Do Audit Committees Have Capacity to Monitor Management: The Case of Serbia

Abstract

In this paper we examine audit committees composition and work in companies in Serbia. Audit committees are seen as integral part of the modern system of corporate governance worldwide which role is even reinforced with new EU Auditing Directive. According to the agency theory, this committee shell contribute to the prevention of management opportunistic behaviour by performing set of monitoring activities. In this study, we intend to illuminate actual capabilities of audit committees in Serbia. We perform content analysis to assess transparency of companies with regard to audit committees and formal assumptions for the design and work of audit committees. In addition, we conduct a survey of external auditors to uncover substance of the audit committee performance. Our results show that the current state of the audit committee in Serbia is not satisfactory. We find that the level of audit committee disclosure is low, formal standards for audit committee composition and responsibilities are not fully in line with EU regulation and audit committee substance is fairly missed. Management is not effectively monitored by audit committee and it still has more power than audit committee in the process of selection of the external auditor. This paper contributes to the discussion about audit committee effectiveness with focus on an emerging country where audit committee does not have long tradition. Our findings reveal that Serbian companies have to make significant improvements in order to have audit committees able to perform substantial monitoring.