TY - JOUR

T1 - The relationship between audit committees, external auditors, and internal control systems

T2 - A literature review and a research agenda.

AU - Wehrhahn, Christoph

AU - Velte, Patrick

N1 - Publisher Copyright: © 2024, Christoph Wehrhahn and Patrick Velte.

PY - 2024/10/31

Y1 - 2024/10/31

N2 - Purpose: This paper aims to focus on the relationship between audit committees, external auditors and internal control systems (ICS) and strives to point out mutual influences between the instances to provide an integrated perspective for firms’ multilateral monitoring mechanisms. Furthermore, this study emphasizes the incorporation of sustainability and fraud considerations into the traditional roles of audit committees and auditors. Design/methodology/approach: This structured literature review is based on 71 empirical-quantitative studies published in high-quality journals between 2005 and 2022. Considering the classification of ICS into ICS quality and internal audit function, the studies are analyzed with regard to audit committees’ and external auditors’ characteristics, divided into incentives and competencies, as well as their mutual relationships. Findings: This study highlights a dynamic trilateral network of relationships between monitoring authorities and primarily shows that audit committees equipped with adequate competencies generate a substitutive effect for external auditors by reducing their efforts, whereas ICS quality serves as a possible mediator in this network of relationships. The establishment of an integrative three-party coalition of competent and adequately incentivized monitoring parties is essential to guarantee sufficient and appropriate ICS and overall corporate governance quality. Practical implications: The findings should prompt legislators and firms to ensure a deeper collaboration between audit committees, internal auditors and external auditors to generate synergy effects and economies of scale within the integrative monitoring process. Legislators should develop stricter requirements for competencies of audit committees and auditors. These should include a holistic triad of sustainability, fraud and digital expertise as well as mandatory forensic procedures performed by all monitoring bodies. Originality/value: The authors contribute to prior research by highlighting the importance of an integrative three-party coalition of monitoring authorities to ensure corporate governance quality and to generate synergy effects within a dynamic multilateral monitoring process. Furthermore, the authors offer cutting-edge implications by stressing the need for consideration of sustainability and fraud aspects in the traditional work and profiles of audit committees and auditors.

AB - Purpose: This paper aims to focus on the relationship between audit committees, external auditors and internal control systems (ICS) and strives to point out mutual influences between the instances to provide an integrated perspective for firms’ multilateral monitoring mechanisms. Furthermore, this study emphasizes the incorporation of sustainability and fraud considerations into the traditional roles of audit committees and auditors. Design/methodology/approach: This structured literature review is based on 71 empirical-quantitative studies published in high-quality journals between 2005 and 2022. Considering the classification of ICS into ICS quality and internal audit function, the studies are analyzed with regard to audit committees’ and external auditors’ characteristics, divided into incentives and competencies, as well as their mutual relationships. Findings: This study highlights a dynamic trilateral network of relationships between monitoring authorities and primarily shows that audit committees equipped with adequate competencies generate a substitutive effect for external auditors by reducing their efforts, whereas ICS quality serves as a possible mediator in this network of relationships. The establishment of an integrative three-party coalition of competent and adequately incentivized monitoring parties is essential to guarantee sufficient and appropriate ICS and overall corporate governance quality. Practical implications: The findings should prompt legislators and firms to ensure a deeper collaboration between audit committees, internal auditors and external auditors to generate synergy effects and economies of scale within the integrative monitoring process. Legislators should develop stricter requirements for competencies of audit committees and auditors. These should include a holistic triad of sustainability, fraud and digital expertise as well as mandatory forensic procedures performed by all monitoring bodies. Originality/value: The authors contribute to prior research by highlighting the importance of an integrative three-party coalition of monitoring authorities to ensure corporate governance quality and to generate synergy effects within a dynamic multilateral monitoring process. Furthermore, the authors offer cutting-edge implications by stressing the need for consideration of sustainability and fraud aspects in the traditional work and profiles of audit committees and auditors.

KW - Audit committees

KW - Corporate governance

KW - External auditors

KW - Internal audit function

KW - Internal control systems

KW - Management studies

KW - Sustainability sciences, Management & Economics

UR - http://www.scopus.com/inward/record.url?scp=85208246736&partnerID=8YFLogxK

UR - https://www.mendeley.com/catalogue/5a6face9-0e9d-3d27-a2ba-07146626e1a0/

U2 - 10.1108/JFRA-05-2024-0312

DO - 10.1108/JFRA-05-2024-0312

M3 - Scientific review articles

AN - SCOPUS:85208246736

JO - Journal of Financial Reporting and Accounting

JF - Journal of Financial Reporting and Accounting

SN - 1985-2517

ER -