SUSTAINABLE RISK MANAGEMENT BY AUDIT COMMITTEES: EVIDENCE OF DERIVATIVES USAGE IN NON-FINANCIAL COMPANIES

Abstract

This research examines the performance of audit committees in non-financial firms. The scale of the financial crisis leads to the nagging question: what were the audit committees doing? Did they take any measures to contain firm risks during the crisis? Using data from the financial crisis period, this study explores whether audit committees provide consistent performance during periods of normalcy and crises. We find that audit committees contribute to effective use of financial derivatives to achieve value-enhancing and risk-reducing hedging activities in non-financial firms. The beneficial risk effects are not evidenced in the firms not employing financial derivatives indicating that audit committees are less involved with risk management activities within these firms. The vigilance may stem from the larger risks and responsibilities involved in the reporting of financial derivatives in financial statements and having to attest to related risks. Following on the premise that audit committees impact firm profitability, we find no impact. It is likely that audit committees are perforce becoming more involved in risk management activities to the detriment of their primary financial reporting. The study provides an insight into functions of audit committees in respect of risk management and uses instrumental variables with 2 SLS methodology and GMM to overcome problems of endogeneity. Further, we employ the Markov Chain Monte Carlo (MCMC) imputation method to capture larger data set. This is amongst the few studies to fill the gap regarding sustainable performance of audit committees in a hedging environment.