The relationship between the audit committee and the financial auditor in Romanian public interest entities.
Manolescu, Maria ; Roman, Aureliana-Geta ; Mocanu, Mihaela 等
1. INTRODUCTION
The audit committee and the financial audit function are corporate
governance mechanisms which are critical for high-performance
management. The international literature comprises different studies
regarding the audit committee as corporate governance mechanism in
charge with monitoring (a) the financial reporting process, (b) the
financial audit activity, and (c) the efficacy of the internal control,
internal audit and risk management systems. Researchers analysed the
effectiveness of the audit committee (DeZoort et al. 2002). Moreover,
there are studies regarding the role of the audit committees in managing
the relationships with the external auditors of the entity (Hoitash
& Hoitash, 2009), as well as regarding the link between the
characteristics of the audit committee and the termination of the
collaboration with the financial auditor at the initiative of the entity
(Carcello & Nea, 2003) or at the initiative of the auditor (Lee et
al. 2004). However, the Romanian literature, although it contains
studies on corporate governance mechanisms (including financial
audit--Manolescu et al. 2010; Mocanu 2009), contains less research
focused exclusively on the relationship between the audit committee and
the financial audit. Empirical studies in this field are particularly
scarce in the Romanian literature. This state of facts points out the
originality of our research, which focuses on the relationship between
the audit committee and the financial auditor in Romanian public
interest entities.
Public interest entities are defined by the Accounting Law no.
82/1991 republished, in Art. 342, as being: credit institutions;
non-banking financial institutions; insurance companies; entities
authorized, regulated and supervised by the Private Pension System
Supervisory Commission; financial investments services companies;
companies for investment management and mutual shares funds; trade
companies with shares traded on a regulated market; legal persons
pertaining to a company group and which enter in the consolidation area
by a mother company that applies the International Financial Standards.
According to Art. [34.sup.1] of the Accounting Law no. 82/1991, the
annual financial statements of public interest entities must be audited.
Moreover, through article 47, the Emergency Ordinance 90/2008 stipulates
the compulsory character of setting up an audit committee in public
interest entities.
2. RESEARCH DESIGN
The research on the corporate governance of public interest
entities in Romania was carried out in the year 2009. The overall
objective was to establish to what extent are the regulations on
corporate governance known, understood and implemented by the public
interest entities in Romania. Authors chose an empirical research approach. Questionnaires were sent to all categories of public interest
entities and the answers were received mostly from qualified persons:
managers, members of the audit committees, members of the board,
executive directors etc. A number of 105 entities (see Table 1) answered
the questionnaires, representing circa 20% of the total population.
3. RESEARCH FINDINGS
Answers were gathered, aggregated and processed. Thus, strengths
and weaknesses of the process of assimilating the corporate governance
principles in Romania were identified. The current paper points out only
the results of the research that concern the relationship between the
audit committee and the financial auditor.
First, it was investigated whether an audit committee operates
within the entities. The number of the affirmative answers was
approximately the same as the number of negative answers: 44.67% answer
"yes" and 44.76% answer "no", while a percentage of
8.57% state that do not hold information whether an audit committee
exists or not. In some entities, the audit committee, although set up,
is not yet functional. In the entities in which the respondents are
informed on the existence of an audit committee, a percentage of 81.64%
of the interviewed ones state that at least one member of the audit
committee is independent and has accounting and/or auditing expertise
(as article 47 of the Emergency Ordinance 90/2008 stipulates), while
16.32% say they do not know.
The respondents were also enquired whether the functions of the
Audit Committee stipulated by the Government Emergency Ordinance no.
90/2008 are fulfilled in their entity. These functions refer to: (1)
monitoring the financial reporting process, (2) monitoring the efficacy
of the systems of internal control, internal audit and risk management,
(3) monitoring the financial audit of the annual financial statements,
and (4) checking and monitoring the independence of the statutory
auditor and the potential situations in which he/she delivers additional
services to the audited entity. Tables 2-5 show the received answers.
Another question addressed in the questionnaire referred to the
reporting of the financial auditor to the audit committee: Do you know
whether the statutory auditor reported to the audit committee the
essential aspects that resulted from the statutory audit and that
concern the significant deficiencies of internal control related to
financial reporting? (see table 6).
With respect to the relationship between the financial auditor and
the audit committee, other representative comments of the respondents
are: (1) The financial auditor reports to the audit committee the
aspects identified during the statutory audit without presenting the
material deficiencies of internal control related to financial
reporting; (2) In the absence of an audit committee, the statutory
auditor sends a letter to the management with the purpose to inform
managers on aspects found during auditing; (3) The statutory auditor
reports to the board the essential aspects that result from the
statutory audit regarding the material deficiencies of internal control;
(4) The audit committee was set up and until the date of the
questionnaire no reporting by the financial auditor was made.
4. INTERPRETATION OF RESEARCH FINDINGS
The research pointed out some flaws in how the audit committee runs
and in its relationship with the financial auditor. A percentage of
approximately 9% of the respondents state they are not even aware
whether an audit committee exists or not. In some entities, the audit
committee, although set up, is not yet functional. Moreover, some
entities (approximately 2%) do not comply with the legal requirement
that at least one member of the audit committee is independent and has
accounting expertise.
Additionally, a rather high percentage of the respondents (varying
from 38.10% to 49.52%) do not know to which extent the functions of the
audit committee are fulfilled. The fact that relevant Romanian
accounting regulations are rather recent may be an explanation for the
answers "no" and "I don't know" in this
respect. However, the situation is totally inadequate.
A relatively high percentage of 32.38% of the respondents are not
informed that the statutory auditor reported to the audit committee the
essential aspects that result from the financial audit and the
deficiencies of the internal control in connection with financial
reporting. This answer ("no") shows the need for improving
auditor's communication with the audit committee. This need for
improvement is also pointed out by a global survey commissioned by IFAC
among the participants in the financial reporting supply chain (IFAC
2007, pp.26). It is suggested that the auditor's opinion could also
provide more insight in the communication that has taken place in the
audit committee and between the committee and auditors.
5. CONCLUSIONS
The results presented in this paper refer strictly to the
functioning of the audit committee and its relationship with the
financial auditor in Romanian public interest entities. They are part of
a wider research project. The future research step would be to develop a
national training program that involves partnerships between different
professional bodies and institutions (e.g. the Bucharest Stock
Exchange). The program would increase the knowledge and competence of
those charged with governance and would contribute to creating a
corporate governance culture that also promotes the qualitative
communication between the audit committee and the auditor.
6. ACKNOWLEDGEMENTS
This paper represents dissemination within the research project
PN-II-ID-PCE-2007-1 nr. ID-795/2007 financed by the state budget through
CNCSIS-UEFISCSU. This article is also a result of the project
"Doctoral Program and PhD Students in the education research and
innovation triangle". This project is co funded by European Social
Fund through The Sectorial Operational Programme for Human Resources Development 2007-2013, coordinated by The Bucharest Academy of Economic
Studies.
7. REFERENCES
Carcello, J.V., Nea, T.L. (2003). Audit committee characteristics
and auditor dismissals following new going-concern reports, The
Accounting Review, Vol.78 95-117, ISSN 0001-4826
DeZoort F.T., Hermanson D.R., Archambeault D.S., Reed S.A., (2002).
Audit committee effectiveness: a synthesis of the empirical audit
committee literature, Journal of Accounting Literature 21 31-17, ISSN
0737-4607.
Hoitash R., Hoitash U. (2009). The role of audit committees in
managing relationships with external auditors after SOX: Evidence from
the USA, Managerial Auditing Journal, Vol. 24, Issue 4 368-397, ISSN
0268-6902
IFAC (2007) Financial Reporting Supply Chain,
http://www.ifac.org/Members/DownLoads/
Financial_Reporting_Supply_Chain_Final_Report.pdf Accessed 2010-06-01
Lee, H.Y., Mande, V., Ortman, R. (2004). The effect of audit
committee and board of director independence on auditor resignation,
Auditing: A Journal of Practice & Theory, Vol. 23, No. 2 131-46,
ISSN 1558-7991
Manolescu M., Roman A.G., Roman C., Mocanu M. (2010). The
auditor's communication with those charged with governance,
Financial Audit 1/2010 12-17, ISSN1583-5812
Mocanu M. (2009). An Analysis of the Concept of Auditor
Independence, Metalurgia International vol. XIV/2009 special issue no.11
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*** (2008) Accounting Law no. 82/1991
*** (2008) Government Emergency Ordinance no. 90/2008 on the
statutory audit of annual financial statements and consolidated
financial statements
Tab. 1. Structure of the sample
National companies/national entities 6,67 %
Trade companies 51,48 %
Credit institutions 18,14 %
Insurance companies 3,81 %
Non-banking financial institutions 16,09 %
Other legal form 3,81 %
Tab. 2. The structure of the opinions regarding the monitoring
of the financial reporting process by the audit committee
Yes 51.43 %
No 6.67 %
I don't know 41.90 %
Tab. 3. Opinions on monitoring the efficacy of the systems of
internal control, internal audit and risk management
Yes 51.43 %
No 6.67 %
I don't know 41.90 %
Tab. 4. The structure of the opinions regarding the monitoring
of the financial audit of the annual financial statements
Yes 51.42 %
No 10.48 %
I don't know 38.10 %
Tab. 5. The structure of the opinions regarding the checking
and monitoring of the independence of the statutory auditor and
the potential situations in which he/she delivers additional
Yes 49.53 %
No 8.57 %
I don't know 41.90 %
Tab. 6. Awareness of the communication between the financial
auditor and the audit committee
Yes 32.38 %
No 32.38 %
I don't know 35.24 %