Audit Committee Connectedness and Audit Fees

Abstract

The study examines the effect of audit committees connectedness, measured using network centrality from social network theory, on audit fees. We also test the effect of the same on audit quality and audit timeliness. We find that network centrality measures of audit committees are positively and significantly associated with audit fees. Moreover, we document that audit committees connectedness is associated with better financial reporting quality and audit timeliness, which might explain the increase in audit fees. We conduct several robustness tests and document the same results. Additional analysis indicates that the results are driven by the overall centrality of the audit committee and not by the centrality of committee chairs, committee financial experts, or members of the committee. Our results also hold true for both pre and post SOX period and after controlling for CEO and CFO network centrality measures. Overall, the findings suggest that connected audit committees are associated with higher audit fees because they demand better audit quality and timely dissemination of information.

Keywords: Audit Committees,Network Centrality, Audit Fees, Audit Timeliness.

JEL Classification: D85, M14, M42.