The Relationship Between Enterprise Risk Management and External Audit Fees: Are They Complements or Substitutes?

Abstract

The paper explores how the adoption of enterprise risk management (ERM) practices influences external audit fees in large pharmaceutical firms. The results show that the mere presence of a Chief Risk Officer does not influence external audit fees. However, when we take the different ERM practices into account, we find that firms that heavily rely on ERM report significantly lower external audit fees. This finding is especially relevant, as it indicates that ERM not only creates the conditions for better internal monitoring, but it also facilitates the external auditor’s work leading to lower external audit fees.

Keywords: Enterprise Risk Management, Audit Fees, Corporate Governance, Chief Risk Officer

JEL Classification: G3, G32, G34