The effect of Social ties on audit fees

Abstract

Audit committee independence is necessary to ensure a higher quality in the audit process, and current legislation ensures independence to a certain degree. However, independent audit committee members can still be connected to senior management through different types of social ties. Using a 2015 and a 2011 to 2015 sample of U.K. FTSE 100 companies, this study finds that the presence of different types of social ties between the CEO and audit committee members affect our proxy for audit quality, namely audit fees, in different ways. The presence of ties based on “friendship networks”, i.e. non-professional ties tend to increase the audit fees whereas ties based on “advice networks” tend to decrease audit fees. When further breaking down advice networks, this study finds that ties based on previous employment or educational background do not affect audit fees, whereas ties based on interlocking directorate networks do negatively affect audit fees.