The link between audit committees, corporate governance quality and firm performance: A literature review

Abstract

This literature review evaluates 117 empirical research studies on audit committee (AC) composition, resources and incentives (period 2007 through 2015). Regulators all over the world try to increase AC effectiveness that should have a positive impact on corporate governance quality. I briefly introduce the theoretical, normative and empirical AC framework that comprises an adequate structure of the state-of-the-art of empirical research in this field. This is followed by a discussion of AC monitoring process which aims to enhance corporate governance quality and is structured as follows: (1) financial reporting quality; (2) internal audit quality and (3) external audit quality. I will then evaluate the impact of AC on (4) firm performance. I will summarise the key findings in each area, and provide a description of the analysed proxies for corporate governance quality and firm performance. Numerous studies have shown a positive impact of the AC’s financial expertise on earnings quality. In this context, AC financial expertise has recently been increasingly specified, wherefore positive impacts of accounting, legal or industry expertise were measured either separately or in combination. Both the number of studies conducted and the observed significances are significantly lower for the other components of the monitoring process (internal and external audit quality) and the firm performance. Finally, I will discuss the current limitations of the studies and give useful recommendations for future empirical research activities in this topic.