An Investigation of the Impact of Audit Committee Characteristics on the Relative Magnitude of Non-Audit Service Purchases

Abstract

This study examines the association between audit committee characteristics and the relative magnitude of non-audit service (NAS) and audit service fees, using data gathered under the recent SEC fee disclosure rules. Issues related to non-audit service fees have been of concern to practitioners, regulators and academics for a number of years. Evidence suggests that audit committees which possess certain characteristics are important participants in the process of managing the client/auditor relationship. We hypothesize that audit committee members who are independent and active financial monitors have incentives to limit NAS fees (relative to audit fees) paid to incumbent auditors, in an effort to enhance auditor independence in either appearance or fact. We examine a sample of 310 firms which 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, negatively associated with the ratio of NAS and audit fees. This evidence is consistent with audit committee members perceiving a high level of NAS fees in a negative light and taking actions to decrease this occurrence.

JEL Classification: G34, M49