Banks’ audit committees, audit firm alumni and fees paid to audit firm

Purpose

This paper focuses on bankaudit committees and examines whether audit committee members who are formerauditors are associated with the acquisition of audit and non-audit servicesfrom their former employers.

 

Design/methodology/approach

The study empirically examinesa sample of large banks that are included in the S&P Composite 1500.

 

Findings

The paper reportssignificantly lower audit fees and a higher proportion of non-audit fees tototal fees when the audit committee chair is an alumnus of the incumbent auditfirm. Moreover, additional analysis reveals that these findings are strongerfor banks with more earnings management.

 

Researchlimitations/implications

Overall, the findings indicatethat audit firms might consider banks using their alumni as audit committeechairs to be less risky or easier to audit, thus requiring relatively lesseffort from the auditors. The reduced effort required to audit clients withaudit firm alumni on their audit committees then has the effect of reducing theaudit fees charged. Alternatively, their auditing experience and cognitiveproximity might influence the assessment of the need for auditing or theability to negotiate lower audit fees on the part of audit firm alumni.

 

Originality/value

This paper provides empiricalevidence of the association between audit firm alumni in influential positionson an audit committee and fees paid to those audit firms in the bankingindustry. The findings contribute to the literature by suggesting that bankswith affiliated former auditors chairing their audit committees not only havesignificantly lower audit fees but also a higher proportion is spent onnon-audit services.