Corporate Governance, Related Party Transactions, and Audit Fees

• In Event: Auditing 4

Abstract

We examined the association between the audit fees and related party transactions with outside directors during fiscal years 2007 – 2012. We find that the dollar magnitude of a firm’s related party transactions with outside directors, when scaled by total assets, is positively related to audit fees. Further we find that this effect varies across firms in that increased audit fees are associated with outside director related party transactions but only when other indicators of poor governance are present. These findings are consistent with the audit risk approach of audit fee determination, that related party transactions with outside directors are but one factor affecting audit risk and that good governance mitigates the audit risk associated with related party transactions.

Authors

• Steven Balsam, Temple University

• Richard H Gifford, SUNY-Geneseo

• Harrison Liu, University of Texas-San Antonio