Essays on external audit committee members

Darmadi, Salim

Essays on external audit committee members

Darmadi, Salim

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Publication Type:: Thesis
Issue Date:: 2023

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Field	Value	Language
dc.contributor.author	Darmadi, Salim
dc.date.accessioned	2023-10-17T03:26:26Z
dc.date.available	2023-10-17T03:26:26Z
dc.date.issued	2023
dc.identifier.uri	http://hdl.handle.net/10453/172725
dc.description	University of Technology Sydney. Faculty of Business.	en_US.UTF-8
dc.description.abstract	This thesis explores the economic consequences of externally-appointed audit committee (AC) members in an emerging market whose AC composition requirement is very different from many other jurisdictions worldwide. While it is a global common practice that the AC is comprised entirely of board members, Indonesia’s AC regime requires listed companies to establish an AC with two elements of members, namely independent board members and externally-appointed (i.e., non-board) members. Exploiting such a unique feature of AC composition, this thesis consists of two standalone empirical essays. The first essay examines the monitoring effectiveness of external AC members in terms of financial reporting quality. While the effects of AC attributes on financial reporting quality have been extensively examined in the literature, there is no evidence of the roles of externally-appointed AC members. The results show that there is a significant and positive association between the proportion of external AC members and financial reporting quality. The finding suggests that external AC members exert effective oversight over the financial reporting process, hence promoting higher-quality financial reporting. The results remain consistent after addressing endogeneity concerns through the difference-in-differences and instrumental variable approaches. Further, the positive association is more prominent for firms with higher levels of external AC members’ expertise and tenure, lower agency costs, stronger external monitors, lesser governmental or political connections, and lower external auditor quality. Additionally, I present further evidence that there is a negative association between external AC members and audit quality. The second essay investigates the effects of external AC members on the extent of tax avoidance, considering a recent development where the scope of the AC’s functions has expanded to include areas aside from financial reporting quality, including corporate tax planning. I find that the proportion of external AC members is positively associated with tax avoidance. The results remain unchanged after addressing endogeneity concerns and utilising alternative measures of tax avoidance. Such evidence suggests that external AC members tend to effectively serve advising roles, rather than monitoring ones, when it comes to tax planning. I also provide evidence that external AC members’ accounting expertise and lack of independence, as well as the firm’s governmental or political connections, appear to be channels through which they positively influence tax avoidance. Further, such a positive link is stronger for firms with poorer corporate governance mechanisms, lower external auditor quality, and lesser agency issues.	en_US.UTF-8
dc.format	Thesis (PhD)
dc.language.iso	en_US	en_US.UTF-8
dc.relation	https://opus.lib.uts.edu.au/bitstream/10453/172725/1/thesis.pdf
dc.rights	info:eu-repo/semantics/openAccess
dc.rights	© 2023 Salim Darmadi
dc.rights	au.edu.uts.lib/cph
dc.rights	The author owns the copyright in this thesis including all reproduction and reuse rights for the work. The work may not be altered without the permission of the copyright owner. Attribution is essential when quoting or paraphrasing from this thesis.
dc.title	Essays on external audit committee members	en_US.UTF-8
dc.type	Thesis
utslib.copyright.status	open_access	*

Abstract:

This thesis explores the economic consequences of externally-appointed audit committee (AC) members in an emerging market whose AC composition requirement is very different from many other jurisdictions worldwide. While it is a global common practice that the AC is comprised entirely of board members, Indonesia’s AC regime requires listed companies to establish an AC with two elements of members, namely independent board members and externally-appointed (i.e., non-board) members. Exploiting such a unique feature of AC composition, this thesis consists of two standalone empirical essays. The first essay examines the monitoring effectiveness of external AC members in terms of financial reporting quality. While the effects of AC attributes on financial reporting quality have been extensively examined in the literature, there is no evidence of the roles of externally-appointed AC members. The results show that there is a significant and positive association between the proportion of external AC members and financial reporting quality. The finding suggests that external AC members exert effective oversight over the financial reporting process, hence promoting higher-quality financial reporting. The results remain consistent after addressing endogeneity concerns through the difference-in-differences and instrumental variable approaches. Further, the positive association is more prominent for firms with higher levels of external AC members’ expertise and tenure, lower agency costs, stronger external monitors, lesser governmental or political connections, and lower external auditor quality. Additionally, I present further evidence that there is a negative association between external AC members and audit quality. The second essay investigates the effects of external AC members on the extent of tax avoidance, considering a recent development where the scope of the AC’s functions has expanded to include areas aside from financial reporting quality, including corporate tax planning. I find that the proportion of external AC members is positively associated with tax avoidance. The results remain unchanged after addressing endogeneity concerns and utilising alternative measures of tax avoidance. Such evidence suggests that external AC members tend to effectively serve advising roles, rather than monitoring ones, when it comes to tax planning. I also provide evidence that external AC members’ accounting expertise and lack of independence, as well as the firm’s governmental or political connections, appear to be channels through which they positively influence tax avoidance. Further, such a positive link is stronger for firms with poorer corporate governance mechanisms, lower external auditor quality, and lesser agency issues.

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http://hdl.handle.net/10453/172725