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Daftar isi
1. The Association between Audit Committee Characteristics and Audit Fees................................................ 1

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The Association between Audit Committee Characteristics and Audit Fees

Link dokumen ProQuest
Abstrak: This study examines the association between audit committee characteristics and audit fees, using
data gathered under the recent SEC fee disclosure rules. We hypothesize that audit fees will be positively
associated with audit committee independence, financial expertise, and meeting frequency. We examine a
sample of 492 nonregulated, Big 5-audited firms that filed proxy statements with the SEC in the period from
February 5, 2001 to June 30, 2001. We find that audit committee independence (defined as an audit committee
comprised entirely of outside, independent directors) and financial expertise (defined as an audit committee
containing at least one member with financial expertise) are significantly, positively associated with audit fees.
This is in contrast to the findings of Carcello et al. (2002a), who find that audit committee characteristics are not
significant in the presence of board-related variables. Meeting frequency (defined as an audit committee that
meets at least four times annually) was not associated with higher audit fees at conventional levels. This
evidence is consistent with audit committees taking actions within their span of control to ensure a higher level
of audit coverage. [PUBLICATION ABSTRACT]
Teks lengkap: Headnote
SUMMARY: This study examines the association between audit committee characteristics and audit fees, using
data gathered under the recent SEC fee disclosure rules. We hypothesize that audit fees will be positively
associated with audit committee independence, financial expertise, and meeting frequency. We examine a
sample of 492 nonregulated, Big 5-audited firms that filed proxy statements with the SEC in the period from
February 5, 2001 to June 30, 2001. We find that audit committee independence (defined as an audit committee
comprised entirely of outside, independent directors) and financial expertise (defined as an audit committee
containing at least one member with financial expertise) are significantly, positively associated with audit fees.
This is in contrast to the findings of Carcello et al. (2002a), who find that audit committee characteristics are not
significant in the presence of board-related variables. Meeting frequency (defined as an audit committee that
meets at least four times annually) was not associated with higher audit fees at conventional levels. This
evidence is consistent with audit committees taking actions within their span of control to ensure a higher level
of audit coverage.
Keywords: audit committee; audit fees.
Data Availability: All data obtained from publicly available sources.
INTRODUCTION
The role of the audit committee in corporate governance is a subject of increasing regulatory interest. In recent
years, the Securities and Exchange Commission (SEC), the Public Oversight Board (POB 1993) and the
National Association of Corporate Directors (NACD 2000) have stressed the role of the audit committee in
providing active oversight of the financial reporting process and in monitoring the relationship between a firm's
management and its external auditor. Such concerns resulted in the Blue Ribbon Committee's report, Improving
the Effectiveness of Corporate Audit Committees (BRC 1999). A number of the BRC's recommendations have
been incorporated into SEC and exchange-listing regulation. The Committee's report (BRC 1999) included
recommendations concerning audit committee composition and activities, including a recommendation that the
audit committee oversee and review all economic relationships between the external auditors and
management.1
In this paper, we examine the association between certain audit committee characteristics and one economic
aspect of the auditor-management relationship, namely, audit fees. In particular, we hypothesize that specific
audit committee characteristics (i.e., independence, financial expertise, and meeting frequency) are associated
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with higher audit fees. Our hypotheses are based upon two premises. First, prior research finds that audit
committees can take actions within their span of control that may result in outcomes associated with a higher
level of audit quality, such as increased going-concern modifications for distressed firms (Carcello and Neal
2000) and the selection of industry specialist auditors (Abbott and Parker 2000, 2001). Since reviewing the
preliminary audit program and the results thereof is a primary audit committee responsibility (DeZoort 1997;
BRC 1999), this suggests that audit committees can influence the level of audit coverage. To this end, it follows
that an audit committee seeking a higher level of audit assurance could demand a greater level of audit
coverage resulting in higher audit fees, given the auditor's wealth-maximization function. Second, prior research
suggests that certain audit committee characteristics critically impact the execution of audit committee duties
(Carcello and Neal 2000; Raghunandan et al. 2001). These two premises generate separate hypotheses that
test the association between three key audit committee characteristics-independence, expertise, and meeting
frequency-and audit fees.
To examine our hypotheses, we collect audit fee data for 492 nonregulated, Big 5-audited firms that filed annual
proxy statements with the SEC between February 5, 2001 and June 30, 2001. Consistent with our hypotheses,
we find that audit committee independence (defined as committees comprised solely of independent directors)
and expertise (defined as committees that include at least one director with financial expertise per BRC
recommendations) are significantly, positively associated with audit fees. Our measure of meeting frequency (a
threshold of four meetings per year) was not significantly associated with audit fees. We interpret our findings as
indicating a relation between these audit committee characteristics and a demand for increased audit coverage,
reflected in higher fees. However, our findings are also consistent with certain audit committee characteristics
leading to an increase in bargaining power for the auditor and a concomitant increase in fees with no change in
audit coverage or quality. Our tests cannot distinguish between these two alternatives. Our findings contrast
with those of Carcello et al. (2002a), who find that audit committee characteristics lose significance when board
characteristics are included. Two possible explanations for this difference in findings are changes in the
regulatory environment during the middle and late 1990s and differences in the degree of variation in audit
committee characteristics in the samples utilized.
The rest of this paper is organized as follows. The next section discusses the background and develops our
research questions. This is followed by discussions of method and results. The paper ends with a summary and
conclusions.
BACKGROUND AND HYPOTHESES
The Audit Committee's Role in the Audit Scope Negotiation Process
Prior research indicates that audit committees can potentially take three actions related to the external auditor
that may result in a higher level of audit assurance or coverage. First, committee members can attempt to
persuade management to select a more knowledgeable auditor with greater reputation. In this regard, Abbott
and Parker (2001) find that companies with audit committees comprised entirely of independent directors that
meet at least twice annually are more likely to select a (then) Big 6 auditor when switching auditors. In this
study, we hold auditor quality (i.e., Big 5 versus non-Big 5) constant through the exclusion of non-Big 5 firms.
Second, the audit committee can demand a greater quantity of audit effort from the existing external auditor
(Simunic and Stein 1996). If greater effort (i.e., an enhanced audit scope) is associated with increased quality,
then the audit committee's efforts will be associated with increased quality. DeZoort (1997) provides evidence of
audit committee involvement with external audit tasks, noting that audit committee members generally believe
the review of the external auditor's work to be a primary audit committee duty. Both the POB (1993) and BRC
(1999) recommend that audit committees discuss the audit scope and plan with the auditor, providing a check
on the adequacy of audit coverage. Carcello et al. (2002b) find that 85 percent of audit committee reports or
charters disclose that the committee reviews the scope of the auditor's proposed audit plan. The following
excerpt from Kimberly-Clark Corporation's 2001 proxy statement illustrates a typical audit committee disclosure
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with respect to the review of the external auditor's proposed scope:

The Audit Committee will meet with the Corporation's principal independent auditor and management to review
the scope of the proposed annual audit (and related quarterly reviews), the audit procedures to be followed and,
at the conclusion of the audit, review the audit findings including any comments or recommendations of the
Corporation's principal independent auditor. (Kimberly-Clark Corporation)
These results and disclosures suggest that audit committees can directly influence the level of audit scope
provided by the external auditor.
The third, indirect means by which an audit committee can impact the level of audit coverage is by mitigating
management's threat to replace the auditor (Knapp 1985). Carcello and Neal (2000, 2003) show that
independent audit committees mitigate management's dismissal threats during a highly contentious situation
involving management and the auditor: the going-concern modification decision. They find that: (1) financially
distressed firms with independent audit committees are more likely to receive a going-concern modification, and
(2) auditors who issue initial going-concern modifications are less likely to be terminated when the audit
committee is comprised entirely of independent directors. Similarly, the determination of audit plan/scope often
involves negotiations between the auditor and management, given that management may have incentives to
minimize audit fees (Knapp 1985; Emby and Davidson 1998). Given these negotiations, an audit committee can
potentially shield the auditor from management pressure to complete the audit quickly, accept management
representations without adequate corroborating evidence or limit audit scope, thus shifting the balance of power
in the auditor's favor.2
Carcello et al. (2002a) have also addressed the question of the relation between audit committee characteristics
and audit fees. They find, using data from 1992-1993, that audit committee characteristics (independence,
expertise, and meeting frequency) are not associated with audit fees when measures of board characteristics
are present. We believe that both the public and regulatory bodies have come to regard the audit committee as
the primary focus for financial monitoring (POB 1993; BRC 1999; NACD 2000) in the period since 1993. In
addition, changes in the regulatory environment suggest a different measure of audit committee expertise than
that used in Carcello et al. (2002a). Their measure of expertise is the number of other public company
directorships held. While this measure certainly captures some aspects of director knowledge and experience,
regulation has focused on whether directors have experienced specific managerial roles or have specific
professional credentials (BRC 1999). The Carcello et al. (2002a) variable may also inadvertently measure the
time pressures faced by the director when multiple directorships are held. The expertise measure chosen may
affect the audit committee results.
Characteristics of Audit Committee Effectiveness
As described in the prior section, an audit committee can impact audit coverage by exercising its decision rights
and executing its corporate governance responsibilities. Currently, all firms listed on the NYSE or
NASDAQ/AMEX are required to maintain an audit committee. Prior research has shown, however, that key
audit committee characteristics-rather than the mere presence of an audit committee-critically impact the audit
committee's ability to effectively execute its duties (Abbott and Parker 2000, 2001; Beasley et al. 2000; Carcello
and Neal 2003; Raghunandan et al. 2001). Consistent with prior literature, we focus on audit committee
independence, expertise, and meeting frequency.
Independence
Independent audit committee members, as outside directors, may view the directorate as a means of enhancing
their reputations as experts in decision control (Fama and Jensen 1983). Audit committee service may increase
the directors' reputational capital, but it also may exacerbate the reputational damage should a financial
misstatement occur. Furthermore, in cases of financial misstatement, outside nonaudit committee directors can
potentially subrogate their director liability to audit committee members by asserting reliance on the audit
committee for issues such as the adequacy of the firm's financial reporting and relationship with its external
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auditor (Reinstein et al. 1984).3 Since audit quality is generally defined as the joint probability of the auditor
detecting and reporting a material financial misstatement (DeAngelo 1981), it is reasonable to expect that
independent audit committees prefer a higher level of audit quality. As previously noted, a higher level of audit
coverage from the existing external auditor-which may result in improved detection of financial misstatementcan be obtained through increases in audit scope.
A number of studies have explored the association of audit committee independence with financial reporting
outcomes and with the relationship with the external auditor. Beasley et al. (2000) find that companies
committing financial-statement fraud have less independent committees than a no-fraud industry benchmark.
Carcello and Neal (2000) find that financially distressed firms with independent audit committees are more likely
to receive going-concern opinions. Abbott et al. (2003) find that firms with audit committees that are
independent, meet frequently, and which have an expert present are less likely to experience a restatement of
earnings. These results suggest that audit committee independence, expertise, and meeting frequency improve
the financial reporting process.
The results of Beasley et al. (2000), Carcello and Neal (2000, 2003) and Abbott et al. (2003) rely upon an
assertion that audit committees independent of management do not have a personal and/or economic
dependence on management. Thus, an independent audit committee may be more willing to disagree with
management on a variety of issues (Baysinger and Butler 1985). During the review of the audit program and
results thereof, an independent audit committee may demand expanded audit scope in order to avoid being
associated with a financial misstatement and preserve reputational capital. The committee may also demand (or
support the auditor's demand for) additional audit procedures beyond the initial audit plan for areas that
subsequently reveal greater amounts of contention, uncertainty, or risk. This suggests that independent audit
committee directors demand greater levels of audit assurance and potentially provide stronger support for
auditors during scope negotiations with management. This ultimately may result in higher audit fees, leading in
our first hypothesis, stated in alternative form:
H^sub 1^: There is a positive association between audit fees and audit committee independence.
Expertise
The POB (1993) states that the "effectiveness of the audit committee is affected, first and foremost, by the
expertise of members of audit committees in the areas of accounting and financial reporting, internal controls
and auditing." Audit committee members, however, come from a wide variety of backgrounds and may not have
the experience or technical knowledge needed for effective accounting and auditing oversight (Kalbers and
Fogarty 1993). Knowledgeable audit committees are better equipped to understand auditor judgments and
discern the substance of disagreements between management and the external auditor (DeZoort 1998; DeZoort
and Salterio 2001).
The assertion that effective audit committees must contain members who possess ample financial experience is
consistent with previous research on audit committee expertise.4 Knapp (1987) finds that auditors were less
likely to refer a complex auditing issue to an audit committee that was perceived as not being knowledgeable
about the issue. DeZoort (1998) finds that audit committee members with internal control experience made
judgments more similar to auditors than those audit committee members without such experience. DeZoort and
Salterio (2001) posit that audit committee members with more experience are more likely to understand and
sympathize with the risks the external auditor faces.
These results suggest that audit committee members who possess financial expertise provide additional
support for external auditors when discussing or negotiating auditing issues and/or audit scope with
management. Such expertise allows audit committee members to better understand the auditing issues, risks,
and the audit procedures proposed to address these issues and risks. These results lead us to expect a positive
association between audit fees and audit committee expertise, leading to our second hypothesis, stated in
alternative form:
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H^sub 2^: There is a positive association between audit fees and audit committee expertise.
Meeting Frequency
The BRC report (1999) noted, as did the Treadway Commission (1987), that the audit committee should have
direct communication channels with the external auditor to discuss and review specific issues as appropriate.
Regular meetings between the audit committee and external auditor make it more likely that the audit committee
will remain informed and knowledgeable about relevant accounting and auditing issues (BRC 1999; NACD
2000; Raghunandan et al. 2001). Menon and Williams (1994) posit that meeting frequency is a signal about
audit committee diligence. Furthermore, the NACD (2000) recently suggested a rule of thumb of four half-day
audit committee meetings per year. These recommendations and findings suggest that: (1) meeting frequency
is an important component of audit committee effectiveness, and (2) meeting frequency is often used as a proxy
for audit committee diligence. Finally, the BRC contends that for an audit committee to be effective, it is
necessary for audit committee directors to expend one of their most valuable resources, time, in executing their
duties.
Recent research supports the importance of audit committee meeting frequency. Beasley et al. (2000) find that
audit committees of fraud firms met less often than audit committees of a nonfraud industry benchmark. Abbott
et al. (2003) find that firms whose audit committees meet at least four times annually are less likely to have
restated their audited financial statements.
The results of prior research and the recommendations of the BRC and NACD suggest that audit committees
that meet frequently are more likely to be informed of current auditing issues and more diligent in the discharge
of their duties. This implies that audit committees that meet frequently can proactively and positively influence
audit coverage during the various stages of the audit. This generates our third hypothesis, stated in the
alternative form:
H^sub 3^: There is a positive association between audit fees and audit committee meeting frequency.
It is important to note that we address the association between audit committee characteristics and audit fees
from the demand side, as do Carcello et al. (2002a), who find that stronger boards are associated with
increased audit fees. However, an alternative view is that an effective audit committee may be viewed by the
auditor as improving the overall control environment, thus reducing the auditor's control risk and the resulting
amount of audit work deemed necessary (Tsui et al. 2001). Thus, the association between audit committee
characteristics and audit fees remains an empirical issue, and consequently we report two-sided p-values in our
results section.
METHOD
Regression Model
Prior audit fee research has generally used variables serving as proxies for auditee size, complexity, and audit
risk in its analyses. Following prior research (Francis and Simon 1987; Simon and Francis 1988), we expect
audit fees to be positively associated with the natural log of total assets (LNTA), receivable and inventory
intensity (RECINV), square root of the number of subsidiaries (SQSUBS), proportion of foreign subsidiaries
(FORGN), and whether the audit opinion is modified (OPIN). We control for these factors in our analysis.
Prior research has also documented an association between board characteristics and audit fees. Carcello et al.
(2002a), using data from Fortune 1000 companies, find that board characteristics are associated with audit
fees. Hence, we also include variables drawn from Carcello et al. (2002a) measuring board composition, board
meeting frequency, and board expertise as control factors. We measure board composition (BDCOMP) and
activity (BDMEET) using the proportion of nonemployees on the full board and the number of board meetings
held in the sample year, respectively.5 As in Carcello et al. (2002a), board expertise (BDEXP) is the average
number of outside directorships in other firms held by outside directors.
Our explanatory variables of interest relate to audit committee characteristics. As noted previously, the SEC,
BRC, and others have emphasized the importance of having solely independent directors on the audit
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committee, and thus we code ACOUT as "1" when the audit committee is comprised entirely of independent
directors, and "0" otherwise.
The BRC recommends that the audit committee include at least one member with accounting or finance
expertise. The BRC report provides specific guidance as to the professional backgrounds likely to result in an
appropriate level of expertise. In particular, the BRC states that accounting or financial management expertise
may be demonstrated by employment experience in finance or accounting, a CPA or comparable experience, or
a position as a CEO or other senior officer with financial oversight responsibilities. Each audit committee
member's current and prior work experiences were reviewed per the annual proxy statement disclosures. We
code ACEXP as "1"' when the audit committee contains at least one member with financial expertise (per the
BRC recommendation), and "0" otherwise.
The Treadway Commission (1987), the POB (1993), NACD (2000) and the BRC (1999) have emphasized that
audit committees should have an adequate number of meetings each year. Based on sample charters included
in the BRC report, the BRC's recommendation for review of interim, quarterly financial reports and a specific
NACD recommendation of four meetings per year, we code ACMEET as "1"' for an audit committee that meets
at least four times during the year, and "0" otherwise.6

Sample Selection
SEC rules requiring the disclosure of audit and nonaudit fees became effective for proxies filed on or after
February 5, 2001. We first examined all proxies filed with the SEC between February 5, 2001 and March 23,
2001 for which there was a corresponding fiscal year-end 10-K available by March 23, 2001. This resulted in an
initial sample of 262 firms. To expand the sample size, we then selected a random sample of 250 firms filing
proxy statements from March 24, 2001 to June 30, 2001, and which met our additional criteria.7 Since mutual
funds and other financial registrants have unique operating and reporting characteristics, we excluded such
registrants from our sample. We also restrict the analysis to clients of the Big 5 audit firms. This enables us to
obtain a more homogeneous sample.
After deleting 20 firms that either had an IPO in 2000 or had missing variables, 492 companies remained in our
sample.8 Table 1 provides descriptive data about the sample. The mean (median) total assets for the
companies in our sample are $6,094 million ($623.4 million). The mean (median) audit fee paid is $917,700
($343,500). With respect to our board composition, expertise and diligence variables, we find that 68 percent of
overall board members are nonemployees, the average board holds just under 7 meetings per year, and the
average board member holds an additional 1.34 outside directorships. Seventy-five percent of the companies in
the sample had audit committees that were composed entirely of outsiders, 80 percent had at least one financial
expert (using the BRC guidelines) and 59 percent of the committees held four or more meetings in the sample
year. Only 40 percent of our sample companies met all three audit committee criteria simultaneously (not
reported), suggesting that despite the BRC's efforts and the resulting regulatory focus on audit committee
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functions, many companies fell short of meeting recommendations during the sample period.
Table 2 provides information on the Pearson pair-wise correlations between our explanatory variables. All of the
remaining independent variables are correlated with the natural log of total assets (LNTA), with the exception of
the proportion of foreign subsidiaries (FORGN) and audit committee independence (ACOUT). Among the other
independent variables, audit committee independence (ACOUT) and board composition (BDCOMP) exhibit the
largest correlation at 0.39 and no other correlation exceeds 0.22. A review of regression diagnostics (discussed
in the next section) does not indicate problems from multicollinearity.
RESULTS
Regression Results
Table 3 provides the results from a regression where the dependent variable is the log of the audit fee. The
overall model is significant (F-statistic = 146.4, p <.0001), and, consistent with prior research, the model's
explanatory power is quite high (adjusted R^sup 2^ = .77). The coefficients for LNTA, RECINV, and SQSUBS
are all positive and significant, whereas the coefficient estimates for FORGN and OPIN are in the predicted
direction, but insignificant. In terms of board characteristics, the coefficient estimates for BDMEET and
BDCOMP are positive and significant (t = 2.31 and 1.75, respectively). Our results for board expertise (BDEXP)
were insignificant. These results are consistent, in part, with those of Carcello et al. (2002a), using a sample
from a later time period and fee data that are publicly disclosed in proxy statements.
Considering the variables of interest, the coefficients for ACOUT and ACEXP are positive and significant (t =
2.39 and 1.74, respectively), indicating that audit fees are higher in companies where the audit committee has:
(1) solely independent members, and (2) at least one member with accounting or finance expertise. The
coefficient for ACMEET is positive, but is not significant at conventional levels (t = 1.37).9

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Our finding that both audit committee and board variables are positively and significantly associated with audit
fees merits further discussion. As previously noted, Carcello et al. (2002a) find that the audit committee
variables were not significant in explaining audit fees after controlling for board composition. We believe there
are at least two possible explanations for the differences between our results. First, Carcello et al. (2002a)
obtained their data based on a survey conducted in 1993 of the Fortune 1000 companies. The Fortune 1000
companies are larger than the overall population of SEC registrants, and prior papers have documented that
size is associated with many issues related to corporate governance including audit committee characteristics. It
is likely that larger firms exhibit less variation in audit committee characteristics than does the present sample.
Further, survey-based data introduce potential concerns related to nonresponse bias. Second, in the period
since 1993 the SEC has considerably expanded its regulatory focus on audit committees as evidenced by the
creation of BRC and the Independence Standards Board (ISB). The SEC and others have called for not only
greater audit committee oversight, but also greater disclosure of audit committee duties and responsibilities in
the annual proxy statements. The expanded audit committee disclosures and increased regulatory focus on
audit committees are likely to have strengthened the motivation of audit committees to act in a manner
consistent with our hypotheses. Consequently, this result also suggests the BRC and ISB recommendations are
at least somewhat effective in accomplishing their corporate governance intentions (BRC 1999; ISB 1999).
Sensitivity Analyses
Size, Alternative Test Variable Definitions, and Additional Variables
We performed several tests to examine the influence of size on our results. First, we ran our regression model
separately on small companies (total assets less than $200 million) and large companies (total assets greater
than $200 million), and performed a Chow test. The Chow test F-statistic was not significant, indicating that
neither segment drives our results. Second, for each of the continuous variables, including LNTA, we deleted
outlying observations (those outside two standard deviations from the median). Third, we truncated outlying
observations to the 1 percent and 99 percent levels. Finally, following Simunic (1984), we also ran separate
tests that deflated audit fees by the square root of total assets. In all cases, our results were qualitatively
unchanged.
We also used continuous versions of our ACOUT (the percentage of outsiders on the audit committee) and
ACMEET (the number of audit committee meetings) variables. With this alternative specification, our results
remained substantively similar. We also substituted the Carcello et al. (2002a) measure of expertise (the
average number of other outside directorships held by outside audit committee directors) for our ACEXP
variable. With this specification (not reported), both audit committee independence and expertise remained
significant.
We also tested whether the inclusion of additional variables such as leverage, return on assets, an indicator
variable for recurring losses, current ratio, and an indicator variable for December 31 year-end firms significantly
impacted our results (Gul and Tsui 2001). We find that current ratio and recurring loss are significantly and
positively related to audit fees, but that our test variable results are not affected. Our results were also robust to
including an indicator variable coded "1" if the CEO is also chairman of the board, "0" otherwise (Tsui et al.
2001).
We checked whether the clients of any one of the audit firms influenced the results. We formed five separate
subsamples by deleting the clients of each of the Big 5 firms. The regression results of such subsamples were
substantively similar to the results reported in the paper, and the audit committee composition variables
continued to remain significant in each regression. We also checked to see if our results are driven by the
engagement of auditor industry specialists since Abbott and Parker (2000) find a positive relationship between
engagement of an industry specialist and audit committee characteristics.10 The industry specialist variable
was not significant and our results remain qualitatively unchanged.11
We also tested the sensitivity of our results to the inclusion of nonaudit fees. Evidence on the impact of nonaudit
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fees on audit fees remains mixed (Simunic 1984; Davis et al. 1993; Felix et al. 2001). Knowledge spillovers from
the joint supply of audit and nonaudit services could lead to higher audit fees, depending on the price elasticity
of the audit demand function (Simunic 1984). Alternatively, auditors may discount their audit fees in the hopes
of providing higher-margin, nonaudit services (Felix et al. 2001). To address this issue, we also used a twostage least squares regression to control for the potential endogeneity among audit fees, audit committee
characteristics, and nonaudit fees. Our test variables continued to remain significant in the two-stage approach.
SUMMARY AND CONCLUSIONS
In 1994, the Public Oversight Board observed that in most companies "management selects or recommends
auditors and changes in auditors, negotiates fees ... and monitors the audit" (POB 1994). The BRC noted the
POB's comments and sought to strengthen the audit committee's ability to monitor the management-auditor
relationship. The BRC asserted that characteristics such as audit committee independence, expertise, and
diligence could lead to better overall audit committee oversight. The BRC also recognized that audit committees
must rely upon the external auditor and emphasized the importance of engaging the audit committee in all
phases of the audit process. Specifically, the BRC (1999) stated that "the (audit) committee's job is clearly one
of oversight and monitoring, and in carrying out this job it acts in reliance on senior management and the
outside auditors." Subsequent adoption of many BRC recommendations by stock exchanges, legislation, and
the SEC further focuses attention on the audit committee's role in management of the audit process.
In this paper, we examine the association between audit committee characteristics and audit fees. Our results,
based on data obtained from 492 proxy statements filed with the SEC, indicate that audit committees consisting
solely of independent directors and having at least one financial expert are associated with higher audit fees.
Assuming that the increased audit fee is associated with a higher level of audit assurance, our results support
the expectation of the BRC that greater independence and expertise of audit committees will lead to enhanced
oversight of the management-auditor relationship. The SEC, BRC, and others have emphasized the need for
financial expertise on the audit committee, but there is little empirical evidence about the association between
audit committee expertise and the audit committee's interaction with the external auditor. Our paper provides
initial empirical evidence on the association between audit committee expertise and audit fees. Overall, our
study provides additional insight into the interplay between the external auditor, the audit committee, and
management in the financial reporting process.
Our results are consistent with audit committee characteristics impacting the demand for greater audit
coverage. An alternative (but not mutually exclusive) explanation for our results is that effective audit
committees could impact the negotiation of audit fees as well as scope (audit effort or coverage). Specifically,
by reducing the overall threat of auditor dismissal, an audit committee could simultaneously strengthen
(weaken) the auditor's (client's) relative bargaining position during audit fee negotiations. Consequently, this
change in relative bargaining position could lead to higher audit fees even in the absence of increased audit
scope. Future research incorporating actual audit hours and audit committee characteristics can shed additional
light on which of the two explanations drives the higher audit fees documented in this paper.
The corporate governance area has recently experienced an accelerated pace of regulatory change.
Subsequent to the time period encompassed by this study, the Sarbanes-Oxley Act of 2002 was passed,
providing for substantial changes to the corporate governance structures of public companies. Among these
changes are more rigorous independence rules for audit committee members, a requirement for at least one
member to possess financial expertise, restrictions on the provision of certain nonaudit services (NAS), and a
requirement that the audit committee preapprove any nonproscribed NAS provided by the financial statement
auditor. Some of these legislative provisions are similar in part to exchange-listing requirements that became
effective June 14, 2001, which set standards for audit committee independence, financial literacy, and
expertise. Even more recently, following the signing of Sarbanes-Oxley, the NYSE and NASDAQ/AMEX have
proposed additional restrictions on (and qualifications for) audit committee membership and additional audit
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committee responsibilities, including mandated periodic meetings. It seems likely that variation in the
characteristics commonly used by research in this area (expertise, independence, meeting frequency) will be
diminished in the future.
However, it is very likely that a consequence of these changes for public companies may be an increase in the
effectiveness and scope of audit committee monitoring. If this is the case, future research in this area may
emphasize subsequent changes in other corporate governance mechanisms that may be either complements
or substitutes for audit committee activities. In addition, the focus of research in this area may shift to an
exploration of audit committee processes and decision making.
Footnote
1 The BRC recommended that audit committee charters specify that the outside auditor is ultimately
accountable to the board of directors and the audit committee, which has the ultimate authority and
responsibility to select, evaluate, and, where appropriate, replace the outside auditor. The substance of a
number of BRC recommendations is included in the Sarbanes-Oxley Act of 2002, which requires audit
committees to be responsible for the appointment, compensation, and oversight of the external auditor and to
preapprove most permitted nonaudit services.
2 Discussions held by the authors with Big 5 audit partners affirm that external auditors currently experience a
range of involvement with the audit committee both in terms of audit scope demanded and committee support
for the auditors in management disputes. These conversations are consistent with increased audit committee
involvement with the audit process.
3 Even if the audit committee director is effectively shielded from personal financial liability by insurance or
indemnification, he or she faces the costs in time of mounting a defense (Sahlman 1990).
4 In this paper, we use the term "expertise" consistent with the BRC report, which states "expertise signifies
past employment experience in finance or accounting, requisite professional certification in accounting, or any
other comparable experience or background" (emphasis added).
5 We also use an alternative measure of board composition by focusing on the percentage of independent (i.e.,
nongray, nonemployee) directors. Results with this alternative definition are substantively similar to those
reported in the paper.
6 We use dichotomous variables for the measures of audit committee independence, expertise, and meeting
frequency because of specific BRC or NACD recommendations concerning entirely independent audit
committees, the presence of at least one audit committee director with accounting or financial management
expertise, and at least four audit committee meetings per year. In contrast, no board of directors has solely
outside directors. Further, there are no rules or "good practice guidelines" that suggest an optimal number of
board members with accounting or financial management expertise or optimal number of board meetings. Thus,
consistent with Carcello et al. (2002a), we use continuous measures for board characteristic variables.
7 Univariate comparisons between the two sample subperiods (February 5-March 23 and March 24-June 30) do
not reveal any significant differences between the two groups.
8 We deleted firms in the first year of public trading because we expect firms to require an initial period of time
post-IPO to appoint an audit committee and effectively transfer functions to the committee.
9 We performed a number of diagnostics on the regression reported in Table 3, including investigation of
outliers (discussed further in the "Sensitivity Analysis" section). In terms of multicollinearity, we performed two
sets of tests. First, variance inflation factor (VIF) scores revealed no problems with multicollinearity (all scores
<2). Second, per Belsley et al. (1980), we calculated condition indices. The maximum calculated condition index
was 6.78. According to Belsley et al. (1980), a condition index of 5-10 indicates weak dependencies and a
condition index of 30-100 indicates moderate-to-strong relations among the independent variables. Therefore, it
appears that multicollinearity is not a problem. With respect to heteroscedasticity, we performed the BreuchPagan test, which failed to reject the null of homoscedasticity, suggesting that heteroscedasticity has not
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interfered with our OLS regressions. Finally, plotting our residuals did not suggest a nonnormal distribution.
Therefore, it appears that the assumptions underlying OLS regression have been satisfied.
Footnote
10 We also acknowledge the mixed results in prior literature regarding the relation between audit fees and audit
firm specialisation.

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AuthorAffiliation
Lawrence J. Abbott is an Assistant Professor at the University of Memphis, Susan Parker is an Assistant
Professor at Santa Clara University, Gary F. Peters is an Assistant Professor at the University of Arkansas, and
K. Raghunandan is a Professor at Florida International University.
The authors thank workshop participants at the University of Arkansas and the University of Georgia for helpful
comments. We are also grateful to two anonymous reviewers, Audrey Gramling, Arnie Wright, and William
Messier for their helpful suggestions. Professor Parker gratefully acknowledges the financial support of the
Dean Witter Foundation and the Ernst and Young Accounting Faculty Research Fellowship.
Submitted: October 2001
Accepted: December 2002
Subjek: Studies; Audit committees; Accounting firms; Correlation analysis; Professional fees;
Klasifikasi: 9190: United States; 9130: Experimental/theoretical; 4130: Auditing; 8305: Professional services
not elsewhere classified
Judul: The Association between Audit Committee Characteristics and Audit Fees
Pengarang: Abbott, Lawrence J; Parker, Susan; Peters, Gary F; Raghunandan, K
Judul publikasi: Auditing
Volume: 22
Edisi: 2
Halaman: 17-32
Tahun publikasi: 2003
Tanggal publikasi: Sep 2003
Tahun: 2003
Penerbit: American Accounting Association
Tempat publikasi: Sarasota
Negara publikasi: United States
Subjek publikasi: Business And Economics--Accounting
ISSN: 02780380
Jenis sumber: Scholarly Journals
Bahasa publikasi: English
Jenis dokumen: Feature
Fitur dokumen: tables references equations

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ID dokumen ProQuest: 216739318

URL Dokumen: http://search.proquest.com/docview/216739318?accountid=32506
Hak cipta: Copyright American Accounting Association Sep 2003
Terakhir diperbarui: 2014-05-24
Basis data: ABI/INFORM Research
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