The Impact Of Audit Committee Tenure And Compensation On Audit Fees
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Type of WorkText
DepartmentBusiness and Management
ProgramDoctor of Philosophy
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Discussion surrounding term limits and “refreshment” on the board and its committees is a highly debated topic among various stakeholders. The first study of this dissertation tests whether the tenure of directors on the audit committee is associated with audit fees. Because directors of the audit committee are in a unique position that requires oversight of both management and the external auditor, identifying characteristics that contribute to an effective audit committee is important. Prior theory establishes that audit committees that are independent and have certain types of expertise are more effective. I argue that the tenure of directors, too, is a valuable factor that contributes to a more effective audit committee because of the skills, knowledge, competence, and confidence that accumulates with a seasoned director. Using audit fees as the main proxy for audit committee effectiveness, I use multiple statistical methods to model the relationship between average audit committee tenure and audit fees. Consistently, I find that average audit committee tenure has a significantly positive relationship with audit fees. These results suggest that director tenure contributes to the effectiveness of the audit committee. In addition to increases in tenure of audit committee directors, over the last decade there has been a substantial shift in audit committee compensation from cash-based to equity-based structures. Albeit this shift, there is no regulatory guidelines to specify the appropriate compensation structure for audit committees. To cast light on whether equity compensation is appropriate for audit committees, the second study in this dissertation examines the relation between equity-based compensation of the audit committee and audit fees. I analyze total equity-based compensation as well as different components of equity compensation, namely stock awards and stock option grants. I find that total equity-based compensation of the audit committee is positively related to audit fees, my main proxy for audit committee effectiveness. Stock awards (options) are positively (negatively) related to audit fees. The results are robust to the use of varying measures of compensation and audit committee effectiveness. The results suggest that while equity-based compensation potentially increases alignment with shareholder interests and audit committee effectiveness, caution should be taken when offering certain types of equity-based compensation such as stock awards versus stock option grants.