About the Audit Committee
The implementation of GCG principles as a whole and consistently is fundamental for the organization. One institutional element within the GCG framework that is expected to be able to make a high contribution in the level of implementation is the "Audit Committee". Its existence is expected to be able to improve the quality of the company's internal supervision, and be able to optimize the checks and balances mechanism, which in turn is aimed at providing optimum protection to shareholders and other stakeholders.
The main task of the audit committee in principle is to assist the Board of Commissioners in carrying out the supervisory function.
This includes a review of the company's internal control system, impact of audit committees qualities on return on assets, the quality of financial statements, and the effectiveness of the internal audit function. The task of the audit committee is also closely related to the review of the risks faced by the company, and also compliance with regulations.
From a simple description of the tasks and functions of the institution, of course, the existence of the audit committee becomes very important as one of the main tools in implementing good corporate governance.
On a practical level, the figure of an audit committee member who is able to carry out his daily tasks effectively is not easy to find. Need special criteria for someone who will serve as chairman and member of the audit committee, given the duties and responsibilities that are very strategic.
Based on the aforementioned thoughts the Indonesian Society of Independent Commissioners together with the audit committee practitioners who have high attention to the above, agreed to form the Association of Audit Committees (The World Institute of Audit Committee) which is an organization that will oversee and conduct education and recognize the qualifications of audit committee members in order to accelerate the transformation of the company towards good corporate governance.
One of the responsibilities of the audit committee is to assess the audit report of the external auditor. The position of the audit committee which is part of the board of commissioners and with their competence is expected to optimize the function of external auditors for the company. Communication between the audit committee and external auditors can be oral or written.
Public Accountant Professional Standards and Auditing Standards explain the rules regarding communication between public accountants (external auditors) and the audit committee. The responsibilities of the audit committee include: selecting an independent auditor, overseeing the audit process and ensuring the quality of the financial statements.
The audit committee performs its functions in terms of oversight of financial statements, oversees external audits, and observes the internal control system. Formal communication between the audit committee, internal auditor and external auditor ensures that the internal and external audit processes are carried out properly. A good internal and external audit process increases the accuracy of the financial statements and then increases confidence in the financial statements.
The results of the study stated that an effective and independent audit committee improved the quality of financial reporting.
The relationship between committee composition and committee interaction with internal auditors. The results of the study are committees consisting of only independent commissioners and one with a financial and accounting background tends to (1) meet with internal auditors more often, (2) have personal access with internal auditors, (3) review internal audit proposals and the results of internal audit.
The selection of auditors is motivated by three sources, namely: the audit environment, the characteristics of the audit company and the client. The decision to choose an auditor or KAP tends to be more determined by factors such as company characteristics, foreign ownership in the company, the type of industry sector, and the size of the company.
The issue of corporate governance arises because of the separation between ownership and management of the company (Gunarsih, 2003). The separation between the ownership and management functions of the company raises the possibility of agency problems that can cause agency conflicts, namely conflicts that arise as a result of the desire of management (agents) to take action in accordance with their interests that can sacrifice the interests of shareholders (principal).
In addition to the corporate governance mechanism, ownership structure is thought to also affect the cost of equity. Yao and Sun (2008) show that companies with family ownership as majority shareholders have higher equity costs than other companies. This is due to the control owned by the majority shareholders and the opportunity to obtain greater personal benefits so that investors want a higher rate of return to compensate for these risks (Dyck and Zingales, 2004). Attig et al. (2008) also states that when a company is majority owned by a certain family, the risk of information becomes greater and causes the cost of equity to be higher.