Who’s Really in Charge? Audit Committee versus CEO/CFO Power and Audit Fees

• In Event: Audit Committees and Corporate Governance

Abstract

Since 2002, regulation makes audit committees responsible for negotiating audit fees. Researchers and practitioners express concern that management continues to significantly influence these negotiations. The recent financial crisis and economic recession created an exogenous shock, which introduced opposing pressures on fee negotiations and sheds light on the relative influence of management vis-à-vis the audit committee. During the recession, we find larger fee reductions in the presence of more powerful CFOs, but not CEOs, and smaller fee reductions in the presence of more powerful audit committees. We also find CFO and audit committee power conflict in that each influences fees only when the other is less powerful. We control for other board and audit committee characteristics and test alternative measures of both dependent and independent variables. Our findings suggest that while increasing audit committee power can help audit committees fulfill their statutory responsibilities, CFO power on the board also merits attention.

Authors

• Matthew James Beck, University of Missouri–Columbia

• Elaine G. Mauldin, University of Missouri–Columbia