Board Characteristics and Audit Fees

Abstract

This paper examines the relationship between board characteristics and external audit fees for Fortune 1000 companies. Competing arguments exist regarding the possible relationship between board characteristics and fees.

One view is that a more independent, diligent, and expert board would be more concerned with effectively discharging its monitoring role and would be more supportive of the external audit function. Such a board would be likely to insist on enhanced audit scope, thus increasing the audit fee. An alternative view is that a more independent, diligent, and expert board would reduce the auditor's assessment of control risk and would substitute some of its own monitoring for the monitoring of the auditor. This would reduce audit effort, thus decreasing the audit fee.

Consistent with the first view, we find significant positive relationships between board independence, diligence, and expertise and audit fees. A more independent, diligent, and expert board does not appear to substitute for audit effort; rather, such a board may complement auditor oversight.

These results add to the growing body of literature documenting a relationship between corporate governance mechanisms and various facets of the financial reporting and audit processes. In addition, the results add to our understanding of the determinants of audit fees.

JEL Classification: M41, M49, G32, G34