| Abstract | This study examines the association between board of directors' effectiveness
and audit fees in state-owned enterprises (SOEs). Furthermore, this study examines the
effect of three country-related indices (the Strength of Minority Investor Protection
Index, the Economic Freedom Index, and the Democracy Index) on the association
between corporate governance and audit fees. The sample consists of 462 firm-year
observationsfrom 30 different countries over the years 2016-2018. The data is collected
from the Thomson Reuters database, Bloomberg database, and SOEs' annual reports.
The study implements multiple linear regression to test for the hypotheses.
The empirical findings reveal a positive and significant association between the
effectiveness of board of directors and audit fees in SOEs. This finding supports the
demand-side of audit quality argument, which states that effective boards tend to
demand greater audit efforts in order to provide reasonable assurance with regards to
the quality of the financial reporting process. As the audit effort increases, higher audit
fees will be incurred. Furthermore, the study shows that the strength of the relationship
between boards' effectiveness and audit fees varies among the various levels of the
country-specific indices. In particular, the results reveal a significant association
between boards' effectiveness and audit fees in SOEs located in countries with strong,
medium, and weak investor protection regulations. The board of directors
effectiveness and audit fees relationship is also significant for SOEs operating in
countries with medium and high levels on the Economic Freedom and Democracy indices. This study provides useful insights into the importance of government's role in
enhancing the effectiveness of board of directors and external auditing for SOEs. |
