Audit committees, Cadbury Code and audit fees: an empirical analysis of UK companies

Audit committees have become more important and prevalent in recent years but there is a relative paucity of empirical research concerning their value. This paper contributes to this research by reporting an analysis of the relationship between the size of the audit fee and the existence of an audit committee. The analysis builds on previous research in this area in several ways. First, it uses more recent data than previous research which may have been influenced by transitional problems. The data in this paper were collected from financial reports for the years ending in 1994 and 1995. Second, it investigates the effect on audit fees of audit committee adherence to the Cadbury Committee Report recommendations of 1992. Finally, the analysis is set within a theoretical framework developed from agency theory. The results suggest that audit committees have been through a transitional phase comprising changes to the general audit environment and a learning phase for the establishment and operation of committees. By 1995 there is no evidence that audit committees, whether adhering to the Cadbury Code or not, have any overall effect on audit fees. The only effect found was a reduction in fees due to improved internal controls in the presence of auditee complexity. There was evidence that size was the main determinant of the presence of an audit committee.