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This study investigates whether an audit committee contributes
towards external auditor independence. An audit committee
is a mandatory internal control mechanism required in all
listed firms to ensure effective enforcement of good corporate
governance. The results indicate that auditor independence
is positively associated with audit committee meetings,
audit committee report in the annual report, roles to approve
and review audit fees, and composition of audit board. These
results are consistent with the spirit of corporate governance
code that was designed, among others, to improve the quality
of financial reporting, and hence, increase confidence in
the information presented in the reports.
The Malaysian Code on Corporate Governance (MCCG) postulates
that "an independent audit committee serves to implement
and support the oversight function of the board in several
ways" (FCCG, 2000, p. 38). Indeed, an audit committee
is appropriate to undertake the board of directors roles
in providing "focused review and detailed discussion
of the company's processes for producing financial data,
its internal controls, and independence of its external
auditor", which "might be too time-consuming for
the full board" (FCCG, 2000, p. 36). This paper investigates
the role of an audit committee and its support for auditor
independence. An independent audit committee enhances the
independence of external auditor, and ensures that auditor
is free from management influence. The committee can conduct
informal and private meetings without the presence of the
company's management to encourage the external auditor to
be transparent on material issues at an early stage.
The concept of an audit committee has evolved over the
years across developed countries and has now become a mandatory
listing requirement in most stock exchanges worldwide. In
Malaysia, the new code of corporate governance and the amended
stock exchange's listing requirement provide evidence on
the importance of audit committees in ensuring transparency
of information and quality financial reporting.Documented evidence on effectiveness of audit committees
in enhancing good corporate governance has focused on various
aspects, but the issue of interest in this paper is the
support of audit committee in enhancing auditor independence
(Mautz and Newman, 1970; Dockweiler et al., 1986; Jackson-Heard,
1987; Knapp, 1987; Collier, 1992; Beattie et al., 1999 and
Fearnley and Beattie, 2004). Knapp (1987) found that an
audit committee is more likely to support the auditor rather
than the management in audit disputes and the level of support
is consistent across members of the audit committee. This
is true regardless of whether the member is in a full time
or part time position, such as corporate managers, academicians
and retired partners of certified public accounting (CPA)
firms. Pearson (1980) and Dockweiler et al. (1986) showed
that auditors' reliance on management is reduced due to
the direct communication with the audit committee.
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