Managerial Overconfidence, Audit Committee Characteristics, and Audit Fees

The aim of this research was to analyze the relationship between managerial overconfidence and audit fees. Furthermore, this study also examined the effect of audit committee characteristics on the relationship between overconfident managers and audit fees. This study used 527 observations from 218 firms listed on the Indonesian Stock Exchange for the period 2014 to 2016. We used univariate and multivariate analyses to examine the testable hypotheses. This study found that auditors perceive managerial overconfidence to be a factor that increases audit risk, for which they will charge additional fees to compensate for the increased audit effort. The existence of an audit committee in the case of companies with managerial overconfidence was characterized by having an accounting background, having more than one member serving as an independent commissioner, and conducting meetings more than four times a year; this has a positive impact on audit fees. For companies, this study provides the insight that having a good quality audit committee is a good way to reduce the risk of overconfident managers. However, this will significantly increase the audit fee. This study has provided a further understanding of how the corporate governance mechanism, through the characteristics of the audit committee, mitigates the risk of overconfident managers