The Role of Audit Committee on Performance of ...

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The Role of Audit Committee on Performance of Listed Companies in Pakistan; an Empirical Evidence Sajjad Nawaz Khan1 , Engku Ismail Engku Ali 2 and Mourad Boudiab3 1 Ph.D. Scholar, School of Accountancy, Universiti Utara Malaysia, Kedah, Malaysia 2 Associate prof, School of Accountancy Universiti Utara Malaysia, Kedah, Malaysia 3 Ph.D. Scholar, School of Accountancy Universiti Utara Malaysia, Kedah, Malaysia Abstract : Nowadays the most important role of audit committee is protection the interest of shareholder. This research indicates the effectiveness of audit committee on the performance of firms by using three different characteristics which are size, meeting and independence. The performance of firms measured by ROA. Thirty (30) listed companies taken and collected data from 2012 to 2015, for data analysis used correlation and multiple regression. The results showed positive significance relationship with independence and meeting of audit committee on performance. Although, the result of audit committee size shows insignificance relationship with firm’s performance. Therefore, study recommended by audit meeting and the independence of audit committee and reduce the size of audit committee.

Keyword: Performance, Audit committee, ROA, Pakistan Introduction Corporate governance can be enhanced, oversight well three accepted committee were established, through these duties of the board can be strictly discharged (Higgs, 2003, p. 59). According to Tricker, 1994, these committees are nomination, audit and compensation (or remuneration). Further current view has been elevated outpointing that the board composition is not only liable for controlling the board, but rather both, composition and structure of the board’s and other subcommittees are also responsible too. According to Kesner, (1988) Many of important decision instigate at the committee level. Moreover, four board committees have strongly affect corporate activities which are audit, compensation, nomination and executive committee (Vance,1983). Although, the failure of corporate for example, companies such as, Enron, Global Crossing, and Tyco, audit committee effectiveness and outside auditors has been questioned by administrators in endorsing, the financial statements are rightly stated to decrease ineffectiveness. Furthermore, according to Helen and Arnold (2011) audit committee can help to mediate clashes between

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auditors and board, also play the role of overseeing audit process. Pakistan Stock Exchange requirements for listing and recommendation by Pakistan code of corporate (2012) for composition of audit committee are purpose to lead effective committee. Most of scholar reported in different studies the audit committee characteristics as monitoring mechanism is significance. For the higher incentives most of manager aim to manipulate financial statement of firms ( Wiwanya and Aim, 2008 ). Moreover, auditors and members of audit committee are good controller or monitor and hoped to manage the financial activities like reporting. So, this study pays the role of audit committee characteristics on performance based on listed companies in Pakistan. Literature & Hypothesis Development Size of Audit Committee and Performance The size of audit committee supposed to be linked to the actual discharge of its duties (Cadbury Committee, 1992). At least three members in audit committee according the Code of Corporate governance of Pakistan (2012). Although, Saleh et al (2007) raised up the question effective monitoring can be possible with big size of audit committee or not. Most of the previous research shows the relationship size of the board and firm performance is positive. Moreover, Dalton (1999) found the relationship between size and monitoring process of the board is positive that consequence in better performance, however, it is contended that a big committee size has for authority and organizational status ( Kalbers and Fogarty 1993 Braiotta, 2000) and an extensive knowledge base (Karamanou and Vafeas, 2005). Although, if large size of audit committee can diffusion of responsibility and suffer from process (Karamanou and Vafeas, 2005). As per discussion develop the following hypothesis. H3: There is a positive relationship between the size of the audit committee and firm performance

International Journal of Innovative Knowledge Concepts, 5(12) December, 2017

2454-2415 Vol Meeting of Audit Committee and Performance Best practice specified that least once in a year audit committee meeting held and in this meeting in the absence of executive board members. Nevertheless, numbers of meeting depend on firm’s terms of situation and difficulty firm’s operation. On the other side, Pakistan code on Corporate Governance (2012) proposes that meeting should be arranged at least two or four to correspond to audit complete cycle or the time of reports publishing annually. Most of studies illustrate that the numbers of meeting of audit committee play a positive role to reduce the different difficulties including agency issues eventually prompting the firm performance, although there are inconsistent and mix finding on this issues (Fadzil, & Al-Matari, 2012,:Wiwanya and Aim, 2008, Anthony, 2008: Saleh etal:, 2007:, Rashidah, 2006; Xie et al., 2003 ). Studies in Pakistan also indicate that number of audit committee meeting is more significant mechanism, which affect performance of the firm (Khatab, Masood, Zaman, Saleem, & Saeed, 2010). Moreover, a study by Rebeiz and Salameh (2006) result shows the frequently meeting of audit committee members increase performance of the firm. As per following discussion the hypotheses developed. H2: There is a positive relationship between meeting of audit committee and performance

Independence of Audit committee and Performance Most of empirical studies illustrate ambiguous relationship between independence of audit committee and performance. llona (2008) shows the positive relationship between the audit committee and firm performance as measured by ROA. Al-Matari, Kaid Al-Swidi, Hanim, Fadzil, & Al-Matari, (2012) found independence of audit committee and firm performance have positive relationship (Tobin's Q). Moreover, Sanda,Garba & Mikailu, (2011) stated that independent board directors can reduce agency problems and also makes significance excess return follows. Similerly Erickson et al. (2005) asserted that agency problems can reduced with help of independent directors because they are well monitors of administration than insider directors. As per discussion following hypotheses developed H1: There is a positive relationship between the audit committee independence and performance. Conceptual framework In this section will explore numerous audit committee characteristics and expected that have an influence on performance of the firm based on pervious literature and the hypothesis development that was demonstrated earlier. Figure 1 represents the framework of this study.

Research Methodolog y This study focused on 30 non-financial listed companies in Pakistan. Related data to the dependent and independent variables were obtain from the company’s yearly reports and time period was four years 2012 to 2015.

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International Journal of Innovative Knowledge Concepts, 5(12) December, 2017

2454-2415 Vol Measurements of variables Name of Variables

Abbreviati on

DV Return on Assets IV’S Audit committee size

Measurement

ROA

PAT/T.ASSETS

ACS

The number of board member in audit committee Meeting of audit committee in year The number of independent executive board member in audit committee

Audit committee Meeting

ACM

Audit committee independence

ACI

Model specification Y= β0 + βX1 +μit................................................................................................................(1) ROAit= β0+β1ACSit+ β2ACMit+ β3ACM it+β4ACSit +μi…………….…… (2) Analysis and descriptions of results TABLE:1 Variable ACS ACM ACI FA FS ROA

NO. OBSERVATION 120 120 120 120 120 120

Mean

std,dev 3.436975 4.10084 0.6677395 3.513014 22.42745 0.7750424

0.6194401 0.3023904 0.3086855 0.5023501 1.224302 0.5613524

All the variables descriptive statistics are presented in table 1. The mean size of the audit committee is 3.44, which is follows the recommendation of Pakistan Corporate Governance. The mean of independent in the audit committee is also high 0.667. The mean of audit committee is about four times which is 4.10 and closely to US figure 4.53 reported by Xie et al. (2003). Correlation Analysis For Correlation analysis taken both dependent and explanatory variables to check for multicollinearity and relationship between the various variables in the study. According to Porter and Gujarati (2009) reasoned 0.8 as value of threshold at which concern of multicollinearity can be destructive to the regression analysis and make the reliability. .TABLE;2 VARIABLES

ROA

ACS

ROA ACS

1 0.0782

1

ACM

0.2354

0.1247

ACI

0.1775

0.0071

FA

-0.0708

0.0215

FS

0.0502

0.1044

ACM

ACI

FA

FS

1 -0.1374 0.0205 0.1232

1 0.1711 -0.0810

1 -0.4536

1

In table 2 show the multicollinearity assumption has not been violated because no one of the variables is more than 0.8. All the variables have positive correlation each other except from ACI and ACS which shown the negative sign.

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International Journal of Innovative Knowledge Concepts, 5(12) December, 2017

2454-2415 Vol Regression Analysis Table;3 Variables ROA

Coef.

t

p>[t]

.0443098

0.54

0.587

ACM ACI Control variables FA FS

.4966151 .4252364

2.94 2.58

0.004 0.011

-.145304 -.0128051

-1.28 0.28

0.201 0.783

-Cons R-squared Adj.R-squared

-.9000947 0.1167 0.0770

-0.67

0.506

Auditcommi ttee.ch ACS

In table 3 show the results of regression analysis between audit committee size(ACS), audit committee meeting (ACM), Audit independence(ACI) and ROA. The value of R2 is 0.1161 it means independent variables explaining 11% variations of model and remaining 89% variation implies other variables. In the study finds positively but insignificantly association between audit committee size and ROA, which is not supported this study arguments and reject the null hypotheses H1. The result show that audit committee size has no influence on the firm performance. With the consistent hypothesis H2, H3 that finds the audit committee meeting and audit committee independent have positive relationship with performance .as measured by ROA, it means that meeting of audit committee and independence of audit committee have positive influence on the performance of firm and these finding sported by Vicknair et al, (1993). In this study firm size and age taken as control variables which are also showing insignificant relationship with ROA. Conclusion

These finding indicate that effectiveness of audit committee (like audit committee meeting and independence) have significantly and positively influence the performance of the firm. While, the finding of audit committee size has insignificant relationship with performance of the firm(ROA). Its mean Size of audit committee did not add the value of the firms in Pakistan. These results purposed some important implication for the policy maker and practitioner in Pakistan. One of the most implication is that, audit committee independence and audit committee meeting significantly contribute to performance of the firms, therefore Pakistan need to reinforce policies by certifying that the provision made in Pakistan securities and exchange commission of Pakistan code 2012 about the independence and meeting of audit committee. On the other side no need increases the audit committee size because result shows the insignificance relationship with performance. Limitation of the study is that only thirty listed companies taken as sample and performance measured by ROA. Forefather study should be taken with large sample and with different performance measurement.

The basic aim of this study is understanding relationship between audit committee and performance of the firms in Pakistan.

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International Journal of Innovative Knowledge Concepts, 5(12) December, 2017

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International Journal of Innovative Knowledge Concepts, 5(12) December, 2017