The Association Between Board of Directors' Effectiveness and Audit Fees in State-Owned Enterprises

Abstract

This study examines the association between board of directors' effectiveness and audit fees in state-owned enterprises (SOEs). Furthermore, this study examines the effect of three country-related indices (the Strength of Minority Investor Protection Index, the Economic Freedom Index, and the Democracy Index) on the association between corporate governance and audit fees. The sample consists of 462 firm-year observationsfrom 30 different countries over the years 2016-2018. The data is collected from the Thomson Reuters database, Bloomberg database, and SOEs' annual reports. The study implements multiple linear regression to test for the hypotheses. The empirical findings reveal a positive and significant association between the effectiveness of board of directors and audit fees in SOEs. This finding supports the demand-side of audit quality argument, which states that effective boards tend to demand greater audit efforts in order to provide reasonable assurance with regards to the quality of the financial reporting process. As the audit effort increases, higher audit fees will be incurred. Furthermore, the study shows that the strength of the relationship between boards' effectiveness and audit fees varies among the various levels of the country-specific indices. In particular, the results reveal a significant association between boards' effectiveness and audit fees in SOEs located in countries with strong, medium, and weak investor protection regulations. The board of directors effectiveness and audit fees relationship is also significant for SOEs operating in countries with medium and high levels on the Economic Freedom and Democracy indices. This study provides useful insights into the importance of government's role in enhancing the effectiveness of board of directors and external auditing for SOEs.