Audit committee accounting expertise, CEO power, and audit pricing

Abstract

The Sarbanes–Oxley Act of 2002 (SOX) mandates that all listed firms disclose whether they have a financial expert on the audit committee, highlighting the committee’s expertise. However, some argue that non-accounting financial experts, compared to accounting financial experts, are not sufficient to ensure audit committee effectiveness because the former lack accounting knowledge. Accounting experts on audit committees may require higher audit efforts, while auditors may assess audit committees with accounting financial experts as effective, decreasing audit efforts. This paper first inspects the effect of audit committee accounting expertise on audit fees as a proxy for audit efforts, and then investigates whether the effect is moderated by powerful CEOs. Using post-SOX period data, our results show that, on average, firms with accounting experts on audit committees are more likely to pay higher audit fees, and the effect is less pronounced when a powerful CEO manages a firm.