Corporate Governance and Audit Fees: Evidence of Countervailing Relations

55 Pages Posted: 14 Dec 2007 Last revised: 4 Sep 2008

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

Estelle Sun

Boston University - Questrom School of Business

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Date Written: 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.

Keywords: Auditing, audit fees, corporate governance, Sarbanes-Oxley

JEL Classification: C30, G34, G38, K22, L84, M49

Suggested Citation

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

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/

University of California, Davis ( 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/

Estelle Yuan Sun

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
1-617-353-2353 (Phone)

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