FROM STRUCTURE TO CAPABILITY: RETHINKING AUDIT COMMITTEE EFFECTIVENESS AND FIRM PERFORMANCE: A NARRATIVE REVIEW
Abstract
Purpose: This review examines whether, how, and under what conditions audit committee effectiveness, conventionally proxied by independence, financial expertise, size, and diligence, is associated with firm performance, and why prior findings diverge.
Design/methodology/approach: A narrative review structured around the SANRA quality criteria synthesises peer-reviewed theoretical, primary empirical, review, and meta-analytic evidence through agency, resource dependence, and institutional theory.
Findings: Evidence is strongest for independence and financial expertise, particularly accounting expertise, and is more robust for financial reporting and audit quality outcomes than for firm performance. Meta-analytic evidence links independence, expertise, and committee size to firm performance, whereas meeting frequency shows no significant aggregate association with performance, even though it is linked to lower earnings management. Divergent findings are traced to three sources: reliance on structural proxies that do not capture oversight processes; dynamic endogeneity, whereby prior performance and adverse events reshape committee composition and activity; and institutional variation, including principal-principal conflicts in concentrated-ownership settings.
Originality/value: The review develops a process-based framework and five testable propositions linking structural attributes, oversight processes, governance outcomes, and firm outcomes under institutional boundary conditions, and illustrates their relevance using Kenya’s corporate governance code.
Research limitations: As a narrative review, the synthesis is interpretive rather than exhaustive, and the proposed mediating pathways remain to be tested empirically.
Practical implications: Boards, regulators and investors should assess audit committees on the substance of their oversight, information access, challenge and follow-up-rather than on their formal composition alone.
Keywords: audit committee; corporate governance; firm performance; financial expertise; independence; endogeneity; institutional theory; emerging markets; narrative review
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