The Effect of Audit Committee Characteristics and Non-Audit Fees on Audit Fees

23 Pages Posted: 17 Jul 2001

See all articles by Lawrence J. Abbott

Lawrence J. Abbott

University of Memphis

Susan Parker

Santa Clara University

Gary F. Peters

University of Arkansas at Fayetteville

Kannan Raghunandan

Florida International University (FIU) - School of Accounting

Date Written: June 29, 2001

Abstract

This study examines the association between audit committee characteristics and audit fees, using data gathered under the recent SEC fee disclosure rules. We hypothesize that audit fees will be higher in the presence of an active and independent audit committee. Our base our hypothesis upon two premises. First, we argue that independent and active audit committees demand a higher level of audit quality due to concerns about monetary or reputational losses arising from financial misstatements. This higher audit quality demand may manifest itself in a higher amount of audit coverage, which, in turn should result in a concomitantly higher audit fee. Second, independent and active audit committees may give rise to greater auditor fee bargaining power.

We examine a sample of 262 non-regulated, Big 5-audited firms that filed both 10-K and proxy forms with the SEC in the period from 2/5/2001 to 3/23/2001. Audit committees comprised solely of independent directors that meet at least four times annually are significantly, positively associated with audit fees. This evidence is consistent with audit committee members taking actions within their span of control to ensure a higher level ofaudit coverage, as well as facilitating auditor independence. Finally, we also examine the impact of non-audit fees on audit fees. We document a significantly positive association between audit fees and non-audit fees, consistent with prior research from the early 1980's.

Keywords: Audit committees; Audit fees; Non-audit fees

JEL Classification: M49, G32

Suggested Citation

Abbott, Lawrence J. and Parker, Susan and Peters, Gary F. and Raghunandan, Kannan, The Effect of Audit Committee Characteristics and Non-Audit Fees on Audit Fees (June 29, 2001). Available at SSRN: https://ssrn.com/abstract=275808 or http://dx.doi.org/10.2139/ssrn.275808

Lawrence J. Abbott (Contact Author)

University of Memphis ( email )

Department of Accounting
Memphis, TN 38152
United States
901-678-4576 (Phone)
901-678-2685 (Fax)

Susan Parker

Santa Clara University ( email )

Leavey School of Business 500 El Camino Real
Santa Clara, CA 95053
United States
(408) 554-4899 (Phone)
(408) 554-5193 (Fax)

Gary F. Peters

University of Arkansas at Fayetteville ( email )

Sam M. Walton College of Business
Department of Accounting
Fayetteville, AR 72701

Kannan Raghunandan

Florida International University (FIU) - School of Accounting ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States
305-348-2582 (Phone)

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