www.ccsenet.org/ijef International Journal of Economics and Finance Vol. 2, No. 3; August 2010 Published by Canadian Center of Science and Education 177 Agency Problem and the Role of Audit Committee: Implications for Corporate Sector in Bangladesh Muhammad Zahirul Islam Senior Lecturer, Department of Business Administration, East West University 43 Mohakhali C/A, Dhaka, Bangladesh Tel : 88-017-1665-3964 E-mail: zahir046@ewubd.edu Mohammad Nazrul Islam, ACA, ACMA Assistant Manager, Audit and Advisory Services Rahman Rahman Huq-Chartered Accountants, Dhaka, Bangladesh Tel: 88-017-1634-2488 E-mail: kpmg-rrh@citech-bd.com, nislam@kpmg.com Sumon Bhattacharjee (Corresponding Author) Lecturer, Department of Business Administration, East West University 43 Mohakhali C/A, Dhaka, Bangladesh Tel : 88-017-1285-9617 E-mail: sumon@ewubd.edu, sb_ctg@yahoo.com A. K. M. Zahirul Islam Senior Lecturer, Prime University, 2A/1 North East of Darussalam Road Mirpur-1, Dhaka-1216, Bangladesh Tel: 88-015-5432-4721 E-mail: Zahictg06@gmail.com Abstract This paper is an attempt to identify various agency relationships that may exist in the economic & business life & the related problems that may arise due to such relationships. Corporate governance is a burning issue now a day. We have witnessed a paradigm shift in the corporate governance practices in different countries where audit committee has been addressed and accepted as a striking force. Likely, audit committees in the corporate sector in Bangladesh have a formidable challenge of effectively overseeing the company’s financial reporting process in a dramatically changed but improperly regulated or unregulated corporate governance environment. It is also an effort to make a relationship between mitigating the agency problem and the role of audit committee in this respect. . Keywords: Agency Problem, Audit Committee, Information Asymmetry, Corporate Governance 1. Introduction One of the key features of modern corporations is the separation of ownership and control (Berle and Means 1932).Large scale businesses, which were developed during the period of industrial revolution, brought significant changes in financing, ownership and management patterns. Innovation in technologies created necessity of huge investment in the industrial unit. Ownership structure was extended to incorporate Joint Stock type of organization where people from different sections of the society came up to provide necessary fund (Khan et al, 2004:131).Corporate governance systems are developed, in part, to help reduce agency problems. Such systems involve the development of monitoring mechanisms and evaluation procedures to help control an organization’s agents and ensure that they behave in the best interests of shareholders. Comprehensive regulatory changes brought on by recent corporate governance reforms have a broadly redefined and re-emphasized the roles and responsibilities of all the participants in a public company’s financial reporting process. Most notably, these reforms have intensified scrutiny of corporate audit committees, whose role as protectors of investors’ interests now attracts substantially higher visibility and expectations. The audit committee acts as an intermediary between the firm’s managers and the external auditor when there are disputes over accounting matters and it also monitors the firm’s financial reporting system and internal controls. The audit committee is commonly viewed as a monitoring mechanism that can make a significant contribution within a good corporate governance framework. However, investors may be expecting too much from audit committees if the underlying accounting and auditing standards are inadequate (Wolnizer 1995). The committee’s duties include recommendation and appointment of external auditors, reviewing the company’s financial statements,