Explanations For Not Having An Audit Committee In A 'Comply Or Explain' Regime

We utilise the Australian 'comply or explain' corporate governance regime to examine the explanations given for not having an audit committee and whether these explanations are consistent with underlying firm characteristics. We hand-collect explanations provided by firms, and find the most common explanations are that the firm or board size is too small or that the firm is insufficiently complex to justify an audit committee. Thus, the reasons that firms provide for not having an audit committee are focused on internal factors limiting their ability to supply an audit committee. As we find that these explanations are associated with lower total assets, smaller board size and lower leverage, they are consistent with underlying firm characteristics. Thus firms are not providing inconsistent or unrelated explanations as pretexts to avoid forming an audit committee. Documenting that the explanations given for non-compliance are associated with related firm characteristics should be of interest to regulators and policy makers.We find the most common explanations for not having an audit committee are that the firm or board size is too small or that the firm is insufficiently complex to justify an audit committee. As we find that these explanations are associated with fewer total assets, smaller board size and lower leverage, the explanations appear consistent with underlying firm characteristics.