Contributors to audit committee effectiveness: An experimental study of external auditors’ perception

Abstract

Effective audit committees are the best guarantee of sound corporate governance (Levitt, 1999). Thus, the investigation of factors affecting audit committee effectiveness (ACE) is the main objective of this study. Specifically, it evaluates the impact of audit committee independence, financial literacy, authority, and diligence on ACE. A mixed method approach is adopted consisting of a fully crossed, within-subjects design to test the main and interactive weights of the four variables and eight in-depth interviews. The analysis of 55 survey‐based factorial experiments reveals that financial literacy has the greatest effect on the external auditor’s decision to assess the effectiveness of audit committees followed by diligence, independence, and authority. Additionally, three significant interactions were found indicating that external auditors process decision-making information configurally, which means that external auditors consider the combined effects of the posited factors. The interviews provide constructive explanations of the effects of the four factors along with their interactive effects. The insights gained from this study are useful to the board of directors, professional bodies, and regulators charged with developing corporate governance seeking the optimal composition of audit committees. These results are vital because they reflect the viewpoint of the external auditors, who are the most communicative and interactive with the audit committees