Document Type

Conference Proceeding

Publication Date

10-2007

Abstract

The Sarbanes-Oxley Act of 2002 (“SOX”) established not only corporate governance reform but also legislated significant changes to the practice of auditing publicly held corporations. Rules implemented by the Securities and Exchange Commission (“SEC”) further reinforced stronger corporate governance standards. The effect of these reforms on the cost of public audits is indisputable: the initial rise in audit fees was dramatic as corporations complied with the new provisions. This paper examines the relationship between corporate governance characteristics and audit fees for a random sample of 100 publicly traded corporations drawn from the 2005 Fortune 500 list. The data is obtained from SEC proxy statements and annual report filings for the 2005 fiscal year. The study examines characteristics of the audit committee and board of directors, while controlling for several financial measures generally associated with higher audit fees. The corporate governance attributes include two measures of expertise (the number of audit committee financial experts and the average number of outside directorships held by board members) and two measures of diligence (meeting frequency of audit committee and board of directors). The results indicate a positive, significant relationship between both measures of expertise and audit fees. In addition, greater frequency of board of directors meetings is also significantly related to higher audit fees, while audit meeting frequency is not. This outcome suggests that higher quality corporate governance as measured by fiduciaries’ expertise and board diligence is associated with higher audit costs.

Comments

The paper available here for download was originally published in the 2007 Proceedings of the Northeastern Association of Business, Economics, and Technology, pp. 76-85.

Presented at the 30th Annual Meeting, October 25th and 26th, 2007.