Audit committee performance

Int. J. Business Governance and Ethics, Vol. 6, No. 3, 2011 225

Copyright © 2011 Inderscience Enterprises Ltd.

Improving audit committee performance in the Middle

East: do Egyptian audit profession norms support

international standards?

Jennifer Bremer*

Public Policy and Administration Department,

American University in Cairo,

AUC Avenue, New Cairo 11835, Egypt

E-mail: [email protected]

*Corresponding author

Mohamed Hegazy

Accounting Department,

AUC Avenue, New Cairo, Egypt

E-mail: [email protected]

Auday Sabri

United Nations Development Programme,

United Nations Assistance Mission for Iraq,

Baghdad, Iraq

E-mail: [email protected]

Abstract: Audit committee effectiveness is shaped by formal institutional

frameworks but mediated by audit profession norms. Through normative

isomorphism, these values may play a greater role in the Middle East, where

formal codes and enforcement lag global practice. This research examines

whether Egyptian professional norms support global audit committee standards

by surveying professional auditors’ support for amendments to the current

Code of Corporate Governance to align it with US and UK codes and

regulations. Senior audit experts strongly endorsed proposed reforms,

confirming that professional norms can supplement weak governmental

oversight to support compliance.

Keywords: audit committee; governance codes; audit standards; Egypt; Middle

East; corporate governance; professional norms; normative isomorphism.

Reference to this paper should be made as follows: Bremer, J., Hegazy, M. and

Sabri, A. (2011) ‘Improving audit committee performance in the Middle East:

do Egyptian audit profession norms support international standards?’,

Int. J. Business Governance and Ethics, Vol. 6, No. 3, pp.225–248.

Biographical notes: Jennifer Bremer is Associate Professor of Public Policy

and Chair of the Department of Public Policy and Administration at the

American University in Cairo’s School of Global Affairs and Public Policy.

Her work focuses on economic development, corporate governance and social

responsibility. She previously directed the Washington Center of the Kenan

Institute of Private Enterprise, a unit of the University of North Carolina

226 J. Bremer et al.

business school and holds a PhD (1982) and MPP (1975) from Harvard’s

Kennedy School, an MA (1976) from Stanford in Development Economics

(1976), and a BAcl (1972) from Columbia University’s Barnard College in

Political Science.

Mohamed Hegazy is Visiting Professor of Financial Accounting and Auditing

at the American University in Cairo. He is a partner at Crowe Dr. A.M. Hegazy

& Co, a member of Crowe Horwath International, a Fellow of the Egyptian

Association of Accountants and Auditors (EAAA) and the Egyptian Tax

Association (ETA), and a member of the American Accounting Association

(AAA). He co-founded and chairs the Financial Consultancies Company for

Marketable Securities, which provides valuation studies for Egyptian listed

companies. He holds a BCom from Cairo University (1982) and an MSc (1984)

and PhD (1988) from the University of Birmingham.

Auday Sabri is a certified professional Accountant practicing in Iraq. He is a

financial specialist with the United Nations Development Programme

in Baghdad. He completed his Master’s Degree in Public Policy and

Administration at the American University of Cairo in 2010, presenting a thesis

on audit committee standards that provided much of the basis for this paper.

Prior to joining AUC, he provided professional accounting services in Iraq.

1 Introduction

The increasing integration of Middle Eastern corporations into global capital markets,

both as targets for international investment and as investors themselves, raises the

importance of Corporate Governance (CG) standards in the region. While regional

standards have advanced notably in recent years, they continue to lag behind global

practice, as further discussed below. This suggests a need to reform official codes to raise

the bar and to strengthen enforcement to ensure that tighter standards translate into

improved governance performance. In achieving these advances, professional norms

and standards offer an important but overlooked tool to support reform.

The Egyptian government is working to raise governance standards in the business

sector generally and in particular for listed companies. In 2003, it established the

Egyptian Institute of Directors (EIOD) under the authority of the Minister of Investment.

The EIOD developed the Egyptian Code of Corporate Governance for private sector

companies in 2005 and issued a governance code for public (state-owned) enterprises in

2006. Review and revision of these codes is underway and in February 2011 the EIOD

issued a revised guide to corporate governance that, inter alia, introduced improved

standards for audit committee independence and operations (see below).

This paper considers the development of higher governance standards in Egypt.

Specifically, it seeks to measure whether current professional norms within Egypt’s audit

profession support higher CG standards. We argue that professional norms take on

increased importance in emerging market countries such as Egypt where regulatory and

market pressures are likely to be lower than in more mature markets.

The research presented focuses on the degree of support for improvements to the

structure and operation of the audit function and the Audit Committee (AC). Professional

standards are arguably of particular importance to achieving governance improvements

Improving audit committee performance in the Middle East 227

in this area, because the standard of governance relies heavily on the diligence of the AC

members and the auditors, which is difficult for those outside the AC to observe.

To measure the degree of support for international AC norms, the authors survey senior

audit professionals in Egypt to assess their support for a set of 53 audit function reform

measures derived from a comparison of Egyptian AC standards with US and UK

governance codes.

The analysis is presented in four sections, following this introduction. A literature

review first considers theoretical considerations that shape our understanding of observed

levels of standards compliance, presenting the conceptual framework that underpins

the remainder of the analysis. This framework emphasises the need to give greater

consideration to professional norms as an adjunct to regulatory and market-based

mechanisms to enforce global standards, or even as a substitute for such mechanisms in

emerging markets. The importance of normative isomorphism suggests a need to measure

the strength of professional norms in such environments, rather than looking only at the

codes and formal enforcement mechanisms.

Section 2 situates Middle Eastern and Egyptian corporate governance standards

within the context of global practice for CG reform processes, with particular reference to

the emergence of CG codes as a tool to drive reform globally, and considers progress in

developing and strengthening CG codes in Egypt and the Middle East more generally.

Section 3 presents the methodology used in the research reported here to fill the gap

identified in the literature with respect to assessing the strength of professional norms

favouring stronger audit committees in the Middle East. This methodology applies the

concept of normative isomorphism to measure support among senior Egyptian auditors

for the introduction of audit committee standards more closely in line with international

practice. A survey of senior audit professionals explores support for international audit

committee norms. The survey assesses the degree of consensus around 53 potential

improvements to the Egyptian standard, identified by the authors by comparing this

standard with audit committee guidance adopted in the USA (Morrow, 2008) and the UK

(Financial Reporting Council, 2008). Four hypotheses regarding the level of support for

related groups of norms are formulated based on these improvements. The results of the

survey are used to test these hypotheses.

Section 4 presents the findings of the survey to assess support for the modifications

proposed and draws conclusions for improvement of audit committee practice in Egypt,

while the final section discusses the study’s findings and conclusions.

2 The theory and practice of standard-setting for corporate audit:

application to the Middle East and Egypt

The analysis that follows relies on two theoretical foundations growing out of the broader

literature on corporate governance and standards: principle-agent theory and institutional

theory.

The development of structures, rules and procedures for corporate governance,

including those shaping the operation of the audit committee, may be considered a

response to the principal-agent problem (Fama and Jensen, 1983). Al-Lehaidan (2006)

notes in his comparison of audit committees in Saudi Arabia and Australia that:

228 J. Bremer et al.

“[Because] conflicts arise [from] the separation of ownership and management

and the inability of principals to observe the actions of the agent, [p]rincipals

and agents have economic incentives to invest in various information systems

and control mechanisms to reduce agency costs associated with information

asymmetry.” (Al-Lehaidan, 2006)

In this context, the audit committee may be considered an investment in both better

information and tighter control to overcome the principal-agent problem. Standard audit

committee rules that specify a membership drawn from independent board members and

that assign to them the responsibility for oversight over financial report accuracy and

reliability reduce the scope for principal-agent failures.

Institutional theory explores the source of pressures on institutions such as the audit

committee that push participants to adhere to the rules established. DiMaggio and

Powell’s (1983) classic institutional theory paper identifies three such sources of pressure

leading to adoption of standard institutional forms, roles, and mechanisms (‘institutional

isomorphism’): coercive, mimetic, and normative. DiMaggio and Powell describe

normative pressures as being particularly identified with professionalisation

and the development of professional standards, including accounting standards.

More recently, the role of social norms in achieving widespread compliance has

received increased attention. Feldman and Harel’s 2008 experimental study found that,

“… when the law is ambiguous (standard-like legal norm) and the social norm

dictates noncompliance, legal noncompliance behaviour is higher than when

information concerning the social norm is absent.” (Feldman and Harel, 2008)

Sunder (2005) has argued for greater reliance on social norms rather than on ever-tighter

formal standards as a strategy to improve accounting compliance. He concludes his

analysis by asking rhetorically,

“Can authority without social norms bring a semblance of order to the chaos to

financial reporting? After seven decades of incessant effort, the answer stares

us in the face.” (Sunder, 2005)

The present analysis examines the strength of these normative pressures in the Egyptian

accounting profession. The application of these theories to the development of the audit

committee in Egypt is incorporated into the conceptual framework shown in Figure 1.

In this model, corporate governance standards in a given national environment are

set through the interaction of national and international standards and codes. These in

turn affect corporate compliance with the code through three governance drivers: external

pressure from the market, government enforcement, and professional norms within

the environment of the corporation and its accountants, whether internal or external

(the dark lozenge). The resulting level of compliance with governance standards leads to

governance outputs in the form of better governance and enhanced corporate

performance and accountability. Within the corporate environment, the normative

standards of the accounting profession interact with those of the corporations themselves

and, on a more general level, with the mimetic and coercive standards of the capital

market and those imposed by the legal environment within which the firms operate.

This interaction shapes the level of compliance with governance norms, which in turn

influences governance outcomes and firm performance.

Improving audit committee performance in the Middle East 229

Figure 1 Theoretical model of relationships among accounting profession support for corporate

governance code, other governance drivers, and governance outcomes (see online

version for colours)

Source: Authors’ analysis

Professional norms influence compliance with governance standards both within

the firm, through the actions of professionals involved in the audit function at all levels,

and through interaction between the firm and external auditors. The research reported

here focuses on the strength of the professional norms in the accounting profession

(the lighter grey rectangle), an area that has received considerably less attention than have

market pressures and government enforcement actions.

It must be noted that, although the concept of ‘professional norm’ is widely used,

specific definitions of the concept in the literature are vague. In particular, scholars have

not clarified the strength or uniformity of agreement around a given behaviour or set of

behaviours norm within a given profession that would be considered the minimum level

to classify that behaviour as a norm. For example, Sunder (2005) defines the norms of

a social group as “the common knowledge expectation of its members about how others

behave in various circumstances”, but does not clarify what percentage must hold this

view or how strongly they must hold it to meet the definition.

In this analysis, we will define a given standard as a professional norm when the

average level of agreement among senior professionals is at least ‘agree’ on a five-point

Likert scale (from disagree strongly to agree strongly). This definition recognises the role

that senior accounting professionals play in setting the standards for professional

performance for the audit function, whether those adopted by senior professionals

themselves, by more junior professionals, or by non-accountants serving on the AC or in

other roles related to the audit function and corporate governance more generally.

230 J. Bremer et al.

Based on the factors underlying AC effectiveness identified by Al-Lehaidan (2006),

we argue that professional norms for AC structure and operation must encompass six

areas: AC composition, AC authority, AC resources, the competence of AC members,

their diligence, and their independence. The remainder of this paper explores whether the

norms and standards of the audit profession in the Middle East and in Egypt specifically

reflect these principles.

3 Audit committee practice in the Middle East: recent developments and

progress toward global standards for AC structure and operation

In developed and emerging markets alike, adoption of mandatory or voluntary codes and

standards has become an established element within the overall effort to promote good

corporate governance. The website of the European Corporate Governance Institute

(ECGI) lists 270 governance code documents from 76 countries (ECGI website and

author’s calculations). The earliest code document indexed by the ECGI is the 1992

Cadbury Report from the UK, followed shortly by the 1994 King Report from

South Africa. As of mid-2010, nine new country-specific documents were shown for

the year, originating in locations as diverse as Ireland, Colombia and Yemen.

The evolution of codes indexed by the ECGI clearly shows increasing engagement of

developing country organisations in developing codes, even relative to the rising global

volume of code publication overall. Only 8% of the developing country codes indexed

was produced prior to 2000, compared to 20% of codes from industrialised countries.

Codes from developing countries accounted for only 16% of all codes issued prior to

2000, compared to 36% in the more recent period (ECGI website and author’s

calculations).

The increasing focus on codifying corporate governance standards reflects the

widespread belief that investors pay close attention to governance standards when

comparing companies or countries as targets for their investment. The index of codes

maintained by the European Corporate Governance Institute, cited above, provides

evidence that the Middle East and North Africa (MENA) region lags in developing

corporate governance codes to respond to this investor preference.

The authors’ analysis of this index indicates that Egypt’s code, the first issued in

MENA, did not appear until 2006, fully a dozen years after South Africa’s first King

report. The MENA-wide average for the number of standards listed (including revisions

to previously issued codes) is the lowest of any region at 1.1 per country, compared to the

average of 3.6 for all 76 countries included in the index.

MENA countries such as Egypt and the UAE have moved toward acceptance of

corporate governance, motivated in part by a desire to attract more foreign portfolio

investments. A recent Hawkamah publication notes that “investors would be willing to

pay a premium of from 15% to 30% to obtain stakes in well-governed companies in the

region” and estimates such a response would translate into $200–300 billion in increased

investment (Smith, 2009).

A draft OECD assessment of corporate governance in 10 MENA countries, based on

a survey completed by investment officials, found that audit committee requirements

range quite widely across the region (OECD, undated draft). Table 1 presents the findings

from this survey with regard to audit committees.

Improving audit committee performance in the Middle East 231

Table 1 Comparison of audit committee framework in selected Middle Eastern countries

232 J. Bremer et al.

Corporate governance standards and practice in the Middle East are progressing, but still

lag behind global standards. This situation casts doubt on the strength of the norms

favouring strong corporate governance in the region, given the presence of formal codes

and enforcement mechanisms.

A 2009 report by the Gulf Cooperation Council Board of Directors Institute

(GCCBDI) cites the “low levels of information disclosure” in the region, for example,

and notes that:

“For example, only 27% of the companies reviewed disclosed the number of

board meetings they held per year. Yet in a similar study, 100% of European

and US companies disclosed this data.” (GCC Board Directors Institute, 2009)

With regard to the regional practice on the audit committee specifically, the GCCBDI

study found that:

“Audit, remuneration and nomination committees are less common on GCC

boards. BDI’s research, which was focused on publicly-traded companies,

found that fewer than 50% of boards in the region have a separate audit

committee …” (GCC Board Directors Institute, 2009)

Their research showed that only 47% of the boards of 100 listed companies surveyed had

an audit committee, compared to a European company rate of 98% (GCC Board

Directors Institute, 2009).

It should be noted that recent research by one of the authors into audit committee

standards compliance, while finding a near-identical rate for the presence of audit

committees among UK listed firms (97%), nonetheless found much lower rates of

compliance for other practices widely accepted as desirable. For example, only 45% of

firms reported that the board conducted an annual review of the audit committee and only

16% reported whether the audit also provided non-audit services (Hegazy and Hegazy,

2010).

Turning to the case of Egypt, we find that formal codes are a relatively

recent development, but have progressed rapidly (see Arab Republic of Egypt, Ministry

of Investment, Capital Market Authority, 2002, 2006; Arab Republic of Egypt,

Ministry of Investment, Egyptian Financial Supervisory Authority, 2008; Arab Republic

of Egypt, Ministry of Investment, Egyptian Institute of Directors, 2006, 2007, 2011;

McKinsey & Company, 2001).

The country’s first corporate governance code was drafted by the EIOD only in 2005.

The EIOD is a government body formed to promote corporate governance improvement

through training, research, and public education, as well as through code issuance. Like

the UAE-based Hawkamah Institute referenced above, it was formed in the early 2000s

to support the work of capital market regulatory bodies and of the stock exchanges in

promoting better corporate governance.

The EIOD’s initiative built on capital market regulations issued in 2002 by the

Egyptian Capital Markets Authority (now incorporated within the Egyptian Financial

Supervisory Authority). Decree 30 of 2002 required all listed companies to publish

financial statements in two widely circulated newspapers and to establish an audit

committee (Arab Republic of Egypt, Ministry of Investment, Capital Markets Authority,

2002; see also UNCTAD, 2008).

Despite the progress made in issuing regulations and guidance, compliance with

global standards remains limited, even among listed companies. This weakness is

demonstrated by earlier findings (Bremer and Elias, 2007) that independent board

Improving audit committee performance in the Middle East 233

members were quite rare in Egypt as recently as 2007. Fawzy (2003) confirms this

finding, noting that:

“In most companies, there is no actual separation between the board of

directors and the executive management… The board of directors does not

include independent members…” (Fawzy, 2003)

Similarly, in a 2006 study by the Egyptian Banking Institute, 8% of banks surveyed

reported that the external auditor does not provide a written comment on the adequacy of

the bank’s internal controls, while a quarter indicated that they do not require rotation of

external auditors according to fixed terms (Arab Republic of Egypt, Central Bank,

Egyptian Banking Institute, 2006). Dahawy and Samaha (2009) also found that disclosure

levels are low among listed companies in Egypt. The government has continued to seek

international assistance to strengthen standards compliance in the banking sector (Arab

Republic of Egypt, Central Bank, 2010).

Recent actions by regulators underscore the growing recognition of both the value of

standards compliance and the need for further progress in this regard. In the former area,

UNCTAD’s 2008 report, cited above, notes that, “[t]he Capital Market Authority (CMA)

is fully committed to bring the Egyptian capital market in line with international

standards …” (UNCTAD, 2008).

In the latter area, to cite one example of such efforts to narrow the gap with

international standards, the Egyptian Financial Supervisory Authority, EFSA, found it

necessary to reaffirm the audit committee requirement in 2008, six years after it was

initially included in the listing requirements, and to begin imposing fines on firms that

had still not complied by the first quarter of 2009 (Arab Republic of Egypt, Ministry of

Investment, Egyptian Financial Supervisory Authority, 2008).

With regard to the audit committee’s structure and operations, the authors’ review of

the Egyptian AC code finds that the formal guidance, embodied in the CMA 2006

corporate governance guidance document discussed above, offers only a brief treatment

of audit committee formation and operations, roughly a page. Egypt thus does not have

detailed regulations comparable to those in the USA or UK, which underscores the value

of developing thorough and precise guidelines for audit committees and of determining

whether professional norms reinforce effective AC operation.

The section of the Egyptian Corporate Governance Code referring to the AC specifies

several requirements for the establishment and operation of the AC, including the

following:

• The AC should be comprised of a minimum of three non-executive board members,

with the option of hiring members from outside of the company, should sufficient

non-executive members not be available. At least one member should be a financial

expert.

• The General Assembly should issue, upon a recommendation from the board,

a manual for hiring AC members and determine their term, responsibilities

and remuneration.

• The management should provide the AC with all available resources and help to

conduct its responsibilities including appointment of external advisors and counsels.

234 J. Bremer et al.

The code further specifies that the AC should meet at least every three months with a

specific agenda and prepare a report on its activities every three months for the board

(Arab Republic of Egypt, Ministry of Investment, Capital Market Authority, 2006).

While formal requirements have remained limited, government agencies working in

corporate governance such as the EIOD have nonetheless worked to give companies

more specific guidance on audit committee operations, among other governance matters.

The EIOD produced a more comprehensive audit committee guidance manual (Arab

Republic of Egypt, Ministry of Investment, Egyptian Institute of Directors, 2007) and in

February 2011 issued new corporate governance guidance addressing audit among other

topics (Arab Republic of Egypt, Ministry of Investment, Egyptian Institute of Directors,

2011), but neither document has regulatory force. Nonetheless, these developments

demonstrate government commitment to bring the standard of performance in line with

US practice. This latest guidance introduces a number of improvements to audit code

guidance, recommending inter alia that:

• The AC chair should be an independent BD member and that the majority of AC

members be independent, whereas independence was not mentioned at all in the

previous code; only a requirement that members should preferably be non-executives

was included.

• The AC should assess the ‘effectiveness’ rather than only the ‘competence’ of its

members.

• The AC should follow up on any comments made by the external auditor to

determine what actions were taken, rather than only reviewing such comments.

• The chair of the AC should prepare a separate report on the committee’s activities

for the AGM.

These further steps offer additional evidence of official support for strengthening audit

committee practice in the directions suggested by the authors, but it does not shed light

on the critical question of support for these changes among audit professionals.

4 Study methodology: measuring auditor support for improvements

to the Egyptian code

The literature review identified a gap with respect to measuring the strength of

professional norms, the drivers of normative isomorphism. Previous work has focussed

on the development of codes and on formal enforcement, but has not addressed the

professional norms as a source of support for better corporate governance. In an

environment such as that prevailing in Egypt and many other emerging markets, where

coercive (regulatory) and mimetic (market-based) pressures may not be sufficient to

ensure standards compliance, normative (professional) standards may take on increased

importance as determinants of governance outcomes. It is therefore useful to explore the

strength of these pressures as they apply in such a market by assessing the attitudes

of the senior members of the accounting profession, key opinion leaders for norm-setting.

The research reported here seeks to fill this gap by examining the strength of support

within the Egyptian accounting profession for provisions present in the international

standards that govern the audit committee’s operations but are absent or incomplete in the

Improving audit committee performance in the Middle East 235

Egyptian guidance. To test whether potential improvements to the Egyptian CG code on

AC structure and operations would be supported by prevailing auditor norms in Egypt,

the researchers first developed a set of 53 specific proposals for modifying the current

code language, based on a comparison of two major US and UK standards, used as

a proxy for global standards. The researchers then surveyed leading members of Egypt’s

audit profession to assess whether there is a consensus of support for each of these steps

towards global standards and for groups of related, mutually supportive proposals.

To develop the list of potential improvements, the authors compared the 2006

Egyptian guidance to two global standards: the audit committee language in the UK

Financial Reporting Council (FRC, 2008; see also FRC 2003, 2005 for comparison) and

the US AICPA Audit Committee Toolkit for public companies (Morrow, 2008).

The selection of the US and UK standards as the comparator reflects the broad

recognition of the US and UK standards for corporate governance, as noted by

Sunder, who argues that,

“The practices proposed for universal use are those prevalent in the

English-speaking countries, especially USA and UK. Such ethnocentricity

would be rejected in most other fields of social sciences but it has remained

largely unchallenged in financial reporting.” (Sunder, 2005)

It should be noted that the US and UK audit committee guidance documents differ

in some respects, indicating that the evolution of global norms is not yet complete.

For example, most of the topics within the first category, Establishment and Role, are

very detailed in the UK AC Code while the US toolkit and the Egyptian Code give these

areas only a brief treatment. Table 2 compares the treatment of the AC topics in each of

these documents. A more granular comparison of the US and UK guidance could be

useful for countries considering new or revised AC guidance and is suggested as a topic

for future research.

The 53 proposals are organised into 11 topics, addressing AC establishment,

resources, member skills, financial reporting, internal control, whistle-blowing, internal

audit function, AC-board relations, communication with shareholders, external audit

function, and the annual audit cycle.

These 11 topics are further collected to form four groups (A–D) based on their

mutually reinforcing relationships. Table 3 presents these topics and groups and relates

them to the six criteria identified by Al-Lehaidan (2006) as the elements of audit

committee effectiveness.

The 53 proposals are summarised in Table 4. Annex 1 provides further detail on the

proposals reviewed by the audit professionals. For reasons of space, the proposals are

presented in summary form in Annex; the full text may be obtained on request from the

authors in English or Arabic.

Based on the above analysis, a set of four hypotheses were formulated regarding the

strength of support for the norms embodied in the proposals stated:

H1: Senior audit professionals in Egypt support higher standards for the

establishment and role of the audit committee.

H2: Senior audit professionals in Egypt support higher standards for the essential

control functions.

236 J. Bremer et al.

H3: Senior audit professionals in Egypt support higher standards for communication

with the board and shareholders.

H4: Senior audit professionals in Egypt support higher standards for the external

audit and annual audit cycle.

Table 2 Comparison of UK, US, and Egyptian audit committee standards (see explanation of

coding used for ratings below)

Category and topic UK USA Egypt

1 Establishment and role

Establishment Very detailed Brief Brief

Appointment Very detailed Brief Brief

Meetings of AC Very detailed Very detailed Brief

2 Resources

AC resources Detailed Detailed N/A

Adviser/counsel Brief Very detailed Brief

Remuneration Very detailed N/A N/A

3 Skills and experience

AC financial expert Brief Very detailed Brief

Experience and training Very detailed Very detailed N/A

4 AC relation with board of directors Very detailed Detailed N/A

5 Financial reporting Very detailed Very detailed Detailed

6 Internal control (fraud)

Internal control Very detailed Very detailed Brief

Fraud N/A Very detailed N/A

7 Whistle-blowing Brief Very detailed N/A

8 Internal audit function

Internal audit process Detailed Detailed Detailed

Evaluation Detailed Very detailed Brief

9 External audit

Appointment Very detailed Detailed Brief

Independence Very detailed Detailed Detailed

Non-audit services Very detailed Brief Detailed

10 Annual audit cycle Very detailed Very detailed Brief

11 Communication with shareholders Very detailed Brief N/A

Explanation of coding:

‘Brief’ means that the subject was mentioned but not discussed. A rating of ‘very

detailed’ or ‘detailed’ was assigned by the authors based on the length of and

comprehensiveness of each subject in the reference documents.

Source: Financial Reporting Council (2008), Morrow (2008),

and authors’ analysis

Improving audit committee performance in the Middle East 237

To test these hypotheses, a questionnaire was developed and administered to a sample of

experienced Egyptian audit professionals. The authors used purposive and snowball

sampling techniques. Selection of experienced auditors relied in the first instance on the

authors’ knowledge of individuals’ experience as auditors and/or audit committee

membership to ensure that the sample would include senior audit profession members

most likely to serve as opinion leaders in the setting of professional norms. To ensure

a sufficient sample, members of this group were also asked to identify other senior

auditors in whom they had confidence.

Approximately 90% of the sample consisted of audit professionals in Egyptian

accounting firms, of whom all responded to the sample. About 10% of the sample

consisted of audit professionals serving on corporate boards. The non-response rate in

this smaller group was somewhat higher, but still within acceptable bounds. A specific

response rate cannot be calculated because snowball sampling was used within some

of the larger firms.

Survey participants were asked to state their agreement with each proposal on a

1–5 Likert scale (from disagree strongly to agree strongly) in order to assess whether

support for the improved provisions is consistent with normative isomorphism.

To encourage a high level of response, the survey was made available in both an Arabic

(paper-based) and an English version (administered online, using an online survey tool).

In all, 54 professionals completed the full survey. A small number of incomplete

surveys were discarded. The professional panel’s responses were then analysed to assess

the level of support for each recommendation and to determine the strength of support for

related sets of proposed improvements.

Table 3 Summary of proposals examined

Group A: Establishment and role Group C: Communication with board/shareholders

Topic 1 Establishment Topic 4 AC relations with the board of directors

1.1 AC appointment method 4.1 AC chair reporting to BD

1.2 AC term limitation 4.2 AC terms of reference

1.3 No more than 3 boards/AC member 4.3 Solve AC-BD variance

1.4 Conflict of interest disclosure 4.4 AC written charter

1.5 Timing of AC-BD meetings Topic

11

Communications with shareholders

1.6 AC meeting documentation 11.1 AR disclose AC compliance

Topic 2 Resources 11.2 AC terms, information in AR

2.1 AC resources adequate 11.3 AC chair at AGM

2.2 AC independent advisors 11.4 AR include disagreements, CPA-issues

2.3 AC salary level reflects duties Group D: External audit management

Topic 3 Skills Topic 9 External audit function

3.1 AC financial expert qualified 9.1 AC oversees CPA

3.2 AC member training 9.2 Investigation of CPA resignation

3.3 AC financial literacy 9.3 AC report to AGM on CPA

238 J. Bremer et al.

Table 3 Summary of proposals examined (continued)

Group B: Essential control functions 9.4 AC-CPA pre-audit engagement letter review

Topic 5 Financial reporting 9.5 AC evaluate CPA qualifications and fee

5.1 AC review financial statements first 9.6 AC review CPA quality control annually

5.2 Report any issues on financials to BD 9.7 AC confirm CPA rotation

Topic 6 Internal control 9.8 AC review ex-CPA employee hiring

6.1 AC confirm internal controls in annual

report

9.9 AC review non-audit services

6.2 AC review control systems, risk 9.10 Certain non-audit services by CPA

prohibited

6.3 Deter management override Topic 10 Annual audit cycle

6.4 Response to fraud reports 10.1 AC review CPA workplan against scope

Topic 7 Whistle-blowing 10.2 AC review CPA plan with CFO, CAE

7.1 Whistle-blowing response 10.3 CPA to give opinion on accounting quality

7.2 Broad access to AC for whistle-blowing 10.4 AC-CPA-mt. meet quarterly on financials

7.3 AC investigations recommend action 10.5 AC review CPA representation letter

Topic 8 Internal audit function 10.6 AC assess audit cycle annually

8.1 Internal audit reports to AC 10.7 AC resolve CPA-management

disagreements

8.2 Internal audit resources adequate

8.3 AC review IAF budget, plans

8.4 AC assure adequate IAF resources

8.5 IAF resources preserved from cuts

8.6 5-yr. review of IAF, AC-execs-CPA

annually

8.7 AC ensure internal audit access to chair

Abbreviations used:

AC: Audit Committee; AR: Annual Report; BD: Board of Directors; CAE: Central

Audit Executive; CFO: Chief Financial Officer; CPA: Certified Public Accountant;

IAF: Internal Audit Function.

Source: Authors’ analysis

Table 4 Summary of proposals for which support was measured

AC effectiveness components

(After Al-Lehaidan) Group and number of norms Topics

Composition and

independence

Group A: establishment and role of

the AC

1 AC establishment

Resources (12 proposals) 2 AC resources

Competence 3 AC skills

Authority Group B: essential control

functions

5 Financial reporting

Authority (16 proposals) 6 Internal control

Improving audit committee performance in the Middle East 239

Table 4 Summary of proposals for which support was measured (continued)

AC effectiveness components

(After Al-Lehaidan) Group and number of norms Topics

Authority 7 Whistle-blowing

Authority 8 Internal audit function

Diligence Group C: communication with

board and shareholders

4 AC-board relations

Diligence (8 proposals) 11 Communication with

shareholders

Diligence Group D: external audit

management

9 External audit function

Diligence (17 proposals) 10 Annual audit cycle

Source: Al-Lehaidan (2006) and authors’ analysis

5 Findings from the survey of audit professionals

Six tests of the survey results were used to test the four hypotheses stated above. Three

tests assessed the degree of support for the 53 proposals individually and three additional

tests measured whether the proposals constituted constructs at the group and topic

levels. First, the average level of support for each proposal and topic was assessed, with

a proposal considered to be supported if it received an average Likert score of four

(agree) or above. It should be noted that, although Likert scales are generally considered

to be ordinal rather than interval measures, it is common to report the average score,

particularly in a comparative context.

Second, the breadth of consensus was measured by the proportion answering agree

or strongly agree, with a minimum proportion of 75% set as the cutoff for support. Third,

the degree of opposition was assessed by examining the level disagreeing, with a

maximum proportion of 15% set as the standard. It should be noted that the cutoff of 4 is

more conservative than the alternative practice used by some authors of setting a cutoff

for ‘agree’ at 3.4, based on dividing the range of 1–5 into five equal segments. While the

authors were not able to find standards for agreement or disagreement, both the levels

chosen and the use of a disagreement standard to supplement the agreement measure may

be regarded as conservative, compared to a standard of majority or even two-thirds

agreement.

Fourth, at the topic and group level, Spearman correlations were calculated to assess

the degree to which support for one set of proposals in the group was related to support

for the other related topics. Spearman correlations were used rather than the more

common Pearson correlations because Likert variables are ordinal rather than measured.

Finally, the reliability and validity of the measured support for each of the topics was

assessed using Cronbach’s Alpha tests. The reliability test measures the consistency of

answers to individual questions and groups of proposals across the respondent

population, whereas the validity test measures whether the data supports a conclusion that

all of the proposals within a given group are part of a single theoretical construct.

Table 5 provides the results for the test of the 53 individual proposals and 11 topics,

using the first three tests above. A proposal was judged to be supported if it passed at

least two of the tests.

240 J. Bremer et al.

These results show support by the audit professionals surveyed for 45 of the 53

proposals considered. Eight proposals, indicated by shading in Table 5, failed to reach at

least two of the standards set for consensus.

Seventeen proposals won strong support from the senior auditors surveyed, with more

than 90% of respondents indicating agreement. Support was particularly strong in

Group C, communication with the board and shareholders, with seven out of 16 proposals

receiving support from more than 90% of those surveyed.

All 11 topics passed the three tests for consensus support, with average Likert scores

of at least ‘agree’, with more than 75% signalling agreement, and no more than 15%

indicating disagreement. Consequently, all four groups also passed the three tests used

at this level.

Table 5 Level of support for proposals reflecting international standards

Topic/proposal Avg.

%

Agree

%

Disagree Topic/proposal Avg.

%

Agree

%

Disagree

A Establishment and role C Communication with board/shareholders

1 Establishment 4.2 0.84 0.09 4 AC-BD relations 4.2 0.86 0.07

1.1 4.0 0.85 0.11 4.1 4.4 0.94 0.06

1.2 3.9 0.72 0.19 4.2 4.1 0.80 0.13

1.3 3.9 0.72 0.19 4.3 4.2 0.89 0.06

1.4 4.5 0.93 0.02 4.4 4.2 0.81 0.06

1.5 4.4 0.98 0.02 11 Communication 4.4 0.81 0.10

1.6 4.2 0.83 0.04 11.1 4.3 0.87 0.04

2 Resources 4.1 0.78 0.12 11.2 4.3 0.89 0.04

2.1 4.5 0.89 0.02 11.3 4.6 0.94 0.02

2.2 4.1 0.80 0.11 11.4 4.3 0.85 0.04

2.3 3.6 0.65 0.24

3 Skills 4.3 0.92 0.06 D External audit management

3.1 4.4 0.96 0.04 9 External audit 4.0 0.79 0.10

3.2 4.3 0.94 0.02 9.1 3.3 0.56 0.37

3.3 4.1 0.87 0.11 9.2 4.3 0.91 0.04

9.3 3.9 0.72 0.09

B Essential control functions 9.4 3.5 0.54 0.17

5 Fin. Reporting 4.5 0.95 0.01 9.5 4.2 0.91 0.04

5.1 4.5 0.94 0.02 9.6 4.2 0.89 0.06

5.2 4.4 0.96 0.00 9.7 4.3 0.83 0.02

6 Internal control 4.4 0.89 0.03 9.8 3.9 0.80 0.07

6.1 4.5 0.94 0.02 9.9 4.1 0.81 0.07

6.2 4.5 0.96 0.02 9.10 4.2 0.89 0.09

6.3 4.4 0.85 0.02 10 Annual audit 4.1 0.84 0.10

6.4 4.1 0.81 0.06 10.1 4.1 0.87 0.13

Improving audit committee performance in the Middle East 241

Table 5 Level of support for proposals reflecting international standards (continued)

Topic/proposal Avg.

%

Agree

%

Disagree Topic/proposal Avg.

%

Agree

%

Disagree

B Essential control functions D External audit management

7 Whistle-blowing 4.2 0.84 0.04 10.2 4.2 0.83 0.07

7.1 4.2 0.87 0.04 10.3 3.6 0.67 0.24

7.2 4.2 0.81 0.07 10.4 4.4 0.94 0.00

7.3 4.2 0.83 0.00 10.5 4.2 0.87 0.06

8 Internal audit 4.3 0.89 0.04 10.6 3.9 0.78 0.15

8.1 4.3 0.85 0.09 10.7 4.4 0.91 0.02

8.2 4.2 0.83 0.04

8.3 4.4 0.93 0.06

8.4 4.4 0.94 0.02

8.5 4.3 0.89 0.02

8.6 4.3 0.87 0.02

8.7 4.3 0.91 0.04

See Table 3 above for clarification of each proposal. A five-point Likert scale from 1

(strongly disagree) to 5 (strongly agree) was used for all questions. Shading indicates

proposals that demonstrate the least support.

Source: Survey data and authors’ calculations

Turning to the two additional tests used to assess consensus at the topic and group levels,

we find that the correlation analysis supported a conclusion that the proposals constitute a

construct in three of the four groups, but did not support this conclusion for the first

group, establishment and role. In particular, as shown in Table 6, responses to the skills

and establishment topics were strongly correlated with each other, but neither was

strongly correlated with the responses to the resources proposals.

The final test, Cronbach’s alpha, measures, first, whether individuals’ answers are

consistent within each group (reliability) and, second, whether the answers are consistent

with a conclusion that the questions themselves make up a theoretical construct (validity).

A widely-used rule of thumb for the Cronbach’s Alpha reliability test is 0.70 or higher for

a substantial sample, although social science data may be held to a lower threshold of

0.60 (http://www.experiment-resources.com/cronbachs-alpha.html, 2010). A threshold of

0.83 or higher is set for the measure of validity with a lower threshold of 0.80 deemed

acceptable for social science testing.

Again, nearly all of the topics passed these tests, although the support for proposals to

provide more adequate resources to the AC and for improved financial reporting was

comparatively low. Nine of the 11 groups were also supported by the Cronbach’s alpha

tests, as shown in Table 7, but two groups, resources and financial planning, failed to

meet the standard set for either reliability (0.6) or validity (0.8).

Considering all of the above results, we find that most of the individual proposals

have consensus support from the senior ranks of the audit profession, but that the level of

support for the four hypotheses stated above differs among the four groups. Each will be

considered in turn.

242 J. Bremer et al.

Table 6 Spearman correlations of average response within groups

Group/topic Category

Group A: Establishment and role 1 2

1 Establishment 1

2 Resources 0.218 1

3 Skills 0.377* 0.087

Group B: Essential control functions 5 6 7

5 Financial reporting 1

6 Internal control 0.515* 1

7 Whistle-blowing 0.579* 0.558* 1

8 Internal audit function 0.478* 0.664* 0.662*

Group C: Communications with board and shareholders 4

4 AC relation with board 1

11 Communication with shareholders 0.655*

Group D: External and annual audit 9

9 External audit 1

10 Annual audit cycle 0.431*

*Indicates significance at the 0.01 level.

Source: Survey data and authors’ calculations

Table 7 Estimated reliability and validity for question groups (Cronbach’s Alpha)

Categories of norms Reliability Validity

1 Establishment (Group A) 0.674 0.821

2 Resources (Group A) 0.424 0.651

3 Skills (Group A) 0.701 0.838

4 AC relation with BD (Group C) 0.649 0.806

5 Financial reporting (Group B) 0.558 0.747

6 Internal control (Group B) 0.681 0.825

7 Whistle-blowing (Group B) 0.798 0.894

8 Internal audit function (Group B) 0.835 0.914

9 External audit (Group D) 0.681 0.826

10 Annual audit cycle (Group D) 0.728 0.853

11 Communication with shareholders (Group C) 0.748 0.865

Source: Survey data and authors’ calculations. Shading indicates levels

below the cutoffs set for reliability and validity

With regard to the establishment and role of the AC (Group A), three of the proposals

failed to attract consensus support, as defined here, while support for proposals to provide

adequate resources was weakly connected to other areas within the group. Thus

hypothesis H1, that there is a consensus around Group A proposals, is not supported.

The proposals related to essential control functions, Group B, were all supported and

the correlation analysis showed that there are strong connections among the different

Improving audit committee performance in the Middle East 243

proposals, although one of the four topics failed the Cronbach’s alpha test for validity and

reliability. Overall, this hypothesis, H1, is supported, but there is indication of a need to

build a stronger consensus around the provision for adequate review of financial

reporting.

Hypothesis H3, that there is consensus support for better communications with the

board and shareholders (Group C), is the most strongly supported of the four proposals.

This hypothesis passed all five tests at the level of individual proposals, related topics,

and the group considered as a whole, and is therefore supported by the research findings.

This is an encouraging sign for better governance in the critical area of stakeholder

communications.

Hypothesis H4, regarding support for external audit management (Group D), received

intermediate support. Five individual proposals among the 17 analysed fell short of

consensus support, but Group D nonetheless passed both tests at the group level,

indicating that the proposals are closely related to each other in the view of the audit

professionals surveyed. This finding suggests a need to build support for the specific

proposals where consensus is weakest, which generally govern the relationship between

the AC and the CPA firm.

Overall, the high level of agreement for the 53 proposals advanced offers important

confirmation that the auditing profession is prepared to support a tightening of standards

for audit committees in Egypt. This support is critical to achieving higher standards in

the absence of either activist shareholders or effective regulatory enforcement. Audit

committee support takes on additional importance, given the provision in Egyptian

governance regulation for non-board members to sit on audit committees in the event that

sufficient independent board members with financial expertise are not available.

6 Conclusions

The findings of this analysis, taken as a whole, demonstrate that the norms of the audit

profession are consistent with improvements to the audit committee standards in Egypt.

At the same time, they also indicate a number of areas where further consensus-building

is needed to establish strong normative support for higher standards of AC operations.

The survey findings confirm that many knowledgeable participants in corporate

governance in Egypt would favour updating and clarifying the current corporate

governance code in Egypt as it applies to the audit committee. This provides

encouragement to the ongoing efforts of the Government of Egypt to strengthen

governance and in particular to improve transparency, accountability and disclosure of

the performance of listed firms.

The analysis indicates two areas where the evidence for professional norms is

comparatively weak, however, and therefore may merit increased attention to building

consensus around global norms for audit committee operations. First, audit professionals

are relatively less convinced that audit committees need greater and more assured access

to financial resources to do their job. This may suggest a lack of consensus on the level of

effort constituting adequate diligence on the part of the committee, although this deserves

further exploration.

Second, the need for active oversight of the external audit group emerges as an area

where professional norms do not appear to be as strong as in other areas. Three of the

proposed standards in this area fell short of the ‘agree’ cutoff, although the remaining

244 J. Bremer et al.

14 standards were supported. This finding argues for greater consensus-building around

the value of professional oversight, even where the auditors on the receiving end of the

oversight are judged to be experienced and trustworthy.

The survey findings provide confirming evidence for the existence of strong

professional norms among audit opinion leaders in Egypt. Further research is needed to

determine whether these norms are also widely held by board members and others having

oversight on corporate governance, such as regulators. It would also be of value to

determine whether senior auditors, in addition to holding these norms themselves, believe

that these norms are held by their peers.

This evidence offers encouragement for continued improvement in the standards of

audit committee operations and for corporate governance overall in Egypt. As argued

above, the support of the audit professionals for reform proposals may be nearly as

important as the regulatory framework itself in an environment of weak or irregular

enforcement such as that found in many emerging markets, including Egypt. In such

environments, where activist shareholder groups are also absent, the ability to rely on

the ‘soft enforcement’ pressure generated by professional norms arguably reinforces

compliance and leads to better governance.

More effective audit committees have the potential to bring Egypt’s listed companies

greater stability and resistance to economic shocks. At a time when the global economic

crisis is far from over and when Egypt’s companies confront louder calls from the public

for transparency and accountability, stronger audit committees and corporate governance

that complies with global standards must be seen as valuable assets for the development

of emerging markets such as Egypt.

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Annex 1: Summary of proposals presented for audit professional’s review

This annex presents the 53 proposals for which audit professional support was assessed.

As noted above, these proposals are organised into 11 topics (1–11) and the topics are

further aggregated into four groups (A–D), each bringing together proposals in 2–4

related topics. Group A is made up of topics 1–3, Group B consists of topics 5–8,

Group C comprises topics 4 and 11, and Group D covers topics 9 and 10.

Group A: Establishment and role of the AC

Topic 1: AC establishment. AC members should be appointed by the BD on the

recommendation of the nomination committee in consultation with the AC chairman.

If any AC member serves in more than three listed companies, the BD should determine

whether this situation will impair the ability of such AC member. Each AC member

should disclose any potential conflict of interest in advance. There should be sufficient

time between AC and BD meetings to allow actions to be carried out. AC meeting

discussions should be documented and circulated to internal and external auditors as

appropriate.

Topic 2: Allocating financial resources to the AC. This topic included questions on the

following changes: supplying the AC with adequate resources to undertake its duties;

hiring independent counsel and other advisers to help the AC as necessary; and providing

a salary to AC members that takes into account the extra responsibilities, skills, duties

and time required of AC members (including whether AC members may receive higher

salaries than other BD members).

Topic 3: AC member skills. The AC members should have financial expertise with

professional qualification. AC members’ training should be timely and ongoing and

related to company bylaws with a focus on new AC members; companies must have AC

members who are financially literate or will become financially literate within a

reasonable time.

Group B: Essential control functions

Topic 5: Internal control. The AC’s responsibility to guard the company from fraud

includes the need to confirm that controls are in place and operating successfully.

In addition, the AC should approve annual report statements in relation to internal control

and management of risk. The AC should assess the company’s risk profile and support

the preparation of a statement on internal control in the annual report. The AC should

deter management override of internal controls and review annually the organisation’s

code of conduct. Fraud must be reported to the AC by the CPA firm, and the board

then has one business day to notify the EFSA (regulatory authority) of suspected fraud,

while the CPA firm is required to report to the EFSA by the end of the next business day.

Improving audit committee performance in the Middle East 247

Topic 6: Financial reporting elements. The AC should review information related

to financial statements. The BD’s approval of the financial report is required. If the AC

is not satisfied with any aspect of the proposed financial reporting, it shall report this to

the BD.

Topic 7: Whistle-blowing. Proposals on this topic, a new tool for Egyptian companies,

include a requirement for the AC to review any complaints received, internal or external,

regarding internal controls and financial statements. AC contact information should be

provided on the company’s website or through a hotline. Confidentiality of the employee

and protection against any retaliation should be guaranteed. The complainer should be

able to follow procedures set up by the AC. The AC investigation should determine

corrective action or recommend action to the full board.

Topic 8: Internal audit function (IAF). The IAF should be directly supervised by the AC

and should report directly to it. The AC creates an agenda for the coming year or

approves the central audit executive’s agenda. An adequately resourced internal audit

function can provide the board with objective assurance of internal controls. The AC

should review the IAF budget and plans and ensure that they reflect the CPA firm’s

objectives. The AC should guarantee that the internal audit function has resources and

access to information and is fully equipped. Companies should perform an internal IAF

improvement and quality assurance programme once every five years. The AC should

meet annually with executive managers and the CPA firm to discuss Central Audit

Executive (CAE) performance. The AC must ensure that the internal auditor team has

direct access to the board chairman and is accountable to the AC.

Group C: Communication with the board and shareholders

Topic 4: Relation between AC and the board. The AC chairman should report formally

to the board after each meeting. The AC should receive formal terms of reference from

the board, which should be reviewed annually by the board; disagreement between the

AC and BD should be allocated enough time for resolution; if the issue is not resolved,

the AC should report the issue to the shareholders. The AC must have a written charter

that includes: annual performance evaluation, purpose, etc., and the charter must be

posted on the company’s website.

Topic 11: Communication with shareholders. The AC is obligated to disclose the work

done by the committee during the previous fiscal year in the annual report, including

confirmation of whether members of the AC are satisfied that they are fulfilling the

charter, which should be attached to the annual report every three years. The EFSA

(the regulator) should have jurisdiction over reporting of information to the public;

the terms of reference of the AC should be made available in the annual report and should

include the number of AC meetings, a summary of the AC role, etc. The AC chairman

should be available at the Annual General Meeting to answer any question about the AC.

The annual report should include other matters concerning any disagreement between

the AC and board, the appointment of the CPA firm, provision of non-audit services and

certain matters regarding the CPA firm.

Group D: External audit management

Topic 9: External audit. The AC is responsible for overseeing the organisation’s relations

with the CPA firm and the engagement letter should state that the client’s representative

248 J. Bremer et al.

is the AC, so that the CPA firm is accountable primarily and directly to the AC. If the

CPA firm resigns, the AC should investigate and consider the need to include the risk

associated with the departure of the CPA firm in their risk evaluation. The AC should

report to shareholders on the appointment, reappointment or removal of the CPA firm.

If the board does not accept the AC’s recommendation, this should be disclosed in the

annual report; the AC should review the engagement letter with the executive partner at

the start of each audit; the AC evaluation should take into consideration the CPA firm’s

qualifications and whether the audit fee is proper to the size, risk, complexity and control

profile of the company. The AC should review annually the CPA firm’s internal quality

control, peer review, governmental inquiries and any steps taken to deal with such issues.

The AC should ensure follow up of the mandatory rotation taking place within the CPA

firm with regard to the lead and other partners after five years and then apply a five-year

time-out. The same rotation process also applies for non-audit services. The AC should

agree with the board on a policy for employing former CPA firm employees who were

part of the audit team, should affirm in the annual report that the provision of any

non-audit services did not harm CPA firm independence, and verify both that the

payment for such services was not more than 5% of the total amount paid to the CPA

firm and that AC approval was obtained. Furthermore, CPA firms should be prohibited

from providing certain non-audit services at the same time that they are performing

audits, such as actuarial and human resource services.

Topic 10: Annual audit cycle. The AC should consider whether the CPA firm’s overall

work plan is consistent with the scope of the audit engagement and review it with the

CPA firm, CFO and CAE. The AC should review the audit plan and scope with the IAF

team to reduce unnecessary efforts. Guidance should require the CPA firm to offer their

opinion of the quality, not just the acceptability, of the accounting principles used in the

company. The AC must meet with management and the CPA firm to review the audited

quarterly and annual financial statements. It should review the CPA firm representation

letters before signature by management, and also review management letters including

the recommendations of the CPA firm and management’s responses. At the end of the

annual audit cycle, the AC should assess the effectiveness of the audit process, review

whether the CPA firm has met its audit plan and obtain feedback from key executives

involved. The AC should discuss with the CPA firm any difficulties faced during the

audit cycle and any major disagreements with management and ensure solution of

disagreements regarding financial reporting.