Articlegreen2012

Multiple large ownership structure, audit committee activity and audit fees

Ismail A. Adelopo · Kumba Jallow · Peter Michael Scott

47 citations0/0 files storedJournal of Applied Accounting Research

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose The purpose of this study is to examine the impact of multiple large ownership structure (MLS) and audit committee activity (ACA) on audit pricing for a sample of UK listed companies. Design/methodology/approach One way analysis of variance (ANOVA) and cross sectional multiple regression analysis of a sample of UK listed companies showed statistically significant differences in the audit fees, firm size and audit committee activities of these firms when they are categorised based on the number of MLS. Findings The study finds a significant negative relationship between audit fees and number of MLS, but a surprising positive relationship with ACA. The findings confirm the beneficial effects of more active institutional investors’ monitoring, but also show that increasing monitoring by audit committees is associated with increase in audit fees. Research limitations/implications The results reported in this research are based on cross sectional data. It is likely that the result may be different if the issue is examined over a relatively longer period. Practical implications The study showed that monitoring intensity of the large shareholders can be captured through their number and not simply through their shareholding. It also confirms the suggestion in previous studies that audit committees’ members protect themselves from depletion in human capital, litigation and reputational risk by buying more audit related services from their auditors. Originality/value The study empirically examined the impact of multiple large ownership structure on audit pricing and thereby extends the practical and theoretical understanding on the monitoring roles of large shareholders as well as the audit committees.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1986Large Shareholders and Corporate Control 1933The Modern Corporation and Private Property 1988Management ownership and market valuation 1990Additional evidence on equity ownership and corporate value 2002The ultimate ownership of Western European corporations 1980Takeover Bids, The Free-Rider Problem, and the Theory of the Corporation 1980The Pricing of Audit Services: Theory and Evidence

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