The impact of expertise on the

mediating role of the audit

committee
Zalailah Salleh
Department of Accounting and Finance, Universiti Malaysia Terengganu,
Kuala Terengganu, Malaysia, and
Jenny Stewart
Department of Accounting, Finance and Economics, Grifth Business School,
Grifth University, Meadowbrook, Australia
Abstract
Purpose The purpose of this paper is to examine external auditors perceptions of the impact of
audit committee nancial expertise and industry expertise on the mediating role played by the
committee in resolving auditor-client disagreements.
Design/methodology/approach The study is a 2 2 between subjects experimental design,
using 61 Malaysian auditors as participants. The authors manipulate audit committee nancial
expertise and industry expertise at high and low levels.
Findings It is found that external auditors perceive that audit committees play a greater mediating
role and use mediating techniques to a greater extent when committee members nancial and
industry expertise is high compared to when expertise is lower.
Originality/value This is the rst paper to examine the importance of audit committee expertise
on the mediating role of the audit committee. The major contribution of the paper is the nding that
auditors believe the audit committees role as a mediator is strengthened not only by the committee
members accounting and auditing expertise but also by their industry expertise. The papers ndings
have implications for practitioners and regulators who are concerned with the role of the audit
committee in enhancing the integrity of the nancial reporting and audit process.
Keywords Malaysia, Audit committees, Dispute resolutions, External audit,
Auditor-client dispute resolution, Audit committee expertise
Paper type Research paper
1. Introduction
Audit committees are recognized globally as an important governance mechanism for
ensuring the integrity of the nancial reporting and audit process (DeZoort et al., 2002;
Cohen et al., 2007). Not surprisingly, market regulators have set inplace certain standards
or requirements designed to strengthen audit committee effectiveness. In addition to the
requirement for audit committees to be comprised of independent directors,
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0268-6902.htm
The authors acknowledge with thanks the helpful comments of two anonymous reviewers,
Jean Bedard, Ken Trotman, and participants at seminars at Grifth University and Macquarie
University, at the annual conference of the Accounting and Finance Association of Australia and
New Zealand, Adelaide, July 2009 and at the First World Accounting Frontiers Series Conference,
Macau, July 2009. The authors also thank Yves Gendron, Mike Gibbins and Hun Tong Tan for
providing copies of research instruments used in prior studies and are particularly grateful to the
auditors who gave up their time to participate in the study.
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Received 8 September 2010
Reviewed 9 February 2011
Accepted 30 March 2011
Managerial Auditing Journal
Vol. 27 No. 4, 2012
pp. 378-402
qEmerald Group Publishing Limited
0268-6902
DOI 10.1108/02686901211217987
regulators have emphasized the need for at least one committee member to possess
nancial expertise (Blue Ribbon Committee, 1999; Sarbanes-Oxley Act (SOX), 2002).
Some jurisdictions have also recognized the importance of industry expertise (ASX
Corporate Governance Council, 2010).
A small but growing body of research has explored the association between audit
committee expertise and factors such as nancial reporting quality, earnings
management, external audit quality and internal control strength. While results have
been mixed, it is generally recognized that audit committee expertise is an important
attribute which strengthens the effectiveness of the audit committee (McMullen and
Raghunandan, 1996; Chtourou et al., 2001; Bedard et al., 2004; Abbott et al., 2004;
Krishnan, 2005; Carcello et al., 2006; Zhang et al., 2007).
Our research extends this literature by examining the inuence of audit committee
expertise on auditors perceptions of the mediating role that the audit committee plays
in resolving auditor-management disagreements on contentious accounting issues.
Auditors perceptions in this regard are important because the resolution of
disagreements is a necessary step in nalizing the nancial statements so that an
unqualied audit opinion can be issued. According to Ng and Tan (2003, pp. 803-4), the
size of an audit adjustment is the result of a negotiation process with the clients
management, and consideration of bargaining power should factor into the auditors
assessments of the ultimate negotiated outcome. An effective audit committee should
strengthen the bargaining power of the auditor and therefore improve nancial
reporting quality (Brown and Wright, 2008). Ng and Tan (2003) examine auditors
perceptions of the impact of audit committee effectiveness on their judgments relating
to audit adjustments. However, they operationalize audit committee effectiveness in
terms of the committees ability to exercise independent judgment. No prior research
has focused on the impact of audit committee expertise in this context.
While we would expect audit committees to be involved in resolving disputes as part
of their oversight responsibilities, the extent of their involvement is unclear. Some
studies have found that audit committees do not play a signicant role in resolving
disputes, but instead expect disagreements to be resolved before they are brought before
the committee (Cohen et al., 2002, 2007; Gibbins et al., 2007). In contrast, other studies
have demonstrated that audit committees are involved in resolving disagreements
between auditors and management (Knapp, 1987; Beattie et al., 2000; Goodwin, 2002;
Ng and Tan, 2003; Beattie et al., 2008; Salleh and Stewart, 2009). Indeed, it has been
argued that audit committees play an important role in mediating auditor-management
disagreements (DeZoort et al., 2003b, p. 176). This is likely to be particularly the case in
the post-SOX era, with auditors in the USA reporting that audit committees have more
power, expertise and diligence than prior to the SOX legislation (Cohen et al., 2009).
Hence, Brown and Wright (2008, p. 104) suggest the need for further research to explore
the inuence of the audit committee on auditor-client negotiations and the reported
nancial statement outcomes in the post-SOX environment.
Following DeZoort et al. (2003b), we posit that the audit committee can act as a
mediator in resolving auditor-client disputes. We then draw on mediation theory and
prior corporate governance studies to suggest that the mediating role of audit
committees is inuenced by the level of expertise of the audit committee. We use an
experimental design to examine the impact of industry and nancial expertise,
manipulating both types of expertise at high and low levels.
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Participants in the study were auditors from Big Four and middle tier auditing
rms in Malaysia, where publicly listed companies are required to have an audit
committee comprising a majority of independent directors. At least one member of the
committee must be either a member of the accounting profession or have a minimum of
three years experience as an accountant. However, there is no requirement for audit
committee members to possess relevant industry or business experience[1]. Although a
developing country, Malaysias corporate governance regulations and practices have
been heavily inuenced by those of the UK and the USA. The inuence of SOX can be
clearly seen in the Malaysian Code of Corporate Governance best practice guidelines
with respect to boards and audit committees.
We nd that both nancial and industry expertise are perceived by external
auditors to inuence the mediation role of the audit committee and the mediation
techniques used by audit committees to help resolve disputes. Hence, we contribute to
the corporate governance literature by demonstrating the importance of both types of
expertise for audit committee effectiveness in the context of resolving auditor-client
disputes. Our results have implications for regulators who are concerned to strengthen
the effectiveness of audit committees as a corporate governance mechanism and for
corporations as they seek to appoint directors with the appropriate expertise to serve
on audit committees.
The paper is structured as follows. In the next section we provide the background to
the study and Section 3 develop our hypotheses. Section 4 describes the research
method while Section 5 reports and analyses the results. In the nal section, some
conclusions are drawn.
2. Background
Mediation
Mediation can be dened as a process involving a third party who assists two or more
disputing parties to resolve their dispute (Kressel and Pruitt, 1989). Wall et al. (2001)
suggest that the process has three dening elements:
(1) assistance or interaction by;
(2) a third party who; and
(3) does not have the authority to impose an outcome.
They acknowledge, however, that the third element is contentious, with many scholars
recognizing that in some situations mediators do have the power to impose an outcome.
Prior literature suggests that a variety of techniques are available for mediators in
approaching conict resolutions between disputants. These techniques include
controlling the agenda, information gathering, pressing, siding, advising the
disputants and proposing a solution (Conlon and Fasolo, 1990; Laskewitz et al., 1994;
Wall et al., 2001). The techniques are not mutually exclusive and are frequently used in
conjunction with each other. For example, as information gatherers, mediators may
gather information from the disputants, the environment or from written documents.
They may then offer advice and information concerning the problem or they may go
further and propose a solution themselves (Wall et al., 2001). Such a solution can be an
integrative solution (Conlon and Fasolo, 1990) or a newcollaborative solution (Kaufman
and Duncan, 1992).
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The mediation literature has further demonstrated an association between mediator
expertise and mediation effectiveness. For mediation to be effective, the disputing
parties must view the mediator as credible and expertise is recognized as a key factor
that generates credibility (Kolb, 1985; Arnold, 2000). Previous studies focus on two
types of expertise, namely process and content expertise (Arnold, 2007). Process
expertise is dened as the mediators experience and knowledge of the mediation
process while content expertise refers to the mediators knowledge and insight relating
to the issue under dispute (Silver, 1996; Arnold, 2000, 2007)[2]. Arnold (2000) found that
mediators who were perceived as having greater content expertise were viewed as
more credible. In turn, more credible mediators were judged more favourably and were
seen as more capable of performing a mediation role. However, Arnold (2007) studied
the interaction between process expertise and content expertise and found that content
expertise was only important when mediators lacked process expertise. When
mediators were expert in mediation procedures, it did not seem to matter whether they
had in-depth knowledge of the issue under dispute.
Notwithstanding Arnolds (2007) ndings, in the present study we focus on content
expertise for a number of reasons. First, audit committee members are unlikely to
possess high process expertise because they are not specically trained in mediation.
Second, audit committee content expertise is recognised as animportant element of audit
committee effectiveness (DeZoort et al., 2002). Third, Arnolds (2007) study involved
management students with limited work experience who role-played as employees
negotiating with their supervisor over a pay dispute. Mediator content expertise in the
study was manipulated as familiarity with company policies and a high awareness of
the specic issue under dispute. This type of expertise is quite different to the specialist
knowledge possessed by an audit committee when dealing with highly experienced
auditors and management. Hence the results of Arnolds (2007) study may not be
generalizable to the scenario in the present study.
The mediating role of the audit committee
Research on audit committee involvement in auditor-client negotiation has provided
mixed results. In the pre-SOX era in North America, some studies found low audit
committee involvement in resolving disagreements between auditors and management
(Gibbins et al., 2001; Cohen et al., 2002). In a Canadian study, Gibbins et al. (2001) used
both interviews and questionnaires to develop a model of auditor-client negotiation.
They conclude that, while such negotiation is commonplace, the audit committee is
involved less frequently. Cohen et al. (2002), in an interview study of 36 practitioners
from north-eastern ofces of US audit rms, report that interviewees believe that audit
committees are often ineffective because they lack the power to resolve contentious
issues and members lack the expertise to perform their job effectively. In contrast,
however, an earlier US study by Knapp (1987, p. 582) found a substantial percentage of
audit committee members in the sample had been involved in resolving
auditor-management conicts, leading him to suggest that audit committees often
mediate such disputes.
With the strengthening of audit committee responsibility in the last decade, it is
reasonable to expect that audit committees now play an even more important
mediating role to help resolve disputed issues (DeZoort et al., 2003b). Cohen et al. (2009)
nd that auditors view audit committees as more diligent, more active, more powerful
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and having greater expertise in the US post-SOX environment compared to the
pre-SOX era. However, they still report limited post-SOX audit committee involvement
in resolving disputes with clients. In contrast, DeZoort et al. (2008) nd that audit
committee members in a post-SOX environment have an increased sense of
responsibility for resolving auditor-management disagreements compared to their
pre-SOX counterparts. Specically, DeZoort et al. (2008) replicated their pre-SOX study
(DeZoort et al., 2003a) which examined audit committee members support for an
auditor-proposed adjustment relating to an inventory writedown. The authors nd
support for their hypothesis that the changes to audit committee responsibilities in the
post-SOX environment would lead to audit committee members being more likely to
support the auditors position (DeZoort et al., 2008).
In a UK survey, Beattie et al. (2008) indicate that audit committees are actively
involved in discussions and negotiations on nancial statement issues. Further, Salleh
and Stewart (2009), in an interview study of audit committee members, chief nancial
ofcers and external auditors of seven Malaysian listed companies, nd that audit
committees play a mediating role in material disputes between auditors and clients.
They also report that the mediating role is strengthened by the authority of the
committee, the committees understanding of possible issues and the members
accounting, industry and business expertise.
Prior research on audit committee expertise
A number of studies have stressed the importance of expertise for audit committee
effectiveness (Kalbers and Fogarty, 1993; DeZoort, 1997; Bedard et al., 2004; Gendron and
Bedard, 2006; Turley and Zaman, 2007). It has been argued that audit committees
possessing relevant expertise are more likely to make judgments that are consistent with
those of auditors (DeZoort, 1998; DeZoort and Salterio, 2001). Further, audit committee
members with accounting experience are perceived to be particularly effective in their
investigations when accounting decisions are aggressive (Pomeroy, 2010). Audit
committee nancial expertise is also perceived to inuence rmperformance (Hsu, 2008)
and nancial reporting quality (McMullen and Raghunandan, 1996; Chtourou et al., 2001;
Abbott et al., 2004; Bedard et al., 2004; Carcello et al., 2006; Dhaliwal et al., 2006). In
addition, studies also show a positive stock market reaction to the appointment of audit
committee members with accountingexpertise (Davidsonet al., 2004; DeFondet al., 2005).
Most studies focus on nancial expertise due to the nature of the audit committee
nancial reporting oversight role. Very few studies have examined other types of
expertise such as industry knowledge and general business experience. Knapp (1987)
provides evidence that current business experience affects the members support for
the external auditor in disputes with client management. Cohen et al. (2007) argue that
audit committees must be alert to company specic types of weaknesses that are likely
to occur. Salleh and Stewart (2009) report that interviewees in their sample stressed the
importance of having audit committee members with industry expertise and a sound
business knowledge in addition to members with nancial expertise. Further, industry
expertise is considered important by some market regulators; for example the ASX
Corporate Governance Council (2010) recommends that audit committees should have
members who have an understanding of the industry in which the company operates.
However, we are not aware of any studies that directly examine the effect of industry
expertise on audit committee effectiveness.
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3. Development of hypotheses
The effect of nancial expertise and industry expertise on the mediating role of the audit
committee
The mediation literature demonstrates that mediators should possess relevant
expertise in order to be perceived as credible. Mediators gain the trust of disputants
when they possess expertise relevant to the issues under dispute (Doney et al., 1998;
Goldberg and Shaw, 2007). Therefore, it is important for audit committee members to
possess the necessary expertise if they are to play a mediating role in resolving
contentious accounting issues between auditors and management.
The previous section has demonstrated a relationship between audit committee
nancial expertise and nancial reporting quality. A high level of nancial expertise
should enable the audit committee to better understand the nancial reporting process
(McDaniel et al., 2002). Hence, we argue that, when auditors and management are in
dispute over accounting issues, auditors will have greater condence in the audit
committees ability to understand the underlying causes of the problem when the audit
committee has a high level of nancial expertise. Auditors will expect this greater
understanding to better equip the audit committee to act in a mediating role to help
resolve the problem.
As noted, audit committee industry expertise is considered to be essential to enable
the audit committee to make informed decisions (Salleh and Stewart, 2009). Given the
paucity of prior research examining audit committee industry expertise, it is necessary
to rely on studies that have examined industry expertise in the context of other
governance parties. For example, in the context of external auditing, studies have shown
that industry expertise enables auditors to better identify errors (Bedard and Biggs,
1991; Owhoso et al., 2002), to be more effective in auditing (Maletta and Wright, 1996)
and to better assess the reasonableness of clients estimates and other nancial
representations (Kwon, 1996). In view of the similarities in the nature of decisions
between audit committees and auditors with respect to the quality and integrity of the
nancial statements, it is not unreasonable to draw on studies relating to external
auditors to generate hypotheses about audit committees. We propose that audit
committees with higher industry expertise are more likely to have a better
understanding of the business and the problems nested within the industry in which
the company operates. This allows audit committees to be more effective mediators
when they are involved in disputes between auditors and management. We therefore
hypothesize that auditors will perceive that audit committees with a higher level of
industry expertise are more knowledgeable and better able to make appropriate
judgments on the disputed issue. Hence auditors will expect such committees to play a
more important role in resolving disputes between auditors and management.
We therefore test the following hypothesis:
H1. External auditors perceive that the audit committee plays a more important
role in resolving disputes between auditors and management when:
(a) audit committee nancial expertise is high compared to when nancial
expertise is low; and
(b) audit committee industry expertise is high compared to when industry
expertise is low.
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The effect of nancial expertise and industry expertise on audit committee concerns for
the truth and fairness of the nancial statements
It has been argued that mediators should be perceived as being impartial, unbiased or
neutral to ensure that disputants feel they are being treated fairly (Silver, 1996).
Disputants perceptions about the neutrality of mediators inuence the successfulness
of the mediation process (Carnevale and Pruitt, 1992). In the context of nancial
reporting, an unbiased approach is reected in a concern for the truth and fairness of
the nancial statements. Hence, if auditors believe that the audit committees primary
concern is for true and fair nancial statements, this should enhance their trust in the
committee to act in an impartial manner.
We argue that audit committees with greater nancial expertise will have a better
understanding of technical accounting procedures and standards, and will be more
concerned with nancial reporting accuracy (DeZoort and Salterio, 2001; DeZoort et al.,
2008). Auditors should therefore expect audit committees possessing higher nancial
expertise to be better able to appreciate and to be more concerned about the importance
of the truth and fairness of nancial statements.
Similar to nancial expertise, industry expertise is also expected to provide audit
committees with a context for understanding the nature of nancial reporting. Again,
drawing on the auditing literature that stresses the importance of industry expertise in
assessing estimates and representations (Bedard and Biggs, 1991; Kwon, 1996), we
predict that auditors will expect audit committees with higher industry expertise to
also be more concerned that the nancial statements present a true and fair view.
Therefore, we hypothesize that:
H2. External auditors perceive that the audit committee will be more concerned
about the truth and fairness of nancial statements when:
(a) audit committee nancial expertise is high compared to when nancial
expertise is low; and
(b) audit committee industry expertise is high compared to when industry
expertise is low.
The effect of nancial expertise and industry expertise on the use of mediation
techniques by audit committees
As previously mentioned, there are a variety of techniques available for audit
committees in the mediation process. We examine three techniques which could be
readily manipulated in an experimental design. These are advising, proposing a
solution and siding.
Advising and proposing a solution. In order to help resolve the issue under dispute,
audit committees require an understanding of the problem to bring both parties to an
agreement point that adheres to accounting standards. As noted, audit committees
with a high level of nancial expertise should be better able to understand the
underlying causes of the problem. Auditors should therefore perceive that such audit
committees will be in a stronger position both to offer advice on the most appropriate
treatment and, going a step further, to propose a solution to the problem.
Prior studies have shown that industry expertise helps external auditors to assess
the reasonableness of a companys estimates and nancial representations
(Kwon, 1996; Maletta and Wright, 1996). We suggest that it is not unreasonable
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to argue that, when audit committees possess higher industry expertise, they too can
apply this experience and knowledge to understand the context of the problem. Hence,
auditors should perceive that audit committees with strong industry expertise will be
more capable of advising the parties on how to resolve the problem and proposing a
solution to the problem.
These arguments lead to the following hypotheses:
H3. External auditors perceive that the audit committee will be better able to
advise on the most appropriate treatment to resolve a dispute between
auditors and management when:
(a) audit committee nancial expertise is high compared to when nancial
expertise is low; and
(b) audit committee industry expertise is high compared to when industry
expertise is low.
H4. External auditors perceive that the audit committee is more likely to propose a
solution to resolve a dispute between auditors and management when:
(a) audit committee nancial expertise is high compared to when nancial
expertise is low; and
(b) audit committee industry expertise is high compared to when industry
expertise is low.
Siding. As part of the mediation process, a mediator can side with one of the parties in a
dispute. While some argue that mediators should remain impartial (Kruk, 1998; Silver,
1996) and therefore should not take sides, prior research shows that this technique is
sometimes appropriate (Laskewitz et al., 1994; Wall et al., 2001). Hence, audit committees
may take sides with auditors or management in order to resolve disputes over
contentious accounting issues. A number of studies have explored the impact of audit
committee experience or expertise on siding. For example, Knapp (1987) reports that
audit committee members with corporate management experience are more likely to
support the auditor. DeZoort and Salterio (2001) nd that audit committee members with
independent director experience and audit knowledge tend to support the auditor,
whereas those members with current experience as executive directors are less likely to
do so. DeZoort et al. (2003b) nd that audit committee members with more experience
and with accounting qualications are more likely to side with the auditor. In contrast,
DeZoort et al. (2003a) report that audit committee members who are CPAs are more
likely to support management. However, in a follow-up study to examine the impact of
SOX on audit committee judgments, DeZoort et al. (2008) nd that post-SOX audit
committee members who are CPAs are more likely to side with auditors in the event of a
dispute compared to their pre-SOX counterparts.
It should be noted that audit committee support for the auditors position does not
necessarily reect a lack of impartiality. Rather, it could reect a shared commitment
with external auditors that the nancial statements should portray a true and fair view.
We therefore predict that auditors will expect that audit committees with a higher level
of nancial expertise will initially adopt the auditors view rather than the view of
management.
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While studies have not directly addressed the impact of industry expertise on siding,
there is some evidence that audit committee members with managerial experience and
general board experience support auditors in auditor-client disputes (Knapp, 1987;
DeZoort et al., 2003b). Directors with this type of experience are likely to have greater
industry expertise and hence we suggest that audit committees possessing industry
expertise are more likely to support auditors in disputes with management. Therefore,
we propose that auditors will also expect audit committees with a higher level of
industry expertise to initially side with auditors rather than with management.
Thus, we hypothesize the following:
H5. External auditors perceive that the audit committee is more likely to initially
side with auditors when:
(a) audit committee nancial expertise is high compared to when nancial
expertise is low; and
(b) audit committee industry expertise is high compared to when industry
expertise is low.
The effect of nancial expertise and industry expertise on the outcome of the mediation
process
Research on audit committee inuence on the outcome of disputes between auditors and
management has been relatively sparse. Ng and Tan (2003) argue that auditors
assessment of the ultimate outcome of a disagreement will be inuenced by their
perceptions of the relative bargainingpower between themselves and client management.
They suggest that an effective audit committee strengthens the bargaining power of the
auditor, particularly in the absence of authoritative guidance relating to the issue under
dispute. Both nancial expertise and industry expertise are key elements of audit
committee effectiveness (DeZoort et al., 2002) andhence we predict anassociationbetween
audit committee expertise andsupport for the auditors position inthe nal outcome of the
dispute. This prediction is further supported by the arguments and research evidence
presented above with respect to the use of the siding technique (DeZoort and Salterio,
2001; DeZoort et al., 2003b, 2008; Knapp, 1987). Hence, our nal hypothesis is as follows:
H6. External auditors perceive that the nal outcome of the dispute will be
towards the auditors initial position when:
(a) audit committee nancial expertise is high compared to when nancial
expertise is low; and
(b) audit committee industry expertise is high compared to when industry
expertise is low.
4. Research method
Case development
The research instrument involved a case study that was developed by the authors. The
scenario was modied from an actual auditor-client dispute identied from discussions
between one of the researchers, an audit partner in a Big Four accounting rm and the
client company. Participants were asked to assume that they were the partner-in-charge
of the audit of a hypothetical publicly listed manufacturing company. They had held this
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role for the past three years and had a good working relationship with management.
However, this year they were faced with a major accounting issue on which they had not
been able to reach agreement with management. The issue involved a proposed
adjustment relating to the impairment of machinery resulting from an unprotable
business segment that the company planned to discontinue. The auditor had
recommended that the machinery be written down from its carrying value of
RM15 million[3] to scrap value of RM1 million. The proposed amount would reduce the
earnings for the year to RM0.36 per share, signicantly belowthe unaudited earnings of
RM0.40 per share announced to Bursa Malaysia at the end of the nal quarter (equal to
10 percent variance). Management argued that the machinery could be sold to a
competitor for RM8 million and hence the write-down should be RM7 million. This
would give anearnings per share gure of RM0.38 (resulting in a 5 percent variance from
the announcedunaudited earnings)[4]. Participants were advised that the issue was to be
raised at the forthcoming audit committee meeting, attendedby the auditor, the CEOand
the CFO. The audit committee comprised three independent non-executive directors.
Independent variables
We examine two independent variables, namely the nancial expertise and industry
expertise of the audit committee. Both types of expertise were varied at high and low
levels bymanipulating informationpertainingto suchexpertise. For the audit committee
possessing a high level of nancial expertise, participants were informed that:
.
the audit committee members were all members of the Malaysian Institute of
Accountants;
.
the audit committee chair had extensive experience as a nance director in listed
companies; and
.
another member was a former partner in a large accounting rm, while the third
member also had a strong accounting and nance background.
On the other hand, for the audit committee in the low level of nancial expertise
condition, participants were informed that:
.
only one of the audit committee members was a member of the Malaysian
Institute of Accountants, having been principal of a small accounting rm until
his retirement a year ago; and
.
the audit committee chair and the other committee member did not have an
accounting or nance background.
In the high level of industry expertise condition, the participants were informed that
the audit committee also had considerable industry expertise, with the audit committee
chair and one other member having held senior positions in companies in the same
industry. In contrast, for the low level of industry expertise condition, the participants
were informed that none of the members had signicant expertise in the industry in
which the company operates.
Dependent variables
The rst dependent variable relates to the mediating role of the audit committee.
Participants were asked whether they expect the audit committee to play an important
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387
role in resolving the dispute. The second dependent variable is a perception concerning
the likelihood that the audit committee is able to appreciate and is concerned about the
importance of the truth and fairness of the nancial statements. Specically,
participants were asked whether the audit committees primary concern will be to
ensure true and fair nancial statements.
The next four dependent variables measure the use of mediation techniques by
audit committees to resolve disputes between auditors and management. Participants
were asked to indicate the extent to which they agree that:
(1) The audit committee will be able to advise auditors and management on the
most appropriate treatment to the problem.
(2) The audit committee will put forward their own solution to the problem.
(3) The audit committee will initially side with the auditor in the dispute.
(4) The audit committee will initially side with management in the dispute.
Participants were asked to make all of these judgments by marking a point on a scale
ranging from one to seven, with end points marked as entirely disagree and entirely
agree.
The nal dependent variable measured in the study is an estimate of the write-down
amount of the machine that is expected by the participants as the nal outcome from
the mediation process[5].
Participants
A total of 61 auditors participated in the experiment, 50 of whom were from Big Four
rms and 11 were fromnon-Big Four rms. The participants comprised 17 audit seniors,
13 managers, 23 senior managers or directors and eight partners. About 30 participants
had between three and ten years of auditing experience, 24 had ten to 20 years of
experience and the remaining seven had in excess of 20 years of experience. The mean
number of years of audit experience was 10.56, with a minimumof three and a maximum
of 30 years. From Table I, it can be seen that the background of participants varied
across the four treatment groups, giving rise to the possibility of confounding effects.
We conducted analyses of covariance (ANCOVAs) to test for the confounding effect of
current position and years of experience. However, meaningful tests could not be
undertaken for the rm type variable due to the small number of participants from
non-Big Four rms across the four treatment groups. Both current position and years of
experience were found to have a signicant effect on some of the dependent variables.
As both of these factors are measures of experience and as such are highly correlated
(r 0.820), we report only the results of our hypothesis testing after controlling for
participants position. Qualitatively similar results were obtained when we controlled
for years of experience. A correlation test found that current position and years of
experience are positively correlated with the dependent variables. This nding indicates
that participants in more senior roles and with more auditing experience perceive that
the audit committee will play a greater mediating role and use mediating techniques to a
greater extent compared to those participants with less seniority and experience.
These differences in perception most likely arise because auditors in more senior
positions have a greater level of interaction with audit committees and this, in turn,
inuences their perception about the mediating role of the audit committee.
MAJ
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Procedures
Extensive pilot testing was conducted before producing the nal versions of the
research instruments. Participants in the pilot study included ve academics with
auditing experience, two managers with experience in dealing with auditors and two
audit partners. Following discussions with the pilot study respondents, minor changes
were made to the content and presentation of the instruments.
Big Four and non-Big Four audit rms in Malaysia were approached to participate in
the study. Aletter was sent to the human resources department and/or to senior partners
of the rms to solicit participation. Approval to distribute research instruments was
receivedfromall of the BigFour andfromfour middle tier audit rms. We deliveredcopies
of the research instrument package[6] to the contact person who then distributed themto
audit seniors, audit managers and audit partners. Knowing that auditors at this level are
very busy, we did not attempt to conduct the experiment in a controlled environment.
However, it was considered that having participants of appropriate seniority outweighs
the loss of validity resulting from the lack of a controlled environment.
5. Results
Manipulation checks
In order to ensure that the nancial and industry expertise manipulations were effective,
participants were asked to indicate the level of both types of expertise on a scale ranging
from one (very low expertise) to seven (very high expertise). We conducted independent
group t-tests to test the responses. The means in the high level of expertise scenarios
were signicantly higher (6.06 for nancial expertise and 5.39 for industry expertise)
than the means in the low level scenarios (3.77 for nancial expertise and
High nancial/high
industry expertise
group
High nancial/low
industry expertise
group
Low nancial/high
industry expertise
group
Low nancial/low
industry expertise
group Total
Panel A: participants position
Partner 2 2 3 1 8
Director/
senior
manager
4 6 4 9 23
Manager 5 2 3 3 13
Senior 5 5 5 2 17
Total 16 15 15 15 61
Panel B: years of audit experience
Below 10
years
9 10 6 5 30
10-20
years
5 3 6 10 24
More than
20 years
2 2 3 0 7
Total 16 15 15 15 61
Panel C: rm type
Big four 11 14 11 14 50
Mid tier 5 1 4 1 11
Total 16 15 15 15 61
Table I.
Participants background
and experience by
treatment group
Mediating role
of the audit
committee
389
2.97 for industry expertise). The differences in means are signicant at p 0.000,
suggesting that both manipulations were successful.
Multivariate analysis of covariance (MANCOVA)
AMANCOVAtest indicated that industry expertise andparticipants current position in
their rmhave a signicant effect on the combined dependent variables at the 0.05 level
(Wilks Lambda of 2.354 ( p 0.032) for industry expertise and 2.257 ( p 0.039) for
current position). Financial expertise has a marginally signicant effect, with a Wilks
Lambda of 2.070 ( p 0.057)[7]. We therefore perform separate ANOVAs on each of the
dependent variables to test our hypotheses.
The mediating role of the audit committee
H1 predicts that external auditors perceive that the audit committee will play a more
important role in resolving disputes between auditors and management when:
.
audit committee nancial expertise; and
.
audit committee industry expertise are high compared to when they are low.
Table II reports the descriptive statistics on the auditors perceptions of the importance
of the audit committees mediating role. The cell means fall between 4.93 and 6.13,
indicating that participants generally perceive that audit committees do play an
important role in resolving disputes between auditors and management. The overall
means for both nancial expertise and industry expertise are in the hypothesized
direction, being higher for the high levels of expertise than for the low levels.
The results of the ANCOVA are presented in Table III. The table shows that the
covariate is highly signicant ( p 0.000). Table III also shows that both main effects
are signicant at the 0.05 level ( p 0.008 for nancial expertise and p 0.021 for
industry expertise). There is no signicant interaction effect between the two factors,
indicating that they have an additive effect on the dependent variable and that they
are independent of each other. The results suggest that audit committees with a higher
level of nancial expertise are perceived to play a more important role in resolving
disputes between auditors and management than those with a lower level of nancial
expertise. Consistent with this result, audit committees are also perceived to play a
more important role in resolving disputes when they possess higher industry expertise.
Therefore, H1 is supported.
Means (standard deviations) and cell sizes
High industry expertise Low industry expertise Overall
High nancial expertise 6.13 5.20 5.68
(0.885) (1.612) (1.351)
n 16 n 15 n 31
Low nancial expertise 5.07 4.93 5.00
(1.486) (1.280) (1.365)
n 15 n 15 n 30
Overall 5.61 5.07
(1.308) (1.437)
n 31 n 30
Table II.
Descriptive statistics for
audit committee role in
resolving the dispute
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390
Audit committee concerns for the truth and fairness of the nancial statements
H2 predicts that external auditors perceive that the audit committee will be more
concerned about the truth and fairness of nancial statements when:
.
nancial expertise; and
.
industry expertise are high compared to when they are low.
The descriptive statistics are presented in Table IV. The cell means range from 5.20 to
6.31, suggesting that auditors perceive audit committees to be concerned with the truth
and fairness of the nancial statements. Further, the results show that the overall
means are greater in the high conditions for both types of expertise.
Table V summarizes the results of the ANCOVA and shows that the current
position factor is signicantly correlated with auditors perceptions about audit
committee concern for the truth and fairness of the nancial statements ( p 0.015).
Table V also shows that both main effects are signicant at the 0.01 level. Again,
there is no signicant interaction between the two factors, showing they are
independent of each other. The results suggest that audit committees with a higher
level of nancial expertise are perceived to be more concerned about the truth and
fairness of nancial statements than those with a lower level of nancial expertise.
Similarly, audit committees are also perceived to be more concerned with the truth and
Source df Type III sum of squares Mean square F Sig.
a
Corrected model 4 34.298 8.575 5.894 0.000
Intercept 1 367.679 367.679 252.724 0.000
Current position 1 20.544 20.544 14.121 0.000
Financial expertise 1 9.189 9.189 6.316 0.008
Industry expertise 1 6.318 6.318 4.343 0.021
Financial expertise industry expertise 1 1.987 1.987 1.366 0.248
Error 56 81.472 1.455
Total 61 1,858.000
Corrected total 60 115.770
R
2
0.296
Adjusted R
2
0.246
Note:
a
A one-tailed test is used for the two main effects, where a direction is predicted
Table III.
Analysis of covariance
for audit committee role
in resolving the dispute
Means (standard deviations) and cell sizes
High industry expertise Low industry expertise Overall
High nancial expertise 6.31 5.60 5.97
(0.793) (1.056) (0.983)
n 16 n 15 n 31
Low nancial expertise 5.60 5.20 5.40
(1.183) (1.207) (1.192)
n 15 n 15 n 30
Overall 5.97 5.40
(1.048) (1.133)
n 31 n 30
Table IV.
Descriptive statistics for
concern with the truth
and fairness of nancial
statements
Mediating role
of the audit
committee
391
fairness of nancial statements when they possess higher industry expertise.
Therefore, H2 is supported.
The use of mediation techniques by audit committees
H3-H5 predict the effect of audit committee expertise on the mediation techniques used
by audit committees in resolving disputes between auditors and management. As
noted, we focus on the three mediation techniques of advising, proposing a solution
and siding.
Advising. H3 predicts that external auditors perceive that audit committees with:
.
a high level of nancial expertise; and
.
a high level of industry expertise will be better able to advise management and
auditors on the appropriate treatment for the problem under dispute compared to
when the relevant expertise is low.
The descriptive statistics on auditors perceptions of the use of the advising technique
by the audit committee are presented in Panel A of Table VI. It can be seen that the
means exceed the midpoint of four, suggesting that auditors generally perceive audit
committees to be able to advise auditors and management on the appropriate treatment
to resolve disputed accounting issues. Consistent with the hypotheses, the means are
higher when the levels of nancial expertise and industry expertise are high compared
to when the respective types of expertise are low.
Panel A of Table VII summarizes the results of the ANCOVA and shows that the
covariate is marginally correlated with auditors perceptions about the ability of audit
committees to advise auditors and management on disagreements ( p 0.078).
The results also show a signicant main effect for both nancial expertise
( p 0.003) and industry expertise ( p 0.042). Again, there is no signicant interaction
between the two variables. Hence, when there is a high level of nancial expertise, audit
committees are perceived to be better able to offer advice to auditors and management on
a disputed accounting issue, providing support for H3a. H3b is also supported,
providing evidence that audit committees with a high level of industry expertise are
perceived by external auditors to be better able to advise management and auditors on
the appropriate treatment for the problem under dispute.
Source df Type III sum of squares Mean square F Sig.
a
Corrected model 4 16.592 4.148 3.971 0.007
Intercept 1 335.081 335.081 320.817 0.000
Current position 1 6.548 6.548 6.269 0.015
Financial expertise 1 5.852 5.852 5.603 0.010
Industry expertise 1 5.852 5.852 5.603 0.010
Financial expertise industry expertise 1 0.285 0.285 0.272 0.604
Error 56 58.490 1.044
Total 61 2,049.000
Corrected total 60 75.082
R
2
0.221
Adjusted R
2
0.165
Note:
a
A one-tailed test is used for the two main effects, where a direction is predicted
Table V.
Analysis of covariance
for concern with the truth
and fairness of nancial
statements
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392
Proposing a solution. H4 predicts that external auditors perceive that audit
committees with:
.
a higher level of nancial expertise; and
.
a higher level of industry expertise are more likely to put forward their own
solution to resolve a dispute between auditors and management than when the
relevant expertise is low.
The results for this hypothesis are shown in Panel B of Tables VI and VII.
The means in Panel Bof Table VI range from3.33 for the lowindustry/high nancial
expertise treatment group to 5.00 for the high industry/high nancial expertise group.
This suggests that auditors are not strongly convinced that audit committees impose
their own solution to resolve disputes between auditors and management. Further,
Panel Bshows that there is little difference in the means between the lowand high levels
of nancial expertise. However, for the industry expertise, the difference in means is
greater and is in the direction predicted by H4b.
Means (standard deviations) and cell sizes
High industry expertise Low industry expertise Overall
Panel A: advising
High nancial expertise 5.69 4.87 5.29
(1.014) (1.457) (1.296)
n 16 n 15 n 31
Low nancial expertise 4.53 4.33 4.43
(1.356) (1.291) (1.305)
n 15 n 15 n 30
Overall 5.13 4.60
(1.310) (1.380)
n 31 n 30
Panel B: proposing a solution
High nancial expertise 5.00 3.33 4.19
(1.095) (1.234) (1.424)
n 16 n 15 n 31
Low nancial expertise 4.20 4.07 4.13
(0.862) (1.033) (0.937)
n 15 n 15 n 30
Overall 4.61 3.70
(1.054) (1.179)
n 31 n 30
Panel C: siding
High nancial expertise 4.31 3.87 4.10
(1.138) (1.598) (1.375)
n 16 n 15 n 31
Low nancial expertise 3.80 3.33 3.57
(0.941) (1.234) (1.104)
n 15 n 15 n 30
Overall 4.06 3.60
(1.063) (1.429)
n 31 n 30
Table VI.
Descriptive statistics
for use of mediating
techniques
Mediating role
of the audit
committee
393
Table VII shows that only the main effect for industry expertise is signicant
( p 0.001) at the 0.05 level, while the main effect for nancial expertise is not
signicant. However, there is a strong interaction effect ( p 0.007) between nancial
expertise and industry expertise on auditors perceptions that the audit committee will
put forward its own solution to the problem. The interaction effect is shown in Figure 1.
APost Hoc Multiple ComparisonTest (Tukey HSD) indicated that the mean of group one
(high nancial expertise and high industry expertise) is signicantly ( p 0.000)
Source df Type III sum of squares
Mean
square F Sig.
a
Panel A: advising
Corrected model 4 21.845 5.461 3.432 0.014
Intercept 1 247.256 247.256 155.391 0.000
Current position 1 5.131 5.131 3.225 0.078
Financial expertise 1 12.291 12.291 7.725 0.003
Industry expertise 1 4.890 4.890 3.073 0.042
Financial expertise industry
expertise 1 1.308 1.308 0.822 0.368
Error 56 89.106 1.591
Total 61 1,557.000
Corrected total 60 110.951
R
2
0.197
Adjusted R
2
0.140
Panel B: proposing a solution
Corrected model 4 24.280 6.070 5.475 0.001
Intercept 1 172.506 172.506 155.608 0.000
Current position 1 2.586 2.586 2.332 0.132
Financial expertise 1 0.085 0.085 0.077 0.391
Industry expertise 1 13.380 13.380 12.069 0.001
Financial expertise industry
expertise 1 8.665 8.665 7.816 0.007
Error 56 62.081 1.109
Total 61 1,144.000
Corrected total 60 86.361
R
2
0.281
Adjusted R
2
0.230
Panel C: siding
Corrected model 4 8.409 2.102 1.339 0.267
Intercept 1 135.537 135.537 86.299 0.000
Current position 1 0.953 0.953 0.607 0.439
Financial expertise 1 4.535 4.535 2.887 0.047
Industry expertise 1 3.499 3.499 2.228 0.070
Financial expertise industry
expertise 1 0.005 0.005 0.003 0.956
Error 56 87.951 1.571
Total 61 994.000
Corrected total 60 96.361
R
2
0.087
Adjusted R
2
0.022
Note:
a
A one-tailed test is used for the two main effects, where a direction is predicted
Table VII.
Analysis of covariance
for use of mediation
techniques
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394
different from group two (high nancial expertise and low industry expertise). The
difference in means between group one and group four (low nancial expertise and low
industry expertise) is also marginally signicant ( p 0.081). The results suggest that
industry expertise has a signicant effect on the audit committee problem solving role
only when the audit committee possesses high nancial expertise. When nancial
expertise is low, the main effect of industry expertise is not signicant. Thus, H4a is not
supported, while H4b is supported only when nancial expertise is high.
This result can be tentatively interpreted as follows. When audit committees have a
high level of nancial expertise, external auditors believe that they will also be cognizant
of their need for industry expertise. Hence, when they have high industry expertise
together with high nancial expertise, they will be willing to put forward a solution to
the problem. However, when they have low industry expertise and high nancial
expertise, theywill not be willingto suggest a solution. This result contrasts withthe low
nancial expertise treatment where external auditors perceive that audit committees
will be relatively indifferent to their level of industry expertise when positing a solution
to the problem. This interpretation suggests the need for further research to explore this
complex interaction in more depth.
Siding. H5 predicts that external auditors perceive that audit committees with:
.
higher nancial expertise; and
.
higher industry expertise will initially side with auditors.
Panel C of Table VI presents the descriptive statistics on auditors perceptions of
whether the audit committee will initially side with auditors. While the means are in the
direction predicted by the hypothesis, they are close to or below the mid-point of four,
indicating that auditors generally believe that audit committees will not initially side
with auditors.
Panel C of Table VII summarizes the results of the ANCOVA. The table shows a
signicant main effect for nancial expertise at the 0.05 level ( p 0.047), supporting
H5a. Industry expertise is signicant at the 0.1 level ( p 0.070), and hence H5b is
marginally supported. The interaction effect is not signicant. Thus, while the low
means demonstrate that external auditors recognize that the audit committee generally
does not take sides in the event of a dispute between auditors and management,
a higher level of audit committee expertise is expected to drive the committee to lean
towards the external auditors position[8].
Figure 1.
Interaction effect of
nancial expertise and
industry expertise on
proposing a solution
4.2
5.0
4.07
3.33
3
3.5
4
4.5
5
5.5
Low High
M
e
a
n
s
Financial expertise
High
Low
Industry expertise
Mediating role
of the audit
committee
395
The outcome of the mediation process
While prior evidence on the outcome of mediation has been limited, studies on audit
committee support of the auditor suggest that audit committees with a high level of
expertise are more likely to take the auditors position. In order to explore the effect of the
two types of expertise on the nal outcome, participants were asked to indicate the
estimated written down value of the machine. As noted from the case, the auditors
proposeda RM14millionwrite-down(carryingvalue RM1 million), while the management
wished to recognize only a RM7 million write-down (carrying value RM8 million).
Table VIII shows the relevant descriptive statistics. The results indicate that there is
little variability across the treatment groups, with all means exceeding 10.5. This
suggests that participants expect that the nal outcome of the mediation process will be
a compromise between the auditors initial position and that of the client, but erring
towards the auditors initial position. This outcome is regardless of the level of both
types of expertise. In all treatment groups, however, the standard deviation is quite high,
suggesting considerable variability in responses.
The results of the ANOVA presented in Table IX show that neither the main effects
nor the interaction are statistically signicant. Thus, H6 is not supported as participants
do not perceive that the level of nancial or industry expertise possessed by the audit
committee would inuence the nal outcome of the mediation process. This is in spite
Means (standard deviations) and cell sizes
High industry expertise Low industry expertise Overall
High nancial expertise 11.38 12.07 11.71
(3.263) (3.327) (3.258)
n 16 n 15 n 31
Low nancial expertise 11.00 11.00 11.00
(3.464) 3.207 (3.280)
n 15 n 15 n 30
Overall 11.19 11.53
(3.311) (3.256)
n 31 n 30
Table VIII.
Descriptive statistics for
mediation outcome
Source df Type III sum of squares Mean square F Sig.
a
Corrected model 3 12.269 3.067 0.274 0.893
Intercept 1 958.931 958.931 85.811 0.000
Current position 1 0.887 0.887 0.079 0.779
Financial expertise 1 7.312 7.312 0.654 0.211
Industry expertise 1 2.069 2.069 0.185 0.669
Financial expertise industry expertise 1 1.746 1.746 0.156 0.694
Error 56 625.796 11.175
Total 61 8,511.000
Corrected total 60 638.066
R
2
0.019
Adjusted R
2
20.051
Note:
a
A one-tailed test is used for the two main effects, where a direction is predicted
Table IX.
Analysis of covariance
for mediation outcome
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396
of differences inperceptions of the impact of bothtypes of expertise onthe mediating role
of the audit committees and on the techniques used by the committee to resolve the
dispute. Apossible reason for the insignicant results is that auditors may believe their
position should be taken to be the correct outcome. However, a willingness to
compromise to some extent towards managements position may reect their concern
about avoiding the need to issue a qualied audit opinion. Overall, this nding is
somewhat anomalous with the results for our other hypotheses and hence is an
important avenue for future research.
6. Conclusion
An experimental study was undertaken to examine external auditors perceptions of
the inuence of nancial expertise and industry expertise on the mediating role
of the audit committee. Hypotheses were developed to investigate auditors perceptions
of the impact of the two types of expertise on:
.
the importance of the role played by the audit committee in resolving disputes;
.
audit committee concern for the truth and fairness of the nancial statements;
.
the use of mediation techniques; and
.
the nal outcome of the mediation process.
We found that both nancial expertise and industry expertise are perceived by
external auditors to inuence the mediating role of the audit committee.
However, external auditors did not perceive any effect of either nancial expertise
or industry expertise on the nal outcome of the mediation process.
Our ndings have implications for regulators and corporations by demonstrating
the importance of both nancial and industry expertise on the audit committee. The
results highlight that having only nancial experts on the audit committee may not
provide the committee with sufcient expertise to help resolve contentious accounting
issues or to play a mediating role in resolving disagreements between auditors and
management. The major contribution of our study is the nding that the audit
committees role as a mediator is strengthened not only by the committee members
accounting and auditing expertise but also by their industry knowledge.
We acknowledge a number of limitations of the study. First, it was not undertaken
in a controlled environment and hence is subject to certain inherent threats to internal
validity. Second, we used external auditors to examine the mediating role of audit
committees. As such, our results must be interpreted with caution as we cannot assume
that other governance parties would necessarily share the perceptions of auditors.
Future research is therefore needed to examine the audit committees mediation role
from the perspective of client management, audit committee members and the board of
directors. Third, some of our participants were audit seniors who may have had limited
experience. We did not ask participants to indicate their level of experience with audit
committees or with other relevant factors such as asset writedowns and auditor-client
disagreements. However, the signicant positive effect of the covariate in our
hypothesis testing suggests that any lack of experience is likely to have understated
the signicance of our ndings. Fourth, it could be perceived that the writedown in our
scenario did not require a high level of industry expertise to form a judgment and
hence this type of audit committee expertise may not have been an important factor
Mediating role
of the audit
committee
397
in helping to resolve this particular dispute. Again, if this were the case, our ndings
with respect to industry expertise would be understated. Fifth, our high nancial
expertise treatment could be construed as combining nancial expertise with a greater
level of executive director experience. Similarly, our high industry expertise treatment
could have been interpreted as combining industry experience with general
management experience. These other types of experience were not mentioned in the
low treatment groups. This may have confounded our results as research evidence has
shown that audit committees with high levels of management experience are more
likely to support the auditor while those with current experience as executive directors
are less likely to do so. Finally, we examined only nancial and industry expertise, and
did not make any mention of audit committee members mediation skills and process
expertise (Arnold, 2007). Hence there are opportunities to explore the effect of
mediation skills on the resolution of auditor-client disagreements and whether these
skills interact with other types of expertise.
In addition to the research opportunities arising from the limitations of the study,
our ndings provide a number of avenues for further research. We found a strong
interaction effect between nancial expertise and industry expertise with respect to
proposing a solution. Research is needed to explore the implication of this interaction
effect in more depth. Further, our study unexpectedly found insignicant results for
the inuence of the two types of expertise on mediation outcome which was somewhat
inconsistent with the results for the mediation techniques. Therefore, future research is
needed to investigate this nding. In addition, prior studies have found that informal
interactions between the audit committee and auditors and management can impact on
audit committee effectiveness (Turley and Zaman, 2007; Beasley et al., 2009). It is likely
that these informal communications impact on the audit committees mediating role in
resolving disputes between auditors and management and hence future research is
needed to explore whether this is the case. Finally, prior research has shown that the
acceptance of mediation as a dispute resolution mechanism is more accepted in some
societies than others (Wall et al., 2001). Malaysia is a society that appears to sanction
this approach to resolving disputes (Mansor, 1998; Wall and Callister, 1999). Wall et al.
(2001) point out that, in contrast, disputants in the USA are less likely to turn to third
parties for assistance. Further research is therefore needed to corroborate the ndings
of the study and to test their overall generalizability to other jurisdictions and other
cultures.
Notes
1. These rules are specied in the Listing Requirements of Bursa Malaysia, the Malaysian
Stock Exchange.
2. Mareschal (2005) refers to these two types of expertise as process knowledge and substantive
knowledge. Substantive knowledge is dened as mediators understanding of the issue and
underlying problems in the dispute, while process knowledge is dened as skills in the process
of facilitating and resolving the disputes.
3. RM denotes Malaysian Ringgit, which is valued at approximately US$0.3.
4. If there is a deviation of 10 percent or more between the prot or loss after tax and minority
interest stated in the announced unaudited accounts and the audited accounts, the company
has to provide an explanation of the deviation to Bursa Malaysia.
MAJ
27,4
398
5. To answer this question, participants were asked to complete a sum in the form of Carrying
value (RM15m) -Write-down (RM. . .m) New carrying value (RM. . .m).
6. The research instrument package comprised: (i) a covering letter; (ii) a coversheet explaining
the purpose of the study, providing instructions and guaranteeing the condentiality of the
participants; (iii) the research instrument; and (iv) a reply envelope.
7. A correlation test indicated that multicollinearity does not appear to be a concern as the
correlations between the dependent variables are less than 0.5 in all cases with the exception
of the correlation between mediating role and the use of the advising technique (r 0.704).
8. Participants were also asked to indicate whether they believed that the audit committee
would initially side with management. The means across the four treatment groups ranged
between 4.07 and 3.60, with neither of the main effects nor the interaction being signicant.
These untabulated results further support the view that audit committees generally are not
perceived to take sides.
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About the authors
Zalailah Salleh is a Lecturer in Accounting in the Faculty of Management and Economics at
Universiti Malaysia Terengganu, Malaysia. Zalailah Salleh is the corresponding author and can
be contacted at: zalailah@umt.edu.my
Jenny Stewart is Professor of Accounting and Discipline Head of Accounting and Law in the
Grifth Business School, Grifth University, Australia.
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