Interdependencies between Auditing and Corporate Governance — Evidence from Germany

Abstract

We study the empirical relation between audit fees and governance mechanisms in Germany. Using data from German listed companies, we examine the German governance setting with its two-tier board system. Various model specifications control for potential endogeneity of the governance variables. We identify two major findings. First, we find that performance-based management remuneration has a significant positive impact on audit fees. This effect suggests that increased audit risk due to enhanced incentives for earnings management is reflected in higher audit fees. Second, we find a complementary relation between audit fees and the formation of an audit committee. The results regarding further board characteristics are ambiguous.