The Effect of Corporate Governance on Audit Fees and Audit Hours During the Financial Crisis of 2008

This study examines the effect of corporate governance on audit fees and audit hours during the financial crisis and pre-crisis periods. While the literature on the effect of corporate governance on audit fees is replete, the results are still mixed. By exploiting the crisis setting which represents exogenous shock unrelated to governance choices or auditing, we examine (1) whether firms with strong corporate governance pay significantly higher audit fees and purchase additional audit hours; (2) whether the association between corporate governance and audit fees (hours) differs between the crisis and pre-crisis periods; and (3) whether the level of governance has a differential effect on the determinants of audit fees between the crisis and pre-crisis periods. Our empirical results are summarized as follows. First, firms with strong corporate governance pay significantly higher audit fees and purchase additional audit hours. Second, the sensitivity of audit fees and hours to the strength of corporate governance is higher during the crisis period relative to the pre-crisis period. Furthermore, the audit fee structure differs between the crisis and pre-crisis periods for firms with poor corporate governance. These results remain significant after using alternative measures of corporate governance and audit fees. Collectively, the above results provide useful insights into the effect of governance on determination of audit fees.