Audit Committees and Risk Assessment in the Context of Corporate Governance

Abstract

The integrity of the financial market depends on the quality of the financial information available to investors. Clear, accurate, and trustworthy disclosure is essential for efficient capital formation and liquidity in financial markets. The higher the degree of transparency, the greater the sense of equality or fairness perceived by investors in these markets, thereby increasing their willingness to invest. In recent years, several companies have undergone public scrutiny and investigation due to allegations of accounting violations. Most of these companies, such as Livent, Global Crossing, and Enron, had global reputations. The results of their disclosures were scandalous, leading to the dismissal of their managements, increased risks to their futures, and severe declines in their stock prices. To maintain economic stability, the concept of audit committees was developed. These committees assist the board of directors by providing financial information, overseeing internal control systems, and appointing independent external auditors. This research aims to enhance the role of audit committees within companies and improve their performance by identifying the effective elements necessary for these committees. It emphasizes their supervisory and monitoring roles, focusing on evaluating risks arising from excessive pressures on management to prepare reports according to analysts' expectations, regulatory conditions, or other reasons. Consequently, audit committees should assess the organization’s internal and external reporting, determine the achievement of objectives, obtain appropriate assurances regarding the completeness and accuracy of financial statements, review the impact of significant changes in accounting principles and auditing standards on the audit process, and make recommendations to the board of directors to prevent financial failure and economic crises, ensuring that necessary measures are in place to monitor management's corrective action plans and protect the company and its shareholders.