Corporate governance mechanisms and audit pricing: evidence on ceo accounting expertise and audit committee independence in an emerging market

Objective: External auditors play an essential role in enhancing the quality of accounting information and reducing the information asymmetry problem between inside & outside stakeholders such as shareholders, creditors and managers. Audit fee is one of the most important indicators for assessing the audit quality. Audit fees consist of two components which are audit resource costs and risk premiums. Audit resource costs are related to the amount of audit efforts took in auditing and the risk premium is a compensation for risk taking. Under risk-oriented auditing, audit risk is that auditors are really concerned about. Audit risk model consists of three components which are inherent risk, control risk and detection risk. In addition, prior studies suggest that the relation between audit market competition and audit quality can be either positive or negative, depending on whether higher concentration results in decreased costs of telling the truth and thus increased audit efforts and audit fees. Numerous studies have examined the impact of audit risk and audit market competition on audit fees with mixed results. This paper analyzed the relation among audit risk, audit market competition environment & audit services fee. So, it investigated the impact of some features related to auditors on the pricing of audit services. The probability of 2nd type error is considered as a proxy of audit detection risk and audit market share is considered as a proxy of audit competition environment. Methods: Statistical analyses include 131 firms which listed in Tehran Securities & Exchange over the period 2013 to 2019. Research data includes 917 firm-year observations. Research hypotheses have assessed through multivariate regression models using panel data with fixed effect and generalized least squares method. Results: According to the findings, there is meaningful and negative relation between audit services fees and 2nd type error as a proxy of audit detection risk. In addition, evidence indicated that there is meaningful and positive relation between audit services fees and audit market share as a proxy of audit competition environment. Other evidences documented that audit services fee is a direct function of auditor opinion, auditor reputation, audit complexity, audit committee independence, board leadership and loss, but it is an inverse function of auditor rotation, board independence, ownership concentration and leverage; however it is not a meaningful function of board activity. Conclusion: As a whole, research evidences suggested that some features related to auditors and some features related to clients rely on supply & demand based perspectives have an important role in determining the effective factors on audit fees. Detection risk results in the auditor's conclusion that no material errors are present where in fact there are. Evidences showed that there is an inverse relationship between detection risk and audit quality: if detection risk is high, lower the audit fee as a proxy of audit quality and if detection risk is low, generally increase the audit fee. Empirically, previous studies examining the association between audit market competition environment and audit quality provide mixed results. It is, therefore, important to understand the various relationships between audit market competition environment and audit quality to prevent regulatory intervention from producing potential unintended consequences. Findings documented that high level of audit market share lead to more the audit fee and low level of audit market share generally decrease the audit fee.

Objective: The purpose of this study is to critically examine and test the factors that determine audit fees, with a particular focus on the roles of corporate governance mechanisms, executive compensation, audit risk, and the fair value of non-current assets. By analyzing these factors, the study aims to provide deeper insights into the complex drivers of audit pricing and contribute to the ongoing discourse on audit quality and financial transparency. Theoretical Framework: Agency theory emphasizes the conflicts of interest between principals (investors) and agents (management) arising from information asymmetry, which results in audit fees that confirm the accuracy of financial statements. Additionally, corporate governance mechanisms, executive compensation, audit risk, and fair value influence this dynamic. Method: This study investigates manufacturing companies in the consumer goods sub-sector listed on the Indonesia Stock Exchange from 2018 to 2022. A purposive sampling method was used to select 42 companies each year, totaling 210 annual reports obtained from the IDX website and the companies' websites. Results and Discussion: The research findings show that a higher number of independent commissioners, a higher number of audit committees, higher executive compensation, and the use of fair value of non-current assets can increase the cost of an external audit. However, this study has yet to be able to prove that managerial ownership and audit risk can affect audit fees. Research Implications: This research offers insights for auditors, management, and regulators. Auditors should align fees with audit quality, factoring in business complexity and risk. Reasonable fees reflect management's investment in internal controls, enhancing financial statement credibility. Regulators must ensure fees support high-quality audits to prevent failures. Originality/Value: This study contributes to the literature by highlighting how corporate governance factors independent commissioners, audit committees, executive compensation, and fair value of non-current assets impact audit fees. It emphasizes their role in enhancing audit quality and offers valuable insights for auditors, management, and regulators in justifying audit fee structures.

A significant sum of a company’s expenses is spent on getting the financial statements audited. Widely varying pricing has been seen in this market of Bangladesh. Corporate governance has been attributed to the ownership structure. These two circumstances have necessitated this study which attempts to find out the effects of corporate governance on determination of audit fees from the perspective of family and non-family business. Evidences have been drawn from a sample of 109 publicly listed companies in Bangladesh We explain the moderation effect of corporate governance on family and non-family firm using GMM model. It was found that in complex business structure, addition of board expertise significantly reduces the audit fees paid by the firms. Also, firms that require complex accounting procedures had a significant negative impact on audit fees when board expertise and audit committee independence were ensured. Corporate governance measures like an increase in female director ratio had a negative impact on audit fees in family-owned firms whereas the fee decreased in such non-family firms. Family owned firms increased the audit fee irrespective of employment of new auditor or continuation of current auditor, whereas the fee had a negative impact in non-family firms irrespective of the auditor’s tenure. Our findings have broad implications for audit markets in emerging nations, where the long-term viability of family businesses is critical to overall economic growth.

This study examines the influence of corporate governance (CG) structures on audit processes, specifically regarding audit fee pricing within Malaysian Islamic banking (IB) institutions. This research employs panel data from 16 Islamic banks in Malaysia covering the period from 2011 to 2017. Fixed effects specifications are used to estimate the model of regression. The results show a significant negative relationship between audit fees and the independence of audit committees (AC) and the expertise of Shariah committees (SC). The majority of CG variables, however, do not exhibit any substantial relationships with audit fees. The results suggest that a lower-intensity audit is demanded by the agents of internal governance in a highly-regulated industry, possibly due to regulatory supervision and the monitoring of audits overlap. This is the first study on audit fees using IB as the study sample which incorporate and examine SC as one of the unique CG mechanisms that have not been explored in audit fee literature. This paper provides support for the recommendations of the MCCG 2017 and 2021, which involved the step-up practice in relation to the need to establish AC composed only of independent directors. By improving the monitoring function and perhaps lowering the control risk, this AC composition will help organizations receive lower audit fees from their external auditors.

PurposeThe purpose of this paper is to investigate whether corporate governance structures influence the audit process in terms of audit fee pricing for regulated companies.Design/methodology/approachThe paper first reviews prior literature and identifies factors within the categories of client size, audit risk, audit complexity, auditor‐related issues and corporate governance characteristics that are likely to influence audit fees of banking clients. It then regresses these variables on audit fees using an ordinary least square regression model for a sample of US listed bank holding companies (BHC).FindingsThe paper finds no significant association between most corporate governance variables and audit fees, suggesting that governance agents do not require additional assurance from the auditor, given close oversight by regulators. It also observes a negative association between audit committee independence and audit fees, implying that auditors reduce their effort and thus audit fees in the presence of an independent audit committee because they perceive that such committees reduce control and financial reporting risks.Originality/valueIn contrast with prior findings based on non‐regulated companies, governance agents in regulated companies such as BHC do not demand a more extensive audit. This reflects a substitution effect of regulatory oversight for internal governance monitoring. The paper also shows that BigN auditors modify their audit strategies in response to corporate governance mechanisms. Modifying audit strategies in accordance with the strength of governance mechanisms is consistent with recommendations in professional standards and would enable auditors to address risks more appropriately, thereby increasing audit quality and efficiency.

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

This article describes a dataset on firm-level corporate governance (CG) mechanisms in the Sultanate of Oman. It incorporates, in cross-sectional time series (pooled panel) data, eleven variables: corporate governance quality, board of directors’ quality, audit committee quality, board independence, board expertise, board size, board meetings, audit committee independence, audit committee expertise, audit committee size, and audit committee meetings. The dataset is derived from 1540 firm-year observations for the period 2005 to 2017, excluding financial firms (482) and firms with missing data (29), resulting in a final sample of 1029 firm-year observations. The data were extracted from six sources: OSIRIS database, CG reports, Google, firm's website, directors’ websites, and Bloomberg. Scholarly researchers can readily use this dataset as two data types were created to allow individual and composite measurements of corporate governance mechanisms. The individual determinants are: board independence, board expertise, board size, board meetings, audit committee independence, audit committee expertise, audit committee size, and audit committee meetings. The composite measurements are: corporate governance quality, board of directors’ quality, and audit committee quality. This dataset could be used for investigating corporate governance mechanisms in different business and market issues.

Agency Problems, Auditing, and the Theory of the Firm: Some EvidenceAuthor(s): Ross L. Watts and Jerold L. ZimmermanSource: Journal of Law and Economics, Vol. 26, No. 3, (Oct., 1983), pp. 613-633Published by: The University of Chicago PressStable URL: http://www.jstor.org/stable/725039Accessed: 29/06/2008 23:14

Purpose This study aims to investigate whether equity incentives granted to rank-and-file employees influence audit pricing in US firms. While prior research has primarily focused on executive compensation, this study explores how broad-based stock options compensation impacts auditors’ risk assessments and engagement outcomes, particularly through the lens of agency theory and behavioral risk theory. Design/methodology/approach Using a sample of 19,588 firm-year observations from 2004 to 2020, the study uses multivariate regression models, path analysis, entropy balancing and two-stage least squares to examine the relationship between rank-and-file employees’ stock options and audit outcomes. Findings This study documents a significant positive association between rank-and-file employees’ stock options and audit fees, suggesting that auditors view these incentives as indicators of elevated audit risk. This association is more pronounced among smaller firms, where governance and oversight mechanisms tend to be weaker. A path analysis shows that the relationship is mediated by a higher likelihood of material internal control weaknesses. Additionally, this study finds that rank-and-file equity incentives are associated with longer audit report lags, consistent with increased audit effort by auditors. Practical implications The findings of this study suggest that audit standards should be broadened to include the evaluation of compensation and financial arrangements not only for executives but also for rank-and-file employees. Originality/value By extending the audit pricing literature beyond executive incentives, this paper highlights how broader compensation structures shape audit risk perceptions and engagement outcomes. It further uncovers a mechanism through which rank-and-file stock options influence audit fees, offering new insight into how employee compensation incentives affect audit outcomes.

Good corporate governance influences the capital structure adopted by a firm. Higher financial leverage increases a firm’s risk. This might result in a window-dressing of financial statements to maintain the value of the firm. The study examined the interaction between corporate governance, financial leverage, external audit quality, and their combined influence on the quality of financial reporting inside enterprises in Ghana. The extensive inquiry was conducted using a dataset consisting of 650 observations and encompassing the timeframe from 2009 to 2021 using SPSS Process version 4.2. The findings of this study revealed a significant inverse correlation between the size of the board and the level of compliance with International Financial Reporting Standards with a correlation coefficient of -0.056. With a correlation coefficient of 0.003, the analysis revealed that there is no linear association between Board Gender Diversity (BGD) and International Financial Reporting Standards. With regards to Independent Audit Committee with a correlation coefficient of around 0.068, the findings of the study indicated a statistically significant positive relationship between the presence of an Independent Audit Committee and the level of compliance with International Financial Reporting Standards. The study showed a negative correlation of -0.024 between Financial Leverage and International Financial Reporting Standards Compliance. The observed data suggests a notable and favourable correlation between Audit Fee and International Financial Reporting Standards Compliance with a significant positive correlation of around 0.157. The model employed in the study exhibited multiple R (R) of about 0.191, indicating a modest positive association between the predictor variables and International Financial Reporting Standards Compliance. The coefficient of determination (R Square) was 0.037, indicating that 3.7% of the variation in International Financial Reporting Standards Compliance can be attributed to the predictor variables in the model used for the study. Furthermore, the study revealed an unstandardized coefficient of -0.003 and a standardized coefficient of -0.078 for Board Size, 0.023 and 0.016 for Board Gender Diversity, 0.028 and 0.109 for the Independent Audit Committee, -2.152E-05 and -0.031 for Financial Leverage and 2.809E-08 and 0.156 for Audit Fee. The study again revealed a significant indirect effect through Financial Leverage (FL) on Board Size and International Financial Reporting Standards Compliance with bootstrapped results of 0.0001. On the contrary, the study revealed that Financial Leverage does not mediate Board Gender Diversity and International Financial Reporting Standards Compliance, Independent Audit Committee, and International Financial Reporting Standards Compliance with, an indirect effect of -0.0021 and -0.0009 respectively. With mediation through Audit Fee, the study showed significant indirect effects for all three independent variables. Board Size at 0.0000, Board Gender Diversity at -0.0016, and Independent Audit Committee at -0.0027. The findings from the direct effects study indicate that Board Size and Audit Fee have a notable influence on IFRS Compliance, hence affecting the quality of financial reporting. However, no concrete evidence was found to establish a link between Board Gender Diversity and Independent Audit Committee and IFRS Compliance. For the mediation effects, it was discovered that Financial Leverage played a role as a mediator in elucidating the connection between Board Size and IFRS Compliance. Furthermore, the Audit Fee variable served as an intermediary in clarifying the associations between Board Size, Board Gender Diversity, Independent Audit Committee, and IFRS Compliance. It is recommended for companies to give utmost importance to the principles of openness, accountability, and consistent monitoring of financial leverage. Moreover, the study recommends the allocation of resources towards high-caliber external audits as it plays a pivotal role in bolstering the precision and dependability of financial reporting.

The issue of whether audit pricing reflects the effectiveness of the audit committee is of fundamental interest to auditors, managers, and others. Auditors are expected to price the effectiveness of the audit committee because it relates to the control risk and thus, the overall audit risk. This study examines the relation between audit fees and a key determinant of the audit committee's effectiveness—that is, the financial expertise of the audit committee. Though the Sarbanes-Oxley Act mandates the disclosure of a financial expert, the Securities and Exchange Commission (SEC) broadly defined experts to include accounting or nonaccounting financial experts. Does audit pricing differentiate between accounting and nonaccounting financial expertise? For a sample of Standard & Poor's (S&P) 500 firms for the years 2000 through 2002, we find that after controlling for several board and audit committee characteristics and firm characteristics, audit pricing is negatively related to accounting financial expertise. However, this finding is conditional upon the strength of the overall governance structure. We do not find a significant relation between audit fees and accounting financial expertise for observations with weak governance structure. Overall, our evidence is consistent with the SEC's initial narrow definition to include only the accounting financial experts. The lack of a significant relationship between nonaccounting financial expertise and audit fees suggests that auditors perceive that only accounting financial expertise contributes to audit committee's effectiveness.

The present study aims to investigate the direct influence of audit quality and corporate governance mechanisms on listed Deposit Money Banks financial performance in Nigeria. It is driven by continued challenges of financial transparency, independence of auditors and quality of governance in Nigerian banks despite several regulatory reforms. The sample consists of 11 banks from the year 2014 to 2024 (a balanced panel of 121 observations). The financial performance was measured with Return on Assets (ROA). Audit quality was measured by Big-4 affiliation, audit fees, non-audit fee ratio, auditor tenure and the specific auditor specialization; whereas governance mechanisms were board independence, audit committee independence and audit committee expertise. Panel regression estimation was used in the analysis with robustness checks, such as fixed effects and random effects model and Driscoll–Kraay standard error correction. The findings reveal that audit fees, independence and expertise of the audit committee have a significant positive impact on ROA indicating higher monitoring quality and better reporting credibility. On the other hand, non-audit fee ratio and leverage negatively and significantly affect ROA, indicating that risk level may increase and auditor independence gets eroded. The findings of this study suggest that improving audit committee quality, restricting non-audit services procurement and enhancing audit effort are all crucial for better outcomes of financial performance in the Nigerian banking sector.

PurposeThis study aims to empirically examine the impact of internal corporate governance mechanisms (ICGM) related to the size of the board, board composition, CEO duality and audit committee independence as a single metric on a firm’s investment decisions.Design/methodology/approachThis study attempts to develop an internal corporate governance quality index comprising 10 items under four main ICGMs – size and independence of the board, CEO duality and audit committee independence – employing panel data analysis to investigate its impact on the investment decisions in 301 nonfinancial firms listed in six emerging capital markets in the Gulf Cooperation Council (GCC) member countries for the years 2015–2020. Data were extracted from sample companies' websites, stock markets, annual reports and Refinitiv database.FindingsThis study provides convincing evidence that effective ICGMs minimize inefficient investment and ultimately boost investment efficiency. The findings remain consistent even after considering the potential endogeneity bias.Originality/valueThis study provides empirical evidence on investment efficiency in the GCC region and emphasizes the importance of high-quality ICGMs in reducing inefficient investment. By examining the impact of ICGMs on investment inefficiencies, this study contributes to the corporate governance literature. The GCC region's unique economic and social contexts, with its growing economies, are considered to shed light on this issue.

Research on audit fees is important because it relates to professional services provided by public accountants. Whereas the transparency of information about audit fees in the company’s financial statements in Indonesia openly and apart from other service fees has only been done in the last few years, so there has not been much research related to this. Therefore, this study aims to examine the effect of size, profitability, company risk, company complexity, and independent audit committee on audit fees. A sample of 136 manufacturing companies listed on the Indonesia Stock Exchange in 2014-2016. Multiple regression analysis is used to test the hypothesis. The results of this study indicate that the size of the company, profitability, complexity of the company has a positive effect on audit fees. Company risk and an independent audit committee have no effect on audit fees.

The aim of this study is to examine the effect of corporate governance mechanisms on the financial reporting quality and examine the effect of corporate governance mechanisms on audit fees. In addition, this study also aimed to examine the effect of audit fees on the financial report quality. The sample in this study is manufacturing companies listed on the Indonesia Stock Exchange (BEI) in the period 2014 and 2015. The total sample is 144 companies. Data analysis was performed using Partial Least Squares (PLS). The results of this study show that the proportion of independent commissioners and audit committee from the board of commissioners and audit committee negatively affect audit fees; the proportion of independent commissioners and audit committee from the board of commissioners, audit committee, and board of directors negatively affect audit fees; the proportion of independent commissioners and audit committee from the board of commissioners and audit committee do not positively affect the financial report quality; the proportion of independent commissioners and audit committee from the board of commissioners, audit committee, and board of directors do not positively affect the financial report quality; and audit fees negatively affects the financial report quality.