidence from Jordan. Journal of Financial Reporting and Accounting, 20(5), 866-896. doi: 10.1108/JFRA-12-2020-0361
Alshareef, M. N. (2024). Ownership structure and financial sustainability of Saudi Listed Firms. Sustainability. 16(9), 3773. doi: 10.3390/su16093773
Alzeban, A. & Sawanb, N. (2015). The impact of audit committee characteristics on the implementation of internal audit recommendations. Journal of International Accounting, Auditing and Taxation, 24, 61-71. doi: 10.1016/j.intaccaudtax.2015.02.005
American Institute of Certified Public Accountants (AICPA) (1991). AU Section 322: SAS No. 65: The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements, AICPA, New York, NY
Anderson, U. (2003). Assurance and consulting services. Research opportunities in internal auditing, 1, 1-23.
Baik B., J. Chae, S. Choi, & D. Farber. (2013). Changes in operational efficiency and firm performance: A frontier analysis approach. Contemporary Accounting Research, 30(3), 996–1026. doi: 10.1111/j.1911-3846.2012.01179.x
Bakhtiari, S., Dehghanizadeh, M., & Hosseinipoor, S. M. (2014). Analysis of labor productivity and efficiency in the cooperative sector: A case study of the industrial cooperative sector in the province of Yazd. Management and development process, 27(3), 45-73. dor: 20.1001.1.17350719.1393.27.3.1.8 [In Persian]
Be´dard, J., Chtourou, S. M., & Courteau, L. (2004). The Effect of Audit Committee Expertise, Independence, and Activity on Aggressive Earnings Management. AUDITING: A Journal of Practice & Theory, 23(2), 13–35. doi: 10.2308/aud.2004.23.2.13
Benston, G.J. (1965). Branch banking and economies of scale. The Journal of Finance, 20(2), 312-331. doi: 10.1111/j.1540-6261.1965.tb00212.x
Boshnak, H.A. (2023). Ownership structure and firm performance: evidence from Saudi Arabia. Journal of Financial Reporting and Accounting. doi: 10.1108/JFRA-11-2022-0422
Cassel, J. (2021). Managerial ownership and operational improvements in buyouts. Swedish House of Finance Research Paper, (21-20). doi: 10.2139/ssrn.3934568
Chen, Y., Lin, B., Lu, L., & Zhou, G. (2020). Can internal audit functions improve firm operational efficiency? Evidence from China. Managerial Auditing Journal, 35(8), 1167-1188. doi: 10.1108/MAJ-01-2019-2136
Cheng, Q., Goh, B. W., & Kim, J. B. (2018). Internal Control and Operational Efficiency. Contemporary Accounting Research, 35(2), 1102–1139. doi: 10.1111/1911-3846.12409
Colombo, M. G., & Grilli, L. (2005). Founders’ human capital and the growth of new technology-based firms: A competence-based view. Research Policy, 34(6), 795–816. doi: 10.1016/j.respol.2005.03.010
Daum, J. H. (2001). Value drivers intangible assets-do we need a new approach to financial and management accounting. A Blueprint for an Improved Management System. Р, 22.https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=b2cc62414eae50b70bb3ebe7ac6083866b29577e
Demerjian, P., Lev, B., & McVay, S. (2012). Quantifying Managerial Ability: A New Measure and Validity Tests. Management Science, 58(7), 1229–1248. doi: 10.1287/mnsc.1110.1487
DeZoort, F. T., Hermanson, D. R., Archambeault, D. S., & Reed, S. A. (2002). Audit committee effectiveness: A synthesis of the empirical audit committee literature. Audit Committee Effectiveness: A Synthesis of the Empirical Audit Committee Literature, 21, 38. https://digitalcommons.kennesaw.edu/facpubs/1495/
Ege, M. S. (2014). Does Internal Audit Function Quality Deter Management Misconduct? The Accounting Review, 90(2), 495–527. doi: 10.2308/accr-50871
Hanim Fadzil, F., Haron, H., & Jantan, M. (2005). Internal auditing practices and internal control system. Managerial Auditing Journal, 20(8), 844–866. doi: 10.1108/02686900510619683
Farzan Kian, M. & Hasani, M. (2019). Analyzing the relationship between the audit committee effectiveness and the management and ownership mechanisms of the corporate governance system: a complementary approach or a replacement approach? Auditing Knowledge, 20(78), 355-324. dor: 20.1001.1.16819691.1399.20.78.13.3 [In Persian]
Gupta, K. & Raman, T.V. (2021). Intellectual capital: a determinant of firms’ operational efficiency. South Asian Journal of Business Studies, 10(1), 49-69. doi:10.1108/SAJBS-11-2019-0207
Habib, A., & Azim, I. (2008). Corporate governance and the value‐relevance of accounting information. Accounting Research Journal, 21(2), 167–194. doi: 10.1108/10309610810905944
Handoyo, S., Suharman, H., Ghani, E. K., & Soedarsono, S. (2023). A business strategy, operational efficiency, ownership structure, and manufacturing performance: The moderating role of market uncertainty and competition intensity and its implication on open innovation. Journal of Open Innovation: Technology, Market, and Complexity, 9(2). doi: 10.1016/j.joitmc.2023.100039
Hassan, Y., & Hijazi, R. (2015). Determinants of the voluntary formation of a company audit committee: evidence from Palestine. Asian Academy of Management Journal of Accounting and Finance, 11(1), 0–30. http://hdl.handle.net/20.500.11889/4281
Hsu, D. H. (2007). Experienced entrepreneurial founders, organizational capital, and venture capital funding. Research Policy, 36(5), 722-741. doi: 10.1016/j.respol.2007.02.022
Humphrey, D.B. (1985). Costs and Scale Economies in Bank intermediation Handbook for Banking Strategy, John Wiley and Sons, New York, pp. 745-783.
Imdieke, A. J.; Li, C. & Zhou, S. (2023). Does the Presence of an Internal Control Audit affect Firm Operational Efficiency? Contemporary Accounting Research, 40(2), 952-980. doi: 10.1111/1911-3846.12839
Jameai, R. A & Rostamian, A. (2016). An investigation the financial expertise of auditing committee members on the characteristics of the forecasted earnings. The Financial Accounting and Auditing Researches, 8(29), 1-17. dor: 20.1001.1.23830379.1395.8.29.1.1 [In Persian]
Jiang, L., André, P., & Richard, C. (2017). An international study of internal audit function quality. Accounting and Business Research, 48(3), 264–298. doi: 10.1080/00014788.2017.1357461
Khoeini, B., Faghih, M., & Shafiee, MH. (2018). The Relationship between Audit Committee Characteristics and Performance Metrics. Accounting and Auditing Research, 10(40), 105-126. https://www.iaaaar.com/article_98830.html [In Persian]
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375-400. doi: 10.1016/S0165-4101(02)00059-9
Kortmann, S., Gelhard, C., Zimmermann, C., & Piller, F. T. (2014). Linking strategic flexibility and operational efficiency: The mediating role of ambidextrous operational capabilities. Journal of Operations Management, 32(7-8), 475–490. doi: 10.1016/j.jom.2014.09.007
Krishnamoorthy, G., & Maletta, M. (2016). The contingent effects of board independence and audit committee effectiveness on internal audit reliance: a pre-SOX perspective. International Journal of Accounting and Finance, 6(1), 62. doi: 10.1504/ijaf.2016.076558
Shehata Mohamed Kasim Soliman, W. (2020). Investigating the effect of corporate governance on audit quality and its impact on investment efficiency. Investment Management and Financial Innovations, 17(3), 175–188. doi: 10.21511/imfi.17(3).2020.14
Lorca, C., Sánchez-Ballesta, J. P., & García-Meca, E. (2010). Board Effectiveness and Cost of Debt. Journal of Business Ethics, 100(4), 613–631. doi: 10.1007/s10551-010-0699-3
Mangena, M., & Pike, R. (2005). The effect of audit committee shareholding, financial expertise and size on interim financial disclosures. Accounting and Business Research, 35(4), 327–349. doi: 10.1080/00014788.2005.9729998
McMullen, D. A. (1996). Audit committee performance: An investigation of the consequences associated with audit committees. Auditing: a journal of Practice & Theory, 15(1), 87-103. https://openurl.ebsco.com/EPDB%3Agcd%3A9%3A4646185/detailv2?sid=ebsco%3Aplink%3Ascholar&id=ebsco%3Agcd%3A9603180445&crl=c&link_origin=scholar.google.com
Mitra, S., Hossain, M., & Deis, D. R. (2007). The empirical relationship between ownership characteristics and audit fees. Review of Quantitative Finance and Accounting, 28(3), 257–285. doi: 10.1007/s11156-006-0014-7
Mosavi, F. A., & Dastgir, M. (2020). The effect of ownership structure on the effectiveness of the audit committee in companies listed on the Tehran Stock Exchange. Journal of Accounting and Management Vision, 3(30), 12-31. https://www.jamv.ir/article_118531.html [In Persian]
Munro, L., & Buckby, S. (2008). Audit Committee Regulation in Australia: How Far Have We Come? Australian Accounting Review, 18(4), 310–323. doi: 10.1111/j.1835-2561.2008.0020.x
Othman, R., Ishak, I. F., Arif, S. M. M., & Aris, N. A. (2014). Influence of Audit Committee Characteristics on Voluntary Ethics Disclosure. Procedia - Social and Behavioral Sciences, 145, 330–342. doi: 10.1016/j.sbspro.2014.06.042
Patel, J., & Bhanushali, K. (2017). Comparative study of profitability of nationalised banks and private sector banks. Rising-A Journal of Researchers, 1(1), 34-40. https://www.semanticscholar.org/paper/COMPARATIVE-STUDY-OF-PROFITABILITY-OF-NATIONALISED-Patel-Bhanushali/a624e210c4ee8ad1788dfefb6a445deb3f9f3860
Pourtaheraghdam, F., Nikoomaram, H., & Rahnamay Roodposhti, F. (2023). Explaining the relationship between the audit quality and the company's operational efficiency by considering the criterion of the auditor's tenure in the industry and the size of the auditor. Management Accounting, 16(56), 1-18. doi: 10.30495/jma.2023.22409 [In Persian]
Pucheta‐Martínez, M. C., & De Fuentes, C. (2007). The impact of audit committee characteristics on the enhancement of the quality of financial reporting: An empirical study in the Spanish context. Corporate governance: An international review, 15(6), 1394-1412. doi: 10.1111/j.1467-8683.2007.00653.x
Rajabi, R. & Mohammadi Khoshoei, H. (2009). Agency costs & independent audit services pricing. Accounting and Auditing Review, 15(4), 35-52. dor: 20.1001.1.26458020.1387.15.4.3.7 [In Persian]
Samaha, K., Khlif, H., & Hussainey, K. (2015). The impact of board and audit committee characteristics on voluntary disclosure: A meta-analysis. Journal of International Accounting, Auditing and Taxation, 24, 13–28. doi: 10.1016/j.intaccaudtax.2014.11.001
Sealey Jr, C. W., & Lindley, J. T. (1977). Inputs, outputs, and a theory of production and cost at depository financial institutions. The journal of finance, 32(4), 1251-1266. doi: 10.1111/j.1540-6261.1977.tb03324.x
Shariatzadeh, I., Shabanzadeh, M., & Zomorodian, G. (2016). Examining the Effective Factors on Commercial Bank Profitability of Iran Using Panel ARDL Method. Financial Engineering and Portfolio Management, 29, 151-172. dor: 20.1001.1.22519165.1395.7.29.8.5 [In Persian]
Sun, J., Lan, G., & Liu, G. (2014). Independent audit committee characteristics and real earnings management. Managerial Auditing Journal, 29(2), 153–172. doi: 10.1108/maj-05-2013-0865
Tahir, I. M., Abu, B. N., & Haron, S. (2008). Technical efficiency of the Malaysian commercial banks: A stochastic frontier approach. Banks & bank systems, 3(4), 65-72. http://www.irbis-nbuv.gov.ua/cgi-bin/
The Institute of Internal Auditors (IIA) (2016). International Standards for the Professional Practice of Internal Auditing, IIA, Altamonte Springs, FL
Thore, S., Kozmetsky, G., & Phillips, F. (1994). DEA of financial statements data: the US computer industry. Journal of Productivity Analysis, 5, 229-248. doi: 10.1007/BF01073909
Verma, K. (1993). Managerial efficiency: A study of management buyouts. Contemporary Accounting Research, 10(1), 179-204.. doi: 10.1111/j.1911-3846.1993.tb00388.x
Won, J. & Ryu, S.L. (2017). Ownership structure and operational efficiency in emerging market: the case of Korea. International Journal of Trade and Global Markets, 10(1), 99–107. doi: 10.1504/IJTGM.2017.082382
Xie, B., Davidson, W. N., & DaDalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295–316. doi: 10.1016/s0929-1199(02)00006-8
Yeung, A. C. L. (2007). Strategic supply management, quality initiatives, and organizational performance. Journal of Operations Management, 26(4), 490–502. doi: 10.1016/j.jom.2007.06.004
Zahmatkesh, S., & Rezazadeh, J. (2017). The effect of auditor features on audit quality. Tékhne, 15(2), 79–87. doi: 10.1016/j.tekhne.2017.09.003
Zhou, H., Owusu-Ansah, S., & Maggina, A. (2018). Board of directors, audit committee, and firm performance: Evidence from Greece. Journal of International Accounting, Auditing and Taxation, 31, 20–36. doi: 10.1016/j.intaccaudtax.2018.03.002