THE RELATIONSHIP BETWEEN BOARD EFFECTIVENESS AND AUDIT FEES IN THE PRESENCE OF SHAREHOLDER VOTING DYNAMICS

Abstract

The study analyses the relationship between the effectiveness of the board of directors and audit fees in the presence of shareholder voting dynamics (SVDs), which are represented via supermajority vote requirements, confidential voting policies, and shareholder approval of significant transactions. The examination is conducted in four distinct phases. The first phase focuses on the impact of board effectiveness on audit fees. However, the second phase considers the effect of SVDs on board effectiveness, while the third phase examines the relationship between SVDs and audit fees. Finally, the fourth phase investigates the moderating effect of SVDs on the board effectiveness-audit fees relationship. The study uses archival data, which is obtained from the Refinitiv Workspace database. The final sample consists of 1,529 firms representing 46 countries over the period 2018 to 2021. Using ordinary least squares regression, the study results suggest a positive relationship between board effectiveness and audit fees. The findings support the demand-side argument, which shows that board of directors demand greater efforts from auditors to ensure the quality of the financial reporting process. As the auditor allocates greater resources to the audit engagement, it is expected that audit fees will increase. Furthermore, the findings show that SVDs are positively related to board effectiveness. In addition, the results indicate that SVDs increase the level of audit fees. Lastly, the findings show that requiring shareholders' approval of significant transactions has a positive moderating effect on the relationship between board effectiveness and audit fees. However, having a supermajority vote requirement or a confidential voting policy does not moderate the relationship between board effectiveness and audit fees. The study contributes to the literature by highlighting the importance of shareholder activism. In particular, companies that require approval from shareholders before conducting significant transaction, will impact the decision-making mechanism at the board level as directors are recognisant of the fact that their actions are vigorously monitored. Furthermore, the board will work more actively with the auditor, thereby increasing the price of the audit engagement.