Governance characteristics and role effectiveness of audit committees

Purpose – This paper examines the association between audit committee (AC) governance characteristics and their role effectiveness. Its objective is to contribute a more comprehensive model and new evidence from Australia that complements and extends recent studies from different country settings on characteristics, roles and effectiveness of ACs. Design/methodology/approach – The sampling frame is Australian listed companies, over the years 2004 to 2009, consisting of 180 observations. The study applies multiple regressions to validate the hypotheses and models. Findings – Results reveal that stronger AC independence and competence, but not diligence, is significantly related to a lower incidence and severity of financial restatements (i.e. to a higher integrity of financial statements). However, greater AC diligence, but not independence or competence, is significantly related to lower non‐audit fee ratio (i.e. to higher external auditor independence). Practical implications – The paper highlights salient links between an AC's governance characteristics and its effectiveness in fulfilling certain governance roles. Also it expands current literature by presenting a comprehensive empirical model along with statistical measures for AC governance characteristics. Originality/value – Previous studies have not drawn AC governance characteristics together in a comprehensive model or provided evidence beyond the North American and European setting. A further original feature is the measurement of AC competence in terms of collective members' combined financial sophistication and industry knowledge.