“Problem” directors and audit fees

Abstract

This study investigates the association between audit fees and the presence of “problem” directors on corporate boards and audit committees. “Problem” directors, in this context, are those directors who have been involved in corporate financial failures and integrity indiscretions in the past. Auditors regard the presence of such directors on boards and audit committees as audit risk, and may have to enhance their audit procedures, leading to higher audit fees. Using a sample of 9,175 firm‐year observations from 2004 to 2010 of US firms, we find that the presence of “problem” directors on boards and audit committees is associated with higher audit fees. This finding has a policy implication for corporate managers, that they should be mindful of the increase in perceived audit risk that arises from professional and personal attributes of directors when recruiting individuals to serve on their boards.

Audit fees, board ethnicity and board independence: evidence from South Africa

“…Carcello et al (2002) provide evidence that a more diligent, independent and expert board seems to attract higher audit fees. Habib et al (2019) find that the presence of problem directors on corporate boards is positively associated with audit fees. Because of calls for greater board diversity in the aftermath of the global financial crisis of 2008, several recent studies examine how diversity on corporate boards affect external audit fees.…”

“…Since the seminal work of Simunic (1980), many studies have investigated the determinants of audit fees (Anderson and Zeghal, 1994; Hay et al , 2006; Habib et al , 2019). Existing literature considers characteristics of corporate boards as important determinants of audit fees because corporate boards are responsible for approving corporate strategies, hiring corporate executives, ensuring financial reporting integrity and setting compensation for CEOs (Hay et al , 2006; Adams et al , 2010; Habib et al , 2019). Additionally, in the aftermath of the global financial crisis of 2008, there has been an increase in calls for diversity of corporate boards.…”

“…In the seminal work, Simunic (1980) considers audit fees to be dependent on auditor effort and litigation risks. Existing literature considers characteristics of corporate boards as important determinants of audit fees (Hay et al , 2006; Adams et al , 2010; Habib et al , 2019). Carcello et al (2002) provide evidence that a more diligent, independent and expert board seems to attract higher audit fees.…”

Hubungan antara Urus Niaga Pihak Berkaitan dan Yuran Audit: Bukti Syarikat Tersenarai di Malaysia

“…Kajian oleh Chaghadari dan Shukor (2011), melalui satu sesi temuramah yang dijalankan ke atas pengurus membuktikan bahawa pengurus lebih memilih untuk menyembunyi UPB daripada dilaporkan dalam pelaporan kewangan kerana ianya dapat mempengaruhi keputusan pelaburan oleh pihak pelabur. Kajian oleh Habib et al (2019) mendapati juruaudit akan menilai kehadiran pengarah yang pernah terlibat dalam skandal perakaunan sebagai faktor risiko audit yang boleh meningkatkan prosedur audit dan seterusnya yuran audit. UPB konflik juga dianggap sebagai petunjuk kepada 'red flag' yang boleh mengakibatkan penyataan semula penyata kewangan dan meningkatkan risiko audit (Kohlbeck & Mayhew 2017).…”

Determinants of audit fees: Evidence from Poland

“…To date, other research hypotheses have appeared in the literature on audit fees, such as audit fees inversely depend on the time elapsed between the date of the auditor's opinion and the balance sheet date (Habib, Bhuiyan, & Rahman, 2019); audit fees are higher if a fiscal year ends in accordance with a calendar year than if a fiscal year ends at a different date (McMeeking, Peasnell, & Pope, 2006;Tee et al, 2017); the length of cooperation with an auditor is inversely proportional to the amount of audit fees due to the smaller effort of the auditor in the process of recognising the weakness of internal control (Okolie, 2014) or the closer relationship between the auditor and the audited entity (Barkess and Simnett, 1994;DeFond, Raghunandan, & Subramanyam, 2002;Car-cello & Nagy, 2004). In turn, in his study, Knapp (1991) pointed out that, in the United States, the likelihood that an auditor will indicate significant irregularities increases in the first years of cooperation and then decreases reaching its minimum after 20 years of cooperation; reports other than the so-called clean opinions have a positive impact on the amount of audit fees (Verbruggen, Christiaens, Reheul, & Van Caneghem, 2015).…”