A GOVERNANCE FRANKENSTEIN INTEGRATING THE
AGENCY AND INSTITUTIONAL PERSPECTIVES:
FOCUSING ON AUDIT COMMITTEES
A thesis submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy
Student ID: s3166152
Akeel M. Lary
BBus (Mgt), BBus (Hons)
Senior Supervisor: Prof. Dennis Taylor
Associate Supervisor: Dr. Grace Wong
School of Accounting
COLLEGE OF BUSINESS
RMIT University
February 2014
Akeel M. Lary
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DECLARATION
DECLARATION
I, Akeel Mansour Lary certify that except where due acknowledgement has been made, this thesis is
my original work and not that of another author; this thesis has not been previously or is currently
being submitted, in whole or in part, to qualify for any other academic award; the content of the
thesis is the result of work which has been carried out since the official commencement date of the
approved research program; any editorial work, paid or unpaid, carried out by a third party is
acknowledged; and ethics procedures and guidelines have been followed.
Akeel M. Lary
28th January 2014
Akeel M. Lary
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ACKNOWLEDGEMENTS
ACKNOWLEDGEMENTS
I would like to express my gratitude to my senior supervisor, Prof Dennis Taylor, for his patience,
guidance and support, who throughout the past three years has dedicated his efforts and guided me
though the preparation and completion of this thesis. It is his belief in my research abilities which
motivated me to overcome my research obstacles– from research planning to the submission of this
completed thesis.
My appreciation goes to my associate supervisor, Dr Grace Wong, for her support and consultation.
This thesis would not be in its current shape had it not been for her efforts and feedback.
I would also like to express my appreciation to Prof Christopher Napier, Prof Lee Parker, Prof Rob
Gray, Dr Prem Yapa, Associate Prof Robert Inglis, Prof Paul De Lange, Prof Geoffrey Stokes, Dr
Tehmina Khan and Dr Pavithra Siriwardhane for their feedback and consultation.
I thank the staff from RMIT University’s School of Accounting for their support. Further, I am
thankful to the School of Accounting for the facilities and resources made available. I acknowledge
RMIT University but particularly the School of Accounting, for the opportunity to complete my
research goals.
Beyond academia, I am grateful to the Institute of Internal Auditors Australia, particularly, Joe
Garbutt and Stephanie Koehn, for their efforts and support. Further, I express my appreciation to
each of the interview participants in my case study research. They took time from their busy
schedules as a director, top executive or consultant to provide me with their insights. While I cannot
disclose your names for ethical and confidentially reasons, I would like to say thank you.
Finally, I would like to express my deepest gratitude to my family, especially my parents whose
support and belief in me motivated and inspired me to believe in myself.
Akeel M. Lary
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TABLE OF CONTENTS
DECLARATION ............................................................................................................................... I
ACKNOWLEDGEMENTS ................................................................................................................ II
LIST OF FIGURES ......................................................................................................................... XII
LIST OF TABLES ......................................................................................................................... XIII
LIST OF ABBREVIATIONS ............................................................................................................ XIV
ABSTRACT .................................................................................................................................... 1
FOREWORD ......................................................................................................................................... 3
CHAPTER ONE: INTRODUCTION .................................................................................................... 3
1.1 INTRODUCTION TO THE THESIS .................................................................................................... 3
1.2 BACKGROUND ON CORPORATE GOVERNANCE ............................................................................ 5
1.3 RESEARCH AIM .............................................................................................................................. 7
1.3.1 RESEARCH OBJECTIVES AND QUESTIONS .............................................................................. 8
1.4 RESEARCH METHODS .................................................................................................................... 8
1.5 RESEARCH MOTIVATION AND SIGNIFICANCE ............................................................................... 9
1.6 RESEARCH SCOPE ........................................................................................................................ 10
1.6.1 BEYOND THE RESEARCH SCOPE ........................................................................................... 11
1.7 ORGANISATION OF THIS THESIS.................................................................................................. 11
1.8 CHAPTER SUMMARY ................................................................................................................... 13
CHAPTER TWO: A REVIEW OF CORPORATE GOVERNANCE LITERATURE AND ITS UNDERLYING
THEORETICAL PERSPECTIVES ...................................................................................................... 15
2.1 INTRODUCTION ........................................................................................................................... 15
2.2 CORPORATE GOVERNANCE ......................................................................................................... 15
2.2.1 AUDIT COMMITTEES: THEIR NATURE AND ROLE ................................................................. 17
2.2.2 AUDIT COMMITTEE EFFECTIVENESS: AN ANNOTATED LITERATURE REVIEW ..................... 21
2.2.3 AUDIT COMMITTEE CHARACTERISTICS ................................................................................ 33
2.2.3.1 COERCIVENESS .............................................................................................................. 34
Akeel M. Lary
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2.2.3.2 INDEPENDENCE ............................................................................................................. 34
2.2.3.3 COMPETENCE ................................................................................................................ 36
2.2.3.4 DILIGENCE ..................................................................................................................... 38
2.2.4 EXTERNAL AUDITOR ISSUES, FINANCIAL STATEMENT INTEGRITY AND AUDIT COMMITTEE
EFFECTIVENESS ............................................................................................................................. 39
2.2.4.1 CONCERN OVER NON-AUDIT SERVICE FEES .................................................................. 39
2.2.4.2 INTEGRITY OF FINANCIAL STATEMENTS ....................................................................... 41
2.3 CURRENT GOVERNANCE THEORIES ............................................................................................ 43
2.3.1 STEWARDSHIP THEORY ........................................................................................................ 44
2.3.2 STAKEHOLDER THEORY ........................................................................................................ 45
2.3.3 RESOURCE DEPENDENCE ..................................................................................................... 46
2.3.4 MANAGERIAL HEGEMONY ................................................................................................... 47
2.4 THE AGENCY PARADIGM ............................................................................................................. 47
2.5 THE INSTITUTIONAL PARADIGM ................................................................................................. 55
2.6 THE GOVERNANCE DILEMMA: AGENCY THEORY, INSTITUTIONAL THEORY, AND CORPORATE
GOVERNANCE ................................................................................................................................... 61
2.7 THE GOVERNANCE MODEL ......................................................................................................... 69
2.7.1 AGENCY ASSUMPTIONS ....................................................................................................... 73
2.7.2 INSTITUTIONAL ASSUMPTIONS ............................................................................................ 75
2.8 CHAPTER SUMMARY ................................................................................................................... 76
CHAPTER THREE: RESEARCH METHODOLOGY .............................................................................. 79
3.1 CHAPTER OVERVIEW ................................................................................................................... 79
3.2 THE RESEARCH DESIGN ............................................................................................................... 79
3.2.1 PHILOSOPHICAL ASSUMPTION UNDERLYING THE QUALITATIVE RESEARCH DESIGN
STRATEGY ...................................................................................................................................... 82
3.3 THE RESEARCH STRATEGY ........................................................................................................... 85
3.3.1 STAGE ONE: SAMPLING FRAME ........................................................................................... 90
3.3.2 STAGE TWO: THE PURPOSE ................................................................................................. 91
3.3.3 STAGE THREE: THE APPROACH ............................................................................................ 91