Getting Inside the Black Box: A Field Study of Practices in “Effective” Audit Committees

Although audit committees typically are considered a crucial corporate governance mechanism, knowledge is scant about the practices carried out in audit committee meetings. This paper provides insights into practices that audit committee members carry out in meetings, including the part of the meetings where members meet privately with auditors. The investigation was conducted via a field study in three Canadian public corporations—whose respective audit committees complied to a large extent with regulatory guidelines of the Toronto Stock Exchange and the voluntary recommendations of the Blue Ribbon Committee on audit committee effectiveness. Further, the three audit committees that we investigated are generally perceived as effective by the individuals who attend meetings. Our results highlight key matters that audit committee members emphasize during meetings, such as: accuracy of financial statements; appropriateness of the wording used in financial reports; effectiveness of internal controls; and the quality of the work performed by auditors. We also elicit the evaluation criteria that members use to assess written and verbal information submitted by managers and auditors. In addition, we found that a key aspect of the work carried out by audit committee members consists of asking challenging questions and assessing responses provided by managers and auditors.