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In order to improve corporate governance, accountancy bodies, market regulators and commissions has recommended the formulation of audit committees. In 2001, after the creation of Douala stock exchange (DSX),the Cameroon capital market authority requested all listed companies to establish audit committees. This study focuses on the role of audit committees and corporate governance in Cameroon listed companies .Particularly, how audit committees operates in a developing economy like Cameroon and how these practices can be compared with those in the western economies as well as other emerging economies, the relationship of audit committees with management, internal and external auditors .The major achievements and challenges facing audit committees .
This study revealed that AC in Cameroon are challenged with inadequate human resource capacity, the interference of the government and sleeping shareholders as well the fast changing legal and operating environment. However, there has been a remarkable improvement on the reliability of financial reporting thus guaranteeing investor's confidence.
Key words; Audit committees, corporate governance, Cameroon, listed companies, management, internal auditor, external auditor, OHADA (organization for harmonization of business law in Africa), CMA ( capital market authority),Decision making.
Table of Content
List of Figures
List of Abbreviations
List of Tables
Chapter 1 Introduction
1.4 The study objective and Questions
1.5 The study scope
1.6 The limitations
.7 The study structure
Chapter 2 Conceptual framework
Section A ; Corporate Governance
2.1- The Definitions of Corporate Governance
2.2- The Background of Corporate Governance
2.3- Corporate Governance Code
2.4 Corporate Governance mechanism
2.5 Corporate governance Environment
2.6 The Evolution of the concept of Corporate Governance
Section B; Audit Committee
2.7 The Operations of Audit Committees
2.7.1- The Charter
2.7.2 Composition of the committee
2.7.3 -Qualification and Experience
2.7.4- Meetings and Reports
2.8-The Relationship between Audit Committees, the management, internal auditors and
2.9 The major Achievements and Challenges facing Audit Committees.
Chapter 3 Theoretical Frameworks for Corporate governance and Audit
3.2 The Agency theory
3.3 Evidence on conflict of interest between shareholders and managers
3.3.1 Conflict over Compensation
3.3.2 Conflict on diversification and wealth reducing investment
3.3 the Stewardship theory
3.3.1 Summary of the theories
4.1 Corporate Governance issues in developing countries.(Cameroon)
4.2 The legal and Regulatory framework for Corporate governance of listed companies in
4.2.1The Role of Douala stock exchange (DSX)
4..2.2- The Board of Directors
4..2.3 The Audit Committee
4.2.4- The Shareholders
4. 2.5.The Role of the Governance
4.3- The Actors of Corporate Governance ; Shareholders and Managers
Chapter 5 Research Methodology
5.2 Questionnaire survey
5.3 Administration of Questionnaires survey
5.4 Responses of the questionnaire survey
5.5 Interview Survey
5.5 Administration of interview survey
6-Findings and Discussion
6.1- Operation of Audit Committees
6.2- Relationship of Audit committees with management, internal and
6.3- Achievements and Challenges
Chapter 7,Conclusion,Refrences and Appendix
Chapter 1 Introduction
In the past two decades, there has been growing attentions on corporate governance notably after the corporate collapse of high profit companies in the world like the Enron and WorldCom. Corporate governance is now a first order issue mostly in economies where companies are run by controlling shareholders(Albuquerue and Wang, 2008) and a large number of companies are trying to adopt better corporate governance practices(Garay and Gonzalez, 2008).Traditionally, corporate governance is regarded as a mean by which companies safeguard the welfare of its financiers such as its investors, creditors and lenders.
Today, with the current recession and global financial distress, issue of corporate governance practices in companies and the roles of different committees are been studied. Audit committee is becoming the most widely used mechanism to ensure good corporate governance in companies(Chen et al, 2008).The audit committee is an operating committee of the company's board of directors that have some oversight responsibilities such as the financial reporting ,financial disclosure, external auditors, internal auditing as well as control.
A good number corporate governance studies has being carried out in developed countries of Europe, United states of America and Japan(Joshi and wakil,2004).Very few studies has being carried out and completed in less developed countries.Tsamenyi,Enninful-Adu and Onumah (2007) observes that corporate governance studies in less develop countries are limited and are available only on individual country basis.
This study tries to bridge the gap in prior study by adding more in our understanding of the operations of audit committee and the major achievements of audit committees in Cameroon. Furthermore, previous research in developing countries did not addressed the issue on how audit committees relate with the management, internal auditors and external auditors .In this study, we seek to fill in this gap by investigating on how audit committees in Cameroon listed companies relate with the management, internal auditors and external auditors
Jensen and Meckling (1976) defined agency relationship as a contract under which one or more persons (principals) engages another (agent) to exercise a service on their behalf. Managers or agents are being delegated the day-to-day decision making by shareholders. Managers are therefore charged with the responsibilities of utilizing and controlling the firm's economic resources .However the managers may not act always to the shareholders best interest due to adverse selection and moral hazard (Anthony and Govindarajan,2007;531). Therefore, shareholders has to monitor managers activities in order to ensure that they live up to the provisions of their contracts (Goddard and Masters,2000)
To avoid management failures, Moldddoveanu and Martin (2001) argued that shareholders must enact ratification, monitoring as well as sanction (reward and punishment) mechanisms . Moldoveanu and Martin(2001) defined ratification mechanisms as the tools used in validating the decisions of the agent, in giving final veto for an initiative, directive or the action plan of the agent. Monitoring mechanisms (both ongoing and separate monitoring) are use to observe, record and to measure the output of the agent's efforts. Furthermore, sanctioning mechanism give selective rewards / or punishments to agents for/ or for not aligning their efforts with shareholders objectives or shareholders interest.
A good number of corporate governance studies has being carried out in developed countries of Europe, United states of America and Japan(Joshi and wakil,2004).Very few studies has being carried out and completed in less developed countries .Tsamenyi,Enninful-Adu and Onumah (2007) observes that corporate governance studies in less develop countries are limited and are available only on individual country basis.
Proper corporate governance is a very imperative mechanism to restore investor's confidence, to enlarge the private sector, and to stimulate economic growth. It have been predicted that "good governance of companies will soon become as crucial to the world economy as proper governance of individual countries." Some people may see this as too early to agree, but this prediction was suggested with evidence, if not obviously true today, then, is very likely to be true in the future. The global acknowledgement of the impact of events regarding corporate social irresponsibility's such as the financial crises in Asia, the corporate scandals in the world high profit companies like Enron and WorldCom and the financial crisis in most African countries in the last decade .All these instances negatively affected the welfare and the lives of many such as the employees, the pensioners, firm's creditors and lenders. These raised the urgent need for effective and efficient regulation of corporations and also led to fear in marketplaces, and a decrease in stock prices . In most developing countries, like in Africa, the recognition of lost opportunities to mobilize financial resources in domestic and international capital markets via good corporate governance took the interest of most African Heads of State. This then inspired the African Heads of State to include good corporate governance as one of the four main thematic areas subjected to review under the African Peer Review Mechanism (the APRM).The four selected areas include ,political governance and democracy, economic governance and management, socio-economic development, and good corporate governance.
The need to closely monitor the operations of corporations can be justified by the following two reasons;
-The increasing interest of the investors in developing countries to invest in listed companies.
-The Potential gains or losses that hinge on good management of corporations can be financially profitable or economically devastating
1.4 Research objective and Questions
The research objective is to add more in the understanding of the operations of audit committees in terms of their composition, membership, independence, meeting and reporting, charter guideline as well as the achievements and challenges. The research also aims at examining the relationship between audit committees with the management, internal auditor and external auditors. Finally we will compare our findings with those in western and other emerging countries. To achieve these aims, the researcher seek to solicits the opinions of four clusters of respondents in the three listed companies in DSX (SEMC,SOCAPALM, and SAFACAM ). (i) the chairpersons of audit committees, (ii) the company secretaries, (iii) the finance heads; and (iv) the external auditors of all the companies listed in the Douala Stock Exchange (DSX).
The following research questions will be address;
a) How the audit committee operates in less countries like Cameroon and how these practices are compared with those in developed countries
b) How audit committees relate with management, internal auditors and external auditors
c) What are the main achievements and challenges facing audit committees
1.5 The study scope
The scope of this study is to analyses the role of audit committees and corporate governance in developing countries particularly in companies listed in the Douala stock exchange(DSX) Cameroon .The analyses will center on the operations of audit committees in listed companies in DSX by looking at their mode of selection, composition ,frequency of the committee meeting, reporting, qualification and experience, the achievements and challenges facing audit committee.
The previous research in developing countries did not addressed the point on how audit committee relate with the management, internal auditor and external auditor.In this study, the researcher seek to fill in this gap by investigating how audit committees in listed companies in Cameroon relate with the management, internal and external auditors
It is imperative for the researcher and the users of this research to be alert of the pertinent limitations as they try to advance and understand the results of this study (Anderson and Poole, 2001). We should recognized that the method of questionnaire survey is entitled to inherent limitations. According to Matthews (2002) all surveys are entitled to some inherent weaknesses as some respondents give responses which they believe are expected of them, or which portray themselves and the organization in the best light. This can be the case of the responses of the participants in this study which included AC chairpersons, company secretaries and finance heads. They may have overstated their assessment of the AC practices as this was seen to be more important than the other group of the participants (external auditors). Also , it can be likely that the questionnaires were not clear, this causes respondents to interpret some questions otherwise or on their own way. This study was also limited by the fact that the interview survey sample size was too small(only 5respondents opted) as conducting more interviews would have guaranteed a broader understanding of the research issue, however the interview survey was just to complement the questionnaire survey to get a deeper insight of the findings
1.7 The study structure
This paper will be made up of seven chapters, chapter one introduces the topic of corporate governance and audit committees, it also give the first understanding of the thesis background, motivation, research objectives, research questions and the limitations .
chapter two which is conceptual framework is in two sections. Section one will be based on corporate governance definitions, its background, corporate governance codes, mechanism, corporate governance environment and lastly the evolution of the concept of corporate governance. Section two of this chapter will base firstly on the operations of audit committees(functions), later focuses on the charter, composition which has to do with the question of independence (Joshi and Wakil,2004) , the factor of financial skills as a prerequisite for audit committees member is also examined as well as audit committee meetings and reports .Blue Ribbon committee (1999)) gave recommendation that audit committees members must be financially literate. Secondly, this section will talk about the relationship of the audit committees with management, internal auditors and external auditors. Lastly, this section will talk about some of the major achievements and challenges facing audit committees.
Chapter three will seek to analyze some theoretical frameworks like the agency theory and stewards theory. And then look at the some of the agency problems between managers and shareholders. This chapter will lastly give a belief summary of the two theories (agency and stewardship theory)
In chapter four, the researcher will talk about corporate governance issues in developing countries(Cameroon), the legal and regulatory framework of corporate governance in listed companies in the Douala stock Exchange( Cameroon) focusing on the role of the Douala stock exchange, the government of Cameroon, the board of directors, shareholders and audit committee, This chapter will look lastly at the actors of corporate governance which involves the shareholders and managers.
Chapter five which is research methodology, the researcher will base his research method on questionnaire and interview survey addressing the study objectives .This questionnaires will be based on the operations of audit committees ,composition, independence, financial literacy, relationship, self-evaluation as well as the major achievements and challenges .they will mostly be "true or false" type questions while others will necessitate the respondents to grade the committees achievement with a score of 4(to a greater extend) to a score of 1(not at all)
Chapter six will focus on the findings and discussions regarding the research results. The findings and discussions will center on the operations of audit committees, the relationship with management, internal and external auditors as well as the achievements and challenges.
Figure 1.thesis outline.
Chapter 2 Conceptual Frameworks
Scandals, Frauds, as well as corporate failures has increase the demand for reforms and better regulations more especially in the fields of corporate governance. In the early 1990s,in united kingdom, a good number of issues like the collapse of Maxwell business empire, leaded to the stimulation of discussions and arguments concerning the structures for controlling executive power(power2002).In December 1992, a code of best practices was published( the Cadbury code).this code gave recommendations to companies to form audit committees comprising of independent non-executive directors (power2002)
In United states of America, the increase number of earnings restatements in public traded companies, together with the financial statement fraud allegations as well as lack of responsible corporate governance in highly profitable companies like Enron ,Global crossing, World com In USA, Leisurenet in south Africa have sharpened the increasing attention in corporate governance as well as audit committees in particular. The decline of these companies raised much concerns regarding the lack of vigilant oversight by boards of directors and audit committees in financial reporting process auditing functions (Rezace et al,2003).George W Bush, USA president in the state of the union address, mentioned the gravity of this problem by stating that " Through stricter accounting standard and tougher disclosure requirements. Corporate America must be made accountable to employees and shareholders and held to the highest standard of conduct (Bush,29th January 2002)".In USA a good number of commissions ,regulations and audit committees has been formed to address corporate governance issues in USA. some of these include Tread way commission (1987), the Blue Ribbon committee (1999).Further more, the 2002 sarbanes-oxely act was signed in to law and one of its main provision were that all listed companies establish audit committees (Joshi and wakil,2004)
Rezace,Olibe and Minmier(2003) stated that good corporate governance promote relationships of accountability between primary corporate participants and this will go a long way to enhance corporate performance as management holds accountability to the board and the board is held accountable to the shareholders. One of the board main function is to ensure quality accounting policies, internal controls as well as independence. This will reduce fraud and financial risk are anticipated as well as promoting accurate, high quality and timely disclosure of financial and other information to the shareholders.
CMA(2002) defined corporate governance as the process and the structure used to direct and manage business affairs of the company towards enhancing prosperity and corporate accountability with ultimate objective of realizing shareholders long-term value while taking in to account the interest of other stakeholders.
In Cameroon, corporate governance issues has been taken very serious .the Cameroon capital market authority (DSX) in conjunction with commonwealth association for corporate governance has produce a sample code for best practices in corporate governance in June 2001.One of the key recommendations in the Douala stock exchange(DSX) (2001) is that all listed companies establishes audit committees comprising of independent non-executive directors which has to keep under review the scope and results of audit ,their effectiveness, independence and auditors objectivities. The code further stated that separate audit committees enables the board in delegating to the sub-committee the responsibility for thorough and detail review of the audit matters, also to enables non-executive directors in contributing independent judgment and have a positive role to play in an area in which they are particularly fitted and offer the auditors a direct link with non-executive directors(CMA,2002)
In south Africa, mangema and chamisa(2008) found out that the likelihood of a firm to be suspended from the stock exchange is higher in firms without audit committee. This therefore suggest the importance and the necessity of audit committees in Africa.
This chapter will be divided in to two sections. Section A will focus on conceptual framework for corporate governance while section B will focus on conceptual framework for audit committees.
Section A. Corporate Governance
2.1 The Definitions of Corporate Governance
Countries are different from one another in terms of technology, culture, political system, economic and historical development (Roman,2001).There differences make the definition of corporate governance to vary from country to country thus making it very difficult to came out with a universally acceptable definition of corporate governance.
Shleifer and Vishny (1997) defined corporate governance while looking at the ways in which the suppliers of finances to the firm assures themselves of good return for their investment. However this definition only laid more emphasis on the suppliers of finances, it fails to recognize the relationship that exist between the firm's managers and stakeholders since every firm has many stakeholders with different interests that must be taken care of by the firm. It is in this regard that corporate governance is also looked upon as a collective group of people united as one person who has the power or authority to control an organization (Ruin,2001)
Australian standard (2003) defined corporate governance as a practice in which companies are controlled, directed and held to account. According to Australian standard (2003) corporate governance therefore comprises of power, accountability, leadership, stewardship direction as well as control. This definition takes in to consideration the need of checks and balances in organization management process, thus it can be regarded as more comprehensive (Gregory,2000).The Australian standard definition is also similar to other definitions like that given by audit commission(2009) which emphasis the importance of accountability and control in organizational governance.
The presence of many different definitions for corporate governance shows that every author formulates a definition that suit his or her theme.(Deunb and neubeuer,1992).For instance, according to Turnbull(1997) corporate governance influences all firms activities that produces good and or services, according to Colley et al(2004) corporate governance is the act of governing whereas Cadbury(2000) define corporate governance according to the system by which the firm is directed and controlled. However Wallace and Zinkin(2005) pointed out clearly that the term good corporate governance is very easy to phrase but difficult to understand and appreciate.
2.2 - The Background of Corporate Governance
The concept of corporate governance is been used both in economics and in law, and it is understood to mean enforcement of contract, protection of property right as well as collective action(McNutt,2010), conclusively, corporate governance is associated with people operating within the organization, however the organization has to be properly governed in order to achieve their set objectives.
This concept of corporate governance became more commonly used and spoken in 1980s(parker,1996)however it originated in nineteenth century when incorporation was advocated for as a means of limiting liability(fletcher,1996.vinten,2001).The creation of registered companies is being perceived as the real starting point for the discussion on corporate governance (Adams,2002).This registration of companies was supported by the joint stock companies act of 1844(Uk).The argent need of modern corporation lead to the separation of control function from ownership(Berles and means,1967).With this separation ,firm's owners no longer exercise control over the firm's action because it was seen as a role of professional managers or agent (kiel and Nicholson,2003).This then suggest the need of corporate governance to protect firm's owners from the actions of managers .In respond to this need, the limited liability act 1855(UK) was created to protect shareholders from debts above their contributions
Francis(2000) argued that the need for corporate governance practices became more pronounce in 1980s.This was because during this period, several parts of the world were experiencing stock market crashes as well as corporate failures in some cooperation due to poor governance. According to united nation,1999) corporate collapse was the key driver for change to corporate governance codes. In 1980, as more and more corporate entities continue to collapse in various parts of the world, there were change of attitude with greater performance expectations on the firm's management board .It was also realized here that the firm has to be run by the manager whereas the board ensures that the firm is being run effectively(Adams,2002).
The adoption of the idea of corporate governance can also be supported on a positive note. There was a growing acknowledgements that improve corporate governance is essential for growth and the development of the country's economy(Carkr,2004,Department of Treasury,1997).A study that was carried out in United States of America by Gompers, Ishii and Metricck,2003) reveals that there is a strong correlation ship between good corporate governance practices and shareholders performance. This study further reveals that over 60% of investors were prepared to pay pore on share of companies with good corporate governance practices.
2.3 Corporate Governance Code (CGC)
In most countries, the best mechanism to enhance quality corporate governance reforms is through the implementation of corporate governance code to supplement the already existing business laws. Corporate governance code can be defined as documents which stipulate the rules and procedures for governing and managing organizations (Dabor and Adeyemi, 2009; Ugoji and Isele, 2009: scott, 2007; Classeens and Bruno, 2007).While corporate governance involves the process by which organizations are governed and controlled with the aim of adding shareholders values as well as meeting stakeholders expectation(CBN, 2006;Iyang, 2009), corporate governance codes on its part, categorically stipulates the rules, principles and the best practices for managing and governing organization's effectively(Okhealam and Akinboade, 2003;Amstrong, 2003; Gatamah, 2008, Andreason, 2009). Most of these codes are implemented by self-professional regulating agencies but under the supervision of government regulatory bodies. However, the responsibility for companies to adopt and implement these codes depends on the company's board of directors (Elebute, 2000;Iyang, 2009; Sanusi, 2003;Soludo, 2004).Therefore, the main responsibilities of the board of directors are to guarantee quality governance performance, add shareholders values, preserve the interest of stakeholders, protect the environment and guarantee precise financial reporting(Alo, 2003, WILSO? 2006.dabor and Adeyemi, 2009;Roe 2003;Ahmed 2007;Olusa, 2007;Elebute, 2000;Iyang 2009;Sanusi 2003;Soludo, 2004)
2.4 Corporate Governance Mechanism
Corporate governance mechanism involves the processes through which a country's business laws and corporate governance codes are been imposed.(Reed, 2002).Corporate governance mechanism consist of means to monitor, however the effectiveness of the corporate governance mechanism lies on the regulatory frameworks and public governance scheme in each country.(Wilson, 2006;Dabor and Adeyemi,2009;Ro, 2003, Ahmed, 2007;Olusa,2007).the best enact of corporate governance code is achieve through regulating professional bodies in alliance with the government regulating agencies and with the stock market authorities( Vintem, 2002, Reed, 2002;Wilson,2006;oe, 2003)
The assumption or the idea that, the presence of many corporate governance mechanisms will often let to good corporate governance has been proven wrong by the high level of corruption, fraud and scandals in Cameroon and in other parts of the world. The acceptance of corporate governance code by most companies in the private sector is simply a conformance and not an indication that the companies will compel themselves to good ethical business practices (Rossouw, 2005;Gatamah, 2008;Iyang,2009).In Cameroon, over 70% of the companies listed in the Douala stock exchange have a adopted the corporate governance code but there are still incidences of frauds, embellzement , lack of accountability and integrity.
2.5 Corporate Governance Environment
According to Li and Nair,(2009), corporate governance environment takes in to consideration the effect of factors like the country's political system, the economic stability and socio-cultural factors that can enhance good governance or prevent unethical business operations(Li and Nair,2009).Therefore corporate governance environment embodies the country's political, economic, technological ,social and legal systems that affect ethical business practices in corporations(Amaeshi and Amao, 2008; Wilson, 20006).Corporate governance then serves as a barometer to measure the company's overall performance, their strategic choice, decisions and actions. Though the political, economic and socio-cultural results of the newly formed corporate governance codes in Cameroon are still under investigation, the codes are created or formed to safeguard companies against ill responsibilities like corruption, environmental abuse, and companies mismanagement(Gatamah, 2008; Andreason, 2009).
2.6- The Evolution of the Concept of Corporate Governance
Due to cultural, political, economic and technological differences between countries, the idea of corporate governance was adopted but with major variations, as a consequent, a variety of corporate governance framework was established. However two major approaches of corporate governance practices is identified with variation arising only on the different legal systems at work in various countries
According to Solomon and Solomon,(2004),Department of Treasury(,1997);countries that practices common law like united states of America, united kingdom, Canada, and Australia develop a type of corporate governance structure which focuses on shareholder's interest(return).In this regard, corporate governance has to ensure that the company achieves the objectives set by the shareholders. This type of corporate is is known as outsider model of control as it recognizes the gap between the mangers of a firm and its owners( Department of Treasury,1997).
On the contrary, countries with civil law such as Germany,france,and Netherlands develop their corporate governance which focuses on stakeholders. In this regards, corporate governance has to balance the interest of key groups like the employees, managers, creditors and customers(Solomon and Solomon,2004).This approach is called insider model of control since it recognizes that the greater control in the firm is held by those closer to its actual working(Department of Treasury,1997)
However the two approaches have some similarities. For instance, they both opted for the fact that the management boards of the firm were to be elected by the firm's shareholders to set policies and then delegate to the management the full authority to manage the firm(Hilmer,1998).Anyway, it was realized that most countries adopted a system of corporate governance with the mixture of the two extremes (Solomon and Solomon,2004)
Nowourdays, corporate governance is an international issue because of business globalistion.3It is seen to play a major role in the management of companies in both developed and less developed countries. However, Davis and schlitzer(2008) pointed out that corporate governance practices are not uniform across countries, that each country tend to adopt corporate governance procedures based on factors like the country legal system ,the financial system of the country, the country cultural and economic situation and the corporate ownership structure of the country( the organization for economic cooperation and development,1998).
Section B: Audit Committee
2.7-The Operations of audit committees
The audit committees has as it prime function to assist the board in fulfilling its oversight obligations. By so doing, they review the financial information that has to be provided to the shareholders, other stakeholders and to the system of internal controls that has been established by the boards of directors and the management (Bean, 1999)
Bean (1999) pointed out some of the general responsibilities of audit committees:
-The audit committee has to provide an open atmosphere for communication between internal auditor, independence auditors and the board of directors.
-They have to report actions to the BODs and make some recommendations
-The committee have the power to carry out or authorize investigations in matters within the committee's scope of responsility.The audit committee has to retain an independent counsel and accountant if needed to assist in an investigation
2.7.1- The charter
In developing countries, audit committee's faces a lot of difficulties in carrying out their functions because of shortage in accounting skills (waweru, Hoque and Uliana, 2004).
A lot of authors have undertaken studies on the oversight responsibilities of audit committees .Most of these studies reveals that there is a wide variations in perceived and stated responsibilities .According to Kalblers and Fogarty(1993) study, the responsibilities of audit committee include oversight of financial reporting, internal controls and external auditor. Coopers and Lybrand(1995) and Dezoort, Hermanson, Archambeault and Reed (2002) in their study found out that the responsibilities of audit committees revolved mainly in areas of financial reporting, auditing and overall corporate governance.
It has being argued by Guy and Burke (2001) that all companies with audit committees must develop a tailor made charter that describes the committees composition and specifies access to appropriate resources. The charter has to be approved by the board which then serves as a guide to the committee in carrying out the various responsibilities delegated to them by the full board of directors .According to Bean (1999), comprehensive charter enhances effective performance of the audit committee, serves as a roadmap for members of the committees by making a clear definition of the responsibilities and provide a systematic discussion structure among the committee and the management as well as public accountant(Bean,1994). A charter helps audit committees members to focus on their specified responsibilities and also the charter enable or assist shareholders in evaluating the role and responsibilities of audit committees (KPMG,1999). In Cameroon, audit committees authority is gotten from capital market act which requires that some authority has to be delegated to the audit committee by the board.
2.7.2- The composition
According to Joshi and Wakil (2004), one important variable of composition of the audit committee is the question of independence (joshi and wakil, 2004). Br aiotta (1999) pointed out that the effectiveness of an audit committee depends on the background of the committee's members which have to consist of both financial and not financial skilled people(Braiotta,1999).
The success or failure of the committee's operation relies on the chairman, therefore great care has to be taken when choosing the chairman (Braiotta,1999).According to Braiotta (1999), the number of audit committee member depends on the responsibilities and authority of the committee and also on the size of the board and the company. The number of the members vary from one country to another (Braiotta,1999)
There are growing arguments on whether the committee members should be independent as advocated by Bean(1999), the Blue Ribbon(1999) as well as it was adopted in Cameroon by the Capital Market Act in 2001(Hussein,2003) or should it depend on the surrounding circumstances of a particular company(Attwood,1986).According to Bean(1999), an independent director is one who is free from any relationship that can influence his or her judgment as a member of the audit committees(Bean,1999).However this is difficult to determine(Pomeranz,1997)
In Cameroon, the issue of independence of most directors is been affected by that fact they serves as directors in more than one listed company. This is as a result of shortage in skilled human resources capacity in Cameroon and also due to the fact that most listed companies in Cameroon are small in size thus making it difficult to attract people with qualified skills.
2.7.3-The Qualification and Experience.
There are different viewpoints on the need of financial literacy as a qualification for audit committee members. The Blue Ribbon committee (1999) recommended that all audit committee members has to be financially literate. According to Rezaee et al (2003) ,financial literate is define as the ability to read and understand financial statement. However Herdman (2002) questioned the issue of whether the requirement about financial literacy of audit committee members by the capital markets went far enough. On the contrary ,Jonathan and Carey(2001) argue on whether in a world of ever more complicated accounting standard, where even fully trained accountant can struggle to understand, if this is a realistic and a necessary requirement as a member of the audit committee(Jonathan and Carey,2001).
In USA, studies were carried out in areas of experience and expertise. The United states General Accounting Office(GAO) (1991) found out that over half of the 40surveyed audit committee chairs from large US banks reveals that their audit committees were operating with no members with expertise in accounting, auditing and law oversight (GAO,1991).
2.7.4- Meeting and Reports
According to Guy and Burke (2001), audit committees have to schedule meetings two to four times per year depending on their scope of activities and the company size. Graziana (2004) argued on the point that audit committee has to meet more frequently , both formally and informally .Formal meeting has to be held a least 4 times and sometimes up to 12 times per year, this 4 meetings are in person and last for almost 4 hours.(Graziana,2004).These meetings must include the senior management, external auditor and the internal auditor(Graziana,2004).Furthermore, the board has to delegate the authority ot the audit committee to hold special meetings as needed(Guy and Burke,2001).
Some studies have being carried out on the frequencies of audit committee meetings .Menon and Williams (1994) made a research on 200 companies and found out that the number of audit committee meeting was increasing as the number of outside directors increased (menon and Williams,1994).Studies have shown that meeting frequency is positively related to the company's size, monitoring and the need of audit committee meeetings. Price WaterHouse Cooper(1999) saw that audit committees in European companies meet averagely 3 to 4 times per year.
The audit committee's report has to be addressed to the BODs and must include their findings and recommendations regarding the effectiveness of the functions of internal and external auditors and other areas within the committee's jurisdiction as stated in the charter. Also, the report has to base on the participation of the members in audit panning process and their monitoring activities (Braiotta,1999).
2.8-The Relationship with Management, Internal auditor and External auditor.
According to Blue Ribbon committee (1999), a company can only achieve quality financial reporting when there is an open and candid communication as well as a co-working relationship between the board of directors, audit committees, the management ,internal and external auditors. It has being argued Rezaee et al (2003) that the most effective approach is for the audit committee to work in collaboration with the management and the auditors to enable them identify complex activities of the company, identify and asses the relative risks, determine the accounting treatment and also to get a complete understanding of their impact on free and fair presentation of financial performance in order to reduce fraudulent activities (Rezaee et al,2003).Members of the audit committees have to be sufficiently knowledgeable to ask tough questions to the management as well as the internal and external auditors regarding the report quality, transparency and the reliability of the reports. However, in developing countries like Cameroon, most of the listed companies are institutionally owned and these institutions are owned by the government, as a consequent, some members serves in the board due to their virtue position in the government and not because of their qualification or experiences.
Braiotta (1999) stated that the audit committee has to be independent from CEO, however the CEO holds the best information source related to the business and they ensure quick respond to the request of the audit committee, thus making the relationship with the CEO the key.(Braiotta,1999).
The BODs has the responsibility of reviewing the overall effectiveness of internal controls system but in reality, the board can delegate this responsibility to the audit committee (Zaman,2001).The board then has to decide on the role of audit committee in the reviewing process, the role of audit committee in the review process also depends on factors like the size, the board composition and the nature of the company's principal risks(Zaman,2001).
According to Braiotta (1999), it is necessary and important for the audit committee and the auditors to establish a good working relationship that is not counterproductive(Braiotta,1999).There is a co-relationship between the works of the audit committees and independent auditors because they both have common financial objectives. Following the Sarbabes-Oxley Act in the United States, it is legal for the auditors to report to the management. The audit committee has to approve all services both audit and non-audit, they get all new accounting and auditing information from the auditors and they also serve as an o official communication line between the company and the auditors(Tackett,2004).The fact that the audit committees are given the authority in making decisions about hiring and firing the auditors, has removes from the management the ability of threatening the auditor with dismissal if the auditors fails to perform to the management best interest, furthermore, the audit committee are required to make approval to all payments made to auditors for their services like auditing thus making it difficult for management ot buy unneeded services from auditors with the hope that the auditors will give them some favorable treatments, lastly, the fact audit committees are required to deal with any disagreement between the management and the auditors, makes it difficult for management to appear in questionable accounting practices. Knapp (1987) made a surveyed on 179 audit committees members and found out that, when there is audit dispute, the audit committee tend to support the auditors and not the management.
2.9- The Major Achievements and Challenges facing audit committees
Several opinions has being raise regarding the usefulness of audit committees .According to Guy and Burke(2001) only 22% of the executive directors of FTSE 100companies have the conception that audit committee are helpful in achieving good corporate governance while 78% remain unconvinced about the value of audit committees.However,89% of the non-executive directors in FTSE 100companies have the believe that audit committees are vital or helpful in achieving quality governance(Guy and Burke,2001).Menon and Williams (1994) carried out a study on whether companies depends on the report of their audit committee, this study reveals that companies do not relies on their audit report though they voluntarily formed the committees, therefore these committees were established for other purposes.(Menon and Williams,1994).According to Joshi and Wakil (2004), audit committees are widely used in large companies and in companies with higher proportion of no executive directors(Joshi and Wakil,2004).
Due to the need of corporate governance in companies, a lot of pressure is being mounted on audit committees in overseeing the integrity of the firm's financial reporting activities. There are higher expectations from the non-executive directors serving as audit committees members(Jonathan and Carey,2001).It is realize that the responsibilities of audit committee are increasing which has to do with matters concerning risk management ,internal control, other regulatory requirement, the independence of external auditors and also the move to international accounting standard(Jonathan and Carey,2001).Furthermore, many stakeholders are interested in the firm's activities but with different agendas thus making it more complex and risky serving in audit committee or on boards. The Sarbane-Oxley for instance states that failure to perform will result to legal actions.
Rezaee et al (2002) pointed out that the inclusion of the report of audit committees in proxy statements serves as challenges for the audit committees. The committee members do not exercise their full participation in the preparation of the financial statements thus increasing their risk (Rezaee et al,2002).
Studies carried out in developed countries shows that good corporate governance reduces fraudulent earning management (Rezaee et al,2003). In fact, the corporate failures in some high profit companies are attributed to lack of vigilant oversight by the boards. It is rather unfortunate that there exist no empirical study on the overall effectiveness of corporate governance in Africa, Mangema and Chammisa (2008) observed that because of country differences in Africa, it will be much nicer and clear to examine the various governance structures separately in every country. This study tries to bridge the gap in prior study by adding more in our understanding of the operations and the major achievements of audit committees in Cameroon.
A lot of empirical studies have being carried out concerning the functioning and the roles of audit committees in different countries. For instance, in Canada, Maingunt and Zeghal (2000) investigated the objectives, composition, selection, frequency of the committee meeting, the relationship of audit committee with management and auditors.(maingunt and zeghal,2000).
The previous research in developing countries did not address the point on how audit committees relate with the management, internal auditor and external auditors. In this study, we want to fill in this gap by investigating how audit committees in Cameroon listed companies relate with the management, internal auditors and external auditors.
Chapter 3 The Theoretical frameworks for Corporate Governance and
The agency theory have influenced recent believe about business management and policies. This tides that managers do not always act to shareholders best interest unless suitable governance structures are imposed to safeguard shareholders welfare.(Jensen and meckling, 1976).The BODs have a great role to play here more especially in the relationship among chairperson and the CEO(Tricker,1984).the interest of shareholders can only be protected when the board chair is not detained by the CEO or when both the shareholders and the CEO have the same interest(Williamson, 1985).
According to Berles and means(1932) a single shareholder cannot exercise control over a firm whose capital is efficiently and sufficiently dispersed. Therefore capital dispersion allows managers to exercise illegitimate power on behalf of shareholder. Managers decisions and actions are been monitored and evaluated by the audit committee formed by the board.The audit committee then serves as a link between the management and the board and also to protect stakeholders welfare.. The agency theory and the stewardship theory are two finance theories that covers the concept of corporate governance and the role of audit committee to enhance good governance.
3.2 The Agency theory
Agency theory can be define as a contract in which one person (the principal) engages another person ( the agent) to perform some services on his or her behalf(Jensen and meckling,1976). According to Kiel and Nicholson(2003),due to the separation of control and ownership functions, managers has to manage the firm on behalf of the firm's owners. However conflicts always arises when the managers are not managing the firm to the owners best interest(Eisenhardt,1989).The agency theory therefore is more concern in analyzing and solving problems or conflicts that occurs between firms owners and managers. By so doing, the agency theory assumes that the role of a company is to maximize shareholders wealth(Blair,1995)
The agency theory relay on the fact that, most businesses are operating with incomplete information and with a lot of uncertainty. These conditions then exposes the business to two major agency problems; adverse selection and moral hazard. The problem of adverse selection occurs when the shareholder(principal) cannot ascertain whether or not he manager(agent ) accurately represent his or her ability to do the job for which he or she is being paid for(Eisenhardt,19989).Moral hazard on the other hand is when the shareholder(principal) is not sure that the manager(agent) has put forth his or her maximum efforts(Eisenhardt,1989).According to this theory, managers have superior information that which allow them to have advantage over the firm's owners, managers may then be more motivated to satisfy their individual welfare rather than the welfare of the shareholder(Berles and means,1967)
It has being argued by Donaldson and Davis(1991) that unless quality corporate governance structures are implemented to safeguard shareholders interest, managers will not always act to maximize shareholders returns. In this regard, the agency theory supported that the purpose of corporate governance is to reduce the potential of managers acting contrary to shareholders interest.
The agency theory further argued on the point that, top management of the firm must have significant share of the firm so as to maintain a positive relationship between corporate governance and the number of stock owned by the top management(Mallin,2004).According to Wheelen and Hunger(2002), conflicts or problems always occurs in a company when the top management is not willing to be held responsible for their decisions unless they have a reasonable amount of stock on the company(Wheelen and Hunger,2002).The agency theory also advocated for the rules and incentives that align managers behaviors with the interest of shareholders(Hawley and Williams,1996), however it is practically impossible to write down the rules that governs all the scenarios that the employees encounters
3.3 Evidence on conflict of interest between shareholders and managers.
following theoretical opinions on the motives for conflicts of interest among shareholders and managers, a good number of research have reveals enough proof suggesting the occurrence and significance of agency conflicts between companies shareholders and managers related with risk discrepancy, privilege and shirking problem.these research centers their findings on the conflict of interest regarding matters of compensation, diversification, and investment
3. 3.1 Conflicts of interest over compensation
A lot of studies observe the affiliation between managers ,compensation and company performance and results shows regularity with conflicting interests between shareholders and managers. A typical research is that conducted by Jensen and Murphy (1990).this study found a weak relation between managers compensation and performance. To compound this, there is the proof that managers wealth are more sensitive to the size of asset than to the market value (Jensen and murphy, 1990),this then opposes Rosen's ( 1982) premise that the size and pay relationship is because big companies employ more able executives. Agrawal and Knoeber (1998) perceive that takeover threat have two contradicting effects on managerial compensation. The first premise is that of the effect of market competition for managers, this leads to less ability for mangers to demand higher wages.the second premise is that of risk effect which in contrasts leads to higher compensation due to the fact that higher takeover threat can increase the likelihoods of a firm losing its specific human capital or compensation deferral. This then oblige manages to request for higher wages to counterweight the high risks.(Agrawal and Knoeber (1998).Following the survey that was carried out by Agrawal and Knoebe (1998) on 450 companies which were divided in to two,(one set where managers experience both effects of risk and competition and the other set where mangers faced only the effect of competition in the market).According Agrawal and knoeber (1998),the both effects are important. everything being equal ,through the effect of competition, lower takeover threat result to higher wages which is in harmony with the viewpoint of misalignment of shareholders interest and mangers interest.
3.3.2 Conflict on diversification and wealth reducing investment
Another main of conflict between shareholders and mangers is on the diversification strategies. There are theoretical claims that diversification have both costs and benefits to firms owners, however ,existing proof suggest that the costs are more than the benefits. there is the assertion that holds that, on an averages basis, diversification costs are far higher than the benefits,Morck,Shleifer and Vishny (1990à;Bhagat ,shleifer and Vishny (1990)servaes(1996) all found out that corporate diversification is associated with substantial value loss.
Some proofs of agency problems can be found in acquisitions and investments. Several studies have reveals that purchaser return from the proclamation of acquisition are negative(Roll, 1986).According to Jensen (1986)the nastiest agency problems arise in companies with poor investment openings and surplus cash.it was argued by lang,stulz and walking (1991) that purchaser returns are likely to be lower when companies have little Tobin Qs and greater cash flows. On the other hand, McConnell and Muscarella found proof of wealth reducing investment in oil exploration, this is especially when mangers holds little ownership stakes( Lewellen,Loderer and Rosenfeld( 1985).
3.4 The stewardship theory
The stewardship theory holds a different approach from that of the agency theory, it first premise is that, the company serves a large range of social purposes rather than just trying to maximize the wealth of shareholders. The stewardship theory also called the stakeholders theory assumes that corporations are social entities that affect stakeholders welfare and stakeholders are individuals interacting with the firms directly, therefore, they can affect or affected by the achievement of the firm's objectives(Donaldson and preston,1995, freeman,1984)
According to Starik and Rands(1995), a company's success can be judge by its ability to add stakeholders value(starik and rands,1995,Dunphy et al,2003).stakeholders will only return to a firm for more when they always get what they wantFreeman,1984, freeman and Mc Vea,2001).Hence stakeholders are regarded as instrumental to corporate success and they tend to possess some moral and legal rights(Donaldson and Preston,1995, Ulrich,2008).Companies management have to take in to consideration the claims or concern of stakeholders in their decision making process(Blair, 1995), stakeholders participation in the company's decision making process enhance better efficiency (Turnbull,1994) and also reduces conflicts(Rothman and friedman, 2001).
A company can use two approaches when considering or integration stakeholders in their decision making (kaptein and van Tulder,2003). These two approaches are reactive and proactive approach. Reactive approach on one hand is when the concern of stakeholders are not considered or integrated in making corporate decision. This usually leads to misalignment of the company's objectives and the demands of stakeholders (Mackenzie,2007).The scandals of world com was attributed to the fact that they never integrated the stakeholder concern in their decision making processes(Curral and Epstem,2003, Turnbull,2002, walkins,2003 and Zandstra,2002) .In respond to these scandals, some regulations were set up by governments with the aim of aligning stakeholders interest with corporate objectives. For instance, the Sarbanes-Oxley Act. On the other hand, the proactive approach is when companies integrate the concern of stakeholders in their corporate decision making process, thus establishes a good corporate governance structure( de wit et al, 2006).
3.5 Summary of the theories.
The knowledge of agency theory can be credited to Coase (1937) however the ideas of this theory was practical only to directors and boards since the 1980's.Following . agency theory, individuals are self-interested and not altruistic, therefore individuals can never be trusted to always act in others best interest. On the other hand,, individuals will always want to maximize their utilities functions, the agency theory considered managers and shareholders relationship as a contract ( Adams, 2002). This means that managers actions must be properly monitored to guarantee that they always act in shareholders' best interest.
The stewardship theory on its part opted that company's board of directors and their CEO, acting as stewards, are encouraged to act in the company's best interests and not trying to satisfy their selfish interests. This is partly because, previously senior executives regarded companies as an extension of themselves (Clarke, 2004; Wheelen & Hunger, 2002).The stewardship theory therefore suggested that,like shareholders, top management of a company should care more on the future success of the company (Mallin, 2004).
4.1 Corporate Governance issues in Developing Countries(Cameroon)
According to Wallace (1990), developing countries are defined as those countries found in mid-stream of development and are referred to anamorphous and heterogeneous group of countries found mostly in Africa ,Asia, Latin America ,Middle East and Oceanea. There exist difference between developed and developing countries in terms of culture, politics and market economics (Waweru and Uliana,2005).Due to lack in skilled human resources, developing countries therefore find it difficult to attract personnel's verse with accounting and financial skills in their committees. The cultural variation between highly individualistic countries ( like North America) and highly collectivistic countries (like Africa) necessitate different corporate governance arrangements. Rabelo and Vasconcelos (2002) pointed out factors like economic trends towards globalization, under developed capital market as well as government intervention has made the model of corporate governance to differ from those in European countries and North America. Mensah (2002) argued that countries in Africa are not well equipped in implementing the kind of corporate governance found in the western world because of the economic and political regimes characterizing these countries(example weak fraudulent legal and judicial regimes ,state ownership of companies as well limited capacity in skilled human resources.).
Corporate governance structures in less develop countries are determined by the zeal to maintain control by the majority shareholders over firms ,the dependent on debt finance, weak financial markets and ineffective legal system (Rabelo and Vasconcelos,2002).Developing countries are always confronted with problems like less developed and illiquid capital markets, economic uncertainties ,investors protection as well as weak legal and judicial control system (Tsamenyi et al,2007).
According to Goddard and Masters(2000),audit committees has become more relevant and prevalent latterly but however there is paucity in the empirical research about their value. Kalbers and fogarty(1993) further indicated that the issue of whether audit committees are really discharging their relevance responsibility remain insufficiently understood, suggesting therefore the need to examine the ways audit committees are operating in developing countries like Cameroon
In Cameroon, most companies are owned by institutions and such institutions are owned by the state(government), therefore most board members are serving the position as management of shareholders not because of their qualification neither their experiences(Mensah,2002).Audit committees operations in developing countries are different compared with the practices in developed countries .In 2001,the Cameroon capital market authority gave guidelines regarding corporate governance activities for listed companies.one of this guideline was that which called all boards to form audit committees comprising at least three independent non-executive directors.
Figure 2, corporate governance(CG) fram work in Cameroon
4.2 The legal and Regulatory Framework of corporate governance for listed companies in Cameroon
Cameroon operates under two systems of laws namely ;the common law and the civil law. The bilingual nature of Cameroon is inherited from Britain and France when the county came under the administration of these two great powers. Therefore Cameroon has a bijural system with the English Common Law effective in the two Anglophone provinces of North West and South West and the French Civil Law effective in the eight francophone provinces namely ; Adamaoua, Centre, East, Far North, Littoral, North, West and South.
The surveillance of the principles of good corporate governance in Cameroon listed companies have been protected by the mixture of voluntary and mandatory mechanisms .The DSX code of best practices for listed companies in Cameroon is voluntary and is aim at enhancing good business practices and standard for all listed companies in Cameroon. On the other hand, mandatory corporate governance requirements linked to companies are enclosed in the Companies and Allied Matters Act 2001).(CAMA).
The following bodies are loaded with the responsibilities of guaranteeing effective management, accountability and control of companies in Cameroon.it is important to deliberate on the respective roles and responsibilities of these institutions .
4.2.1 The Douala Stock Exchange(DSX)
The DSX is the top regulatory organ of stock market in Cameroon. DSX was formed , and organized in agreement with the provisions of degree No.99/015 of the 22nd December, 1999.but it went effective from 2001. The DSX is both a standard bearer of the national economic and the financial community .It is a public limited company with board of d