Purpose - This paper aims to examine the relationship between firm characteristics and incentives for the voluntary formation of audit committees by non-top 500 firms listed on the Australian Stock Exchange (ASX). Design/methodology/approach - Data are obtained from a random sample of 224 non-top 500 firms listed on the ASX for the year 2005. Logistic regression analysis is used to examine the characteristics of non-top 500 firms who have voluntarily established audit committees. Findings - The results are consistent with the hypothesis that incentives to voluntarily form audit committees increase with agency costs of debt. The results show a significant and positive association between cost of debt, firm size, number of directors on the board, the proportion of independent directors, independent board chair and the voluntary formation of audit committees. Research limitations/implications - Results indicate that firm size is not necessarily the primary influence in voluntary formation of audit committees. Board size and the proportion of independent directors and having an independent board chair also have a significant influence on the decision. These results suggest that audit committees will be established in high agency cost of debt situations, where there are economies of scale and are reflective of a desire to reduce information asymmetries and the liability exposure of outside directors. Originality/value - This study provides useful insights and direction in examining voluntary formation in an Australian context using non-top 500 firms. The results have implications for regulators in considering making audit committees mandatory for all listed companies.