The Effect of Regulatory Oversight on the Association Between Internal Governance Characteristics and Audit Fees

We examine the relationship between internal governance, external audit monitoring and regulatory oversight for a sample comprising industrial companies and financial/utility companies subject to additional industry-specific regulation. Our results indicate that the association between audit fees and board/audit committee (i) independence and (ii) size are weaker for regulated companies. These observations are consistent with the notion that regulatory oversight partially substitutes the external audit as a monitoring mechanism. Boards/audit committees with more multiple directorships, however, demand a more extensive audit in the presence of regulatory oversight to protect their reputation capital. Our study enhances our understanding of the complex relationships amongst the major corporate governance elements