Family firms and audit risks: The role of audit committee financial expertise

Abstract

The purpose of this study is to examine whether ownership structure, i.e. family firms, influences firms' audit risks, and whether the presence of a high proportion of financial experts on the audit committee of family firms would reduce the perceived inherent risk of auditors. In this study, the sample consists of balance panel data of 2,165 firm-year observations of Malaysian non-financial publicly listed firms during the year 2006 to 2010. The ordinary least square regression is used to estimate the hypothesised relationships. In this study, a firm is identified as a family firm when more than two family members are present on the board, while audit risks are measured based on statutory audit fees charged by external auditors as reported in the corporate reports. The findings show that family firms are associated with higher audit risks, as shown by higher audit fees. This relationship is significantly weaker when the firms have a high proportion of financial experts on their audit committee. These results imply that auditors, in their assessment of a firm's inherent risk, consider that the audit committee's financial expertise could moderate the dominant influence of family members on the board.