The Relationship Between Corporate Governance and Audit Fees

Abstract

Corporate governance is a set of policies, methods and proceedings that are carried out to provide the required interests of firm’s stockholders and accountability, transparency and fairness in firm’s operation, using internal and external mechanisms. There are two contrary views expressed in the literature, regarding the relationship between corporate governance and audit function. First, corporate governance as a set of internal and external controls may reduce misreporting risk and damaging manipulation that, in turn, improves auditing process and effectiveness, and then, makes audit fees to reduce. Second, improved governance creates needs to auditing function that could raise audit fees. This study examines whether corporate governance mechanisms correlate with audit fees in Iran or not, and such a correlation moves upward or downward. We use a sample of 201 firms listed in Tehran Security Exchange (TSE) in 2008, and select 10 known factors of corporate governance from the relevant theories and sorces, and analyze the expected relationship between corporate governance and audit fees. The results show that two factors of corporate governance, namely the share owned by government institutions and the type of auditor are correlated with audit fees significantly and directly.

Keywords

• corporate governance
• outside directors
• audit fees