Title: Voluntary audit committee formation and agency costs

Authors: Michael Firth, Oliver M. Rui

Addresses: Department of Finance and Insurance, Lingnan University, Tuen Mun, NT, Hong Kong. ' School of Accountancy, Chinese University of Hong Kong, Shatin, NT, Hong Kong

Abstract: This paper finds that only a small proportion of listed companies in Hong Kong voluntarily establish audit committees prior to the implementation of the revised Code of Best Practice, which effectively mandated them. We show that firms with dispersed ownership, a greater proportion of outside directors, and that have a non-Big Five auditor, are associated with the voluntary adoption of audit committees. The latter result differs from other studies and it suggests that audit committees are a substitute mechanism for the employment of high quality auditors (using the Big Five as a proxy for high quality).

Keywords: agency costs; voluntary audit committee; audit quality substitution effect; Hong Kong; auditors.

DOI: 10.1504/IJAAPE.2007.015231

International Journal of Accounting, Auditing and Performance Evaluation, 2007 Vol.4 No.2, pp.142 - 160

Available online: 28 Sep 2007 *

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