Are Audit Committees Red Herrings?

The common expectation of committees established in the wake of the corporate debacles during 1980s in the English‐speaking world is that the audit committee device will raise the standards of corporate accountability and governance by improving the quality of financial reporting. That expectation is based on the prevalent belief that by strengthening the independence of auditors and non‐executive directors audit committee members will monitor the financial reporting process in an independent manner. Unless accounting practices are reformed so that financial statements can be authenticated by recourse to reliable commercial evidence, audit committees are red herrings. Such reforms are essential if audit committee members are to keep under vigilant appraisal matters pertaining to the financial governance of, and reporting by, firms: the raison d'être of their appointment.