The Association between Audit Committee Characteristics and Audit Fees

TLDR

Prior work by Carcello et al. (2002a) found no significant effect of audit committee characteristics when board variables were considered, a result that this study seeks to challenge. The study investigates whether audit committee independence, financial expertise, and meeting frequency are positively associated with audit fees under SEC fee disclosure rules. Using proxy statements from 492 nonregulated firms audited by Big 5 firms between February and June 2001, the authors analyze the relationship between committee attributes and audit fees.

Abstract

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.