Does Female Representation on Audit Committees Affect Audit Fees?

By Ittonen, Kim; Miettinen, Johanna et al. | Quarterly Journal of Finance and Accounting, Summer-Autumn 2010 | Go to article overview

Does Female Representation on Audit Committees Affect Audit Fees?


Ittonen, Kim, Miettinen, Johanna, Vahamaa, Sami, Quarterly Journal of Finance and Accounting


Introduction

Psychology literature and management literature long have acknowledged the existence of significant gender differences, for instance, in cognitive functioning, communicative skills, decision-making, and leadership styles. Given these differences, the recent corporate finance literature has examined the effects of female representation on corporate boards and committees and noted that gender diversity may have important implications for corporate governance (Carter et al., 2003; Erhardt et al., 2003; Huse and Solberg, 2006; Rose, 2007; Adams and Ferreira, 2009; Huse et al., 2009). In general, prior studies indicate that female representation contributes to board effectiveness and may enhance the board's monitoring activities within the firm. Nevertheless, the issue of gender diversity so far largely has been ignored in the accounting and auditing literature.

In this paper, we examine the role of gender diversity on corporate audit committees in relation to external auditing. In particular, we attempt to assess whether and how female audit committee representation affects the fees paid to the external auditors. Given that recent legal reforms impose strict requirements on the composition of the audit committee and emphasize the committee's monitoring responsibilities in ensuring the integrity of the financial reporting process (Sarbanes-Oxley Act, 2002; SEC, 2003), it is important to consider the potential effects of gender diversity on the functioning and effectiveness of audit committees. To the best of our knowledge, this study is the first attempt to address the role of gender diversity on audit committees. Thus, by focusing on the association between female audit committee representation and audit fees, this paper provides novel insights into empirical audit pricing literature.

Over the past few years, the relationship between audit committee characteristics and audit fees has been examined in Abbott et al. (2003), Lee and Mande (2005), Goodwin-Stewart and Kent (2006), and Vafeas and Waegelein (2007). In brief, these studies indicate that audit committee characteristics are important determinants of audit fees. Consistent with demand-side argumentation, the findings reported in previous studies suggest that audit fees are positively related to audit committee size, expertise, independence, and meeting activity. The present paper aims to extend the existing literature by considering the potential effects of audit committees' gender diversity on audit fees. Based on the recent corporate governance literature (e.g., Adams and Ferreira, 2009; Huse et al., 2009), we presume that female representation may enhance the monitoring activities of the audit committee.

Our empirical findings demonstrate that female representation on audit committees affects audit fees. In particular, using a sample of the S&P 500 firms, we find considerable evidence to suggest that female representation is negatively related to the fees paid to the external auditors. The results are particularly strong for firms with female audit committee chairs. Consistent with previous studies, our control variables for other audit committee characteristics (size and activity level) are positively associated with audit fees. From the demand-side perspective, our results may indicate that female chairs and audit committee members reduce the need for assurance provided by external auditors. Alternatively, from the supply-side perspective, female chairs may decrease audit fees by affecting the auditor's assessment of audit risk (for instance, by improving communication with external and internal auditors and/or by enhancing the effectiveness of internal monitoring and the integrity of the financial reporting process). If female representation reduces the inherent risk of misstatements, gender diversity on audit committees may be negatively associated with audit fees. Overall, our findings are broadly consistent with the view that gender diversity may lead to improvements in the effectiveness and monitoring activities of the audit committee. …

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