Corporate Governance Quality, Audit Fees and Non‐Audit Services Fees

Abstract: This paper extends prior research on the relationship between governance quality and auditor remuneration. We examine the influence of audit committee effectiveness (ACE), a proxy for governance quality, on audit fees (AF) and non‐audit services fees (NASF) using a new composite measure comprising audit committee independence, expertise, diligence and size. We find that after controlling for board of director characteristics, there is a significant positive association between ACE and AF only for larger clients. Our results indicate that effective audit committees undertake more monitoring which results in wider audit scope and higher audit fees. Contrary to our expectations, we find the association between ACE and NASF to be positive and significant, especially for larger clients. This suggests that larger clients are more likely to purchase non‐audit services (NAS) even in the presence of effective audit committees probably due to the complexity of their activities. Overall, our findings support regulatory initiatives aimed at improving corporate governance quality.