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Chapter One: Introduction
1.1. Background of the Research
The theoretical framework of corporate governance was established since the 1930s. The framework includes different mechanisms, such as the board characteristics, sub-committees’ characteristics, stakeholder management, and much more (Demirag, 2005). Bansal and Sharma (2016) stated that it is a priority for any nation economic growth to have corporate governance nowadays.
One of the audit committee definitions it is a sub-committee, whom members are nonexecutive directors, work cooperatively on auditing, financial reporting, and internal controlling (Spira, 1998). The audit committee has a specific responsibility to act independently to protect the interest of the shareholders by overseeing the financial report and internal control. They provide a full picture of any concerns about the audit to the board, internal auditors, and external auditors (Mallin, 2007).
Due to different scandals worldwide, such as Enron and Worldcom, some governments obligated the regulations on the listed companies with some exceptions. Even in Saudi Arabia, at the beginning of 2006, there was an extraordinary crash of the Saudi Stock Market; thus, the Capital Market Authority (CMA) was established (Al-Matari et al., 2012). By the end of that year, Saudi Arabia firms started to adopt many of the corporate governance codes that were regulated by CMA. In August 2017, the kingdom issued the updated rules for corporate governance to guarantee the security of shareholders and rights of stakeholders (CMA, 2017).
According to the agency theory, which is the base theory for all other related corporate governance theories (Jensen and Meckling, 1976), the attributes of corporate governance are anticipated to have an impact on firm performance. In this case, the internal control performed by the audit committee (Fama, 1980; Pincus et al., 1989; Bradbury, 2006).
1.2. Purpose
In order to avoid sanctions, some companies comply the requirements of the corporate governance regulations; yet, not all committees effectively work to enhance the company performance (Beasley, 1996). The audit committee effectiveness depends on their characteristics not solely on their existence. There were mixed results of the empirical studies done in US, UK, France, Oman, Egypt, Jorden, and other countries concerning audit committee characteristics and firms’ performance. Few studies were done to examine the corporate governance mechanisms in the Middle East, especially in Saudi Arabia. The main objective of this research is to contribute to knowledge by investigating the effect of the audit committee characteristics (size, independence, the frequency of meetings, and financial expertise) on firms’ financial performance (return on asset and return on equity) in the Saudi market for four years (2012 – 2015).
1.3. Research Hypotheses
Based on the research purpose and objective the following research hypotheses were developed:
H1: There is a positive relationship between audit committee size and firm performance.
H2: There is a positive relationship between audit committee independence and firm performance.
H3: There is a positive relationship between audit committee financial expertise and firm performance.
H4: There is a positive relationship between audit committee meetings frequency and firm performance.
1.4. The Scope of the Research
The research evaluates the impact of audit committee characteristics on the financial performance of non-financial firms in Saudi Arabia. It is limited to all non-financial firms listed in the Saudi Stock Exchange Market because financial corporations have different mechanisms and regulations. The research period is for four years from 2012 to 2015. The performance of the firms will be measured financially by return on asset and return on equity. ??
The remainder of the paper is planned as follows. The second chapter contains a literature review about corporate governance and audit committee characteristics followed by a theoretical chapter. Later on, the researcher outlines the research design and the development of hypotheses. The fifth chapter has an analysis of the descriptive statistics and the results of the research. Chapter six contains a further discussion of the results. The final section concludes with a summary, research implications, limitations, and suggestions for future research. ?

Chapter Two
Literature Review
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Chapter Two: Literature Review
2.1. Corporate governance
Corporate governance has become a dominant issue that needs to be addressed not just locally but also on a global scale. The strategies and policies that are put in place to assist in corporate governance must not only be in favor of the nation they are being implemented in but all the neighboring countries as well for peace and harmony to reign. Having policies and strategies that are friendly will thrive all parties to be involved. The state of the corporate governance in a country is one of the significant factors that affect the economic status of the country (Strange, et al., 2009).
Corporate governance has been an issue that researchers from all over the universe have deeply delved into. A majority of them are fascinated by how the topic is full of diverse cultures, processes, and systems. This intrigues them to join the quest of getting the diverse perceptions and viewpoints of all these systems of corporate governance (Jreisat, 2004). This is evident when Jreisat (2004) described corporate governance as, “the profound effects of governance on contemporary societies inspired a global resurgence of interest in the theory and practice of governance.”
Since the foundation of the Cadbury Report in 1992, the code was drawn implicitly from the agency theory. Therefore, the code encourages companies to increase and strengthen the monitoring ability of their boards. The UK Corporate Governance Code states that corporate governance is a structure and a system that direct and control companies. Also, the governance of the company is the responsibility of the board of directors (Financial Reporting Council, 2016).
In 2001, the Organization for Economic Cooperation and Development (OECD) had a general definition of corporate governance. It stated that corporate governance includes laws and regulations to govern and facilitate the relationship between the entrepreneurs, investors, and managers in the process of decision making (OECD, 2001). The Saudi Capital Market Authority in 2017 defines corporate governance as regulations that assist in leading and guiding a firm with the tools and techniques that control the different relationship between the Executive Directors, the Board, stakeholders, and shareholders. Those mechanisms make the decision process easier; ensure credibility, and transparency to protect the shareholders’ and stakeholders’ rights. Moreover, to compete with fairness and transparency in the business environment and the Saudi Stock Exchange market (CMA, 2017).
Every nation may have different requirements and expectations regarding governance. The system of governance is likely to change when things such as new laws are passed, political leadership changes, and at times when the number of partners interested direct foreign investment increases. In the case of developing economies, numerous factors can directly affect the corporate governance such as how people perceive management, family-owned enterprises, prevailing economic conditions, religious practices, and the type of political leadership (Egri ; Ralston, 2004; Peng ; Zhou, 2005).
2.1.1. Corporate Scandals
The weakness of corporate governance practices might be the reason behind corporate scandals that occurred in USA, Canada, Australia, Europe, and in the Middle East North Africa (MENA) region. Examples of corporate scandals are Enron, Worldcom, Crocus, Parmalat, and HIH Insurance (Ho and Wong, 2001; Mitton, 2002; Gul and Leung, 2004).
In 2001, Enron accounts were irregular; therefore, the former Enron vice president and whistleblower Sherron Watkins alerted the CEO Kenneth Lay anonymously. However, the CEO did not take any actions which caused huge financial losses in Enron’s financial statements (Ackman, 2014). This incident was a reason behind passing the Sarbanes-Oxley Act of 2002 (SOX). The congressional hearings stressed the importance that public companies need to investigate their financial integrity, key employees, and internal auditors.
Following Enron, in 2002, Cynthia Cooper the former vice president of internal auditing in WorldCom discovered a $3.8 billion in fraud (Alveraz, 2013). WorldCom covered their losses by overstating their revenue and understating their expenses. Farrell (2008) explained that they created journal entries that were fake and capitalize costs inaccurately.
Furthermore, in 2003, Parmalat was discovered for deflating more than € 4 billion in cash and €150 million bond issue. Parmalat CEO Calisto Tanzi tried to cover the company loses that started in 1990 by unethical accounting conventions and self-dealing (Rimkus, 2016).
Later on, in 2005, Wal-Mart Stores, Inc, the former executive informed a senior lawyer in the company about bribery in $24 million in Wal-Mart de Mexico. The top executives knew about it, so they started an internal investigation and concealed the information from other company leaders. The investigation results were not shared with the public; therefore, the U.S. Securities and Exchange Commission (SEC) investigated and criminal charges can be in the future of Wal-Mart executives. These different events show the importance of corporate governance and adapting and complying the regulations can minimize frauds and scandals (Barstow, 2012; Bloxham, 2015)
2.2. Background of Corporate Governance in Saudi Arabia
The newly developing economies are still not fully aware of the significance of corporate governance. This is illustrated by the research data that has been gathered by researchers. There have been numerous scandals all being traced back to poor corporate governance as the root source. Saudi Arabia has been a subject of research by many researchers because it exhibits signs of both the emerging and developed economies. Saudi Arabia has employed the free market mechanism which enables them to have an unending capital supply as well as skills required in management in their corporate governance the system still lacks some of the significant components like databases for finance and professional market analysts (Falgi, 2009).
In 2000, Saudi Arabia started issuing their standards for internal control. Thus, the companies in the country were required to create and design their internal control system. After Oman, Saudi Arabia is considered the second country in the Gulf Area to regulate corporate governance in their public companies (Buallay et al., 2017). In 2005, Hawkamah, The Institute for Corporate Governance, was established to support and overcome the governance gap the MENA region. Developing and executing the frameworks of corporate governance in the public companies and countries can assist in diminishing the governance gap. The objective of Hawkamah is to “shape corporate governance practices and framework throughout the region by promoting the core values of transparency, accountability, fairness, disclosure, and responsibility” (Hawkamah, 2011).
In 2006, after the tremendous crash of the Saudi stock market, the corporate governance codes were issued due to the question raised about the effectiveness of the monitoring systems used to protect the investors’ interest (Al-Matari et al., 2012). Rezaee (2009) stated that if the companies implemented the corporate governance tools that will increase the capital investment, reduce investors’ risk, and enhance the business financial performance.
2.2.1. Capital Market Authority in Saudi Arabia
The Stock Market in Saudi Arabia has drastically evolved especially in the twenty-first century. The shares elevated to SR. 2438 billion in 2005 from SR. 275 billion in 2001 which was a nine-fold increase (CMA, 2009). However, in 2006, this positive growth in the economy was shattered by the crash in the stock market. The absence of corporate governance rules and responsibilities affected the collapse of the stock market in Saudi Arabia (Alshowish, 2016). As a result of this crash, it was mandatory for the stock market to launch the corporate governance code to develop the corporate governance practices between the companies listed in the stock market (Al-Abbas, 2009). The CMA is the body responsible for governing all activities related to the stock exchange in Saudi Arabia.
2.2.2. Saudi code
The Capital Market Authority board introduced the corporate governance code in Saudi Arabia on November 12th, 2006. The code has undergone several amendments over the years to make sure that the Saudi Stock Exchange market is adequately regulated. The code also ensures that the stock market is experiencing healthy growth and the financial reports are transparent (Falgi, 2009).
The updated Saudi code consists of about 98 articles which encompass the various aspects of corporate governance. The first article gives an introduction of what the code is all about while the second article offers broad descriptions and definitions of the technical terms used throughout the article and the third article covers the objectives of the regulations. The next set of articles ranging from the fourth to the ninth article go into detail about general rights such as the right to dividends, voting, attending the yearly general meetings, and right to retrieve company data when need be. The third part discusses the board of directors from the 16 to 49 article; they give a detailed account of the roles and functions plus how the board committees are formed. The articles that cover all information and details about the audit committee are between article 54 and 59 such as the committee formation, responsibilities, meetings, and powers. They also provide details about the nomination and payment committee in addition to conflicting interests and the compensation given to members of the board (CMA, 2017).

2.3. Audit committee
The audit committees are bodies that are involved in bridging the gap that exists between the firm being audited and the external auditors. In Saudi Arabia, the role of auditing the bulk company stock was initially undertaken by one audit firm solely, but to protect the interests of the shareholder’s other audit firms have been established. There are specific requirements that have to be met to create this type of committee (Robertson et al., 2012).
Buallay et al, (2017) specified the clash in the stock exchange in Saudi Arabia and other financial encounters around the world led to the formation of audit committees in the corporations and corporate governance codes to act as guidelines.
In 2002, Al-Twaijry et al. did research that examined the role of the audit committee in Saudi Arabia. The results of that examination that the audit committee suffered due to different reasons such as the lack of independence, lack of expertise, the weak working relationship between internal and external auditors, and incompetent terms of restraints and reference of their detail work. Another study was done in 2003, Al-Moataz, about the evaluation of audit committee role in Saudi Arabia according to the best practices to the professional and academic literature. He had primary concerns about their responsibilities, lack of non-executive directors, and lack of expertise.
The members of the audit committee are elected by the shareholders during the general meeting held annually. The members of the audit committee then select the external auditor from one of the five audit firms nominated. It is the five nominated audit firms that propose the best strategy that should be implemented in conducting the external audit. After analyzing these proposals, the audit committee can decide to hire several firms for the external audit or just one. After the committee makes a choice, they have to go back to the other shareholders who elected them for them to decide on several aspects, such as the duration of time the external auditor will be hired and the fee they want to pay the external auditor. Different procedures are then taken depending on whether it is one or several audit firms that were selected (Abulkhair, 1995; Arrubaish, 1995; Fallatah, 1995; Shabani, 1995).
In Saudi Arabia, the ministry of commerce made several publications in 1997 and 1998 regarding how resolves should be made in the auditing committees. These publications were meant to state the roles and responsibilities of external auditing firms hence encouraging many corporations to embrace this strategy. The audit committees were also intended to be a regulatory tool that ensured the corporate governance performed its function with the best interest of the shareholders and stakeholders (Buallay et al., 2017).
2.3.1. Audit Committee role and responsibilities
After the series of frauds and scandals, the critical role of audit committees has been well revealed. The audited financial statements are similar to a scorecard about the financial performance of a company to stakeholders, the general public, and the capital market. The role of the audit committee is essential in ensuring the accuracy of the financial statements and reports for the board of directors, trusts of banks, savings associations, and public companies.
SOX act of 2002, section 205 and 301, established three primary roles for the auditing committee. First, they should oversight their responsibilities and duties for the financial statement audit as well as the process of the financial and accounting reporting of the company. Second, they are accountable for paying compensation, assigning, and monitoring or controlling the external auditor. Third, the committee ought to form techniques and procedures to receive, maintain, and treat a complaint about the internal control, accounts, or auditing issue; and the anonymous and confidential of the employee who submitted the uncertain auditing or accounting problem (U.S. SEC, 2003).
The committee also has the responsibility to ensure that the company has proper and effective monitoring and management system of risk; however, this responsibility to be fulfilled by the board while the auditing committee ensures that it adequately discussed this matter.
Furthermore, the auditing committee serves as an intermediary between the key parties in the process of the financial report, such the corporate management, internal auditors, board of directors, and external auditors. They provide a strategic function for monitoring, for example, the scope of internal and external audit work, implementation of internal control, and review the nominated auditors (Goodwin, 2003).
Moreover, Collier ; Gregory (1999) indicated that the audit committee is charged to protect the interests of investors by making sure that the quality of financial information disclosed is high, hiring managing performance, and maintain the independence of external auditors. Also, ensure compliance with the regulations and requirements; evaluating the risk of management practices, monitoring and overseeing the function of internal auditors; and monitor accounting policy choices.
Klein (2002) stated that the main role of the audit committee is to minimize and reduce the degree of unusual accruals which will enhance the earning quality. In that matter, the committee is more likely to concentrate on the timeliness of the information reported and if the disclosed information was verified efficiently.
2.4. Audit Committee characteristics
In all codes, the audit committee is discussed in depth because it is imperative and shows critical role in corporate governance. Abbott et al. (2003) said that researchers are suggesting that the audit committee characteristics are considered essential to the role effectiveness of audit committees. Researchers are highlighting that the audit committee should include independent members, members who have financial expertise, meet frequently and be at least three members. (Carcello et al., 2002; Abbott et al., 2004; Al-Twaijry et al., 2002)
The Sarbanes-Oxley Act of 2002, requests the disclosure if the company has at least one member of the audit committee who is a financial expert, the name of the expert, and if that member is independent or not. The SOX act does not have a requirement for the minimum number of meetings; however, they have to hold enough frequent meetings to be able to monitor the quarter and annual financial reports. Further, the committee size is three minimum and all members have to be independent directors (U.S. SEC, 2003).
The UK corporate governance code specifies the committee should consist at least of three members who are independent non-executives directors. The audit committee should not have less than three meetings per year that are coinciding with the dates of the audit cycle and financial reports. Moreover, at least one member of the committee should have a recent and relevant financial experience (Financial Reporting Council, 2016).
2.4.1. Audit Committee Size
Gulf Cooperation Council (GCC), Egypt, and Tunisia outline the number of members to be at least three non-executive directors; excluding Bahrain (Shehata, 2015). Karamanou and Vafeas (2005), argue that the committee may suffer if it becomes too large and it could lose and diffuse some of the responsibilities. As per the CMA rules, the size of the committee cannot be less than three and cannot be more than five.
2.4.2. Audit Committee Independence
The definition of AC independence is the size or proportion of independent directors compared to the sum of all directors in AC. It is expected that if there was a large number of the AC is independent than the committee will be more effective, well-functioning, and active in monitoring the firm’s financial performance (Menon & Williams, 1994). Furthermore, Beasley (1996) bargains that a lower possibility of fraud on boards could happen if there were more independent audit committees. Based on Shehata (2015) study the Moroccan, GCC, and Jordanian codes declare that the majority of the audit committee members should be independent. As per the CMA rules, those members need to sign a form of acknowledgment that nothing can affect their membership in the committee. In addition, the audit committee chairman has to be an independent director.
2.4.3. Audit Committee Financial Expertise
The financial expertise which contains education, as well as experience, is one of the audit committee characteristics that is likely to impact the performance. This will ensure that the committee is up-to-date with how the financial world operates and the new tricks that are used to commit fraud and therefore the AC with be able to keep up with the system (Zábojníková, 2016).
Additionally, the latest research has confirmed that when there are members of the committee who have accounting expertise the governance of the audit committee is reliable and effective. This allows the committee to monitor bodies efficiently and enhance conservatism (Krishnan & Visvanathan, 2008). However, it has been discovered that most audit committee chairs lack the necessary auditing experience. But this may not be a significant hindrance as too much experience is not essential for financial experts if the individual has the educational background and is aware of what they are doing (Giacomino et al., 2009).
As per the CMA rules, there should be at least one member who is specialized in finance and accounting.

2.4.4. Audit Committee Frequency Meeting
How regular the AC members meet is a crucial factor when examining the audit committee’s effectiveness in monitoring the internal control as well as providing the shareholders with reliable data (Lin et al., 2006). Furthermore, it has been noted that when an audit committee meets frequently, they become more conversant with the accounting and auditing issues that affect the companies and this has been known to improve their effectiveness. The frequent meetings allow the auditors to address problems quickly; therefore, reducing the chances of financial fraud occurring (Zábojníková, 2016).
However, most chairpersons have opted to hold more than three meeting yearly; this technique considerably reduces the chances of fraud being committed because irregularities will be harder to hide when there are frequent inspections (Menon ; Deahl, 1994). According to Shehata (2015), GCC and Egypt codes specify that the audit committee meeting frequency ought to be at least four times.
2.5. Literature Gap
The distinctiveness of this research can contribute to the growing literature with a combination of a theoretical context that has been outlined in this research; its function is to determine the various characteristics of an audit committee. Future researchers could take advantage of this research to identify the boundary circumstances for the various theoretical explanations concerning the relationship found between the audit committee and the firm’s performance (Amer, 2016).
Ineffective disclosure practices, the weak legal framework, as well as audit problem are some of the main challenges that corporate governance in developing countries faces (Nenova, 2009). A few techniques have been suggested and approved by experts that will assist in improving the stricture of governance. These tactics include the improvement of the strength and transparency of capital market structures that will help to surge the investors’ overall confidence in the business. Also, improving the domestic firms’ performance as well as encouraging growth by using equity rather than debt which spoils a company’s profits (Reed, 2002).
Unfortunately, most of the research has been carried out in developed parts of the world while there has been little research done in developing countries in the Middle East especially in Saudi Arabia. As a result, it has become necessary to investigate their corporate governance strength in companies due to their continued failure to control the management which has resulted in multiple companies going bankrupt and fraud. Recently, there have been reports of corporate scandals that have provoked an interest in what effects the corporate governance has on the firm’s performance.
Therefore, this research is focused on Saudi Arabia which has had a rapid market growth. Additionally, a study on Saudi’s business environment, which has experienced an unusual reform throughout the past few decades, is critical for future reference. Recently, the Saudi environment and market have been more vibrant and competitive. The Saudi economy is going through a lot of progress and changes in its effort to meet its 2030 vision. ??
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Chapter Three
Theoretical Background
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Chapter Three: Theoretical Background
3.1. Agency Theory developments
It’s necessary for one to understand the background relating to the formulation of a theory. Mostly real life occurrences and experience in the various fields either social, economic, or politics form the contextual basis for the policy guidelines required. The theorist consequently commits towards constructing up the comprehensive scheme which influences and explain events, relationship, and status in the community (Muldoon et al., 2013). Therefore, by having the outlined entire picture, we can sufficiently understand the theory, any inherent limitations prevalent, and help us in future research operations. Therefore, let’s appreciate and acknowledge the effort and determination made by the founding personnel.
The significant crucial contribution to the emergence of agency theory diffused from the undertakings of Max Weber – a German sociologist dating back to around 1947. The theme of the thesis entailed bureaucracy. The term implies that the organization is bureaucracy and has a red tape measure that persons must follow in solving or inquiring about a particular subject. According to his views, people are rational while comprehending and respecting the rules and principles. A leader’s capacity to enforce objectives comes from law. Equally, he can make use of technical rules, or other jurisdictions, to ensure enforcement of what the principal may demand. Bendickson et al. (2016) explained that the willingness of the staff to adhere to regulations is based on the leader’s position, i.e., the human resource respects the position, not the leader. However, that does not necessarily mean that the agency problem disappears.
Weber focuses on some authority with the objective of establishing similarity and differential for better clarity and understanding. However, his primary concentration revolves around formal influence as it is the parameter of contracts in agency association or contracts. The basis of bureaucracy is that one group can institute a legal claim to perform specific functions, in return for a consideration. These declarations are underlined as rationally and expediently. The ability of one faction to enter into a relationship is of their own will as well as the fact that their continual engagement in the organization is based on following the rules stipulated in the contract signed (Bendickson et al., 2016).
The early work of Berle and Means (1932) continues to influence and impact on the ongoing debate in agency theory. It’s the focus on the separation of ownership and management and the inability of owners to adequately protect their property rights; this is a somewhat an exemplary realization considering the fact researchers have struggled to find relationships between agency problems and organization performance.
Despite their effort, the emergence of a coherent agency theory did not occur until the 1980s, when the approach was developed. Jensen’s and Meckling’s (1976) revolution maintained that organizations should be seen as no more than a set of associated rights with implicit and explicit agreements. In contrast, Alchian and Demsetz (1975) specialized in the process production of the team, the demerits of free riding, and monitoring within the entity. Other theorists reflected on the managerial employment market capability to restrain and channel individual executive opportunism (Fama, 1980). These diversified schemes of the nature of organizational relationships are constructed around a few simple assumptions characterized as a – theory of interest, motivation, and compliance (Donaldson, 1990). It is this interaction of assumed autonomy and self-interested motivation that results in the appearance of the problems within agency relationships – the relationship between a principal and agents to execute their goals on their behalf (Figure 1).

Figure 1: The agency theory (the relationship between the principal and agent)
3.2. Agency Problem and Costs
Smith (1838) identified the potential conflict that may arise between the principal and agent since the principal expects that the agent would act with the same anxious as their own. Jensen and Meckling (1976) define agency costs as residual losses, monitoring expenses by the principal, and bonding expenses by the agent. The costs of monitoring and bonding assist in restoring and increasing the performance of the firm. Dion (2016) defines agency costs as the invested costs by the principal to protect themselves from problems elevated due to the opportunistic behavior of the agents.
The residual loss occurs when the value of the firm is reduced due to the weakness of the entrepreneur ownership (Jerzemowska, 2006). It was discussed that to reduce and limit the agency costs, the agents should have a superior level of performance, and their performance should be consistent with the principals’ expectations (Eisenhardt, 1985; Fama, 1980; Fama and Jensen, 1983).
Berle and Means (1932), Jensen and Meckling (1976), initiated two variables that cause agency problems: the behavioral factor and the economic environment. Additional possibilities that were identified by Chowdhury (2004) that can cause agency problems, such as the limit of earnings of the agent because they are fixed and there are no incentives while the principal has the residual claimant. Also, the principal does not have a direct part in the decision making or control of the management. Moreover, the perception of risk differs, so the agent is assumed to be risk-averter while the principal is a seeker or averter to risk. Further, Marnet (2008) found that agents usually have better or more accurate information about the company state, performance, and affairs than the principal which causes an information asymmetry.
Eisenhardt (1989) acknowledged other assumptions that raise the agency problem if there is a conflict of goals, pre-eminence of efficiency, self-centeredness, rationality is limited, the information is asymmetry, or the information is considered as a commodity.
Corporate governance provides an internal mechanism to deal with such a problem. Jensen (1993) and Berle and Means (1932) debates that non-executive director can help in monitoring the agency problem and promotes the shareholders’ interest because they fear the lawsuits and have reputation concerns. Moreover, the principal can offer incentive compensation or managerial ownership to maximize the shareholders’ value (Crutchley et al., 1999).
3.3. Agency Theory and Audit committee
The framework of the audit committee is old as the prevailing agency theory sensitizing on the use, independence members and communication among various audit committees to reduce agency cost (Fama and Jensen, 1983). While significant research has been carried out on corporate governance and its interaction with firm performance, insignificant researches have concerned to investigate the role of audit committees (Mishra and Mohanty 2014; Rodriguez-Fernandez et al. 2014; Velnampy 2013; Ezzine, 2017).

Figure 2: Audit committee acts and aligns the interest of parties
Agency theory often used accounting research predicts that auditing committees act on behalf of shareholders in supervising management and undertaking of the auditors (Figure 2) (Jensen ; Meckling,1976; Fama, 1980; Fama ; Jensen, 1983; Beasley et al., 2009; Cohen et al., 2010).
The Agency theory suggests that members of the audit committee must be affected and influenced to affect agency costs; however, it’s not always the approach. The accounting literature regularly uses an agency theory framework, suggesting that the committees are efficient in executing their duties and reduce information asymmetry without considering occasionally internal or external environmental factor (Kalbers & Fogarty, 1993, 1998; Spira, 2002; Looknanan-Brown, 2011).
In 2002, SOX increased audit committees’ mandate to improve audit quality, streamlines financial reporting integrity, and restores investors’ confidence in financial reporting; all objectives mentioned consistently with an agency-based role for the same division.
Researchers enlist that due to various motives and incentives, the mentioned committees metaphorically execute their responsibilities sometimes in disagreement with agency theory (DiMaggio & Powell,1983; Kalbers & Fogarty, 1998; Looknanan-Brown, 2011).
From a principal-agent perspective, the audit committee is mandated to protect the needs of the principals (Haron et al. 2010). Institutions with an audit committee provide greater protection to their minority shareholders and are least skeptical during the volatile financial crisis (Ezzine & Oliver, 2013). Similarly, Anandarajah (2001) ensures the audit committee performs their responsibilities in accordance contractual stipulation. Additionally, the committee is assisting the board of directors in overseeing the adequate functioning of the internal control mechanisms and review of the risk management.
Furthermore, Wild (1996) found that having an audit committee escalate the firm performance and increases the quality of reporting. It was also argued that larger audit committees are likely to be more efficient in monitoring, discovering, and resolving inherent issues of governance hence reducing organization’s vulnerability to financial crisis and improve the performance of the company (Raghunandan and Rama 2007; Aldamen et al. 2011; Sang-Woo and II Chong, 2005; and Mak and Kusnadi, 2005).
In conclusion, the agency theory can endure a healthy status by establishing a supportive infrastructure like appropriate committees to act as the watchdog of the principle in the organization. Therefore, it is essential to discuss this subject, especially in the environment of Saudi Arabia. The relation inherent between the audit committee and institutional performance is fundamentally crucial, especially during financial problems.
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Chapter Four
Research Design
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Chapter Four: Research Design
4.1. The Technique of Data Analysis
The methodology that will be used is quantitative because all characteristics of an audit committee, ROE, and ROA are computed in figure form (Fabozzi et al., 2005). An Ordinary Least Squares (OLS), is a multiple regression analysis using panel-data, will be used to describe variability dependent variable using one or more of independent variables. According to Hutcheson and Sofroniou (1999), OLS regression is a powerful technique if the model had both continuous and dummy variables, which applies to this research. Moreover, Zubair (2016) explains that the OSL is considered an effective technique for testing the relationship. The panel data sets usually have cross-sectional and time series elements.
This regression is done using the statistical program Eviews. To ensure that the results are reliable, a Cronbach’s Alpha test was done to check the effects of Serial correlation, Multicollinearity, Omitted variable bias, and Heteroskedasticity. In research similar to this type, it is expected that the data will not normally be distributed (Rashidah and Mohamed, 2006). To reach precise results, the research used the random-effect model because of the results of the Hausman test.
4.2. Model
The research model tests the characteristics of the auditing committee that impact the performance of the companies listed in Saudi Arabia for the year of 2012 until 2015. The methodology to be used is quantitative because it is more objective and has higher reliability (Fabozzi et al., 2005).
Falgi (2009) indicated that the audit committees in Saudi Arabia are suffering from lack of independent, qualified members, and incompetent in their responsibilities and roles. Thus, an examination of four audit committee characteristics size, independence, the frequency of meetings, and financial expertise of the members was preferred.
Based on previous studies the common evaluations to measure the performance of the companies are ROA, ROI, ROE, and Tobin’s Q (Amer, 2016). He also clarified that ROA indicates the achievement of the management regarding the assets or resources since they are accountable for utilizing those resources in the firm operations. Agency theorists’ claim that a lower return on assets with less profit distribution is caused by the management who is not able to utilize the corporate assets efficiently. Therefore, a lower ROA points out inefficiency (Mehran, 1995).
Tezel and McManus (2003) explained that ROE is a reflection of the effectiveness of the management by how they generate extra earnings for the shareholders and the firm. Accordingly, in this research, two measurements were used the return on assets and return on equity.
4.2.1. Audit Committee Size
The right size of the committee affects the performance of a firm. Several researchers examined the relationship between AC size and firm performance. The results of the studies and researches were either negative or positive correlation. Karamanou and Vafeas (2005) argued that if the audit committee has too many members, it can suffer from the distribution of responsibility and process loss. Also, Zabojnikova (2016) said that based on other authors that large size audit committee can be the reason for inefficient governance.
In 2011, Yasser et al. used a sample of thirty listed companies from the Karachi Stock Exchange and found that there is a definite relationship between the variables. However, in 2012, Al-Matari et al. used a sample of all listed companies in the Saudi Stock Exchange and found that there is a negative relationship between the variables. Also, in 2016, Amer, used a sample for all listed firms in Egypt Exchange for the period of (2004 – 2012) and found that there is not a significant relationship as well between the audit committee size and firm performance. The hypothesis raised and will be tested:
H1: There is a positive relationship between audit committee size and firm performance.
4.2.2. Audit Committee Independence
In order for the audit committee to effectively function, Vicknair et al. (1993) agreed strongly that they have to be independent of the management. Erickson et al. (2005) provided arguments that independence of the directors can reduce the agency problem; therefore, the same argument can be done with the audit committee. If the members were independent, the agency problem could be overcome (Al-Matari et al., 2012).
The Saudi audit committee has a close relationship with the management which means they might be not independent (Khudair, 1995; Shabani, 1995). In 1995, Abulkhair suggested that to enhance the independence members of the audit committee; they should not be selected and appointed by the members’ of the board of directors. Altwaijry et al., (2002) confirmed that as well in the interviews with the external auditors.
Moreover, Kajola in 2008, who used a sample from all non-financial companies listed in Nigeria, found an insignificant relationship between them. Similarly, Al-Matari (2012) found that there is an insignificant relationship between the variables. On the other hand, in 2016, Amer found a positive relationship between the AC independence and firm performance. To discover the relationship between the variables a test to the following hypothesis will be performed:
H2: There is a positive relationship between audit committee independence and firm performance.

4.2.3. Audit Committee Financial Expertise
The audit committee primary role is to monitor the organization financial process; therefore, it is expected that some of the members have experience and competent in different aspects and financial issues (Rashidah ; Fairuzana, 2006). McDaniel et al., (2002) debated that if the members of audit committee had a financial background, then the quality of financial reporting becomes better. Thus, it is unlikely that the firms can manipulate the financial statements and the committee report quality will be better since they understand the accounts and financial system (Al-Mamun et al., 2014).
Hamdan et al. (2013) used a sample of 212 non-financial companies and financial companies and found that that there is a positive relationship between the financial expertise of audit committee and firm performance. Moreover, Amer (2016) supported the hypothesis, and his findings confirmed that there is a definite relationship between the variables.
On the other hand, in 2016, Cheah et al. studied 100 listed companies in Malaysia, the researchers found that there is no relationship between the variables and that the businesses in Malaysia refused to have financial experts in their AC. In Saudi Arabia, Altwaijry et al., (2002) found from the opinion of the external auditors that the audit committee members did not have the necessary financial expertise. To understand the connection between the variables the following hypothesis was developed:
H3: There is a positive relationship between audit committee financial expertise and firm performance.
4.2.4. Audit Committee Frequency Meeting
Amer et al., (2014) claimed it is expected that the audit committees that meet often are more effective in monitoring the management and vice-versa. Based on many researchers, the frequency of meeting has a significant role in mitigating issues, such as the ultimate agency theory problems that influence the performance of firms; regardless of the different outcomes about this matter (Wiwanya and Aim, 2008; Anthony, 2007; Saleh et al., 2007; Rashidah and Mohammed, 2006; Xie et al., 2003; Al-Mamun et al., 2014).
Zábojníková in her research she studied 72 listed non-financial companies in the United Kingdom for five years (2011 – 2015). She discovered that there is a relation between the firm performance and the frequency of meetings of the audit committee. Also, Amer (2016) supported the same argument, which implies that the frequent meetings of an audit committee has a positive impact on the financial performance of the firms and can lead them to have a superior accomplishment. On the other hand, Al-Matari et al. (2012), found an insignificant relationship between the audit committee meeting frequency and firm performance.
There are unclear and mixed findings of the effect of the audit committee meetings and performance of firms in Saudi Arabia because there have been very few studies that examined that effect (Al-Matari et al., 2012; Al-Mamun et al., 2014). Thus, to investigate the impact of the audit committee frequency meetings on firm performance the below hypothesis is used:
H4: There is a positive relationship between audit committee meetings frequency and firm performance.
The proposed regression model is demarcated by the following equation:
ROE = ?1 ACSIZE + ?2 ACINDEP + ?3 ACMEET + ?4 ACFINEXP + C
ROA = ?1 ACSIZE + ?2 ACINDEP + ?3 ACMEET + ?4 ACFINEXP + C
The measurement of the variables is shown in table 1.
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Table 1: Variables definition
VARIABLES MEASUREMENT
Dependent variables
ROA Return on assets The natural logarithm of the net income divided by the total assets
ROE Return on equity The natural logarithm of the net income divided by the total equity
Independent variables
ACSIZE AC size The natural logarithm of the number of the AC members in a given year (Al-Rassas ; Kamardin, 2015; Garven, 2015; Zhang et al., 2007; Sean et al., 2016).
ACINDEP AC independence The natural logarithm of the number of the independence AC members in a given year
ACMEET AC meeting frequency The natural logarithm of the number of meetings held in a given year
ACFINEXP AC financial expertise one if the audit committee has one or more members who have financial expertise, zero otherwise
4.3. Sampling and Data Collection
Scott and Morrison (2007) refer to sampling as the selection of the number of people or things from the population to represent them. Sampling is a time saver, reduces costs, has greater accuracy, and easier for the researcher (Anca-oana, 2013). A sample from the secondary data was collected for this research from the listed companies in Saudi Stock Market excluding financial businesses. By the end of 2015, a sample of 102 listed companies was selected. In this research, an assumption was taken that all listed companies follow the rules and regulations of the CMA. Thus, those firms are required to publish their financial and board information according to the rules. The sample of firms covers about twelve industries: building ; construction, telecom ; IT, energy ; utilities, agriculture ; food industries, cement, petrochemical industries, industrial investment, retail, hotels ; tourism, transportation, media ; publishing, and real estate development. From the annual reports of the companies, all independent and dependent variables will be collected.
1. Data of the audit committees –were found in the board reports of selected companies for 2012-2015, mostly from the part “Audit Committee. ” It is important to note that sometimes the number of members, independents, and experienced members change. Therefore, the numbers that found at the end of the given year were used.
2. Data of the firm performance – for the data of ROA and ROE; these numbers were collected from the annual reports and then calculated.
The next chapter will identify and analyze the relationship between the independent variables auditing committee characteristics (size, independence, the frequency of meetings, and financial expertise) and the dependent variables ROA and ROE.?

Chapter Five
Data Analysis
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Chapter Five: Data Analysis
5.1. Data analysis
This section discusses the empirical evidence generated from data collection of the audit committee characteristics and the firms’ performance. The data collected was for 102 companies for four years 2012-2015. There are four independent variables for the audit committee characteristics: size, independence, meeting frequency, and financial expertise. Two dependent variables were used to measure the firms’ performance: return on asset and return on equity.
5.2. Descriptive Statistics
Table 2: Descriptive statistics
Mean Std. Dev. Minimum Maximum Skewness Kurtosis CV
ROA 0.1435 0.1125 -0.0393 0.5712 0.9276 3.7401 0.7840
ROE 0.2608 0.2212 -0.1144 1.2326 1.3187 5.3710 0.0001
Size 3.3922 0.6015 2.0000 6.0000 1.2678 3.9992 0.1773
Independence 1.5417 1.0318 0.0000 4.0000 0.5063 2.8106 0.6693
Financial Expertise 0.2868 0.4528 0.0000 1.0000 0.9430 1.8892 1.5788
Frequency of Meetings 5.6176 2.1253 0.0000 15.000 1.3765 6.0059 0.3783
The results of the descriptive statistics are given in Table 2. Regarding the audit committee frequency of meeting average per year was about six times (mean= 5.6), which follows the CMA code of having at least four meetings per year. The average of meeting frequency is higher than both US and Egypt which is average of four times (Amer, 2016; Xie et al., 2003). Also, the size of the committee on average is three (mean = 3.39); which is in the range of the Saudi corporate governance recommendation. Furthermore, the average of independence was about two members (mean =1.54); which is considered the majority of a committee that has three members. However, the financial expertise of the audit committee members averages was not as per the rules of CMA. The average of financial expertise was zero (mean = 0.27).
In the last column of the table above, there is the measurement of the coefficient of variation (CV), which describes the variability of the sample of the data collected to the mean (?/?) (Banik et al., 2012). Accordingly, it can be assumed that the financial expertise has the highest coefficient of variation of 157.88 percent compared to the other independent variables.
5.3. Hypothesis Testing
This research mined the secondary data from the listed companies’ annual and board reports. Those reports were published and obtained from Argaam. Argaam is a Saudi financial portal that provides up-to-date data and analysis of the market financial information in Saudi Arabia. Based on Sulaiman et al. (2014), it is more likely that larger companies disclose accurate information in their annual reports. Thus, we can assume that the data collected is reliable and no further test is needed.
Since the data collected is large, the panel data was used because it contains a better off information compared to time-series or pure cross-section data. The panel data could have a more comprehensive analysis of focuses and concentrate on more precise estimates (Kuan, 2004). According to Baltagi (2001), using the panel data usually sets less collinearity, a higher degree of freedom, improved efficiency of an estimate, and a more comprehensive possibility for interpretation
To improve the model fit the natural logarithm of AC size, independence, and frequency of meeting was used instead of the number representing to make the variables normally distributed (Zabojnikova, 2016). The researcher ensured that the OLS regression assumptions were met there was no: cross-sectional correlations (autocorrelation), Multicollinearity, Omitted variable bias, and Heteroskedasticity. To enhance the power of the analysis, the random-effect model was applied after performing the Hausman test. The test summary is shown below:
Table 3: Correlated Random Effect – Hausman Test
Cross-section random Chi-Sq. Statistic Chi-Sq. d.f. Prob.
LROE 3.0151 4 0.5553
LROA 2.4695 4 036501
5.4. Results
5.4.1. Dependent Variable – ROE
The four audit committee characteristics (independent variables) were regressed against the return on equity (dependent variable) to analyze their impact. H0 is accepted if the p-value was more than 0.05; otherwise, H1 is accepted. The outcomes of the regression are displayed in table 4.
Table 4: OLS regression analysis results for ROE using random-effect
Independent variables Coefficient Probability
Intercept -1.168440 0.0145
ACSIZE -0.619595 0.0892
ACINDEP -0.229343 0.0327
ACFINEXP -0.117837 0.3304
ACMEET 0.162180 0.1742

Weighted Statistics
Observations 332
R-squared 0.030866
Adjusted R-squared 0.019011
Durbin-Watson Stat 1.557583
The equation that could be formulated from the table above:
ROE = -1.1684 – 0.2293 (ACIND) – 0.6196 (ACSIZE) – 0.1178 (ACFINEXP) + 0.1622 (ACMEET)
The R-squared value is around 3.09% which shows that only 3.09% of ROE variation is determined by the characteristics of the audit committee (size, independence, financial expertise, and meeting frequency) used in the regression. Thus, 96.91% remaining of variation is affected by other variables. While, the adjusted R-squared only present 1.90% of ROE variation caused by the independent variables, which implies that 98.1% is influenced by other attributes.
Keeping in mind, the R-squared has some limitations. It cannot select if the estimates or the coefficients predications are biased and does not automatically show whether the model used is adequate or not (Zabojnikova, 2016). Regardless of the R-squared and adjusted R-squared values, the coefficients are significant and present a change in the dependent variable while keeping all other independent variables constant.
The first hypothesis (H1) states there is a positive relationship between audit committee size and firm performance that is measured by ROE. The outcome is consistent with the hypothesis, which means that the size of the audit committee has a positive influence on the firm performance. This result was similar to two studies done: a study about four different African countries Ghana, Nigeria, Kenya and South Africa for five years 1997-2001 by Kyereboah-Coleman et al. (2007) who examined 103 listed companies. Another research was done in the US by Bauer et al. (2009). However, MoIlah and Talukdar (2007) findings were the opposite when they tested the relationship between the variables in Bangladesh as well as Amer (2016).
The second hypothesis (H2) states there is a positive relationship between audit committee independence and firm performance that is measure by ROE. The finding of the regression is not consistent with the hypothesis, which means that the independence of the audit committee has a negative influence on the firm performance. Such a result is similar to Dar et al. (2011), Amer et al., (2014), and Amer (2016). However, is contradictory to the of Yasser et al. (2011), who found a positive relationship that more independent members are positively related to higher firm performance.
The Third hypothesis (H3) states there is a positive relationship between audit committee financial expertise and firm performance that is measured by ROE. The result of the regression is consistent with the hypothesis, and there is a definite relationship between the variables; which is supported by Rashidah and Fairuzana, 2006; Amer et al., 2014; Zabojnikova, 2016; Amer 2016.
The fourth hypothesis (H4) states there is a positive relationship between audit committee meetings frequency and firm performance that is measured by ROE. The finding of the OLS regression accepts the hypothesis, which means that the rate of meetings of the audit committee has a positive impact on the firm performance. It is similar to the results of the studies of Carcello et al., 2002; Xie et al., 2003; Abbot et al., 2004; Amer et al., 2014; and Amer 2016.
5.4.2. Dependent Variable – ROA
The four characteristics of the audit committee (independent variables) were regressed against the return on asset (dependent variable) to analyze their influence. We accepted the H0 if the p-value was higher than 0.05; otherwise, we rejected H0. The results of the regression are exhibited in table 5.
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Table 5: OLS regression analysis results for ROA using random-effect
Independent variables Coefficient Probability
Intercept -1.355622 0.0046
ACSIZE -0.870837 0.0172
ACINDEP -0.221268 0.0399
ACFINEXP -0.121068 0.3179
ACMEET 0.122942 0.3061

Weighted Statistics
Observations 332
R-squared 0.037146
Adjusted R-squared 0.025368
Durbin-Watson Stat 1.63132
The equation that could be formulated from the table above:
ROA = -1.3556 – 0.2213 (ACIND) – 0.8708 (ACSIZE) – 0.1211 (ACFINEXP) + 0.1229 (ACMEET)
The R-squared value is around 3.71% which shows that only 3.71% of ROE variation is determined by the characteristics of the audit committee (size, independence, financial expertise, and meeting frequency) used in the regression. Thus, 96.29% remaining of variation is affected by other variables. While, the adjusted R-squared only present 2.54% of ROA variation caused by the independent variables, which implies that 97.46% is influenced by other attributes. Nevertheless, the R-squared or adjusted R-squared values, their coefficients yet reflect and show that while keeping all other independent variables constant, there is a change in the dependent variable.
The first hypothesis (H1) states there is a positive relationship between audit committee size and firm performance that is measured by ROA. The finding rejected the hypothesis, which means that the increase in the number of members of the audit committee has a negative influence on the firm performance. The outcome is supported by Yayah et al. (2012), Amer et al. (2014), and Amer (2016), but then again different from the one Kyereboah-Coleman et al. (2007) found.
The second hypothesis (H2) states there is a positive relationship between audit committee independence and firm performance that is measured by ROA. The result also is not consistent with the hypothesis; thus the alternative hypothesis is accepted. This was supported by the findings of Hsu (2007) and Yayah et al. (2012) neither studies found a relationship between the variables. However, the result is different from Vicknair et al., (1993); Aanu et al. (2014), and Amer et al. (2014).
The Third hypothesis (H3) states there is a positive relationship between audit committee financial expertise and firm performance that is measured by ROA. The outcome of the regression is consistent with the hypothesis; hence, there is a definite relationship between the variables. The findings are consistent with prior studies Aanu et al. (2014) and Bouaziz (2012). However, Amer et al. (2014) and Amer (2016) found that the financial expertise of the audit committee did not influence the firm performance.
The fourth hypothesis (H4) states there is a positive relationship between audit committee meetings frequency and firm performance that is measured by ROA. The null hypothesis is accepted, which means that the frequency of meeting of the audit committee has a positive influence on the firm performance. A similar hypothesis was rejected by Yayah et al. (2012), Aanu et al. (2014), and Amer (2016).
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Table 6: Summary and comparison of audit committee hypotheses findings for ROA and ROE
Summary of Audit Committee Sub-Hypotheses Findings ROE results ROA results
H1 There is a positive relationship between audit committee size and firm performance Accept Reject
H2 There is a positive relationship between audit committee independence and firm performance Reject Reject
H3 There is a positive relationship between audit committee financial expertise and firm performance Accept Accept
H4 There is a positive relationship between audit committee meetings frequency and firm performance Accept Accept

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Chapter Six
Discussion
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Chapter Six: Discussion
6.1. Discussion
The researcher in this section discusses the results related to the impact of audit committee characteristics on firm performance. Based on previous researchers, the possible reasons for the insignificant finding of audit committee characteristics and firm performance is that in the context of Saudi Arabia it is a developing country, they are not aware entirely of the importance of corporate governance, and the audit committee is not as important. This research will prove the assumption that if the Saudi companies who implemented the corporate governance rules, in this case, audit committee characteristics, may have an increase in their financial performance.
Regarding the hypothesis about the positive relationship between the audit committee size and firm performance, it did not have a clear image. In one hand, the size of AC had a positive relationship with the firm performance ROE. On the other hand, it had a negative relationship with the firm performance ROA. Similar results were found in Amer (2016) who stated that regardless of the audit committee size whether it is large or small, it does not significantly enhance the firm performance financially. The possible reason behind such results can be because some companies violated the recommended rules of CMA and had two or six members. As a sub-committee to have only two members is not efficient and to be six members is considered too large for a sub-committee.
One of the results of the research revealed that there is a negative relationship between the audit committee independence and the firm performance. As per the agency theory for an audit committee to have effective control ought to be entirely independent. Prior studies showed and defended the agency theory that having independent audit committee members guarantee to have a better quality of financial reporting; thus, a higher firm performance (Abbott et al., 2000; Beasley et al., 2000).
In this research, the results did not support the agency theory or the CMA guidelines. Not all reports have a clear disclosure about the independence of the members. To ensure the independence of the members, a thru check between the board of directors and audit committee members was performed. Furthermore, some reports indicated that there is at least a member who is independent or the majority without specifications. Consequently, a negative association between the variables was found.
Regarding the financial expertise and the firm performance, the results reflected what was expected. This was supported by DeZoort and Salterio (2001), who declared that the chance of finding misstatement in the financial reports increases when the audit committee has financial expertise members. As per the CMA guide, there must be at least one member who is a financial expert; however, most companies did not reveal if they had one. Some firms presented the background of the members and their eligibility; while others acknowledge that at least a member is an expert. The declaration was vague; thus, in our measurement, one was used if there is at least a member who has a financial experience or knowledge; otherwise, zero. The result confirmed that to have a better financial performance, the firm has to have at least a member who is an expert.
Last but not least, the empirical results of the audit committee frequency meetings and firm performance showed a positive relationship as the number of encounters increases the performance improved. As per the CMA rules, the minimum number of meetings is four. In this research, the median of meetings is five; thus, it can be expected as the number of meeting increases, the firm financial performance is enhanced. Beasley et al. (2000) had the same results and explained that more meetings indicate that the likelihood of fraud decreases. Further, Bedrad et al. (2004) discussed that the committee is capable of performing their responsibilities and duties effectively.
Evidence of association was found between audit committee characteristics with firm performance. The critical role of a specific characteristic of audit committee determines whether it is positive or not to the firm.
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Chapter Seven
Conclusions
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Chapter Seven: Conclusions
7.1. Conclusion
This research intends to fill the space left in previous academic studies by concentrating on Saudi’s companies. Thus, the research aimed to investigate the relationship between the audit committee characteristics and the listed companies’ financial performance in Saudi Arabia. The research accomplishes this with the use of secondary data. A sample of 102 companies was collected for the period of four years from 2012 to 2015. The statistical method that was used to test the hypotheses is the Ordinary Least Squares with a Random Effect.
The research emphasizes on the critical role that the audit committee has, the recommended size, the financial expertise, its independence from the firm, and the frequency at which the audit committee should meet to ensure effectiveness. These variables together can provide a clearer image of how a firm’s audit committee should be structured and its corporate governance practices.
The performance of the firm has been measured by the overall profitability and values of the company because the primary aim of the research is to outline in what way the characteristics of audit committee affect the overall performance of the firm. Moreover, those measures of performance usually market-based and accounting-based performance: ROE and ROA (Amer, 2016).
A mixed of results were revealed from the empirical examination. A positive relationship was found between two characteristics audit committee financial expertise and meeting frequency with the firm performance. This means that both characteristics can improve and enhance the financial performance of a firm.
On the other hand, a negative relationship between the meeting frequency of an audit committee and firm performance was found. The last hypothesis predicted a positive association of audit committee size with the firm financial performance; however, it was rejected when it was tested with the ROA and accepted when it was examined with ROE.
It is possible to gain further understanding and ideas to have on how to achieve better corporate governance practices in Saudi Arabia. The findings of this research can be precious, as they will allow us to identify the necessary and most significant auditing committee characteristics that are required to reduce agency problems, find a solution on how to lead the company’s financial performance to high profits, and a minimize fraud cases (Al-Matari et al., 2012).
7.2. Research Limitations
The research had some constraints that were similar to earlier researches and studies while some were new limitations. Nevertheless, future researches and studies could transform those limitations into opportunities for further investigations and studies in the same area. Regardless of those limitations, significant measures were ensured to reach the purpose and objective of the research.
First, this research excluded all financial companies because they have special practices and operations. The results only reflect the non-financial sector; thus, they cannot be generalized to all sectors. It is possible to be generalized within all sectors used in the research.
Second, a sample of 102 firms was used to provide the necessary data for the research. Collecting the financial information, such as the ROA and ROE; was challenging as well as the audit committee independence, financial expertise, size, and meeting frequency. There should be an electronic corporate governance database that provides the information free of charge and ensures that this information is available in the reports.
Third, due to the short time frame, the research used only the Agency Theory that is related to the characteristics of the audit committee and firm performance. In addition, the research is limited to only four independent variables (independence, financial expertise, size, and meeting frequency) and two dependent variables (ROA and ROE).
Finally, this data represents the Saudi companies in a specific period. There will be future variations; however, similar results were found in other countries which means those results can be generalized to a limit.
7.3. Future Research Suggestions
This research can be extended in many ways, such as extending the sample for many years or include the financial companies for comparison. Another topic of interest that prospective research can examine is the diversity of the audit committee members. Dennis and Kunkel (2004) argued that on the contrary of male managers; female managers are more rational, independent, competent, and less hostile. Thus, a female in an audit committee could be more sensitive to any potential fraud in the financial reports of a firm. Furthermore, Li and Wearning (2004) pointed out those nonexecutive female directors usually at a disadvantage being promoted to be a member of the audit committee.
A more comprehensive investigation of the audit committee financial expertise could be done about their education, experience, and knowledge in finance or accounting. Moreover, a thru research can be done to examine the truth of independence of the audit committee members, and to what extent they are independent. The CMA rule is that the majority of the members should be independent; however, in the sample collected some companies did not have any.
The research used secondary data only; hence, future research may use questionnaire and interviews to provide a deeper understanding of the relationship. Last but not least, the theoretical part was built on the agency theory only; therefore, other researchers can examine other theories associated between the audit committee characteristics and firm performance, such as the stewardship theory and stakeholder theory.

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