The Impact of Ownership, Governance and Non‐Audit Services on Audit Fees: Evidence from the Insurance Industry

Abstract

This paper adds to the existing audit pricing literature in three respects. First we focus our analysis on insurance companies thereby allowing us to compare the pricing of audits in mutual and proprietary companies. The different external ownership structure of mutual and proprietary insurers provides an ideal environment in which to explore the influence of external governance on auditors’ pricing decisions. Second, we examine the impact of board composition and audit committees on audit fees. Third, we analyse the impact of non‐audit fees on audit fees. Data for the study were obtained from both statutory disclosures and a postal questionnaire. Our results suggest that mutual insurers pay significantly lower audit fees compared to their proprietary counterparts. We find some evidence that the existence of an audit committee has a positive impact on audit fees paid by companies in the sample but we find no evidence that audit fees are sensitive to the composition of audit committees. We find weak evidence that the provision of non‐audit services exerts a positive impact on audit fees but the nature of the non‐audit service provided has no significant impact. Apart from governance factors, we find that company size and complexity are the most important determinants of audit pricing in insurance with significant price reductions earned by insurers specialising in either general or life business.