Corporate Governance and Audit Fees: Evidence of Countervailing Relations
Paul A. Griffin
University of California, Davis - Graduate School of Management; University of California, Davis
David H. Lont
University of Otago - Department of Accountancy and Finance
Boston University - Questrom School of Business
Febuary 12, 2008
This study derives and tests an economic framework that explains the relation between corporate governance and the fees paid by companies for auditing. Importantly, our framework posits and we find that auditing and governance are co-determined by two countervailing relations, namely, a fee-increasing relation because auditing services provide one means to attain better governance, and a fee-decreasing relation because auditors incorporate the benefits of better governance in pricing their services.
The study period provides an interesting setting for testing the framework because it covers the passage of the Sarbanes-Oxley legislation, which imposed substantial cost on many companies to strengthen governance, including increased spending on auditing and internal control. Yet, after controlling for such increased spending, our results also suggest that better governance reduces the cost of auditing. Our framework explains that this offset occurs because even though better governance (including auditing) is costly, it also enhances the quality of financial statements and internal controls, which enables auditors to decrease the price of audit risk and reduce fees.
Number of Pages in PDF File: 55
Keywords: Auditing, audit fees, corporate governance, Sarbanes-Oxley
JEL Classification: C30, G34, G38, K22, L84, M49
Date posted: December 14, 2007 ; Last revised: September 4, 2008
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 0.234 seconds