MOHAMAD SYAIRAZI BIN MOHD AFFENDY 233241

CHAPTER 2

LITERATURE REVIEW

2.1 Definition of investigated variables

In this paper, I was studied about the impact of audit committee characteristics on the firm
performance. I had found three of independent variable which are the independence of an audit
committee, the effectiveness of audit committees, activity and size and one of dependent
variable which is firm performance.

2.1.1 The independence of an audit committee (AC)

Independence of AC will be the independent variable which will influence the dependent
variable. Independence of an audit committee can be defining as “considered a vital
characteristic influencing the committee’s efficiency in managing the process of financial
statements” (Baxter, & Cotter, 2009)

2.1.2 The effectiveness of audit committees

Effectiveness of AC will be the second factor that will influence the firm performance. The
effectiveness of audit committees can be defining as “The expertise of the audit committee is
generally considered an important characteristic for its effective operation” (Baxter, & Cotter,
2009).

2.1.3 Activity and size

The level of activity of an audit committee will be the third and last variable that will influence
the performance of the firm. It can be defining as “The level of activity of an audit committee
has been recommended as important to enhance its effectiveness in improving earnings
quality” (Baxter, & Cotter, 2009). “Other studies have also found a significant relationship
between AC independence and the quality of financial reporting”
(GhafranandO’Sullivan,2013; LinandHwang,2010).
MOHAMAD SYAIRAZI BIN MOHD AFFENDY 233241

2.1.4 Firm performance

Our dependent variable is firm performance which can be define as “relevant construct in
strategic management research and frequently used as a dependent variable” (Juliana Bonomi
Santos, 2012). The firm performance will be influence by the audit committee characteristic
like independence, effectiveness and activity and size due to (Jensen and Meckling (1976, p.
323)) characterise the auditing function as an important bonding mechanism in firms which
“serve to more closely identify the manager’s interests with those of the outside equity
holders”.

2.2 Relationship:

2.2.1 Relationship between the independence of an audit committee and firm

performance
According to my studied, I have found the hypothesis for this studied; Null (H0) where, there
is no relationship between independence of an audit committee and firm performance.
Alternative (H1), there is relationship between independence of an audit committee and firm
performance.

2.2.2 Relationship between the effectiveness of audit committees and firm performance
I had found null (H0), there is no relationship between the effectiveness of audit committees
and firm performance. Alternative (H1), there is relationship between the effectiveness of audit
committees and firm performance.

2.2.3 Relationship between activity and size and firm performance

I also found null (H0), there is no relationship between activity and size and firm performance.
For the alternative (H1), there is relationship between activity and size and firm performance.

2.3 Theoretical framework

Figure 1.1 demonstrates the framework of study which investigate the relationship between
university-related aspects with lecturer-related aspects will influence student academic
performance.
MOHAMAD SYAIRAZI BIN MOHD AFFENDY 233241

The independence of an
audit committee

The effectiveness of audit

FIRM PERFORMANCE
committees

Activity and size

2.5 Hypothesis
Based on the evidence from previous studies, the following hypotheses were developed:

 H1: There is a significant effect of the independence of an audit committee on firm

performance.

 H2: There is a significant effect of the effectiveness of audit committees on firm

performance.

 H3: There is a significant effect of activity and size of audit committees on firm

performance.