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Audit Committee Composition, "Gray Directors," and Interaction with Internal Auditing.

K. Raghunandan and Dasaratha V. Rama are Professors both at Texas A&M International University, and William J. Read is a Professor at Bentley College.

SYNOPSIS: The functioning of corporate audit committees was criticized in recent years by the Treadway Commission, the Public Oversight Board, the Kirk Panel, and the SEC Chairman. In response, the NYSE and NASD sponsored the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees. The BRC Report includes recommendations aimed at strengthening director independence and qualifications, and highlights the role of internal auditors in assisting audit committees in the corporate governance process. Moreover, the first three recommendations of the BRC relate to audit committee composition: absence of inside or directors, and presence of a member with financial expertise.

This study examines the association between audit committee composition and the committee's interaction with internal auditing. Our results, based on responses from chief internal auditors of 114 public companies, indicate that committees comprised solely of independent directors and with at least one member having an accounting or finance background are more likely to (1) have longer meetings with the chief internal auditor; (2) provide private access to the chief internal auditor; and (3) review internal audit proposals and results of internal auditing. These findings provide empirical support for the BRC's recommendations related to audit committee composition.

The functioning of corporate audit committees was criticized in recent years by the Treadway Commission (NCFFR 1987), the Public Oversight Board (1993), the Kirk Panel (1994), and the SEC Chairman (Levitt 1998). In response, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) sponsored the Blue Ribbon Committee (BRC) on Improving the Effectiveness of Corporate Audit Committees. The BRC Report (BRC 1999) includes recommendations for audit committee reform and a discussion of the role of audit committees in ensuring the quality of financial reporting. Similar suggestions are made by another blue ribbon commission sponsored by the National Association of Corporate Directors (NACD 1999). The SEC acted on these recommendations and adopted new rules requiring disclosure about audit committees' composition, charter, and activities in proxy statements (SEC 1999a).

The first two recommendations of the BRC Report relate to the composition of the audit committee and are aimed at strengthening the independence of audit committees. This reflects the belief that independent audit committee members are more likely to "objectively evaluate the propriety of management's accounting, internal control, and financial reporting practices" (SEC 1999b). The NYSE had required its listed companies to have audit committees comprised solely of outside directors, while the NASD had required only that the audit committee have a majority of outside directors. However, outside directors included both those independent of the company (except for board service) as well as those so-called "gray directors" with some nonboard affiliation with top management of the company.

The first recommendation of the BRC Report stated that directors should not be considered independent if (1) the director or a member of his/her immediate family was an employee of the company or its affiliates within the past five years; (2) the director received compensation for work other than board service; or (3) the director serves as a partner or controlling shareholder or executive of a business with which the company has significant business. The second recommendation of the BRC calls for NYSE and NASD to modify their requirements so that listed companies have audit committees comprised solely of independent directors in the sense of the new, more stringent definition. The NYSE and NASD changed their listing requirements as suggested by the BRC (SEC 1999b, 1999c).

When audit committees have solely independent directors, there are information asymmetries between the independent directors and management. Internal auditing is a valuable resource that can provide the information needed for audit committees to meet their governance mandate (Bishop et al. 2000). The BRC followed the lead of the Treadway Commission (1987) in recognizing the important role that internal auditing plays in the financial-reporting process and corporate governance, and in helping the audit committee to effectively discharge its responsibilities. Similarly, the National Association of Corporate Directors (1999, 47) notes that "the audit committee can look to today's internal auditing function to provide independent, objective assurance and consulting activities designed to add value and improve the organization's operations." The information asymmetry between audit committees and management is more likely to be reduced when there is high-quality interaction between audit committees and internal au diting.

Given the nature of the audit committee, members must interact with external and internal auditors and with managers responsible for the company's accounting and finance functions. The BRC Report (p. 25) notes that given the audit committee's responsibility for overseeing the corporate accounting, financial controls and reporting, the committee must have members with accounting or financial expertise. The third recommendation of the BRC highlights the need for at least one member of the committee to have expertise in accounting or finance.

In this paper we examine the relationship between audit committee composition and the interaction of audit committees with internal auditors. We examine audit committees' working relationships with internal auditing because an effective internal auditing function can be a valuable resource to the audit committee in discharging its responsibilities (Treadway Commission 1987; Institute of Internal Auditors [IIA] 1993; BRC Report 1999).

BACKGROUND AND RESEARCH QUESTIONS

Previous studies examine the association between the presence of audit committees and the absence of financial-reporting problems (DeFond and Jiambalvo 1991; McMullen 1996; Dechow et al. 1996; Beasley 1996). More recently, Beasley et al. (1999, 2000) analyzed SEC enforcement actions, finding that companies with fraud were less likely to have audit committees having solely outside directors. However, as noted by Scarbrough et al. (1998, 52), such research focuses "on instances of detected or acknowledged errors or misstatements; in other words, an end product of (not) having an audit committee" (emphasis in the original). Empirical research related to audit committee processes such as the interaction between audit committees and internal auditors is in the development stage, and previous researchers (e.g., Beasley 1996; McMullen 1996; Scarbrough et al. 1998) note that further studies are needed to provide increased understanding of audit committee processes and activities.

Gray Directors on Audit Committees

Two recent studies examine the association between the presence of gray directors on audit committees and issues related to the external auditor (Carcello and Neal 1999; Abbott and Parker 2000). [1] This study adds to the literature on audit committees by examining the association between audit committee composition and the activities of the audit committee as they relate to internal auditing.

Scarbrough et al. (1998) found that Canadian audit committees with solely nonemployee directors were more likely to have frequent meetings with the chief internal auditor, and to review the internal auditing program and results. As noted earlier, the first two recommendations of the BRC stress the distinction between independent directors and nonemployee directors. In addition, Scarbrough et al. (1998) did not address the issue of having members with accounting or financial background on the audit committee. The BRC Report stresses the need for audit committees to have members knowledgeable about accounting or finance matters. This study goes beyond Scarbrough et al. (1998) to focus on whether the audit committee contains (1) independent directors, as opposed to nonemployee directors; and (2) members with an accounting or finance background. Given the first three recommendations of the BRC Report, we believe these distinctions are significant. [2]

Audit Committee Members and Accounting/Finance Background

Although some previous studies focus on the presence of independent directors on audit committees, no previously published study examines the issue of having directors with accounting or finance background on the audit committee. A benchmark study on audit committees notes that "the effectiveness of audit committees is affected, first and foremost, by the expertise of members of audit committees in the areas of accounting and financial reporting, internal controls, and auditing" (Kirk Panel 1994). The SEC (1999b) expresses its belief that having at least one member with an accounting or finance background will "enhance the effectiveness of the audit committee in carrying out its financial oversight responsibilities."

In light of the above discussion, we focus on audit committees with solely independent directors and having at least one member with an accounting or finance background. We examine five specific research questions related to audit committee interaction with internal auditing.

Frequency of Meetings with the Chief Interal Auditor

The BRC Report notes, as do the Treadway Commission (1987) and the Toronto Stock Exchange Committee on Corporate Governance (TSECCG 1994), that the audit committee should have direct communication channels with internal auditing to discuss and review specific issues as appropriate. Regular meetings between the audit committee and internal auditing make it more likely that the audit committee remains informed and knowledgeable about relevant accounting and auditing issues. The Institute of Internal Auditors (IIA 1993), based on a benchmarking survey of audit committees, suggests that to be effective an audit committee should meet with the chief internal auditor at least four times each year. Unlike prior studies that find an association between audit committee meeting frequency and absence of financial-reporting problems (McMullen and Raghunandan 1996; Beasley et al. 2000), this study focuses on meetings with the chief internal auditor. Thus, the first research question examines the number of meetings.

RQ1: Are audit committees comprised solely of independent directors (without employee or gray directors) and with at least one member having an accounting or finance background likely to have more meetings with the chief internal auditor?

The Length of Meetings with Chief Internal Auditor

Collier and Gregory (1998) suggest the importance of the time spent in audit committee meetings because the length of the meeting can serve as a proxy for audit committee activities. Although we acknowledge that longer meetings are not necessarily more productive, length is yet another measure of audit committee diligence. The second research question focuses on the length of meetings between the audit committee and the chief internal auditor.

RQ2: Are audit committees comprised solely of independent directors (without employee or gray directors) and with at least one member having an accounting or finance background more likely to have longer meetings with the chief internal auditor?

Private Meetings with the Chief Internal Auditor

The BRC Report (p. 39) also notes the unique position of the internal auditor--someone "employed" by management but expected to review the conduct of management--and suggests that "it is essential to have formal mechanisms in place to facilitate confidential exchanges between the internal auditor and the audit committee." Similarly, the Treadway Commission (1987) and the IIA (1993) also emphasize the importance of private meetings between the audit committee and the chief internal auditor. The third research question addresses private meetings between the audit committee and the chief internal auditor.

RQ3: Are audit committees comprised solely of independent directors (without employee or gray directors) and with at least one member having an accounting or finance background more likely to provide private access to the chief internal auditor?

Review of Internal Auditing Proposals and Results

The BRC Report, the Treadway Commission (1987) and the TSECCG (1994) also note the audit committee's oversight responsibility to ensure that an effective internal control system is designed and implemented within the company. This requires that the audit committee review (1) the internal audit proposals related to program, plans, and coordination with external auditors, to ensure that its scope is adequate; and (2) the results of internal auditing as they relate to financial reporting, internal controls, and compliance with laws and regulations. The fourth research question focuses on audit committee review of internal auditing proposals and results of internal auditing.

RQ4: Are audit committees comprised solely of independent directors (without employee or gray directors) and with at least one member having an accounting or finance background more likely to review the internal auditing proposals and results of internal auditing?

Internal Auditing Interaction with Management

For internal auditing to be effective it is essential that there be good interaction between management and internal auditing. Two issues are particularly relevant in this context. First, management needs to respond appropriately to the audit findings and suggestions of internal auditors. Second, management should not impose any scope restrictions or obstacles on internal auditing activities. The BRC Report (p. 30) recognizes the importance of the relationship between management and internal auditing, noting that "the audit committee has the responsibility to review regularly the relationship between management and the outside and internal auditors." The final research question examines audit committee review of the interaction between management and internal auditing.

RQ5: Are audit committees comprised solely of independent directors (without employee or gray directors) and with at least one member having an accounting or finance background more likely to review the interaction between management and internal auditing?

METHOD AND DATA

We obtained the names and addresses of all publicly held U.S. manufacturing companies with sales greater than $250 million from the CD-SEC database. With the assistance of the IIA, we identified 423 companies that had an internal auditor who was an IIA member. From this list, we randomly selected 400 companies and mailed a questionnaire addressed to each company's chief internal auditor. This was done to (1) minimize any industry effects associated with regulated industries, and (2) identify those larger companies likely to have internal audit departments. We received responses from 129 chief internal auditors (response rate = 32 percent). Of these, 125 respondents provided data about the presence of nonemployees and gray directors on audit committees; 123 provided data about members with accounting or finance backgrounds. [3] Some of the respondents used blank envelopes or deleted the control number used in their return mailing; hence, we were unable to obtain financial data for some companies. After deleti ng such observations with missing data, our sample has 114 usable responses. Nonresponse bias is not likely a problem as the average size of respondents' and nonrespondents' companies is similar and we noted no significant differences in the responses of early and late respondents.

We examine the five research questions with five multivariate regression analyses to control for other factors that may be associated with the activities of the audit committee, including interaction with internal auditing. Our independent variable of interest is QUAL, which measures the absence of inside or gray directors and the presence of at least one member with an accounting or finance background.

Conventional ordinary least squares (OLS) regression is appropriate when the dependent variable is continuous or can assume discrete values, as in the first two regressions related to the frequency and length of meetings. However, OLS is not appropriate when the dependent variable is dichotomous--e.g., either the audit committee provided private access to the chief internal auditor or it did not--because the assumptions about the normal distribution of the error term are violated. Hence, we use a logistic regression for the three regressions with dichotomous dependent variables measuring whether private access, audit committee reviews of internal auditing program and results, and audit committee review of internal auditing interaction with management occurred. [4]

The control variables used in the regressions are LNSL (log of annual sales, :measured in thousands of dollars), EXCH (whether listed on NYSE or not), SHOF (proportion of shares held by officers and directors), and LVRG (leverage). Larger companies are more likely to have mechanisms in place that foster an active and informed audit committee (cf., IIA 1993; Menon and Williams 1994). Because the NYSE has, since the 1970s, stronger requirements related to audit committees, it is likely that audit committees of NYSE-listed companies are more active. Managerial ownership and leverage are used as proxies for agency costs by many previous researchers, and monitoring mechanisms such as audit committees and internal auditing may be related to the magnitude of agency costs. [5]

RESULTS

Audit Committee Composition

One hundred seven of the 114 (94 percent) companies in our sample had audit committees comprised solely of nonemployee directors; when using the more stringent definition of independence suggested by the BRC, 84 of the 114 (74 percent) respondents' audit committees consisted entirely of independent directors. [6] These results provide empirical support for the BRC's contention that independence requirements must go beyond the absence of inside directors. [7] Seventy-eight of the 114 (68 percent) companies had audit committees comprised solely of independent directors and at least one member with an accounting or finance background. [8]

Audit Committee Meetings with the Chief Internal Auditor

On average, audit committees had 3.3 meetings (median = 3 meetings) per year with the chief internal auditor. In his seminal speech criticizing the functioning of accountants and audit committees, SEC Chairman Levitt (1998) spoke approvingly about audit committees that meet 12 times a year. None of our respondents indicated such frequency; the highest number indicated was seven meetings per year. The mean (and median) meeting time was 60 minutes. The audit committee provided private access to the chief internal auditor in 81 of 114 (71 percent) companies.

Audit Committee Review of Internal Auditing Proposals/Results

Ninety-three percent of audit committees reviewed the proposed internal audit program, but only 49 percent of the audit committees reviewed the proposed internal auditing budget. Eighty-seven percent of audit committees reviewed the proposed coordination between internal auditing and the external auditors. Internal auditing results related to financial reporting, internal control, and compliance with laws and regulations were reviewed by 85 percent, 96 percent, and 91 percent of the audit committees, respectively. Only 49 audit committees (43 percent) reviewed all of the above issues related to internal auditing plans and results of internal auditing. Our subsequent analysis focuses on this combined variable, which examines whether the audit committee reviewed all of the above aspects related to internal auditing.

Audit Committee Inquiries of Chief Internal Auditor

Eighty-seven percent of audit committees in our sample made inquiries of the chief internal auditor about management's response to internal audit findings. Eighty-two percent of audit committees in our sample also inquired about any difficulties or scope restrictions encountered by internal auditors. Eighty-two of the 114 (72 percent) audit committees inquired about both these aspects of internal auditors' interaction with management. Our subsequent analysis focuses on this combined variable, which examines whether the audit committee inquired about both of these two aspects related to the interaction between internal auditing and management.

Audit Committee Type and Interaction with Internal Auditing

In the following discussion, we refer to audit committees comprised solely of independent directors (that is, without inside or gray directors) and with at least one member having an accounting or finance background as the QUAL1 group. Audit committees failing to meet either of these two criteria are referred to as the QUAL0 group. Table 1 provides the results from comparing the two groups. The data indicate that, when compared with audit committees in the QUAL0 group, audit committees in the QUAL1 group had longer meetings with the chief internal auditor and were more likely to:

* Provide private access to the chief internal auditor,

* Review both internal auditing proposals and results of internal auditing, and

* Review the interaction between management and internal auditing.

The results from the comparisons are suggestive. More conclusive evidence requires multivariate analyses, which control for the effects of other control variables. We now provide the results from the following five regressions.

Frequency of Meetings with the Chief Internal Auditor

The second and third columns in Panel A of Table 2 report the results from regressing five explanatory variables on the number of meetings between the audit committee and the chief internal auditor. The overall regression is significant, and the results indicate that audit committees of large companies were more likely to have frequent meetings with the chief internal auditor. [9] In addition, the coefficient of SHOF--the proportion of shares held by officers and directors--is negative and significant in the regression for the number of meetings, indicating that a "higher level of monitoring [may be] required as managers' holdings decrease" (Menon and Williams 1994, 125). However, the variable of interest, QUAL, is not statistically significant.

Length of Meetings with the Chief Internal Auditor

The last two columns in Panel A of Table 2 report the results of regressing the same five explanatory variables on the length of meetings (measured in minutes) between the audit committee and the chief internal auditor. The overall regression is significant, and the coefficient for QUAL is positive and significant (p [less than] .05), indicating that audit committees without inside or gray directors and with at least one member having an accounting or finance background have longer meetings with the chief internal auditor.

Private Meetings with the Chief Internal Auditor

The second and third columns in Panel B of Table 2 report the results of a logistic regression, where the dependent variable is whether the chief internal auditor has private access to the audit committee, without management being present. The overall regression is significant, and the results indicate that audit committees of companies (1) listed on the NYSE, and (2) with higher leverage are more likely to provide private access to the chief internal auditor. QUAL's coefficient is positive and significant (p [less than] .05) indicating that audit committees without inside or gray directors and with at least one member having an accounting or finance background are more likely to provide private access to the chief internal auditor.

Review of Internal Auditing Proposals and Results

The fourth and fifth columns in Panel B of Table 2 report the results of a logistic regression, where the dependent variable is whether the audit committee reviews the internal auditing program and results. The overall regression is significant, and the coefficient for QUAL is positive and significant (p [less than] .05) indicating that audit committees without inside or gray directors and with at least one member having an accounting or finance background are more likely to review the internal auditing program and results.

Internal Auditing Interaction with Management

The last two columns in Panel B of Table 2 report the results from a logistic regression, where the dependent variable is whether the audit committee reviews management's interaction with internal auditing. The overall regression is significant, and the coefficient for QUAL is positive and marginally significant (p = .08) indicating that audit committees without inside or gray directors and with at least one member having accounting or finance background are more likely to review the interaction between management and internal auditing.

SUMMARY AND DISCUSSION

The Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (BRC 1999) recommends that audit committees consist solely of independent directors--without employee or gray directors--and have at least one member with accounting or finance expertise. Our results, from responses of 114 chief internal auditors of public manufacturing companies indicate that only 68 percent of the responding companies had audit committees without inside or gray directors and with at least one member with an accounting or finance background. These results provide an empirical basis for the concerns expressed by the BRC about the need to strengthen the independence and qualifications of audit committee members.

The rationale underlying the BRC recommendations about audit committee composition is that committees with independent and knowledgeable members will "have a higher degree of active oversight" (BRC Report 1999, 22) in matters of corporate governance. Our data indicate that audit committees without inside or gray directors and with at least one member having an accounting or finance background are more likely to:

* Have longer meetings with the chief internal auditor,

* Provide private access to the chief internal auditor,

* Review the internal auditing program and results, and

* Review management's interaction with internal auditing.

These results empirically support the premise of the BRC and the SEC that audit committee composition is associated with the quality of the committees' oversight activities.

Although we address some issues related to the quality of the interaction between audit committees and internal auditing, much remains to be explored. Future research should examine the nature of this relationship by delving into issues such as personality, attitude, and character brought into the relationship by the audit committee members. In addition, it is possible that communication with the external auditor may substitute for communications with the internal auditor.

Corporate audit committees also are under increased scrutiny in other countries. For example, the Toronto Stock Exchange Commission on Corporate Governance in Canada and the Cadbury and Hampel Commissions in the U.K. highlight the importance of having independent and effective audit committees. Two interesting issues for further research are (1) to examine how the composition of audit committees--without inside or gray directors--varies across countries, and (2) compare audit committee interaction with internal auditing in various countries.

(1.) Carcello and Neal (1999) find that the percentage of gray directors is (1) negatively associated with the likelihood of receiving a going-concern modified audit opinion, and (2) positively associated with the likelihood of auditor changes following the receipt of a going-concern modified audit report. Abbott and Parker (2000) did not find differences between companies with and without gray directors in terms of choosing an industry specialist as the auditor.

(2.) This study differs from Scarbrough et al. (1998) along at least three other dimensions. First, we examine U.S. companies, as opposed to Canadian companies. Second, we use a more detailed analysis of the interaction between audit committees and internal auditing, focusing more on the quality of the interaction between audit committees and internal auditing. Third, we gathered our data in the summer of 1999 while Scarbrough et al. (1998) obtained their data during 1996.

(3.) We examined proxy statements of a random sample of 10 companies and compared the data in the relevant proxy statement with the survey responses. The data from the two sources matched in nine of the ten companies; in one instance the chief internal auditor designated one member as gray, but this was not disclosed in the proxy statement.

(4.) Logistic regression is useful when the dependent variable has two possible outcomes, typically the occurrence or nonoccurrence of an event. The logistic method predicts the probability that the dependent variable is 1 or 0 based on a linear combination of the explanatory variables. The resulting coefficients are those producing a predictor variable that approaches either positive or negative infinity, indicating probability values of 1, the event occurred; or 0, the event did not occur.

(5.) There may be differences in the practices of audit committees of companies audited by the Big 5 firms as opposed to other firms. However, we did not examine this issue because only six of the companies in our sample had non-Big 5 auditors.

(6.) Vicknair et al. (1993) found that 74 percent of their sample companies had at least one gray director. The difference, in the proportion of companies with solely independent directors, between Vicknair et al. (1993) and the current study is due to at least two reasons: (1) Vicknair et al. (1993) included interlocking directors in their definition of gray directors. We followed the BRC guidelines and did not classify such directors as gray directors; (2) the data for Vicknair et al. (1993) are from the 1980s, whereas the data for the current study are from 1999.

(7.) These results also reinforce our contention that the results of Scarbrough et al. (1998) may not be directly applicable in the U.S. In their sample of Canadian manufacturing companies, Scarbrough et al. (1998) find that 71 percent of companies had only outside directors, compared with 94 percent in the current study.

(8.) Seven companies had no one on the audit committee with an accounting or finance background, while 25 companies had audit committees where all the members had such a background. Fifty-seven respondents (50 percent) noted that less than half of the audit committee members had an accounting or finance background.

We relied on the respondents to provide information about audit committee composition. SEC requirements related to disclosure about audit committee members also involve judgments on the part of company officials, and our respondents were chief internal auditors, who are senior executives in their companies.

(9.) As seen in Table 2, LNSL is not significant in any of the other regressions, suggesting that the results of Menon and Williams (1994) about an association between company size and audit committee activities may not hold if we use a more detailed analysis of audit committee activities.

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TABLE 1
Audit Committee Type and Interaction with
Internal Auditing
Panel A:
Mean Frequency and Length of Meetings with the Chief Internal Auditor
Audit Committee Type    Number of Meetings Per Year
QUAL1                               34.1
QUAL0                               3.05
t-stat. (p-value)               1.73 (.087)
Audit Committee Type  Length of Meeting (minutes)
QUAL1                            65.4
QUAL0                            48.2
t-stat. (p-value)             2.54 (.013)
Panel B:
Private Meetings with the Chief Internal Auditor
                             Audit Committee Meets in Private
                               with Chief Internal Auditor
Audit Committee Type                       Yes
QUAL1                                    62 (79%)
QUAL0                                    19 (53%)
Chi-square = 8.54, p = .003
Audit Committee Type                     No
QUAL1                                 16 (21%)
QUAL0                                 17 (47%)
Chi-square = 8.54, p = .003
Panel C:
Review of Internal Auditing Program and Results
                             Audit Committee Reviews Internal
                               Auditing Program and Results
Audit Committee Type                       Yes
QUAL1                                    40 (51%)
QUAL0                                    9 (25%)
Chi-square = 6.94, p = .008
Audit Committee Type                     No
QUAL1                                 38 (49%)
QUAL0                                 27 (75%)
Chi-square = 6.94, p = .008
Panel D:
Review of Management--Internal Auditing Interaction
                             Audit Committee Reviews Internal
                                 Auditing Inteaction with
                                        Management
Audit Committee Type                       Yes
QUAL1                                    61 (78%)
QUAL0                                    21 (58%)
Chi-square = 4.82, p = .028
Audit Committee Type                     No
QUAL1                                 17 (22%)
QUAL0                                 15 (42%)
Chi-square = 4.82, p = .028
QUAL1 = All of the audit committee
members are neither inside nor "gray"
directors and at least one member has
accounting or finance background.
QUAL0 = Failure to meet the QUAL1
definition.
TABLE 2
Director Qualifications and Audit Committee Activities
Panel A: Continuous Variables--OLS Regressions
                   Dependent Variable = FRQ
Parameter                Coefficient                 t-stat. (p-value)
Intercept                    0.62                        0.51 (.61)
LNSL                         0.19                        2.16 (.03)
EXCH                        -0.25                       -0.83 (.41)
SHOF                        -2.03                       -2.02 (.04)
LVRG                         0.08                        0.12 (.90)
QUAL                         0.30                        1.33 (.19)
           F = 3.29, p [less than] .01; [R.sup.2] =
                             .14
                  Dependent Variable = TIME
Parameter               Coefficient                t-stat. (p-value)
Intercept                    2.76                      0.07 (.95)
LNSL                         4.23                      1.43 (.23)
EXCH                       -12.58                     -1.26 (.21)
SHOF                       -18.97                     -0.55 (.58)
LVRG                        -7.15                     -0.35 (.73)
QUAL                        15.65                      2.11 (.04)
           F = 2.27, p [less than] .05; [R.sup.2]
                           = .11
Panel B: Dichotomous Variables--Logistic Regressions
                Dependent Variable = PVT
Parameter              Coefficient              Chi-sq. (p-value)
Intercept                 -5.77                     2.91 (.09)
LNSL                       0.09                     0.13 (.72)
EXCH                       1.56                     4.00 (.04)
SHOF                      -3.64                     2.02 (.16)
LVRG                       6.16                    10.89 (.00)
QUAL                       1.34                     5.69 (.02)
           Chi-sq. = 34.2, p [less than .0001;
                     c-stat. = .83 a
                Dependent Variable = REVU
Parameter              Coefficient              Chi-sq. (p-value)
Intercept                 -4.06                    2.25 (.13)
LNSL                       0.10                    0.28 (.59)
EXCH                       0.53                    0.58 (.45)
SHOF                      -3.02                    1.71 (.19)
LVRG                       2.29                    2.84 (.09)
QUAL                       1.02                    4.17 (.04)
           Chi-sq. = 14.3, p = .013; c-stat. =
                          .76 a
                   Dependent Variable IAMG
Parameter                Coefficient                Chi-sq. (p-value)
Intercept                   -3.65                      1.49 (.22)
LNSL                         0.15                      0.45 (.50)
EXCH                         0.34                      0.27 (.60)
SHOF                        -0.61                      0.07 (.79)
LVRG                         2.85                      3.56 (.06)
QUAL                         0.86                      2.97 (.08)
           Chi-sq.=10.8, p = .055; c-stat. = .68 a


(a.)We use the c-statistic to measure the classification accuracy of the logistic regression model. Higher values of this measure indicate a better classification accuracy for the model, with 1.0 indicating perfect accuracy. Details about the calculation of this statistic can be found in SAS (1983).

FRQ = number of meetings per year between audit committee and chief internal auditor;

EXCH = 1 if NYSE listed company, else 0;

IAMG = 1 if audit committee reviewed management's interaction with internal auditing, else 0;

LNSL = log of net sales, in thousands of dollars;

LVRG = leverage (total liabilities divided by total assets);

PVT = 1 if audit committee provided private access to chief internal auditor, else 0;

QUAL = 1 if all audit committee members are neither inside nor "gray" and at least one member has accounting or finance background, else 0;

REVU = 1 if audit committee reviewed internal auditing plans and results, else 0;

SHOF = proportion of shares held by officers and directors; and

TIME = average length of meeting between audit committee and chief internal auditor, in minutes.
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Author:Raghunandan, K.; Read, William J.; Rama, Dasaratha V.
Publication:Accounting Horizons
Geographic Code:1USA
Date:Jun 1, 2001
Words:5953
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