Audit Committees and Corporate Governance: A Study of Select Companies Listed in the Indian Bourses

Audit committees act as an important link in corporate governance mechanisms. As such, SOX Act, 2002, Blue Ribbon Committee’s report and Narayana Murthy Committee’s report have placed greater emphasis on their role in order to strengthen the functioning of these committees. The rationale behind this is that greater independence of audit committees is necessary for effective functioning and for alleviating weaknesses in corporate governance which, in turn, reduces the agency costs. Research evidence reaffirms this aspect. The objective of this paper is to examine the relationship between the independence of the audit committee, board independence and firm performance of listed firms segmented1 between BSE 100 and BSE 200 indices, for the years 2007 and 2008. The results are in consonance with other research studies indicating that performance of firms which have independent audit committees and greater board independence is higher resulting in premium valuations as measured by Tobin’s Q, a proxy for firm performance.