ABSTRACT

A Study on the Effects of Corporate Governance on Audit Fees and Audit Hours

Yoo-Young Seol
Department of Accounting,
The Graduate School
Chonbuk National University

Academic Director:
Professor, Kil-Seok Han, Ph.D.

The purpose of this study is to investigate the effects of corporate governance on audit fees and audit hours. When Korean firms overcome the currency crisis in 1997, the reformation of corporate governance throughout accounting transparency was the initial step because information asymmetries among stakeholders are the one of the reasons of the crisis. In particular, accounting transparency can be improved with high quality of auditing, so that this study examines the effects of corporate governance on audit qualities measured with audit fees and audit hours.

In order to examine the relationship between corporate governance and audit fees and audit hours, I use corporate governance score that is published by Korea Corporate Governance Service (KCGS) for corporate governance variable. For audit fees and audit hours, I elicit the data from Data Analysis, and Retrieval and Transfer System (DART) that is operated by Korea Financial Supervisory Service.

Throughout the regression analysis, I firstly find that corporate governance has a positive relationship with audit fees as well as audit hours. I interpret the result as follow: Under Korean economy, the firms with high corporate governance are also likely to improve accounting transparency by employing high quality auditors and securing more audit times. Alternatively, I interpret that under the disclosure systems to report audit fees and audit times, the firms with high corporate governance tend to use the information about audit fees and audit quality to deliver their level of transparency, or giving signals of transparency to investors.

Secondly, I further conduct the analysis by dividing my sample into two samples in terms of the size of assets. I find that while the big assets size sample shows the positive relationship between corporate governance and audit quality (measured with audit fees and audit hours), the small size sample shows no such relationship. The result suggests that when studying the relationship between corporate governance and audit quality, researchers need to consider the size of assets.

Thirdly, with a time series data, I test the effect of the increase of corporate governance on the increase of audit fees and audit hours. I find that the more corporate governance increases, the more audit fees and audit hours increase. The result implies that the firms with high increase of corporate governance are also likely to improve audit quality.

In conclusion, I empirically find that corporate governance has a positive effect on both audit fees and audit hours. The result suggests that when firms are trying to improve corporate governance, they are able to accomplish the goal by improving audit quality throughout audit fees and audit hours. In addition, this study helps investors utilize the disclosure information of audit fees and audit hours for their decision making.

Keywords : Corporate Governance, Audit Fees, Audit Hours