The Association between Audit Fees and the Ownership Structure

This study examines the association between ownership structure and audit fess. Especially, this study focuses on the ownership structure measured by the divergence of control and ownership. If an owner owns a company through the pyramidal structure, it is possible that the voting rights of the owner are greater than the cash flow rights of the same owner. The difference could influence the firm’s audit-related Seoul Journal of Business Volume 13, Number 2 (December 2007) * Coauthor, Assistant Professor of Accounting, College of Business Administration, Seoul National University ([email protected]). ** Coauthor, Professor of Accounting, College of Business Administration, Seoul National University ([email protected]). *** Main author, Master of Science, College of Business Administration, Seoul National University ([email protected]). This study is based on the master’s dissertation paper by the main author completed at Seoul National University on August 2007. The first and second authors served as dissertation committee members. We appreciate helpful comments provided by Tai-Sik Ahn, Lee-Seok Hwang, Woon-Oh Jung, and Chang-Woo Lee. policy and auditor’s behavior. This study examines this issue by focusing on audit fees. Using 436 firm-year observations collected over 2003-2005 period from Korean stock market and the divergence data provided by Korea Fair Trade Commission, we examine above prediction. The empirical results reveal that the audit fee is negatively correlated with the divergence. It suggests that the audit quality is lower when there exist greater divergence. It is because the divergence is related to the incentive for owners to expropriate minority shareholders. In order to hide the expropriation from outside minority shareholders, it is possible that the owner asks the auditor to provide low quality audit service which in turn results in low audit fees.