Auditing Section Research Summaries Space

A Database of Auditing Research - Building Bridges with Practice

This is a public Custom Hive  public

research summary

    Who’s Really in Charge? Audit Committee versus CFO Power a...
    research summary posted March 1, 2015 by Jennifer M Mueller-Phillips, tagged 10.0 Engagement Management, 10.06 Audit Fees and Fee Negotiations, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    352 Views
    Title:
    Who’s Really in Charge? Audit Committee versus CFO Power and Audit Fees
    Practical Implications:

    The results demonstrate the importance of, and tension between, CFO and audit committee power in audit fee negotiations. Our findings suggest CFOs often continue to exert significant influence over audit fees even though contractual responsibility for compensating external auditors resides with the audit committee. These results highlight the importance for auditors to identify the more powerful party when negotiating audit fees with their clients.

    In addition, this study has significant implications for investors who believe current regulations separate management from audit fee negotiations. These regulations may give investors a false sense of security if they assume the audit committee always limits managerial influence during audit fee negotiations.

    For more information on this study, please contact Elaine Mauldin.

    Citation:

    Beck, M. J. and E. Mauldin, 2014. Who’s really in charge? Audit committee versus CFO power and audit fees. The Accounting Review 89 (6): 2057-2085.

    Keywords:
    audit fees, audit committee, CFO, recession
    Purpose of the Study:

    Sarbanes-Oxley (SOX) intended to restore and improve investor confidence in financial reporting by charging audit committees with direct responsibility for determining external audit fees. However, some auditors report that management continues to control the external auditor relationship, even though the audit committee, by law, has contractual responsibility. Thus, current regulations may give investors a false sense of security if they assume the audit committee always limits managerial influence during audit fee negotiations.

    We compare chief financial officer (CFO) and audit committee influence on audit fees to provide insight into the effectiveness of mandating contractual responsibility for audit fees to the audit committee. We examine changes in fees during the recent financial crisis and economic recession as this time period creates a natural experiment that allows us to better isolate and identify the influence of audit committee and CFOs on audit fees. We expect CFOs with greater power, relative to the audit committee, will negotiate fee reductions during the recession because cutting audit fees directly improves net income and reduced audit fees could result in less audit effort and allow management more earnings management opportunities. On the other hand, we expect audit committees with greater power, relative to the CFO, will not negotiate fee reductions during the recession because they more likely support the auditor’s and shareholders’ desire for higher fees to combat higher audit risks

    Design/Method/ Approach:

    We utilize a sample of firms from 2006-2009 and utilize OLS regressions to examine the effects that audit committee and CFO power have on audit fees during the recession. We utilize tenure of the audit committee and CFO to proxy for power as longer tenure increases firm-specific expert knowledge necessary for effective bargaining and the ability to develop networks of key stakeholders, enabling individuals to form coalitions in support of their bargaining position.

    Findings:
    • We find that during the recession audit fees declined by 4 percent on average 
    • We find smaller fee reductions when audit committee power is greater than CFO power and larger fee reductions when CFO power is greater than CFO power
    • We find when the audit committee is sufficiently more powerful than the CFO, audit fee reductions during the recession disappeared
    Category:
    Corporate Matters, Engagement Management
    Sub-category:
    Audit Committee Effectiveness, Audit Fee Decisions