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Audit committee members’ proximity to corporate headquarters and audit fees

Maryam Firoozi (Sprott School of Business, Carleton University, Ottawa, Canada)
Michel Magnan (John Molson School of Business, Concordia University, Montreal, Canada and CIRANO, Montreal, Canada)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 15 July 2022

31

Abstract

Purpose

This study aims to investigate how audit committee members’ geographical location relative to corporate headquarters affects audit fees. The motivation for the paper rests on the observation that regulatory and market trends have significantly affected the composition of boards of directors and audit committees. To ensure that audit committees play their monitoring role, regulations now require directors’ independence and some level of financial expertise. The need to find directors who meet these requirements, as well as the advent of globalization and technological improvements lead firms to expand their reach when looking for directors.

Design/methodology/approach

The authors use a sample of 1,517 firm-year observations of Canadian firms from 2008 to 2017. The study relies on multivariate analyses.

Findings

The results show that, among nonlocal audit committee members, the presence of foreign directors is associated with higher audit fees. In contrast, other nonlocal audit committee members do not have a differential impact on audit fees. This effect is more prevalent in large firms. Moreover, having a foreign chair of the audit committee as well as foreign audit committee members who are not accounting experts appear to accentuate the increase in audit fees. A possible explanation for the finding is that, from the supply side, auditors assign a higher risk to firms with a higher percentage of foreign audit committee members. Alternatively, from the demand side, firms with foreign audit committee members may ask for more audit effort. Further analysis indicates that having a higher percentage of foreign audit committee members is associated with a higher likelihood of restatements, an indication of low audit quality.

Originality/value

To the best of the authors’ knowledge, this study is the first to document that auditors price the location of audit committee members and consider it when planning for their audit.

Keywords

Acknowledgements

Maryam Firoozi acknowledges the financial support from Research Start-Up Grant, Sprott School of Business, Carleton University. Michel Magnan acknowledges financial support from the Stephen A. Jarislowsky Chair in Corporate Governance (Concordia University) and the Institute for the Governance of Private and Public Organizations. The authors appreciate helpful comments from workshop and conference participants at Concordia University, Canadian Academic Accounting Association Annual Conference, 2017 (Montreal), European Accounting Association Annual Congress, 2017 (Valencia), 18éme Conférence Internationale de Gouvernance, 2019 (Brussels), the discussant Jean Bédard and Alain Schatt. The authors thank Siying Zhou, Pancheng (Steven) Guo, D’Arcy O’Farrell and Mackinley MacLennan for their excellent research assistance.

Citation

Firoozi, M. and Magnan, M. (2022), "Audit committee members’ proximity to corporate headquarters and audit fees", Managerial Auditing Journal, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MAJ-05-2020-2684

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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