Insights from an Analysis of Audit Committee Governance Practices at U.S. Registered Investment Companies and Public Operating Companies

Abstract

Guided by agency theory and institutional theory, we investigate the influence of the unique aspects of investment companies (ICs) on audit committee (AC) governance and compare AC IC and operating company (OC) governance practices. We use a dual-method, three-stage research approach: (1) surveys of 107 IC AC members, (2) interviews of ten AC and ten management members at ICs, and (3) interviews of ten OC AC members and follow-up interviews of the ten IC AC members. Consistent with agency theory, we find IC ACs are substantively engaged in overseeing AC operations quality (AC composition and diligence) and other critical governance areas (auditor hiring/retention, audit process, agenda setting, and critical risks), whereas management is not. In contrast, our findings for OC ACs reveal evidence of both ceremonial oversight (auditor retention/hiring and agenda setting) and substantive oversight (audit process and critical risks). Our study’s findings have important implications for regulators and practitioners.