Audit committee and integrated reporting practice: does internal assurance matter?

Abstract

Purpose This paper aims to examine the role of the audit committee function as an internal assurance provider in the emerging integrated reporting (IR) practice. In particular, the authors examine the role of the overall effectiveness, as well as specific aspects, of the audit committee function in IR practice. Design/methodology/approach The authors examine the integrated reports of 246 firm-year observations of large South African companies over a three-year period (2011-2013), following the introduction of an “apply or explain” IR requirement and an embedded “combined assurance” model in South Africa. Drawing from conflicting theoretical perspectives of economics-based (e.g. agency theory) and socio-political theories (e.g. legitimacy theory), the authors develop competing hypotheses to predict the role of the overall, as well as specific aspects, of the audit committee function in IR practice. Findings Consistent with the predictions of economics-related theories, the authors find that the overall effectiveness of the audit committee function has a strong positive association with the extent and quality of IR practice. In particular, audit committee authority and meetings are shown to have a significant positive impact on IR practice. However, as implied by socio-political theories, the authors do not find a significant association between key aspects of the audit committee function such as audit committee independence and financial expertise and IR practice. Practical implications This study informs local and international regulatory authorities, as well as the business community, about the potential significance of internal assurance mechanisms such as the audit committee function in the emerging IR practice. Given the practical challenges associated with independent external assurance provisions, the findings of this study suggest that internal assurance mechanisms – such as the audit committee function – can be genuine and cost-effective alternative assurance mechanisms in enhancing the credibility and reliability of non-financial reporting practices, particularly the emerging IR practice. The results also inform academic researchers to take cognisance from the expanding roles and responsibilities of audit committees and conduct in-depth investigation on “how” the audit committee function is handling the increasing responsibilities. Originality/value The study provides initial empirical account towards the role of the audit committee function in the emerging IR practice. The study is novel because it shows the significance of internal assurance mechanisms in wider organisational reporting practice.