ABNORMAL AUDIT FEES AND AUDIT QUALITY: THE INFLUENCE OF FINANCIAL EXPERTISE IN THE AUDIT COMMITTEE

Abstract

The Sarbanes-Oxley Act of 2002 had a major influence on the relationship between auditors and clients, and gave audit committees the responsibility for approving and negotiating audit fees. Even if, in theory, abnormal audit fees should be associated with audit quality, there is not yet a consensus in the literature – which is limited and inconclusive – on the statistical significance of their relationship. Therefore, to fill this research gap, this study examines the association between a firm’s audit fees with audit quality, while also assessing the impact of audit committee members’ financial expertise on that relationship. Specifically, a large time frame is employed for regression analysis in a sample consisting of 3,599 firm-year observations from 2010 to 2018 in the US market. A two-stage approach is used, where the first model estimates audit fees based on the model’s residuals according to prior relevant studies, while the second model uses the aforementioned residuals as the main variable of interest in a logistic regression with the appearance of restatements as the dependent variable. The findings conclude that abnormal audit fees have a negative impact on audit quality. Furthermore, financial expertise in the audit committees has a positive impact on audit quality. These findings also conclude that there is no significant relationship between the interaction of abnormal audit fees and financial expertise in the audit committees and audit quality. These results are robust, after having been subject to a robustness check of a different audit quality proxy: discretionary accruals. This is consistent with the economic bonding theory and is in line with prior research.