Audit Committee Characteristics and Low-balling of Audit Fees

Abstract

This paper aims to investigate whether audit committees with certain characteristics effectively avoid initial year audit fee discounts or so called low-balling. Effective audit committees may not be attracted with auditors fee cutting in the initial engagement year to maintain high quality of audit. We classify audit committee based on four aspects that signify the quality of the committee: independence, financial expertise, meeting frequency, and tenure. Consistent with prior research, we find low-balling of audit fees exist in Korean audit market and audit committee independence and meeting frequency are positively associated with audit fees. In particular, audit committees with frequent meetings prevent audit fee discounts in the first engagement year, suggesting that diligent audit committee plays an important role to maintain high audit quality. Finally, we find that the audit committees which satisfy at least one of good governance criteria are effective in preventing initial year audit fee discounts. Sensitivity analyses also reveal that audit committee expertise is also weakly related to higher audit fees.