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Int. J. Business Governance and Ethics, Vol. 6, No. 3, 2011 225
Copyright © 2011 Inderscience Enterprises Ltd.
Improving audit committee performance in the Middle
East: do Egyptian audit profession norms support
Public Policy and Administration Department,
American University in Cairo,
AUC Avenue, New Cairo 11835, Egypt
AUC Avenue, New Cairo, Egypt
United Nations Development Programme,
United Nations Assistance Mission for Iraq,
Abstract: Audit committee effectiveness is shaped by formal institutional
frameworks but mediated by audit profession norms. Through normative
isomorphism, these values may play a greater role in the Middle East, where
formal codes and enforcement lag global practice. This research examines
whether Egyptian professional norms support global audit committee standards
by surveying professional auditors’ support for amendments to the current
Code of Corporate Governance to align it with US and UK codes and
regulations. Senior audit experts strongly endorsed proposed reforms,
confirming that professional norms can supplement weak governmental
oversight to support compliance.
Keywords: audit committee; governance codes; audit standards; Egypt; Middle
East; corporate governance; professional norms; normative isomorphism.
Reference to this paper should be made as follows: Bremer, J., Hegazy, M. and
Sabri, A. (2011) ‘Improving audit committee performance in the Middle East:
do Egyptian audit profession norms support international standards?’,
Int. J. Business Governance and Ethics, Vol. 6, No. 3, pp.225–248.
Biographical notes: Jennifer Bremer is Associate Professor of Public Policy
and Chair of the Department of Public Policy and Administration at the
American University in Cairo’s School of Global Affairs and Public Policy.
Her work focuses on economic development, corporate governance and social
responsibility. She previously directed the Washington Center of the Kenan
Institute of Private Enterprise, a unit of the University of North Carolina
226 J. Bremer et al.
business school and holds a PhD (1982) and MPP (1975) from Harvard’s
Kennedy School, an MA (1976) from Stanford in Development Economics
(1976), and a BAcl (1972) from Columbia University’s Barnard College in
Mohamed Hegazy is Visiting Professor of Financial Accounting and Auditing
at the American University in Cairo. He is a partner at Crowe Dr. A.M. Hegazy
& Co, a member of Crowe Horwath International, a Fellow of the Egyptian
Association of Accountants and Auditors (EAAA) and the Egyptian Tax
Association (ETA), and a member of the American Accounting Association
(AAA). He co-founded and chairs the Financial Consultancies Company for
Marketable Securities, which provides valuation studies for Egyptian listed
companies. He holds a BCom from Cairo University (1982) and an MSc (1984)
and PhD (1988) from the University of Birmingham.
Auday Sabri is a certified professional Accountant practicing in Iraq. He is a
financial specialist with the United Nations Development Programme
in Baghdad. He completed his Master’s Degree in Public Policy and
Administration at the American University of Cairo in 2010, presenting a thesis
on audit committee standards that provided much of the basis for this paper.
Prior to joining AUC, he provided professional accounting services in Iraq.
The increasing integration of Middle Eastern corporations into global capital markets,
both as targets for international investment and as investors themselves, raises the
importance of Corporate Governance (CG) standards in the region. While regional
standards have advanced notably in recent years, they continue to lag behind global
practice, as further discussed below. This suggests a need to reform official codes to raise
the bar and to strengthen enforcement to ensure that tighter standards translate into
improved governance performance. In achieving these advances, professional norms
and standards offer an important but overlooked tool to support reform.
The Egyptian government is working to raise governance standards in the business
sector generally and in particular for listed companies. In 2003, it established the
Egyptian Institute of Directors (EIOD) under the authority of the Minister of Investment.
The EIOD developed the Egyptian Code of Corporate Governance for private sector
companies in 2005 and issued a governance code for public (state-owned) enterprises in
2006. Review and revision of these codes is underway and in February 2011 the EIOD
issued a revised guide to corporate governance that, inter alia, introduced improved
standards for audit committee independence and operations (see below).
This paper considers the development of higher governance standards in Egypt.
Specifically, it seeks to measure whether current professional norms within Egypt’s audit
profession support higher CG standards. We argue that professional norms take on
increased importance in emerging market countries such as Egypt where regulatory and
market pressures are likely to be lower than in more mature markets.
The research presented focuses on the degree of support for improvements to the
structure and operation of the audit function and the Audit Committee (AC). Professional
standards are arguably of particular importance to achieving governance improvements
Improving audit committee performance in the Middle East 227
in this area, because the standard of governance relies heavily on the diligence of the AC
members and the auditors, which is difficult for those outside the AC to observe.
To measure the degree of support for international AC norms, the authors survey senior
audit professionals in Egypt to assess their support for a set of 53 audit function reform
measures derived from a comparison of Egyptian AC standards with US and UK
The analysis is presented in four sections, following this introduction. A literature
review first considers theoretical considerations that shape our understanding of observed
levels of standards compliance, presenting the conceptual framework that underpins
the remainder of the analysis. This framework emphasises the need to give greater
consideration to professional norms as an adjunct to regulatory and market-based
mechanisms to enforce global standards, or even as a substitute for such mechanisms in
emerging markets. The importance of normative isomorphism suggests a need to measure
the strength of professional norms in such environments, rather than looking only at the
codes and formal enforcement mechanisms.
Section 2 situates Middle Eastern and Egyptian corporate governance standards
within the context of global practice for CG reform processes, with particular reference to
the emergence of CG codes as a tool to drive reform globally, and considers progress in
developing and strengthening CG codes in Egypt and the Middle East more generally.
Section 3 presents the methodology used in the research reported here to fill the gap
identified in the literature with respect to assessing the strength of professional norms
favouring stronger audit committees in the Middle East. This methodology applies the
concept of normative isomorphism to measure support among senior Egyptian auditors
for the introduction of audit committee standards more closely in line with international
practice. A survey of senior audit professionals explores support for international audit
committee norms. The survey assesses the degree of consensus around 53 potential
improvements to the Egyptian standard, identified by the authors by comparing this
standard with audit committee guidance adopted in the USA (Morrow, 2008) and the UK
(Financial Reporting Council, 2008). Four hypotheses regarding the level of support for
related groups of norms are formulated based on these improvements. The results of the
survey are used to test these hypotheses.
Section 4 presents the findings of the survey to assess support for the modifications
proposed and draws conclusions for improvement of audit committee practice in Egypt,
while the final section discusses the study’s findings and conclusions.
2 The theory and practice of standard-setting for corporate audit:
application to the Middle East and Egypt
The analysis that follows relies on two theoretical foundations growing out of the broader
literature on corporate governance and standards: principle-agent theory and institutional
The development of structures, rules and procedures for corporate governance,
including those shaping the operation of the audit committee, may be considered a
response to the principal-agent problem (Fama and Jensen, 1983). Al-Lehaidan (2006)
notes in his comparison of audit committees in Saudi Arabia and Australia that:
228 J. Bremer et al.
“[Because] conflicts arise [from] the separation of ownership and management
and the inability of principals to observe the actions of the agent, [p]rincipals
and agents have economic incentives to invest in various information systems
and control mechanisms to reduce agency costs associated with information
asymmetry.” (Al-Lehaidan, 2006)
In this context, the audit committee may be considered an investment in both better
information and tighter control to overcome the principal-agent problem. Standard audit
committee rules that specify a membership drawn from independent board members and
that assign to them the responsibility for oversight over financial report accuracy and
reliability reduce the scope for principal-agent failures.
Institutional theory explores the source of pressures on institutions such as the audit
committee that push participants to adhere to the rules established. DiMaggio and
Powell’s (1983) classic institutional theory paper identifies three such sources of pressure
leading to adoption of standard institutional forms, roles, and mechanisms (‘institutional
isomorphism’): coercive, mimetic, and normative. DiMaggio and Powell describe
normative pressures as being particularly identified with professionalisation
and the development of professional standards, including accounting standards.
More recently, the role of social norms in achieving widespread compliance has
received increased attention. Feldman and Harel’s 2008 experimental study found that,
“… when the law is ambiguous (standard-like legal norm) and the social norm
dictates noncompliance, legal noncompliance behaviour is higher than when
information concerning the social norm is absent.” (Feldman and Harel, 2008)
Sunder (2005) has argued for greater reliance on social norms rather than on ever-tighter
formal standards as a strategy to improve accounting compliance. He concludes his
analysis by asking rhetorically,
“Can authority without social norms bring a semblance of order to the chaos to
financial reporting? After seven decades of incessant effort, the answer stares
us in the face.” (Sunder, 2005)
The present analysis examines the strength of these normative pressures in the Egyptian
accounting profession. The application of these theories to the development of the audit
committee in Egypt is incorporated into the conceptual framework shown in Figure 1.
In this model, corporate governance standards in a given national environment are
set through the interaction of national and international standards and codes. These in
turn affect corporate compliance with the code through three governance drivers: external
pressure from the market, government enforcement, and professional norms within
the environment of the corporation and its accountants, whether internal or external
(the dark lozenge). The resulting level of compliance with governance standards leads to
governance outputs in the form of better governance and enhanced corporate
performance and accountability. Within the corporate environment, the normative
standards of the accounting profession interact with those of the corporations themselves
and, on a more general level, with the mimetic and coercive standards of the capital
market and those imposed by the legal environment within which the firms operate.
This interaction shapes the level of compliance with governance norms, which in turn
influences governance outcomes and firm performance.
Improving audit committee performance in the Middle East 229
Figure 1 Theoretical model of relationships among accounting profession support for corporate
governance code, other governance drivers, and governance outcomes (see online
version for colours)
Source: Authors’ analysis
Professional norms influence compliance with governance standards both within
the firm, through the actions of professionals involved in the audit function at all levels,
and through interaction between the firm and external auditors. The research reported
here focuses on the strength of the professional norms in the accounting profession
(the lighter grey rectangle), an area that has received considerably less attention than have
market pressures and government enforcement actions.
It must be noted that, although the concept of ‘professional norm’ is widely used,
specific definitions of the concept in the literature are vague. In particular, scholars have
not clarified the strength or uniformity of agreement around a given behaviour or set of
behaviours norm within a given profession that would be considered the minimum level
to classify that behaviour as a norm. For example, Sunder (2005) defines the norms of
a social group as “the common knowledge expectation of its members about how others
behave in various circumstances”, but does not clarify what percentage must hold this
view or how strongly they must hold it to meet the definition.
In this analysis, we will define a given standard as a professional norm when the
average level of agreement among senior professionals is at least ‘agree’ on a five-point
Likert scale (from disagree strongly to agree strongly). This definition recognises the role
that senior accounting professionals play in setting the standards for professional
performance for the audit function, whether those adopted by senior professionals
themselves, by more junior professionals, or by non-accountants serving on the AC or in
other roles related to the audit function and corporate governance more generally.
230 J. Bremer et al.
Based on the factors underlying AC effectiveness identified by Al-Lehaidan (2006),
we argue that professional norms for AC structure and operation must encompass six
areas: AC composition, AC authority, AC resources, the competence of AC members,
their diligence, and their independence. The remainder of this paper explores whether the
norms and standards of the audit profession in the Middle East and in Egypt specifically
reflect these principles.
3 Audit committee practice in the Middle East: recent developments and
progress toward global standards for AC structure and operation
In developed and emerging markets alike, adoption of mandatory or voluntary codes and
standards has become an established element within the overall effort to promote good
corporate governance. The website of the European Corporate Governance Institute
(ECGI) lists 270 governance code documents from 76 countries (ECGI website and
author’s calculations). The earliest code document indexed by the ECGI is the 1992
Cadbury Report from the UK, followed shortly by the 1994 King Report from
South Africa. As of mid-2010, nine new country-specific documents were shown for
the year, originating in locations as diverse as Ireland, Colombia and Yemen.
The evolution of codes indexed by the ECGI clearly shows increasing engagement of
developing country organisations in developing codes, even relative to the rising global
volume of code publication overall. Only 8% of the developing country codes indexed
was produced prior to 2000, compared to 20% of codes from industrialised countries.
Codes from developing countries accounted for only 16% of all codes issued prior to
2000, compared to 36% in the more recent period (ECGI website and author’s
The increasing focus on codifying corporate governance standards reflects the
widespread belief that investors pay close attention to governance standards when
comparing companies or countries as targets for their investment. The index of codes
maintained by the European Corporate Governance Institute, cited above, provides
evidence that the Middle East and North Africa (MENA) region lags in developing
corporate governance codes to respond to this investor preference.
The authors’ analysis of this index indicates that Egypt’s code, the first issued in
MENA, did not appear until 2006, fully a dozen years after South Africa’s first King
report. The MENA-wide average for the number of standards listed (including revisions
to previously issued codes) is the lowest of any region at 1.1 per country, compared to the
average of 3.6 for all 76 countries included in the index.
MENA countries such as Egypt and the UAE have moved toward acceptance of
corporate governance, motivated in part by a desire to attract more foreign portfolio
investments. A recent Hawkamah publication notes that “investors would be willing to
pay a premium of from 15% to 30% to obtain stakes in well-governed companies in the
region” and estimates such a response would translate into $200–300 billion in increased
investment (Smith, 2009).
A draft OECD assessment of corporate governance in 10 MENA countries, based on
a survey completed by investment officials, found that audit committee requirements
range quite widely across the region (OECD, undated draft). Table 1 presents the findings
from this survey with regard to audit committees.
Improving audit committee performance in the Middle East 231
Table 1 Comparison of audit committee framework in selected Middle Eastern countries
232 J. Bremer et al.
Corporate governance standards and practice in the Middle East are progressing, but still
lag behind global standards. This situation casts doubt on the strength of the norms
favouring strong corporate governance in the region, given the presence of formal codes
and enforcement mechanisms.
A 2009 report by the Gulf Cooperation Council Board of Directors Institute
(GCCBDI) cites the “low levels of information disclosure” in the region, for example,
and notes that:
“For example, only 27% of the companies reviewed disclosed the number of
board meetings they held per year. Yet in a similar study, 100% of European
and US companies disclosed this data.” (GCC Board Directors Institute, 2009)
With regard to the regional practice on the audit committee specifically, the GCCBDI
study found that:
“Audit, remuneration and nomination committees are less common on GCC
boards. BDI’s research, which was focused on publicly-traded companies,
found that fewer than 50% of boards in the region have a separate audit
committee …” (GCC Board Directors Institute, 2009)
Their research showed that only 47% of the boards of 100 listed companies surveyed had
an audit committee, compared to a European company rate of 98% (GCC Board
Directors Institute, 2009).
It should be noted that recent research by one of the authors into audit committee
standards compliance, while finding a near-identical rate for the presence of audit
committees among UK listed firms (97%), nonetheless found much lower rates of
compliance for other practices widely accepted as desirable. For example, only 45% of
firms reported that the board conducted an annual review of the audit committee and only
16% reported whether the audit also provided non-audit services (Hegazy and Hegazy,
Turning to the case of Egypt, we find that formal codes are a relatively
recent development, but have progressed rapidly (see Arab Republic of Egypt, Ministry
of Investment, Capital Market Authority, 2002, 2006; Arab Republic of Egypt,
Ministry of Investment, Egyptian Financial Supervisory Authority, 2008; Arab Republic
of Egypt, Ministry of Investment, Egyptian Institute of Directors, 2006, 2007, 2011;
McKinsey & Company, 2001).
The country’s first corporate governance code was drafted by the EIOD only in 2005.
The EIOD is a government body formed to promote corporate governance improvement
through training, research, and public education, as well as through code issuance. Like
the UAE-based Hawkamah Institute referenced above, it was formed in the early 2000s
to support the work of capital market regulatory bodies and of the stock exchanges in
promoting better corporate governance.
The EIOD’s initiative built on capital market regulations issued in 2002 by the
Egyptian Capital Markets Authority (now incorporated within the Egyptian Financial
Supervisory Authority). Decree 30 of 2002 required all listed companies to publish
financial statements in two widely circulated newspapers and to establish an audit
committee (Arab Republic of Egypt, Ministry of Investment, Capital Markets Authority,
2002; see also UNCTAD, 2008).
Despite the progress made in issuing regulations and guidance, compliance with
global standards remains limited, even among listed companies. This weakness is
demonstrated by earlier findings (Bremer and Elias, 2007) that independent board
Improving audit committee performance in the Middle East 233
members were quite rare in Egypt as recently as 2007. Fawzy (2003) confirms this
finding, noting that:
“In most companies, there is no actual separation between the board of
directors and the executive management… The board of directors does not
include independent members…” (Fawzy, 2003)
Similarly, in a 2006 study by the Egyptian Banking Institute, 8% of banks surveyed
reported that the external auditor does not provide a written comment on the adequacy of
the bank’s internal controls, while a quarter indicated that they do not require rotation of
external auditors according to fixed terms (Arab Republic of Egypt, Central Bank,
Egyptian Banking Institute, 2006). Dahawy and Samaha (2009) also found that disclosure
levels are low among listed companies in Egypt. The government has continued to seek
international assistance to strengthen standards compliance in the banking sector (Arab
Republic of Egypt, Central Bank, 2010).
Recent actions by regulators underscore the growing recognition of both the value of
standards compliance and the need for further progress in this regard. In the former area,
UNCTAD’s 2008 report, cited above, notes that, “[t]he Capital Market Authority (CMA)
is fully committed to bring the Egyptian capital market in line with international
standards …” (UNCTAD, 2008).
In the latter area, to cite one example of such efforts to narrow the gap with
international standards, the Egyptian Financial Supervisory Authority, EFSA, found it
necessary to reaffirm the audit committee requirement in 2008, six years after it was
initially included in the listing requirements, and to begin imposing fines on firms that
had still not complied by the first quarter of 2009 (Arab Republic of Egypt, Ministry of
Investment, Egyptian Financial Supervisory Authority, 2008).
With regard to the audit committee’s structure and operations, the authors’ review of
the Egyptian AC code finds that the formal guidance, embodied in the CMA 2006
corporate governance guidance document discussed above, offers only a brief treatment
of audit committee formation and operations, roughly a page. Egypt thus does not have
detailed regulations comparable to those in the USA or UK, which underscores the value
of developing thorough and precise guidelines for audit committees and of determining
whether professional norms reinforce effective AC operation.
The section of the Egyptian Corporate Governance Code referring to the AC specifies
several requirements for the establishment and operation of the AC, including the
• The AC should be comprised of a minimum of three non-executive board members,
with the option of hiring members from outside of the company, should sufficient
non-executive members not be available. At least one member should be a financial
• The General Assembly should issue, upon a recommendation from the board,
a manual for hiring AC members and determine their term, responsibilities
• The management should provide the AC with all available resources and help to
conduct its responsibilities including appointment of external advisors and counsels.
234 J. Bremer et al.
The code further specifies that the AC should meet at least every three months with a
specific agenda and prepare a report on its activities every three months for the board
(Arab Republic of Egypt, Ministry of Investment, Capital Market Authority, 2006).
While formal requirements have remained limited, government agencies working in
corporate governance such as the EIOD have nonetheless worked to give companies
more specific guidance on audit committee operations, among other governance matters.
The EIOD produced a more comprehensive audit committee guidance manual (Arab
Republic of Egypt, Ministry of Investment, Egyptian Institute of Directors, 2007) and in
February 2011 issued new corporate governance guidance addressing audit among other
topics (Arab Republic of Egypt, Ministry of Investment, Egyptian Institute of Directors,
2011), but neither document has regulatory force. Nonetheless, these developments
demonstrate government commitment to bring the standard of performance in line with
US practice. This latest guidance introduces a number of improvements to audit code
guidance, recommending inter alia that:
• The AC chair should be an independent BD member and that the majority of AC
members be independent, whereas independence was not mentioned at all in the
previous code; only a requirement that members should preferably be non-executives
• The AC should assess the ‘effectiveness’ rather than only the ‘competence’ of its
• The AC should follow up on any comments made by the external auditor to
determine what actions were taken, rather than only reviewing such comments.
• The chair of the AC should prepare a separate report on the committee’s activities
for the AGM.
These further steps offer additional evidence of official support for strengthening audit
committee practice in the directions suggested by the authors, but it does not shed light
on the critical question of support for these changes among audit professionals.
4 Study methodology: measuring auditor support for improvements
to the Egyptian code
The literature review identified a gap with respect to measuring the strength of
professional norms, the drivers of normative isomorphism. Previous work has focussed
on the development of codes and on formal enforcement, but has not addressed the
professional norms as a source of support for better corporate governance. In an
environment such as that prevailing in Egypt and many other emerging markets, where
coercive (regulatory) and mimetic (market-based) pressures may not be sufficient to
ensure standards compliance, normative (professional) standards may take on increased
importance as determinants of governance outcomes. It is therefore useful to explore the
strength of these pressures as they apply in such a market by assessing the attitudes
of the senior members of the accounting profession, key opinion leaders for norm-setting.
The research reported here seeks to fill this gap by examining the strength of support
within the Egyptian accounting profession for provisions present in the international
standards that govern the audit committee’s operations but are absent or incomplete in the
Improving audit committee performance in the Middle East 235
Egyptian guidance. To test whether potential improvements to the Egyptian CG code on
AC structure and operations would be supported by prevailing auditor norms in Egypt,
the researchers first developed a set of 53 specific proposals for modifying the current
code language, based on a comparison of two major US and UK standards, used as
a proxy for global standards. The researchers then surveyed leading members of Egypt’s
audit profession to assess whether there is a consensus of support for each of these steps
towards global standards and for groups of related, mutually supportive proposals.
To develop the list of potential improvements, the authors compared the 2006
Egyptian guidance to two global standards: the audit committee language in the UK
Financial Reporting Council (FRC, 2008; see also FRC 2003, 2005 for comparison) and
the US AICPA Audit Committee Toolkit for public companies (Morrow, 2008).
The selection of the US and UK standards as the comparator reflects the broad
recognition of the US and UK standards for corporate governance, as noted by
Sunder, who argues that,
“The practices proposed for universal use are those prevalent in the
English-speaking countries, especially USA and UK. Such ethnocentricity
would be rejected in most other fields of social sciences but it has remained
largely unchallenged in financial reporting.” (Sunder, 2005)
It should be noted that the US and UK audit committee guidance documents differ
in some respects, indicating that the evolution of global norms is not yet complete.
For example, most of the topics within the first category, Establishment and Role, are
very detailed in the UK AC Code while the US toolkit and the Egyptian Code give these
areas only a brief treatment. Table 2 compares the treatment of the AC topics in each of
these documents. A more granular comparison of the US and UK guidance could be
useful for countries considering new or revised AC guidance and is suggested as a topic
for future research.
The 53 proposals are organised into 11 topics, addressing AC establishment,
resources, member skills, financial reporting, internal control, whistle-blowing, internal
audit function, AC-board relations, communication with shareholders, external audit
function, and the annual audit cycle.
These 11 topics are further collected to form four groups (A–D) based on their
mutually reinforcing relationships. Table 3 presents these topics and groups and relates
them to the six criteria identified by Al-Lehaidan (2006) as the elements of audit
The 53 proposals are summarised in Table 4. Annex 1 provides further detail on the
proposals reviewed by the audit professionals. For reasons of space, the proposals are
presented in summary form in Annex; the full text may be obtained on request from the
authors in English or Arabic.
Based on the above analysis, a set of four hypotheses were formulated regarding the
strength of support for the norms embodied in the proposals stated:
H1: Senior audit professionals in Egypt support higher standards for the
establishment and role of the audit committee.
H2: Senior audit professionals in Egypt support higher standards for the essential
236 J. Bremer et al.
H3: Senior audit professionals in Egypt support higher standards for communication
with the board and shareholders.
H4: Senior audit professionals in Egypt support higher standards for the external
audit and annual audit cycle.
Table 2 Comparison of UK, US, and Egyptian audit committee standards (see explanation of
coding used for ratings below)
Category and topic UK USA Egypt
1 Establishment and role
Establishment Very detailed Brief Brief
Appointment Very detailed Brief Brief
Meetings of AC Very detailed Very detailed Brief
AC resources Detailed Detailed N/A
Adviser/counsel Brief Very detailed Brief
Remuneration Very detailed N/A N/A
3 Skills and experience
AC financial expert Brief Very detailed Brief
Experience and training Very detailed Very detailed N/A
4 AC relation with board of directors Very detailed Detailed N/A
5 Financial reporting Very detailed Very detailed Detailed
6 Internal control (fraud)
Internal control Very detailed Very detailed Brief
Fraud N/A Very detailed N/A
7 Whistle-blowing Brief Very detailed N/A
8 Internal audit function
Internal audit process Detailed Detailed Detailed
Evaluation Detailed Very detailed Brief
9 External audit
Appointment Very detailed Detailed Brief
Independence Very detailed Detailed Detailed
Non-audit services Very detailed Brief Detailed
10 Annual audit cycle Very detailed Very detailed Brief
11 Communication with shareholders Very detailed Brief N/A
Explanation of coding:
‘Brief’ means that the subject was mentioned but not discussed. A rating of ‘very
detailed’ or ‘detailed’ was assigned by the authors based on the length of and
comprehensiveness of each subject in the reference documents.
Source: Financial Reporting Council (2008), Morrow (2008),
and authors’ analysis
Improving audit committee performance in the Middle East 237
To test these hypotheses, a questionnaire was developed and administered to a sample of
experienced Egyptian audit professionals. The authors used purposive and snowball
sampling techniques. Selection of experienced auditors relied in the first instance on the
authors’ knowledge of individuals’ experience as auditors and/or audit committee
membership to ensure that the sample would include senior audit profession members
most likely to serve as opinion leaders in the setting of professional norms. To ensure
a sufficient sample, members of this group were also asked to identify other senior
auditors in whom they had confidence.
Approximately 90% of the sample consisted of audit professionals in Egyptian
accounting firms, of whom all responded to the sample. About 10% of the sample
consisted of audit professionals serving on corporate boards. The non-response rate in
this smaller group was somewhat higher, but still within acceptable bounds. A specific
response rate cannot be calculated because snowball sampling was used within some
of the larger firms.
Survey participants were asked to state their agreement with each proposal on a
1–5 Likert scale (from disagree strongly to agree strongly) in order to assess whether
support for the improved provisions is consistent with normative isomorphism.
To encourage a high level of response, the survey was made available in both an Arabic
(paper-based) and an English version (administered online, using an online survey tool).
In all, 54 professionals completed the full survey. A small number of incomplete
surveys were discarded. The professional panel’s responses were then analysed to assess
the level of support for each recommendation and to determine the strength of support for
related sets of proposed improvements.
Table 3 Summary of proposals examined
Group A: Establishment and role Group C: Communication with board/shareholders
Topic 1 Establishment Topic 4 AC relations with the board of directors
1.1 AC appointment method 4.1 AC chair reporting to BD
1.2 AC term limitation 4.2 AC terms of reference
1.3 No more than 3 boards/AC member 4.3 Solve AC-BD variance
1.4 Conflict of interest disclosure 4.4 AC written charter
1.5 Timing of AC-BD meetings Topic
Communications with shareholders
1.6 AC meeting documentation 11.1 AR disclose AC compliance
Topic 2 Resources 11.2 AC terms, information in AR
2.1 AC resources adequate 11.3 AC chair at AGM
2.2 AC independent advisors 11.4 AR include disagreements, CPA-issues
2.3 AC salary level reflects duties Group D: External audit management
Topic 3 Skills Topic 9 External audit function
3.1 AC financial expert qualified 9.1 AC oversees CPA
3.2 AC member training 9.2 Investigation of CPA resignation
3.3 AC financial literacy 9.3 AC report to AGM on CPA
238 J. Bremer et al.
Table 3 Summary of proposals examined (continued)
Group B: Essential control functions 9.4 AC-CPA pre-audit engagement letter review
Topic 5 Financial reporting 9.5 AC evaluate CPA qualifications and fee
5.1 AC review financial statements first 9.6 AC review CPA quality control annually
5.2 Report any issues on financials to BD 9.7 AC confirm CPA rotation
Topic 6 Internal control 9.8 AC review ex-CPA employee hiring
6.1 AC confirm internal controls in annual
9.9 AC review non-audit services
6.2 AC review control systems, risk 9.10 Certain non-audit services by CPA
6.3 Deter management override Topic 10 Annual audit cycle
6.4 Response to fraud reports 10.1 AC review CPA workplan against scope
Topic 7 Whistle-blowing 10.2 AC review CPA plan with CFO, CAE
7.1 Whistle-blowing response 10.3 CPA to give opinion on accounting quality
7.2 Broad access to AC for whistle-blowing 10.4 AC-CPA-mt. meet quarterly on financials
7.3 AC investigations recommend action 10.5 AC review CPA representation letter
Topic 8 Internal audit function 10.6 AC assess audit cycle annually
8.1 Internal audit reports to AC 10.7 AC resolve CPA-management
8.2 Internal audit resources adequate
8.3 AC review IAF budget, plans
8.4 AC assure adequate IAF resources
8.5 IAF resources preserved from cuts
8.6 5-yr. review of IAF, AC-execs-CPA
8.7 AC ensure internal audit access to chair
AC: Audit Committee; AR: Annual Report; BD: Board of Directors; CAE: Central
Audit Executive; CFO: Chief Financial Officer; CPA: Certified Public Accountant;
IAF: Internal Audit Function.
Source: Authors’ analysis
Table 4 Summary of proposals for which support was measured
AC effectiveness components
(After Al-Lehaidan) Group and number of norms Topics
Group A: establishment and role of
1 AC establishment
Resources (12 proposals) 2 AC resources
Competence 3 AC skills
Authority Group B: essential control
5 Financial reporting
Authority (16 proposals) 6 Internal control
Improving audit committee performance in the Middle East 239
Table 4 Summary of proposals for which support was measured (continued)
AC effectiveness components
(After Al-Lehaidan) Group and number of norms Topics
Authority 7 Whistle-blowing
Authority 8 Internal audit function
Diligence Group C: communication with
board and shareholders
4 AC-board relations
Diligence (8 proposals) 11 Communication with
Diligence Group D: external audit
9 External audit function
Diligence (17 proposals) 10 Annual audit cycle
Source: Al-Lehaidan (2006) and authors’ analysis
5 Findings from the survey of audit professionals
Six tests of the survey results were used to test the four hypotheses stated above. Three
tests assessed the degree of support for the 53 proposals individually and three additional
tests measured whether the proposals constituted constructs at the group and topic
levels. First, the average level of support for each proposal and topic was assessed, with
a proposal considered to be supported if it received an average Likert score of four
(agree) or above. It should be noted that, although Likert scales are generally considered
to be ordinal rather than interval measures, it is common to report the average score,
particularly in a comparative context.
Second, the breadth of consensus was measured by the proportion answering agree
or strongly agree, with a minimum proportion of 75% set as the cutoff for support. Third,
the degree of opposition was assessed by examining the level disagreeing, with a
maximum proportion of 15% set as the standard. It should be noted that the cutoff of 4 is
more conservative than the alternative practice used by some authors of setting a cutoff
for ‘agree’ at 3.4, based on dividing the range of 1–5 into five equal segments. While the
authors were not able to find standards for agreement or disagreement, both the levels
chosen and the use of a disagreement standard to supplement the agreement measure may
be regarded as conservative, compared to a standard of majority or even two-thirds
Fourth, at the topic and group level, Spearman correlations were calculated to assess
the degree to which support for one set of proposals in the group was related to support
for the other related topics. Spearman correlations were used rather than the more
common Pearson correlations because Likert variables are ordinal rather than measured.
Finally, the reliability and validity of the measured support for each of the topics was
assessed using Cronbach’s Alpha tests. The reliability test measures the consistency of
answers to individual questions and groups of proposals across the respondent
population, whereas the validity test measures whether the data supports a conclusion that
all of the proposals within a given group are part of a single theoretical construct.
Table 5 provides the results for the test of the 53 individual proposals and 11 topics,
using the first three tests above. A proposal was judged to be supported if it passed at
least two of the tests.
240 J. Bremer et al.
These results show support by the audit professionals surveyed for 45 of the 53
proposals considered. Eight proposals, indicated by shading in Table 5, failed to reach at
least two of the standards set for consensus.
Seventeen proposals won strong support from the senior auditors surveyed, with more
than 90% of respondents indicating agreement. Support was particularly strong in
Group C, communication with the board and shareholders, with seven out of 16 proposals
receiving support from more than 90% of those surveyed.
All 11 topics passed the three tests for consensus support, with average Likert scores
of at least ‘agree’, with more than 75% signalling agreement, and no more than 15%
indicating disagreement. Consequently, all four groups also passed the three tests used
at this level.
Table 5 Level of support for proposals reflecting international standards
Disagree Topic/proposal Avg.
A Establishment and role C Communication with board/shareholders
1 Establishment 4.2 0.84 0.09 4 AC-BD relations 4.2 0.86 0.07
1.1 4.0 0.85 0.11 4.1 4.4 0.94 0.06
1.2 3.9 0.72 0.19 4.2 4.1 0.80 0.13
1.3 3.9 0.72 0.19 4.3 4.2 0.89 0.06
1.4 4.5 0.93 0.02 4.4 4.2 0.81 0.06
1.5 4.4 0.98 0.02 11 Communication 4.4 0.81 0.10
1.6 4.2 0.83 0.04 11.1 4.3 0.87 0.04
2 Resources 4.1 0.78 0.12 11.2 4.3 0.89 0.04
2.1 4.5 0.89 0.02 11.3 4.6 0.94 0.02
2.2 4.1 0.80 0.11 11.4 4.3 0.85 0.04
2.3 3.6 0.65 0.24
3 Skills 4.3 0.92 0.06 D External audit management
3.1 4.4 0.96 0.04 9 External audit 4.0 0.79 0.10
3.2 4.3 0.94 0.02 9.1 3.3 0.56 0.37
3.3 4.1 0.87 0.11 9.2 4.3 0.91 0.04
9.3 3.9 0.72 0.09
B Essential control functions 9.4 3.5 0.54 0.17
5 Fin. Reporting 4.5 0.95 0.01 9.5 4.2 0.91 0.04
5.1 4.5 0.94 0.02 9.6 4.2 0.89 0.06
5.2 4.4 0.96 0.00 9.7 4.3 0.83 0.02
6 Internal control 4.4 0.89 0.03 9.8 3.9 0.80 0.07
6.1 4.5 0.94 0.02 9.9 4.1 0.81 0.07
6.2 4.5 0.96 0.02 9.10 4.2 0.89 0.09
6.3 4.4 0.85 0.02 10 Annual audit 4.1 0.84 0.10
6.4 4.1 0.81 0.06 10.1 4.1 0.87 0.13
Improving audit committee performance in the Middle East 241
Table 5 Level of support for proposals reflecting international standards (continued)
Disagree Topic/proposal Avg.
B Essential control functions D External audit management
7 Whistle-blowing 4.2 0.84 0.04 10.2 4.2 0.83 0.07
7.1 4.2 0.87 0.04 10.3 3.6 0.67 0.24
7.2 4.2 0.81 0.07 10.4 4.4 0.94 0.00
7.3 4.2 0.83 0.00 10.5 4.2 0.87 0.06
8 Internal audit 4.3 0.89 0.04 10.6 3.9 0.78 0.15
8.1 4.3 0.85 0.09 10.7 4.4 0.91 0.02
8.2 4.2 0.83 0.04
8.3 4.4 0.93 0.06
8.4 4.4 0.94 0.02
8.5 4.3 0.89 0.02
8.6 4.3 0.87 0.02
8.7 4.3 0.91 0.04
See Table 3 above for clarification of each proposal. A five-point Likert scale from 1
(strongly disagree) to 5 (strongly agree) was used for all questions. Shading indicates
proposals that demonstrate the least support.
Source: Survey data and authors’ calculations
Turning to the two additional tests used to assess consensus at the topic and group levels,
we find that the correlation analysis supported a conclusion that the proposals constitute a
construct in three of the four groups, but did not support this conclusion for the first
group, establishment and role. In particular, as shown in Table 6, responses to the skills
and establishment topics were strongly correlated with each other, but neither was
strongly correlated with the responses to the resources proposals.
The final test, Cronbach’s alpha, measures, first, whether individuals’ answers are
consistent within each group (reliability) and, second, whether the answers are consistent
with a conclusion that the questions themselves make up a theoretical construct (validity).
A widely-used rule of thumb for the Cronbach’s Alpha reliability test is 0.70 or higher for
a substantial sample, although social science data may be held to a lower threshold of
0.60 (http://www.experiment-resources.com/cronbachs-alpha.html, 2010). A threshold of
0.83 or higher is set for the measure of validity with a lower threshold of 0.80 deemed
acceptable for social science testing.
Again, nearly all of the topics passed these tests, although the support for proposals to
provide more adequate resources to the AC and for improved financial reporting was
comparatively low. Nine of the 11 groups were also supported by the Cronbach’s alpha
tests, as shown in Table 7, but two groups, resources and financial planning, failed to
meet the standard set for either reliability (0.6) or validity (0.8).
Considering all of the above results, we find that most of the individual proposals
have consensus support from the senior ranks of the audit profession, but that the level of
support for the four hypotheses stated above differs among the four groups. Each will be
considered in turn.
242 J. Bremer et al.
Table 6 Spearman correlations of average response within groups
Group A: Establishment and role 1 2
1 Establishment 1
2 Resources 0.218 1
3 Skills 0.377* 0.087
Group B: Essential control functions 5 6 7
5 Financial reporting 1
6 Internal control 0.515* 1
7 Whistle-blowing 0.579* 0.558* 1
8 Internal audit function 0.478* 0.664* 0.662*
Group C: Communications with board and shareholders 4
4 AC relation with board 1
11 Communication with shareholders 0.655*
Group D: External and annual audit 9
9 External audit 1
10 Annual audit cycle 0.431*
*Indicates significance at the 0.01 level.
Source: Survey data and authors’ calculations
Table 7 Estimated reliability and validity for question groups (Cronbach’s Alpha)
Categories of norms Reliability Validity
1 Establishment (Group A) 0.674 0.821
2 Resources (Group A) 0.424 0.651
3 Skills (Group A) 0.701 0.838
4 AC relation with BD (Group C) 0.649 0.806
5 Financial reporting (Group B) 0.558 0.747
6 Internal control (Group B) 0.681 0.825
7 Whistle-blowing (Group B) 0.798 0.894
8 Internal audit function (Group B) 0.835 0.914
9 External audit (Group D) 0.681 0.826
10 Annual audit cycle (Group D) 0.728 0.853
11 Communication with shareholders (Group C) 0.748 0.865
Source: Survey data and authors’ calculations. Shading indicates levels
below the cutoffs set for reliability and validity
With regard to the establishment and role of the AC (Group A), three of the proposals
failed to attract consensus support, as defined here, while support for proposals to provide
adequate resources was weakly connected to other areas within the group. Thus
hypothesis H1, that there is a consensus around Group A proposals, is not supported.
The proposals related to essential control functions, Group B, were all supported and
the correlation analysis showed that there are strong connections among the different
Improving audit committee performance in the Middle East 243
proposals, although one of the four topics failed the Cronbach’s alpha test for validity and
reliability. Overall, this hypothesis, H1, is supported, but there is indication of a need to
build a stronger consensus around the provision for adequate review of financial
Hypothesis H3, that there is consensus support for better communications with the
board and shareholders (Group C), is the most strongly supported of the four proposals.
This hypothesis passed all five tests at the level of individual proposals, related topics,
and the group considered as a whole, and is therefore supported by the research findings.
This is an encouraging sign for better governance in the critical area of stakeholder
Hypothesis H4, regarding support for external audit management (Group D), received
intermediate support. Five individual proposals among the 17 analysed fell short of
consensus support, but Group D nonetheless passed both tests at the group level,
indicating that the proposals are closely related to each other in the view of the audit
professionals surveyed. This finding suggests a need to build support for the specific
proposals where consensus is weakest, which generally govern the relationship between
the AC and the CPA firm.
Overall, the high level of agreement for the 53 proposals advanced offers important
confirmation that the auditing profession is prepared to support a tightening of standards
for audit committees in Egypt. This support is critical to achieving higher standards in
the absence of either activist shareholders or effective regulatory enforcement. Audit
committee support takes on additional importance, given the provision in Egyptian
governance regulation for non-board members to sit on audit committees in the event that
sufficient independent board members with financial expertise are not available.
The findings of this analysis, taken as a whole, demonstrate that the norms of the audit
profession are consistent with improvements to the audit committee standards in Egypt.
At the same time, they also indicate a number of areas where further consensus-building
is needed to establish strong normative support for higher standards of AC operations.
The survey findings confirm that many knowledgeable participants in corporate
governance in Egypt would favour updating and clarifying the current corporate
governance code in Egypt as it applies to the audit committee. This provides
encouragement to the ongoing efforts of the Government of Egypt to strengthen
governance and in particular to improve transparency, accountability and disclosure of
the performance of listed firms.
The analysis indicates two areas where the evidence for professional norms is
comparatively weak, however, and therefore may merit increased attention to building
consensus around global norms for audit committee operations. First, audit professionals
are relatively less convinced that audit committees need greater and more assured access
to financial resources to do their job. This may suggest a lack of consensus on the level of
effort constituting adequate diligence on the part of the committee, although this deserves
Second, the need for active oversight of the external audit group emerges as an area
where professional norms do not appear to be as strong as in other areas. Three of the
proposed standards in this area fell short of the ‘agree’ cutoff, although the remaining
244 J. Bremer et al.
14 standards were supported. This finding argues for greater consensus-building around
the value of professional oversight, even where the auditors on the receiving end of the
oversight are judged to be experienced and trustworthy.
The survey findings provide confirming evidence for the existence of strong
professional norms among audit opinion leaders in Egypt. Further research is needed to
determine whether these norms are also widely held by board members and others having
oversight on corporate governance, such as regulators. It would also be of value to
determine whether senior auditors, in addition to holding these norms themselves, believe
that these norms are held by their peers.
This evidence offers encouragement for continued improvement in the standards of
audit committee operations and for corporate governance overall in Egypt. As argued
above, the support of the audit professionals for reform proposals may be nearly as
important as the regulatory framework itself in an environment of weak or irregular
enforcement such as that found in many emerging markets, including Egypt. In such
environments, where activist shareholder groups are also absent, the ability to rely on
the ‘soft enforcement’ pressure generated by professional norms arguably reinforces
compliance and leads to better governance.
More effective audit committees have the potential to bring Egypt’s listed companies
greater stability and resistance to economic shocks. At a time when the global economic
crisis is far from over and when Egypt’s companies confront louder calls from the public
for transparency and accountability, stronger audit committees and corporate governance
that complies with global standards must be seen as valuable assets for the development
of emerging markets such as Egypt.
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Annex 1: Summary of proposals presented for audit professional’s review
This annex presents the 53 proposals for which audit professional support was assessed.
As noted above, these proposals are organised into 11 topics (1–11) and the topics are
further aggregated into four groups (A–D), each bringing together proposals in 2–4
related topics. Group A is made up of topics 1–3, Group B consists of topics 5–8,
Group C comprises topics 4 and 11, and Group D covers topics 9 and 10.
Group A: Establishment and role of the AC
Topic 1: AC establishment. AC members should be appointed by the BD on the
recommendation of the nomination committee in consultation with the AC chairman.
If any AC member serves in more than three listed companies, the BD should determine
whether this situation will impair the ability of such AC member. Each AC member
should disclose any potential conflict of interest in advance. There should be sufficient
time between AC and BD meetings to allow actions to be carried out. AC meeting
discussions should be documented and circulated to internal and external auditors as
Topic 2: Allocating financial resources to the AC. This topic included questions on the
following changes: supplying the AC with adequate resources to undertake its duties;
hiring independent counsel and other advisers to help the AC as necessary; and providing
a salary to AC members that takes into account the extra responsibilities, skills, duties
and time required of AC members (including whether AC members may receive higher
salaries than other BD members).
Topic 3: AC member skills. The AC members should have financial expertise with
professional qualification. AC members’ training should be timely and ongoing and
related to company bylaws with a focus on new AC members; companies must have AC
members who are financially literate or will become financially literate within a
Group B: Essential control functions
Topic 5: Internal control. The AC’s responsibility to guard the company from fraud
includes the need to confirm that controls are in place and operating successfully.
In addition, the AC should approve annual report statements in relation to internal control
and management of risk. The AC should assess the company’s risk profile and support
the preparation of a statement on internal control in the annual report. The AC should
deter management override of internal controls and review annually the organisation’s
code of conduct. Fraud must be reported to the AC by the CPA firm, and the board
then has one business day to notify the EFSA (regulatory authority) of suspected fraud,
while the CPA firm is required to report to the EFSA by the end of the next business day.
Improving audit committee performance in the Middle East 247
Topic 6: Financial reporting elements. The AC should review information related
to financial statements. The BD’s approval of the financial report is required. If the AC
is not satisfied with any aspect of the proposed financial reporting, it shall report this to
Topic 7: Whistle-blowing. Proposals on this topic, a new tool for Egyptian companies,
include a requirement for the AC to review any complaints received, internal or external,
regarding internal controls and financial statements. AC contact information should be
provided on the company’s website or through a hotline. Confidentiality of the employee
and protection against any retaliation should be guaranteed. The complainer should be
able to follow procedures set up by the AC. The AC investigation should determine
corrective action or recommend action to the full board.
Topic 8: Internal audit function (IAF). The IAF should be directly supervised by the AC
and should report directly to it. The AC creates an agenda for the coming year or
approves the central audit executive’s agenda. An adequately resourced internal audit
function can provide the board with objective assurance of internal controls. The AC
should review the IAF budget and plans and ensure that they reflect the CPA firm’s
objectives. The AC should guarantee that the internal audit function has resources and
access to information and is fully equipped. Companies should perform an internal IAF
improvement and quality assurance programme once every five years. The AC should
meet annually with executive managers and the CPA firm to discuss Central Audit
Executive (CAE) performance. The AC must ensure that the internal auditor team has
direct access to the board chairman and is accountable to the AC.
Group C: Communication with the board and shareholders
Topic 4: Relation between AC and the board. The AC chairman should report formally
to the board after each meeting. The AC should receive formal terms of reference from
the board, which should be reviewed annually by the board; disagreement between the
AC and BD should be allocated enough time for resolution; if the issue is not resolved,
the AC should report the issue to the shareholders. The AC must have a written charter
that includes: annual performance evaluation, purpose, etc., and the charter must be
posted on the company’s website.
Topic 11: Communication with shareholders. The AC is obligated to disclose the work
done by the committee during the previous fiscal year in the annual report, including
confirmation of whether members of the AC are satisfied that they are fulfilling the
charter, which should be attached to the annual report every three years. The EFSA
(the regulator) should have jurisdiction over reporting of information to the public;
the terms of reference of the AC should be made available in the annual report and should
include the number of AC meetings, a summary of the AC role, etc. The AC chairman
should be available at the Annual General Meeting to answer any question about the AC.
The annual report should include other matters concerning any disagreement between
the AC and board, the appointment of the CPA firm, provision of non-audit services and
certain matters regarding the CPA firm.
Group D: External audit management
Topic 9: External audit. The AC is responsible for overseeing the organisation’s relations
with the CPA firm and the engagement letter should state that the client’s representative
248 J. Bremer et al.
is the AC, so that the CPA firm is accountable primarily and directly to the AC. If the
CPA firm resigns, the AC should investigate and consider the need to include the risk
associated with the departure of the CPA firm in their risk evaluation. The AC should
report to shareholders on the appointment, reappointment or removal of the CPA firm.
If the board does not accept the AC’s recommendation, this should be disclosed in the
annual report; the AC should review the engagement letter with the executive partner at
the start of each audit; the AC evaluation should take into consideration the CPA firm’s
qualifications and whether the audit fee is proper to the size, risk, complexity and control
profile of the company. The AC should review annually the CPA firm’s internal quality
control, peer review, governmental inquiries and any steps taken to deal with such issues.
The AC should ensure follow up of the mandatory rotation taking place within the CPA
firm with regard to the lead and other partners after five years and then apply a five-year
time-out. The same rotation process also applies for non-audit services. The AC should
agree with the board on a policy for employing former CPA firm employees who were
part of the audit team, should affirm in the annual report that the provision of any
non-audit services did not harm CPA firm independence, and verify both that the
payment for such services was not more than 5% of the total amount paid to the CPA
firm and that AC approval was obtained. Furthermore, CPA firms should be prohibited
from providing certain non-audit services at the same time that they are performing
audits, such as actuarial and human resource services.
Topic 10: Annual audit cycle. The AC should consider whether the CPA firm’s overall
work plan is consistent with the scope of the audit engagement and review it with the
CPA firm, CFO and CAE. The AC should review the audit plan and scope with the IAF
team to reduce unnecessary efforts. Guidance should require the CPA firm to offer their
opinion of the quality, not just the acceptability, of the accounting principles used in the
company. The AC must meet with management and the CPA firm to review the audited
quarterly and annual financial statements. It should review the CPA firm representation
letters before signature by management, and also review management letters including
the recommendations of the CPA firm and management’s responses. At the end of the
annual audit cycle, the AC should assess the effectiveness of the audit process, review
whether the CPA firm has met its audit plan and obtain feedback from key executives
involved. The AC should discuss with the CPA firm any difficulties faced during the
audit cycle and any major disagreements with management and ensure solution of
disagreements regarding financial reporting.
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