Abstract

http://ssrn.com/abstract=1069480
 
 

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Corporate Governance and Audit Fees: Evidence of Countervailing Relations


Paul A. Griffin


University of California, Davis - Graduate School of Management

David H. Lont


University of Otago - Department of Accountancy and Finance

Yuan Sun


Boston University - School of Management

Febuary 12, 2008


Abstract:     
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

working papers series


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Date posted: December 14, 2007 ; Last revised: September 4, 2008

Suggested Citation

Griffin, Paul A. and Lont, David H. and Sun, Yuan, Corporate Governance and Audit Fees: Evidence of Countervailing Relations (Febuary 12, 2008). Available at SSRN: http://ssrn.com/abstract=1069480 or http://dx.doi.org/10.2139/ssrn.1069480

Contact Information

Paul A. Griffin (Contact Author)
University of California, Davis - Graduate School of Management ( email )
3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)
HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

David H. Lont
University of Otago - Department of Accountancy and Finance ( email )
Box 56
Dunedin, Otago 9054
New Zealand
+64 3 479 8119 (Phone)
+64 3 479 8171 (Fax)
HOME PAGE: http://www.business.otago.ac.nz/acty/
Yuan Sun
Boston University - School of Management ( email )
595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)
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