Association between corporate governance, audit industry specialization and audit fees.

Our study examines the association between corporate governance, audit industry specialization and audit fees. Findings on the relationship between corporate governance and audit fees are inconclusive and conflicting. Prior researchers draw from both the demand and supply-perspectives to explain the conflicting findings. We argue that we need to examine auditor choice in addition to the audit fee determinant issue. We argue that the demand perspective is more appropriately examined as an auditor choice issue and the supply perspective is appropriately examined as an audit fee determinant issue. Using a sample of 576 U.S. bank holding companies (BHCs) that filed proxy statements for the year ended 2005, we find that BHCs with stronger corporate governance are more likely to appoint a Big 4 auditor and BHCs with weaker corporate governance are likely to appoint an audit industry specialist. We also find that stronger corporate governance is associated with higher audit fees. This indicates that the demand for closer audit scrutiny by more conscientious governance agents dominates the supply perspective explanation, which argues that auditors who face higher risk (when corporate governance is weaker) tends to be more thorough in their work