Corporate Governance and Audit Fees: Evidence of Countervailing Relations

Journal of Contemporary Accounting and Economics, Forthcoming

Posted: 15 May 2008 Last revised: 4 Sep 2008

See all articles by Paul A. Griffin

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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Abstract

This study suggests that audit fees, and hence audit quality, and corporate governance are jointly determined. To show this, we derive and test a framework that reflects two countervailing relations between governance and audit fees, namely, a fee increase because of exogenous changes in expected liability that require greater auditing and other mechanisms to attain better governance, and a fee reduction because auditors reduce the price of risk to reflect the benefits of better governance. The study period provides an interesting setting to test the framework because it covers the passage of the Sarbanes-Oxley legislation, which imposed a substantial cost on many companies to strengthen governance, including increased auditing and internal control spending. 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 controls, which enables auditors to decrease the price of 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 Yuan, Corporate Governance and Audit Fees: Evidence of Countervailing Relations. Journal of Contemporary Accounting and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1133140

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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