Audit Fee Structure, Financial Crisis and Corporate Governance

Abstract

This study examines the effect of corporate governance on audit fees and audit hours during the financial crisis and pre-crisis periods. While the literature on the effect of corporate governance on audit fees is replete, the results are still mixed. By exploiting the crisis setting which represents exogenous shock unrelated to governance choices or auditing, we find that firms with strong corporate governance pay significantly higher audit fees and purchase additional audit hours. We also find that the sensitivity of audit fees and hours to the strength of corporate governance is higher during the crisis period relative to the pre-crisis period. Furthermore, the structure of audit fees and hours differs between the crisis and pre-crisis periods for firms with poor corporate governance. Collectively, the above results provide useful insights into the effect of governance on determination of audit fees.