The Role of Audit Committee and Analysis of its Non-Establishment and Non-Application of this Committee in Iran

Journal of Accounting Advances (J.A.A)
Vol. 2, No. 1, Summer 2010, Ser. 58/3
 
 
Extended Abstract
 
The Role of Audit Committee and Analysis of its Non-Establishment and Non-Application of this Committee in Iran
 
 
Dr. H. Alavi Tabari                                       R. Asabakhsh
      Az-zahra University
 
 
Introduction
       In recent years, developed countries have witnessed the appearance and rapid evolution of the audit committee. The expansion of international activities, aggravation of activities of public companies for access to competitive merits, the increase in liabilities due to damages made to the environment, the role and effects of management estimations in figures reflected in financial statements and reports, the lack of a valid basis for external auditors to evaluate the claims made by management on the quality of internal control structures, the widespread use  of computer systems and subsequently the complexities of supervising the systems' controls have resulted in an increase in the formation and utilization of audit committees.
       Nowadays, authentic management, control and the supervision of various issues of public companies have become major issues propounded in the economic systems of various countries across the world including Iran. Considering the changes that have been occurring in today's world, protection of the interests of investors as providers of capital and also the most significant users of accounting information and financial reports has become more important than ever. The establishment and expansion of audit committees is one of the strategies that is expected to be influential in the protection of interests of various groups of users of accounting information and financial reports. A number of companies in developed countries have nowadays established audit committees to take over the role of supervising accounting procedures and operations, and the financial reporting system of economic entities (Arbab Soleimani and Nafari, 2008). The role of the audit committee as an influential factor in increasing the utility of the presentation of financial reports shall continue and the effective audit committee shall play a part in filling the credit vacuum that is present in today's financial reports.
 
Research Hypotheses
       Eight hypotheses have been formulated to examine the role played by the audit committee and obstacles that prevent its establishment and utilization in Iran, as follows:
1-    The audit committee helps maintain the relationship between the entity's board of directors and auditors.
2-    The presence of an audit committee increases the independency of the external auditor with regards to the entity's board of directors.
3-    The presence of an audit committee increases the efficiency and effectiveness of accounting and internal auditing units within each economic entity.
4-    The authentic performance of the audit committee is a preventive factor for managers with regard to internal control systems and fraud.
5-    The authentic performance of the audit committee improves the quality of financial reports.
6-    Unfamiliarity with the audit committee and its influential role are among the factors for the avoidance of formation and utilization of audit committees in Iranian economic entities.
7-    Tendencies of Iranian managers to centralize are also a factor in avoiding the formation and utilization of audit committees in Iranian economic entities.
8-    The absence of Regulations requiring companies listed on Tehran Stock Exchange to establish an audit committee is again a factor for the non-establishment and utilization of audit committees in economic entities in Iran.
Methods
       Analysis of general and specialized information within the questionnaires was performed using descriptive statistical methods including frequency distributions, absolute distributions and arithmetic mean, and specialized information on the questionnaires were also analyzed using statistical inference including binomial tests, Chisquareand one sample t tests within a 95% confidence interval.
 
Research Results
   Results of the research showed that:
1-   The presence of an audit committee helps maintain the relationship between an entity's board of directors and its auditors.
2-   The presence of an audit committee increases the auditors' independency from the entity's board of directors.
3-   Audit committees increase the efficiency and effectiveness of accounting and auditing units.
4-   The presence of an audit committee results in the promotion of the following:

Ensuring the establishment of an integral internal control system,
Effectiveness and quality of internal control systems
Safeguarding assets of the economic entity

Reducing chances of errors, irregularities, illegal actions, fraud, swindling, and violation of the internal control systems. Moreover the audit committee can prevent any optional change in accounting procedures by the entity's management.



5-    The audit committee holds a crucial role in the following:

Preparation and presentation, by the economic entity, of easy to understand information that responds to the needs of the users of financial reports.
Discovery of significant financial errors and fraud
Encouraging the board of directors to present integral financial reports and increasing the company's credit rating and reliability of its reports.

6-    Unfamiliarity of the various groups of users of accounting information and financial reports, regulation bodies and professional authorities in accounting and auditing in Iran with the role played by the audit committee and the impact of investors' interests as capital providers are among the obstacles for its establishment and utilization in Iranian entities.
7-    Tendencies of managers to centralization in Iran are another obstacle in the establishment and application of the audit committee in Iranian entities.
8-    The other factor for non establishment and utilization of an audit committee would be the absence of any regulation requiring companies listed on Tehran Stock Exchange to hold such committees.
 
Conclusion and Suggestions
       Results indicate that the establishment and utilization of an audit committee is quite effective in the prevention of illegal actions, improvement of the financial reporting process and also the presentation of transparent and reliable information and financial reports. Moreover, the unfamiliarity of Iranian economic entities with these committees, the tendency of Iranian managers to centralize, and the absence of regulations by Tehran Stock Exchange are among the factors for non-establishment and utilization of audit committees in Iran.
       Since, according to research results the presence of an audit committee can have a very significant impact on the quality of financial reports, it is deemed necessary for other studies to be carried out on the necessity of establishing an audit committee in Iranian economic entities including the following subjects:

An investigation of the influence of audit committee on the effectiveness and efficiency of the activities of operational auditors.
An investigation of the influence of audit committees on an entity's value.
An investigation of the influence of the audit committee on attracting foreign investors to invest in Iranian entities.
Examining the effects of the presence of an audit committee on the neutrality of the internal auditors.

 
Keywords: 1. Audit Committee  2. Quality of Financial Reports
3. External Auditors  4. Stock Exchange 5. Audit Standards.