Audit committee characteristics in financially distressed and non‐distressed companies

Abstract

Purpose – The purpose of this paper is to investigate whether there is any difference in the characteristics of an audit committee between financially distressed and non-distressed companies listed on the Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange). Financial distress among big companies is a sign of weak corporate governance, of which the audit committee is one of elements. Four characteristics of the audit committee being examined are size, independence, activity, and accounting knowledge. Design/methodology/approach – The sample comprises 73 financially distressed and the matched pair of 73 financially non-distressed listed companies. The financially distressed companies have been suspended from the listing under the provision of the practice note 4 (PN4) of the listing requirements. Findings – Results show that financial distress of companies has a significant negative association with financial literacy of the audit committee and the quality of external audit. Research limitations/implications – The finding is limited to PN4 companies and the selected match of the non-PN4. Results may not be generalized to other companies that are faced with financial difficulties but are not classified as financially distressed under the PN4 provision. Practical implications – The paper does not examine other qualitative factors such as the culture and dynamics of audit committee meetings which may have effect on the audit committee performance. An examination on the issue requires a different research design. Hence, further research is needed to address the issue. Originality/value – The evidence suggests that financial literacy of audit committee members is a significant factor which helps the audit committee enhance the financial performance of the company. It also suggests that a quality external audit, in addition to an effective audit committee, enhances company financial performance.