Audit committee members’ proximity to corporate headquarters and audit fees

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.