Corporate Governance, Related Party Transactions and Audit Fees

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Abstract

We examine the association between related party transactions (hereafter RPTs) and audit fees both over time and across firms. Examining 2002 through 2012, a window that included revised SEC RPT disclosures, passage of International Standard on Auditing 550: Related Parties, and deliberations leading to adoption of AS No. 18: Related Parties (AS 2410), we initially do not find an association between RPTs and audit fees. However following the SEC’s 2006 promulgation “Executive Compensation and Related Person Disclosure” we find RPTs positively associated with audit fees. Further we find that the association increased significantly subsequent to the effective date of International Standard on Auditing 550, Related Parties. We also find that the association between RPTs and audit fees varies across firms, i.e., the association between RPTs and audit fees is greater in the presence of other indicators of poor governance, as well as when client firms are financially constrained.

Authors

• Steven Balsam, Temple University

• Richard H Gifford, SUNY-Geneseo

• Harrison Liu, University of Texas-San Antonio