Effect of audit and compensation committee membership overlap on audit fees

Abstract

PurposeRecent studies document that approximately two-thirds of sample firms have at least one audit committee member serving on their compensation committee (Liao and Hsu, 2013). Prior studies on overlap membership document that presence of audit committee members on compensation committee affects the reporting quality. Since auditors’ audit risk is affected by reporting quality. The purpose of this paper is to examine how the auditors perceive the overlap of audit and compensation committee members when pricing audit fees.Design/methodology/approachThe author use a sample from 2007 to 2012 and run an OLS regression.FindingsThe author find a negative association between overlap membership and audit fees. The results are robust after controlling for selection bias, alternate measurement of overlap membership, and an alternate pre- and post-overlap membership test. Additional tests show that the negative relationship between overlap membership and audit fees is explained by lower audit risk and not by lower brand premium of non-Big4 auditors and that the benefit of overlapping membership increases when the audit committee size is large.Practical implicationsThe findings suggest that firms with large audit committee can improve their reporting and lower their audit fees by having audit committee members on compensation committee.Originality/valueThe findings contribute to the literature on the consequences of overlap membership and on the ongoing debate about the extent that common membership enhances audit committee monitoring. It also adds to the limited literature on audit committee and audit pricing.