Audit committee characteristics, trust and audit quality: Evidence from Hong Kong

Cheung, Kwok Yip

Abstract

This thesis comprises of two parts. Part One of the thesis denotes an archival modelling study that evaluates the relationships between effective audit committee characteristics (size, independence, financial expertise, meeting frequency, directorship, tenure and age of audit commit-tees) and perceived audit quality in Hong Kong. Part Two is a questionnaire survey study exploring the effects of external auditors’ trust in audit committee members on both their interactions and perceived audit quality in Hong Kong.

In the archival modelling study, discretionary accruals estimated by the modified Jones model were employed in order to measure perceived audit quality. Fixed effect panel data regression with robust standard errors was used as primary analysis. On the basis of data obtained from the Hong Kong Hang Seng Composite Index between 2010 and 2015, the findings suggest that their financial expertise, size, tenure and age are important determinants of perceived audit quality. This result indicates that their expertise enables them to fulfil their oversight role competently, whereas their size provides them with sufficient resources to be able to perform their roles. Similarly, their length of tenure enables them to obtain more experience and knowledge of the operations of companies, while their age indicates that they may have less energy to perform their oversight role and have difficulties in keeping abreast of changing environment of companies. Thus, an audit committee with old members may reduce audit quality. Audit fees and choice of auditor are used as the measures of audit quality for the robustness checks. The results of robustness checks demonstrate that a large audit committee with financial expertise demands greater efforts from external auditors, as indicated in higher audit fees. However, audit commit-tee members’ directorships are found to be negatively associated with audit fees but positively related to the appointment of Big 4 auditors.

In the questionnaire survey study, perceived audit quality is measured based on external auditors’ interactions with audit committee members. Semi-structured questionnaires were used in order to assess the levels of their trust in audit committee members and their interactions. Ordinary least square with robust standard errors, independent t-tests and thematic analysis were used in this study. According to the findings, the external auditors trust them because they have and display integrity, competence and goodwill. These findings also suggest that their trust in audit commit-tee members improve their interactions in terms of sharing information, devoting their time and efforts to an external audit and providing their comments on managers.

Overall, both findings are congruent with agency theory and social interdependence theory. On the one hand, agency theory states that higher quality audit committees are associated with effective monitoring, which, in turn, helps to improve audit quality so that earnings management is constrained. On the other hand, social interdependence theory states that when two parties (external auditors and audit committee members, in this case) depend on one another, they will try to improve their interactions so that their common goals (high audit quality) can be achieved on the basis of trust. The findings are of potential interest to policy makers, professionals, boards of directors and audit firms, particularly on issues relating to audit quality and the mandating of corporate governance practices.

• Thesis Type: Thesis
• Publicly Available Date: Oct 16, 2019
• Keywords: audit committee characteristics, trust, audit quality
• Public URL: https://uwe-repository.worktribe.com/output/1490854
• Award Date: Oct 16, 2019