Audit committee pre‐Enron efforts to increase the effectiveness of corporate governance

Abstract

Purpose: This study of audit committee effectiveness, performed in the period immediately preceding the Enron collapse, seeks to determine whether audit committees were beginning to accept more responsibility for corporate governance before such behavior became mandatory.Design/methodology/approach: The period studied was approximately two years prior to the Sarbanes‐Oxley Act of 2002 and roughly one year after the Blue Ribbon Committee published its recommendations on audit committee effectiveness. The efforts of 296 audit committees to improve their effectiveness as reported by Chief Audit Executives (CAEs) to the Global Audit Information Network (GAIN) database maintained by the Institute of Internal Auditors (IIA) were investigated.Findings: It was found that audit committees' responsiveness to each of eight effectiveness steps was surprisingly high. For instance, almost all (w99.6 percent) audit committees meet with CAEs. It is recommended that audit committees focus more on big picture/strategic concerns in their discussions with CAEs.Research limitations/implications: The study's chief limitation is that only companies with internal audit functions were studied and thus the results cannot be generalized to companies without internal audit functions.Originality/value: This study was the first to utilize the GAIN database and provides specifics about 15 different topics that CAEs might bring to audit committees for discussion. Topics of communication more often focused on specifics such as “significant audit findings” (95.9 percent) and less often dealt with big picture/strategic concerns such as “overall corporate control environment” (68.9 percent).