Board Structure and Audit

Committee Monitoring:
Effects of Audit Committee
Monitoring Incentives and
Board Entrenchment on Audit
Fees

Journal of Accounting,
Auditing & Finance
128
The Author(s) 2015
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DOI: 10.1177/0148558X15583412
jaf.sagepub.com

Khondkar Karim1, Ashok Robin2, and

SangHyun Suh1

Abstract
Our study addresses two research questions. First, are audit fees related to the presence
of common members in audit and compensation committees (committee overlap)? Second,
are audit fees related to whether board membership is protected by the use of a staggered
voting system (board classification)? Using a treatment effects model to control for endogeneity, we find a negative relationship between audit fees and committee overlap, which is
consistent with the argument that committee overlap is associated with weak corporate
governance and that in an environment with weak governance, monitoring efforts by the
audit committee are similarly weak. We find a positive relationship between audit fees and
board classification, indicating that firms with classified boards seek greater monitoring,
which is consistent with the prior literature which suggests that such firms seek the quiet
life and wish to avoid reporting-related problems.
Keywords
corporate governance, board overlap, classified board, audit fees

Introduction
The audit committee is a critical player in financial reporting and is arguably one of the
most important board committees. Section 301 of the SarbanesOxley Act (hereafter, SOX)
not only provides more powers to this committee but also adds to its responsibilities (e.g.,
Hoi, Robin, & Tessoni, 2007). A key responsibility of the audit committee in the post-SOX
era is auditor engagement, the hiring and firing of auditors as well as the determination of
1

University of Massachusetts Lowell, MA, USA

Rochester Institute of Technology, NY, USA

Corresponding Author:
Khondkar Karim, Robert J. Manning School of Business, University of Massachusetts Lowell, Lowell, MA 01854,
USA.
Email: khondkar_karim@uml.edu

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Journal of Accounting, Auditing & Finance

the terms of engagement (fees, structure of work, etc.). As the auditor has direct as well as
indirect effects on information disclosure, the audit committee has the potential to influence
operations, strategy, and firm performance. For example, auditing influences reporting
quality, which, in turn, can influence compensation contracts (e.g., Leone, Wu, &
Zimmerman, 2006; Peng, 2011), and, in turn, can influence operations, strategy, and performance. Given the economic significance of these relationships, it is useful to understand
how audit committees actions (principally, auditor engagement) are influenced by committee (and board) characteristics. Our study therefore examines how audit fees are influenced
by audit committee and board characteristics.
The literature examining the effect of audit committee or board characteristics on audit
fees is well established; an excellent review may be found in Carcello, Hermanson, and
Ye (2011). Prior works include Carcello, Hermanson, Neal, and Riley (2002); Abbott,
Parker, Peters, and Raghunandan (2003); Hay, Knechel, and Wong (2006); Zaman, Hudaib,
and Haniffa (2011); and Bliss (2011). These studies focus mostly on audit committee characteristics such as independence, expertise, and diligence. To the best of our knowledge,
ours is the first to examine the effects of committee overlap and board classification. As
these two characteristics reflect monitoring incentives and board entrenchment, respectively, we are able to add to the existing literature in a meaningful manner.
Audit committees hire auditors, so their incentives, capabilities, and constraints are relevant to the discussion. Audit committees can vary with respect to independence, expertise,
monitoring incentives, and entrenchment. This variance will likely affect the committees
monitoring decisions and efforts and will therefore affect audit fees. As the prior literature
has mostly focused on issues of independence and expertise, we examine the remaining
issues, monitoring incentives and entrenchment. Accordingly, our study addresses two
research questions:
Research Question 1: Are audit fees related to the presence of common members in
audit and compensation committees (committee overlap)?
Research Question 2: Are audit fees related to whether board membership is protected by the use of a staggered voting system (board classification)?
By bringing evidence to bear on these questions, we are able to add to the literature
relating audit fees to board structure generally and to audit committee characteristics
specifically.
Committee overlap has become an important issue in the post-SOX era primarily
because of membership constraints imposed both by SOX and by stock exchanges. For
example, SOX requires that the audit committee be staffed only by independent directors
(Section 301). Similar and, indeed, more stringent constraints are imposed by stock
exchanges affecting the composition of various committees and the composition of the
overall board.1 Consequently, and also because of tightness in the director labor market,
firms deploy certain board members in multiple committees creating committee overlap.
While such overlap enhances intercommittee information flows, it also leads to concerns of
diminished effort by overextended directors (Jiraporn, Davidson, DaDalt, & Ning, 2009).
This in turn suggests that overlapping committees expend a lower level of monitoring
effort.
Laux and Laux (2009) examine the issue of committee overlap analytically. In their
model, the effect of task separation (the extent to which board members are allocated to
committees without overlap, that is, without common committee membership) is examined

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Karim et al.

in the context of decisions involving executive compensation and financial reporting. When
there is task separation, Laux and Laux suggest that both incentive compensation to the
CEO and monitoring effort are increased. In the whole board scenario (no task separation),
a lower level of incentive compensation is awarded, and a lower level of monitoring effort
is expended as well. The insight from this model is that committee overlap (specifically,
common members in compensation and audit committees) will coincide with lower monitoring effort. As the audit fee may be a substitute for monitoring effort by the board, we
therefore expect a negative relation between audit fees and committee overlap. We refer to
this as the committee overlap hypothesis.
While committee overlap is the main issue we study, we also examine the effect of
board classification on audit fees. Faleye (2007) shows that classified boards decrease firm
value because they entrench managers and they also make directors less effective. Based
on this study, one could also argue that directors themselves are entrenched when they are
members of a classified board and are not as accountable as they would be in a nonclassified (or unitary) board. Thus, similar to committee overlap, one would expect a diminution
of the effectiveness of the audit committee when boards are classified. Such a view would
predict a negative relation between audit fees and board classification. However, Zhao and
Chen (2008) present evidence supporting the opposite prediction. These authors argue that
board classification entrenches directors and enables them to enjoy the quiet life. So that
the quiet life is not disturbed, it appears that firms with classified boards engage in earnings
management to a smaller extent. In this context, a higher allocation to auditing (i.e., higher
audit fees) would be consistent with bonding to a less-troublesome disclosure environment,
and the allocation may even be thought of as an insurance premium to obtain protection
against any reporting-relation perturbation to quiet life. Thus, unlike the predicted relation
between committee overlap and audit fees (negative), we may predict a positive or negative
relation between board classification and audit fees. On balance, as our study is in the context of financial reporting, we place a greater weight on the evidence in Zhao and Chen
and hypothesize a positive relation between board classification and audit fees. We refer to
this as the board classification hypothesis.
Our sample is from the period 2000-2011. The data therefore span SOX. Accordingly,
in addition to full-sample results, we also report results for the pre-SOX (2000-2002) and
the post-SOX (2003-2011) periods. We control for endogeneity using the treatment effects
model, which simultaneously estimates the selection model as well as the test model using
full information maximum likelihood (Maddala, 1983; Tucker, 2010). Consistent with the
committee overlap hypothesis, we find a significantly negative relationship between audit
fees and committee overlap. This relationship holds true in the full sample as well as in the
subperiods. Also, we find a significantly positive relation between audit fees and board
classification. We confirm the results using FamaMacBeth regressions.
Our findings, especially those concerning audit fees and committee overlap, contribute
to the literature examining audit fees. As mentioned earlier, we are able to extend this literature and provide consideration to recently researched board structure features. For example, research by Engel, Hayes, and Wang (2010) and Wysocki (2010) provides evidence of
how audit fees are related to audit committee members compensation and executive compensation, respectively. We extend this line of research by linking audit fees to committee
overlap and board classification. Thus, we provide further evidence of how incentives and
entrenchment play a role in determining audit fees.
We provide evidence of whether auditing complements or substitutes for other corporate
governance measures. Specifically, the issue concerns whether or not a greater auditing effort,

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Journal of Accounting, Auditing & Finance

evident in fees, is positively or negatively related to other corporate controls. The complementarity argument is evident in studies such as Bliss (2011); Zaman et al. (2011); Hay, Knechel,
and Ling (2008); Carcello et al. (2002); Abbott et al. (2003); and Fan and Wong (2005). The
substitution argument is evident in studies such as Tsui, Jaggi, and Gul (2001); Cohen and
Hanno (2000); Cohen, Krishnamoorthy, and Wright (2002); Bedard and Johnstone (2004); and
Griffin, Lont, and Sun (2008). Our evidence is consistent with the former viewpoint.
The rest of this study is organized as follows: Section Background and Hypotheses
discusses background, prior literature, and hypotheses development. Section Research
Methodology describes the methodology, measurement, sample selection, and model specification. Section Results reports descriptive and multivariate statistics, including
robustness concerns. Section Summary and Conclusion concludes.

Background and Hypotheses

Audit Fee Literature
The structure of audit fees is a well-researched topic in accounting. Generally speaking,
audit fees are a function of factors, such as the amount/complexity of work and the risk
inherent in client engagement. Accordingly, the classic Simunic (1980) model relates fees
to work-related explanatory variables, such as firm size and the number of segments, and
risk-related explanatory variables, such as leverage and financial losses. Over time,
researchers have added other explanatory variables to the Simunic model to test specific
theories and hypotheses. Of these efforts, one stream of research, closely related to our
study, examines the effect of governance factors on audit fees. For example, see Larcker
and Richardson (2004), Griffin et al. (2008), and Gul and Goodwin (2010); also see
Carcello et al. (2011) for a recent review of the literature.
As the audit committee is the main entity within a corporation with audit oversight
responsibilities, most studies relating governance to audit fees focus on audit committee
characteristics. This relationship is perhaps best explained in Abbott et al. (2003) who
argue that the audit committee affects fees in two important ways. First, the audit committee affects fees through its choice of auditors. For example, if a high-quality auditor is
chosen, the fee is high. Second, the audit committee, through its influence on audit scope
and plan, influences the amount of effort expended by the auditor and, consequently, the
costs. For example, an audit committee could increase costs (audit fees) by more robustly
demanding work when the auditing firm presents its plan.
How exactly would audit committee characteristics affect auditor engagement? Would positive committee characteristics such as greater expertise or greater independence lead to greater
demand for quality as well as quantity in auditing? A widely accepted concept is that a highcaliber board has incentives to safeguard its reputation and to avoid lawsuits (e.g., Fama &
Jensen, 1983; Gilson, 1990). This general idea can be applied specifically to audit committees
and to their members (e.g., Carcello et al., 2002). For instance, an audit committee with greater
financial expertise may demand a more thorough and higher quality audit to protect itself.
Such reasoning implies a direct relationship between committee characteristics and audit fees.

Committee Overlap
Our article examines the role of the overlap between audit and compensation committees in
determining audit fees. The literature examining committee overlap is quite limited.

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Karim et al.

Chandar, Chang, and Zheng (2012) argue that audit committee members who are also compensation committee members have knowledge of how compensation affects managerial
reporting behavior. This knowledge spillover potentially enhances oversight. While this is
possible, in practice, details of compensation contracts are available to all board members
whether they serve on the compensation committee or not, so it is unclear how exactly
membership on the compensation committee allows greater understanding of how compensation affects reporting. Nevertheless, the empirical analysis in their article shows that committee overlap potentially produces higher quality financial reporting.
In contrast to Chandar et al. (2012), the analytical model of Laux and Laux (2009)
makes the opposite prediction that committee overlap is a negative characteristic. The Laux
and Laux model views the monitoring effort of board members as a costly commodity similar to the viewpoint advocated in the director busyness literature (e.g., Jiraporn et al.,
2009). Recognizing that the award of equity incentives brings tension between higher
incentives for the CEO to generate firm value and higher incentives to manipulate earnings,
board members weigh characteristics of compensation packages against the associated
monitoring requirements. As monitoring costs are borne personally by directors, compensation committee members who are also on the audit committee will be less likely to offer
equity incentives; in turn, this implies a lower level of monitoring effort by the audit committee and correspondingly lower fees. In the opposite scenario, if there is no overlap, compensation committee members will no longer bear monitoring costs personally and will be
more likely to offer equity incentives to CEOs; in this scenario, a greater monitoring effort
is required on the part of the audit committee, and audit fees will be correspondingly
higher.
The relation between audit fees and committee overlap is therefore determined by the
weight one gives to the positive effect of knowledge spillover between the two committees
and to the significance of the monitoring burden of audit committee members. A small
stream of research offers some evidence regarding CEO pay and reporting quality. Chang,
Luo, and Sun (2011) support the prediction of Laux and Laux (2009) that firms with overlapping committees offer their CEOs less equity incentives. However, in this same study,
they find that there is no relationship between committee overlap and CEO pay-performance sensitivity. Turning to the issue of committee overlap and reporting quality, the literature offers conflicting evidence. Chang et al. report that committee overlap is associated
with accruals management; the opposite result is reported in Chandar et al. (2012). Thus
far, the literature offers no evidence concerning the level of monitoring effort as evident in
audit fees.

Board Classification
The literature on board classification is relatively more mature compared with the literature
on committee overlap. Classical theory of the firm literature provides a robust analysis
of corporate entrenchment wherein managers or directors not subject to market discipline
are viewed as value destroyers. One important way in which insiders boost entrenchment is
through staggered or classified boards. In this arrangement, shareholders cannot replace a
majority of the board in a single election. Thus, at least two annual elections are necessary
to effect a change in control, thereby entrenching insiders. Typical mechanisms for changing control such as proxy contests and hostile takeovers are less effective against firms
with classified boards. In an influential study, Bebchuk and Cohen (2005) show that classified boards lower firm value, consistent with the entrenchment argument outlined above.

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Journal of Accounting, Auditing & Finance

In a comprehensive analysis of firms with classified boards, Faleye (2007) confirms the
Bebchuk and Cohen (2005) finding concerning firm value. In addition, Faleye examines
the channels through which entrenchment is achieved and firm value destroyed in these
firms. Importantly, Faleye shows that CEO turnover in response to poor performance is
lower in these firms as is the sensitivity of CEO pay to performance. Also, firms with classified boards deter proxy contests and are less likely to implement shareholder-approved
proposals. Faleye concludes that classified boards are adopted for managerial self-serving
purposes and are associated with weak corporate governance.
Based on Bebchuk and Cohen (2005) and Faleye (2007), one would expect a poorer
reporting quality in firms with classified boards. This is because managers who are not
working on behalf of their shareholders would wish to obscure firm performance by promoting opacity in financial reporting. Interestingly, however, Zhao and Chen (2008) show
that classified boards are associated with lower likelihoods of committing fraud and smaller
magnitudes of abnormal accruals. Thus, it appears that classified boards are associated with
higher reporting quality. This counterintuitive result is explained by Zhao and Chen as follows: Classified boards enable managers to enjoy the quiet life which in turn means that
they are less motivated to increase firm value or to manipulate earnings. The quiet life
argument would suggest that in firms with classified boards, the firm allocates more
resources to monitoring to ensure that reporting lapses do not disturb the quiet life.

Statement of Hypotheses
Our study focuses on how board features, principally committee overlap and board classification, affect the monitoring effort of the audit committee. Following Abbott et al. (2003),
we argue that this effort will be reflected in the audit fee.
Our first hypothesis, the committee overlap hypothesis, relates audit fees and committee
overlap and is stated as follows in the null form.
Hypothesis 1: There is no association between audit fees and committee overlap.
The alternative hypothesis, following Laux and Laux (2009), is that there is a negative
relation between audit fees and committee overlap.
Our second hypothesis, the board classification hypothesis, deals with audit fees and
board classification and is once again stated in the null form.
Hypothesis 2: There is no association between audit fees and board classification.
The alternative hypothesis could potentially specify a negative or positive relation.
According to Bebchuk and Cohen (2005) and Faleye (2007), board classification constitutes
a weakness in corporate governance. This suggests a lower monitoring effort by the audit
committee for firms with classified boards or a negative relation between audit fees and
board classification. Alternatively, according to the quiet-life conjecture of Zhao and Chen
(2008), managers of firms with classified boards wish to ensure a quiet life by expending
more resources in monitoring. This suggests the opposite: a positive relation between audit
fees and classification. The relation between audit fees and board classification could be
positive or negative depending on which argument prevails. As the context of our study is
allocation toward monitoring of financial reporting, we place a greater weight on the latter
explanation and hypothesize a positive relation between audit fees and board classification.

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Karim et al.

Table 1. Sample Selection and Descriptive Statistics.

Panel A: Sample Selection.
Number of observations
Firm-years with potential data availability in the Compustat
database during 2000-2011
Less
Observations from finance industries (SIC code: 6000-6999)
Observations with missing identifiers (CUSIP and FYEAR)
Potential Compustat sample
Less
Missing data for control variables from Compustat
Missing data from AuditAnalytics (audit fees)
Missing data from RiskMetrics (committee overlap)
Final sample used in the baseline regression analysis for
committee overlap

132,898

(36,577)
(15)
96,306
(45,536)
(425)
(38,923)
11,422

Panel B: Descriptive Statistics.

Overall
Variable
LNAUDIT
OVLAP
CLASS
ACEXPERT
ACATTEND
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP

Median

SD

11,422
11,422
9,803
11,422
11,422
11,422
11,422
11,422
11,422
11,422
11,422
11,422
11,422
11,422
11,422
7,277

14.0223
0.3935
0.5833
0.1956
0.0118
0.9549
2.4593
0.0987
0.1058
0.2086
0.1717
0.1349
0.0429
0.8137
7.4252
7.1876

14.0079
0.3333
1
0
0
1
1.9460
0.0758
0.0778
0.2007
0
0.1192
0.0515
1.0986
7.2696
7.5140

1.1884
0.3205
0.4930
0.3053
0.0602
0.2075
1.8323
0.2331
0.1095
0.1780
0.3771
0.0928
0.1021
0.6999
1.4691
2.2281

Note. SIC = Standard Industry Classification; CUSIP = Committee on Uniform Securities Identification Procedures.

Research Methodology
Our sampling procedure is explained in Table 1, Panel A. The information in this panel is
geared toward explaining the sample of 11,422 observations used in the baseline regression
for committee overlap (Table 4, Model (1)). To start with, we obtain 132,898 potential
observations (firm-years) from Compustat for the 2000-2011 period. From this set, we
delete 36,577 observations from financial firms Standard Industry Classification (SIC codes
6000-6999) and 15 observations with missing firm identifier Committee on Uniform
Securities Identification Procedures (CUSIP) or fiscal year end. Thus, the Compustat database potentially provides 96,306 observations. Most of our controls (see Equation 1; also

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Journal of Accounting, Auditing & Finance

see the appendix for variable definitions and sources) are obtained from Compustat; we
lose 45,536 observations in this step. Next, we obtain auditor name (to determine whether
the auditor is big, a control variable) and audit fees (dependent variable) from
AuditAnalytics; we lose 425 observations in this step. Finally, we obtain committee overlap
and audit committee information from RiskMetrics; we lose 38,923 observations in this
step. This leaves us with 11,422 observations for the baseline regression for committee
overlap. A smaller set of observations is used for the analogous baseline regression for
board classification because of a larger missing set of observations from RiskMetrics for
the classification variable. We winsorize the top and bottom 1% of all independent variables to control for potential outliers.
Other regressions we present have fewer observations because of additional data requirements. For example, some of our models use equity compensation obtained from the
ExecuComp database. Also, in robustness tests we run a model with controls for SOX
Section 404-related internal control weakness, the data for which are only available since
2004.
We estimate the following model to examine the effect of committee overlap or board
classification on audit fees:
LNAUDIT = a + b OVLAP or CLASS + d CONTROLS + e,

where the dependent, test, and control variables are as follows:

(Dependent)
LNAUDIT = log of total audit fees;
(Test)
OVLAP = number of directors serving in both the audit and compensation committees
divided by the number of directors serving on the audit committee;
CLASS = 1 if a firm has classified board, and 0 if a firm has unitary board;
(Control)
ACATTEND = percent of audit committee members attending less than 75% of committee meetings;
ACEXPERT = percent of audit committee composed of financial experts;
BIG = 1 if the financial statement is audited by a Big 4 audit firm,2 and 0 otherwise;
CR = current assets divided by current liabilities;
EQUITYCOMP = log of CEOs (total compensation 2 cash compensation), where cash
compensation = salary + bonus;
GROW = (Sales at time t 2 Sales at time t 2 1) / Sales at time t 2 1;
INV = total inventories divided by total assets;
LEV = sum of debt in current liabilities and long-term debt scaled by total assets;
LOSS = 1 if Income before Extraordinary Items \ 0, and 0 otherwise;
REC = total receivables divided by total assets;
ROA = income before extraordinary items scaled by average total assets;
SEG = log of number of segments;
SIZE = log of total assets.
We also insert dummies for years and industries to control for year- and industry-fixed
effects.
We follow prominent works such as Simunic (1984); Francis and Simon (1987);
Whisenant, Sankaraguruswamy, and Raghunandan (2003); Larcker and Richardson (2004);

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Karim et al.

Francis, Reichelt, and Wang (2005); and Elder, Zhang, Zhou, and Zhou (2009) to determine our list of control variables. These controls account for various risks faced by the
audit firm as well as the effort level in the engagement (Johnstone, 2000). To control for
client-business risk, the risk that the clients business will deteriorate, we include leverage
(LEV), return on assets (ROA), and loss (LOSS). We also control for firm size (SIZE),
firms sales growth (GROW), and firm complexity using number of business segments
(SEG). Because prior studies find higher audit fees for the perceived higher quality of services from former Big 8 firms (Francis, 1984; Francis & Stokes, 1986; Palmrose, 1986),
we include the dichotomous variable, BIG. We include receivables (REC), inventory (INV),
and current ratio (CR). In addition, consistent with Abbott et al. (2003), we control for
audit committee characteristics: the level of financial expertise (ACEXPERT) and attendance of members in meetings (ACATTEND).3 Finally, we run models with and without
EQUITYCOMP as control to examine the Laux and Laux (2009) argument that board characteristics affect monitoring through incentive compensation.
We estimate Equation 1 using panel data as described above. The test variables are
OVLAP and CLASS. The parameter b indicates the sensitivity between audit fees and our
two test variables.
We present an initial set of results using only Equation 1, but most tables displaying
results incorporate controls for endogeneity by incorporating a selection model (Heckman,
1979).4 We use the treatment effects approach, which entails simultaneous estimation of
Equation 1 along with a selection model for committee overlap (or board classification)
using full information maximum likelihood (Maddala, 1983).
The selection model uses the following independent variables:
AGE = log of number of years listed on Center for Research in Security Prices (CRSP)
from 1925;
BM = total equity / (common shares outstanding 3 fiscal close price);
BSIZE = log of total number of directors on board;
CEODUAL = 1 if CEO is chair, 0 otherwise;
DE = (debt in current liabilities + long-term debt) / total equity;
FCF = (cash flows from operations 2 dividends) / total assets;
LNMV = log of common shares outstanding 3 fiscal close price;
POUT = total number of outside directors / total number of directors;
REG = 1 if two-digit SIC code equals 49; 0 otherwise.5
We identify the set of variables listed above from the prior literature (e.g., Ahmed &
Duellman, 2007; Brandes, Dharwadkar, & Suh, 2014; Chandar et al., 2012; Chang et al.,
2011; Krishnan, 2005). Committee overlap is influenced by the characteristics of the board
and firm. Prior studies use board size (BSIZE), CEO duality (CEODUALITY), and ratio of
outside (inside) directors (POUTSIDE) as the characteristics of the board. The studies also
use the characteristics of firms such as firm age, firm size and growth, and firm risk; log of
firm age (AGE), book-to-market ratio (BM), free cash flows (FCF), log of market value
(LNMV), debt-to-equity ratio (DE), and regulation (REG).6

Results
Table 1, Panel B, provides the descriptive statistics for the variables described above. The
average firm size as measured by log of total assets in thousands (SIZE) is 7.43.7 Our
dependent variable in the analysis, LNAUDIT, the log of total audit fees, has a mean of

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10

Journal of Accounting, Auditing & Finance

14.02.8 As would be expected in a sample of this type (containing some very large firms),
both SIZE and LNAUDIT have lower medians than means. Turning to our test variable,
OVLAP, the proportion of common directors on audit and compensation committees as a
fraction of audit committee members, has an average of 0.39, indicating substantial committee overlap in sample firms; however, we also note a high degree of variability in
OVLAP because its standard deviation is 0.32. Our other test variable, CLASS, whether the
firm has a classified board, has an average of 0.58, indicating the high prevalence of classified boards.
The average values of some of the control variables are as follows: growth in sales
(GROW) is about 10%; return on assets (ROA) is about 4%; firms audited by Big N auditors (BIG) is about 95%; firms with losses (LOSS) is about 17%; receivables as a proportion of total assets (REC) is about 13%; inventory as a proportion of total assets (INV) is
about 11%; the current ratio (CR) is about 2.5; about 20% of the audit committee is comprised of financial experts (ACEXPERT).
Table 2 presents univariate tests of differences in values between treatment firms and
control firms. Specifically, we test whether values differ between firms with overlapping
directors (OVLAPDUMMY = 1) and firms without any overlapping directors
(OVLAPDUMMY = 0), and between firms with classified boards (CLASS = 1) and firms
without classified boards (CLASS = 0). We note that audit fees (LNAUDIT) are significantly lower in firms with overlapping directors and in firms with classified boards; the
result concerning committee overlap is consistent with expectations while that concerning
board classification is not. In both cases, the difference in fees is quite high: Converting to
dollar values, we note that the difference in fees (implied from the displayed log of fees)
between firms with and without overlapping directors is about US$400,000; the analogous
difference attributable to classified boards is about US$200,000. However, we note that the
values of variables that affect audit fees (the control variables) are also different between
treatment and control firms, indicating the necessity of models with controls (as in Table
4). For example, firms with overlapping committees and classified boards are significantly
smaller than firms without overlapping committees and without classified boards, respectively. Also, compared with firms without overlapping committees, firms with overlapping
committees have lower leverage, fewer segments, are less likely to be audited by a Big N
auditor, and have fewer financial experts. Finally, compared with firms without classified
boards, firms with classified boards have higher leverage, more segments, are more likely
to be audited by a Big N auditor, and have fewer financial experts.
Table 3 presents the correlation matrix. The following are findings from Panel A, which
contains Pearsons correlations. LNAUDIT is significantly negatively correlated with
OVLAP (correlation = 2.22) as well as with CLASS (correlation = 2.07). The former is
consistent with our hypothesis, but the latter is not. The correlation between OVLAP and
CLASS (our two test variables) is 2.05, which is significant but not very high. We also
note that, consistent with the prior literature, LNAUDIT is correlated with several firm measures of audit risk, including LEV, SIZE, and SEG. The highest correlation is between
LNAUDIT and SIZE (.72), perhaps indicating that SIZE is the most important determinant
of audit fees. More generally, reviewing all correlations and not just those involving
LNAUDIT, we note another high value, between ROA and LOSS (2.70), but there are no
other correlations exceeding .50. High values among remaining correlations are as follows:
LNAUDIT and SEG (.34), LNAUDIT and CR (2.29), OVLAP and SIZE (2.23), ROA and
GROW (.20), LNAUDIT and ACEXPERT (.20), and LOSS and GROW (2.19). Turning to

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Karim et al.

11

Table 2. Univariate Tests.

Panel A: Committee Overlap.

OVLAPDUMMY = 1
Variable

LNAUDIT
CLASS
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP

8,330
7,110
8,330
8,330
8,330
8,330
8,330
8,330
8,330
8,330
8,330
8,330
8,330
8,330
5,306

OVLAPDUMMY = 0

Test of difference
in M

Test of difference
in median

Median

Median

13.9334
0.5793
0.0114
0.1896
0.9467
2.5176
0.0989
0.1064
0.2032
0.1761
0.1359
0.041
0.7987
7.3059
7.112

13.9172
1
0
0
1
1.9786
0.0771
0.0768
0.1939
0
0.1194
0.0507
1.0986
7.1506
7.422

3,092
2,693
3,092
3,092
3,092
3,092
3,092
3,092
3,092
3,092
3,092
3,092
3,092
3,092
1,971

14.2616
0.5938
0.0128
0.2118
0.977
2.3023
0.0981
0.1044
0.2232
0.1598
0.1322
0.0479
0.8541
7.7467
7.3911

14.2714
1
0
0
1
1.8623
0.0727
0.0814
0.2213
0
0.1184
0.0534
1.0986
7.5887
7.7619

213.21***
21.29
21.08
23.31***
28.31***
5.91***
0.15
0.89
25.50***
2.10**
1.94*
23.41***
23.76***
214.38***
24.34***

213.23***
21.29
20.13
21.29
26.94***
4.90***
1.26
21.11
26.44***
2.06**
0.73
22.44**
23.63***
214.14***
29.14***

Test of difference
in M

Test of difference
in median

Panel B: Board Classification.

CLASS = 1
Variable
LNAUDIT
OVLAP
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP

CLASS = 0

Median

Median

5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
5,718
3,672

14.0211
0.3699
0.0111
0.1825
0.9643
2.3217
0.0927
0.11
0.2137
0.1523
0.1376
0.0459
0.8726
7.4032
7.1146

14.0237
0.3333
0
0
1
1.8656
0.077
0.0879
0.2117
0
0.1259
0.052
1.0986
7.2759
7.4586

4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
4,085
2,774

14.1975
0.404
0.0102
0.2446
0.9483
2.5138
0.0949
0.1019
0.2017
0.1684
0.1342
0.0481
0.7819
7.5926
7.3937

14.1633
0.3333
0
0
1
2.0022
0.0754
0.0697
0.1878
0
0.1145
0.0548
1.0986
7.4121
7.6997

27.22***
25.21***
0.73
29.57***
3.76***
25.28***
20.47
3.62***
3.35***
22.13**
1.76*
21.08
6.35***
26.09***
25.16***

25.86***
24.62***
0.91
29.28***
3.87***
24.77***
0.78
5.25***
4.38***
22.15**
4.01***
22.82***
6.1***
24.05***
27.12***

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

Panel B, containing Spearmans correlations, we find similar results, so we do not repeat

our findings.
Table 4 presents our baseline results by estimating Equation 1 without controls for endogeneity. The various models in this table relate LNAUDIT to OVLAP and to CLASS. Model
(1) assesses the effect of OVLAP separately, Model (2) assesses the effect of CLASS

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12

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1. LNAUDIT
2. OVLAP
3. CLASS
4. ACATTEND

Panel B: Spearman.

1. LNAUDIT
2. OVLAP
3. CLASS
4. ACATTEND
5. ACEXPERT
6. BIG
7. CR
8. GROW
9. INV
10. LEV
11. LOSS
12. REC
13. ROA
14. SEG
15. SIZE
16. EQUITYCOMP

Panel A: Pearson.

10

11

12

13

14

2.047
2.006

.009

10

11

12

13

2.222 2.074 2.054

.196
.106 2.288 2.029 2.046
.144 2.095
.050
.072
.340
2.053 2.010 2.064 2.122
.120
.025
.002 2.089
.024
.030 2.017 2.103
.007 2.098
.039 2.054 2.005
.037
.034 2.022
.018 2.011
.064
2.063
.018
.004 2.006 2.013
.015
.026
.011 2.026
.003
2.033
.001 2.067
.002 2.006 2.028 2.026
.028
.009
2.147
.006 2.056
.126
.003 2.040 2.025
.056
.025
.052 2.339
.088 2.044
.017 2.220
2.054 2.020 2.189
.012
.199 2.061
2.103 2.058
.116
.081 2.032
.093 2.169 2.189
.150
2.056 2.697 2.059
.084
.128
.001

2.220
2.059
2.044

Table 3. Correlations.

14

15

16

.332
2.105
2.063
2.040
.163
.117
2.116
.039
2.068
.088
2.045
2.090
.041
.050
.350

16

(continued)

.715
2.231
2.063
2.001
.089
.193
2.386
.015
2.106
.313
2.150
2.189
.097
.308

15

13

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.187
.112
2.263
2.011
.018
.194
2.097
.070
.014
.349
.707
.496

2.094
.039
2.048
.008
.053
.044
2.022
.041
2.028
.062
2.041
2.089

2.043
2.115
.111
.031
2.023
2.104
.026
.008
.002
2.096
2.227
2.162

2.070
.021
2.014
2.015
2.011
.024
.022
.009
2.032
.019
.019
2.030

5
2.055
.034
2.086
2.004
2.024
2.028
2.040
.030
.002
.075
.217

Note. Boldface font indicates significance at levels of 5% or better.

5. ACEXPERT
6. BIG
7. CR
8. GROW
9. INV
10. LEV
11. LOSS
12. REC
13. ROA
14. SEG
15. SIZE
16. EQUITYCOMP

Panel B: Spearman.

Table 3. (continued)

2.136
.001
2.066
.141
.003
2.051
2.032
.059
.202
.159

.045
.239
2.444
.063
.140
.118
2.189
2.439
2.140

2.052
2.077
2.250
.037
.342
2.070
.012
.077

2.053
2.061
.211
.091
.050
2.067
2.094

.060
2.155
2.291
.196
.397
.097

10

2.063
2.653
2.061
2.150
2.089

11

.116
.165
2.198
2.115

12

2.074
.012
.123

13

.316
.089

14

.529

15

16

14

Journal of Accounting, Auditing & Finance

Table 4. Baseline Results Without Endogeneity Controls.

Dependent variable

Log (audit fees)

Log (audit fees)

Variables

(1)

(2)

(3)

(4)

(5)

(6)

Intercept

9.4566***
(150.78)
20.1914***
(28.27)

9.3190***
(140.46)

9.4723***
(133.26)
20.1480***
(25.59)

9.4299***
(129.11)

20.9408***
(27.88)
0.4926***
(20.71)
20.1444***
(24.06)
20.0025
(20.55)
20.1020***
(23.21)
0.0660
(0.99)
20.5006***
(211.00)
0.1151***
(4.27)
2.1493***
(26.04)
20.0484
(20.48)
0.1725***
(15.53)
0.5871***
(97.85)

20.0454***
(22.86)
20.8589***
(26.33)
0.4852***
(19.31)
20.0735*
(21.86)
0.0076
(1.49)
20.0846**
(22.36)
20.0030
(20.04)
20.4874***
(29.70)
0.1443***
(4.89)
2.1102***
(23.90)
20.1013
(20.89)
0.1673***
(13.99)
0.5917***
(93.10)

9.4938***
(135.77)
20.1940***
(27.71)
20.0536***
(23.38)
20.8735***
(26.46)
0.4741***
(18.89)
20.0976**
(22.48)
0.0078
(1.55)
20.0776**
(22.17)
20.0191
(20.27)
20.4959***
(29.89)
0.1398***
(4.75)
2.1067***
(23.93)
20.1134
(21.00)
0.1655***
(13.87)
0.5831***
(90.63)

9.5683***
(124.02)
20.1537***
(25.46)
20.0487***
(22.76)
20.5922***
(23.55)
0.2977***
(11.41)
20.0221
(20.56)
0.0068
(1.22)
20.1066**
(22.56)
20.0611
(20.75)
20.4095***
(26.92)
0.1227***
(3.56)
2.1701***
(22.16)
20.4934***
(23.57)
0.1760***
(13.30)
0.5319***
(70.21)
0.0474***
(11.18)

Yes
Yes
.5847
11,422

2000-2011
Yes
Yes
.5780
9,803

Yes
Yes
.5805
9,803

OVLAP
CLASS
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP
Testing period
Industry-fixed effect
Year-fixed effect
R2
n

20.8244***
(25.45)
0.3387***
(13.61)
20.0488
(21.31)
0.0039
(0.74)
20.0683*
(21.73)
20.0071
(20.09)
20.4626***
(28.35)
0.1364***
(4.16)
2.1667***
(23.08)
20.4113***
(23.12)
0.1778***
(14.11)
0.5477***
(75.94)
0.0397***
(9.98)
Yes
Yes
.6105
7,277

20.0417**
(22.36)
20.5765***
(23.45)
0.3076***
(11.79)
20.0048
(20.12)
0.0066
(1.17)
20.1125***
(22.70)
20.0410
(20.50)
20.4083***
(26.89)
0.1242***
(3.60)
2.1655***
(22.07)
20.5014***
(23.62)
0.1763***
(13.30)
0.5387***
(71.92)
0.0480***
(11.31)
2000-2011
Yes
Yes
.6106
6,446

Yes
Yes
.6124
6,446

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

separately, and Model (3) assesses the combined effects of these two variables. Models (4)
to (6) are analogous models using EQUITYCOMP as an additional control. In Model (1),
the coefficient of OVLAP is equal to 20.19 and is statistically significant with a t statistic
of 28.27 (significant at the 1% level). The regression R2 is about 58% (most studies report
a value exceeding 50%). The controls also behave as expected. Among these, the main
ones appear to be SIZE (t = 97.85), SEG (t = 15.53), and REC (t = 26.04). The result that
LNAUDIT and OVLAP are negatively related is consistent with the complementary

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Karim et al.

15

argument that board overlap is associated with weak corporate governance and that in an
environment with weak governance, monitoring efforts by the audit committee are also
weak. This result is consistent with expectations.
We next examine the relation between LNAUDIT and CLASS. Model (2) in Table 4 presents this result. We find that the coefficient of CLASS is 20.05 with a t statistic of 22.86
(significant at the 1% level). Once again, as with the previous regression of LNAUDIT on
OVLAP, the R2 value is high (about 58%), and the controls behave as expected. This result
is consistent with a lower level of monitoring by firms with a classified board compared
with firms without a classified board. This result is not consistent with expectations.
We next include both OVLAP and CLASS together as test variables in Model (3) of
Table 4. We find that both variables maintain significance. In fact, the values of the coefficients of these variables are quite similar to those reported in previous models. Model (3)
shows that the coefficients of OVLAP and CLASS are 20.19 and 20.05, respectively, and
are significant at the 1% level. Thus, it appears that OVLAP and CLASS are not redundant
measures (the correlations between the two measures are also low) and have separate
effects on audit fees.
Models (4) to (6) reflect the argument in Laux and Laux (2009) that board structure
(specifically, committee overlap) affects monitoring through its effect on executive compensation. We therefore include EQUITYCOMP as an additional control to test whether
this variable relates to LNAUDIT and reduces the significance of the board structure variables. We find that the significance of OVLAP and CLASS is maintained. However, consistent with the Laux and Laux model, we find that EQUITYCOMP loads positively and the
coefficient of OVLAP is lower (20.15 in Model (4) vs. 20.19 in Model (1)). We note that
at least in our research setting, the relation between board structure and monitoring is not
fully explained by executive compensation.
In studies of this type, endogeneity is an important consideration. Specifically, both
audit fees and the governance mechanism in question (board overlap or board classification) may be jointly determined by unobservable factors in such a way that a spurious relation between the two results. For example, it is conceivable that an unspecified risk factor
that lowers monitoring (hence lowers audit fees) also leads firms to adopt boards with overlapping committees or with classification. Lennox, Francis, and Wang (2012) indicate that
the Heckman (1979) two-step procedure might help alleviate such a concern but also note
challenges in properly using the method. Tucker (2010) as well as Guo and Fraser (2010)
make the case that a one-step maximum likelihood estimation of the selection and test
models produces more efficient estimators compared with the two-step procedure (the procedure involving the Inverse Mills Ratio); accordingly, we use this treatment effects
approach in subsequent tests.
Table 5 presents results from the treatment effects model for committee overlap. Panel
A presents the selection model for committee overlap (OVLAPDUMMY). Results show that
firms are more likely to have an overlapping board if board size is small, the CEO is not
the chair, the percent of outside directors is low, firm age is high, free cash flows are low,
and the firm is regulated. Table 5, Panel B, presents estimates of the test model. The coefficient of OVLAP is significantly negative in all specifications. In Model (1), the coefficient
equals 20.07 with a t statistic of 22.45 (significant at the 5% level). In Model (2), we add
EQUITYCOMP as an additional control and find a similar result. Following recommendations in Lennox et al. (2012), we conduct sensitivity tests by varying the set of controls in
the test model. These tests are represented by Models (3) to (6) in which either ROA or
LOSS is removed as an independent variable. We note that the results are fairly stable.

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16

Journal of Accounting, Auditing & Finance

Table 5. Audit Fees and Committee Overlap: With Endogeneity Controls.

Panel A: Selection Equation.

Dependent variable

(1)a

(2)b

OVLAPDUMMY

OVLAPDUMMY

4.3591***
(28.82)
21.3208***
(218.77)
20.1085***
(23.49)
21.6154***
(215.98)
0.1926***
(9.22)
20.0262
(21.49)
20.0019
(21.12)
20.5570***
(23.24)
20.0186*
(21.71)
0.3501***
(5.96)

4.3753***
(21.68)
21.3172***
(214.58)
20.0439
(21.17)
21.5757***
(211.80)
0.2126***
(7.91)
20.0525
(21.05)
20.0034
(21.55)
20.5848**
(22.39)
20.0330**
(22.24)
0.3474***
(4.66)

Variables
Intercept
BSIZE
CEODUAL
POUT
AGE
BM
DE
FCF
LNMV
REG
a

Without control for equity compensation in the test model

With control for equity compensation in the test model

(continued)

Overall, we find that overlapping committees are associated with reduced monitoring as
reflected in audit fees.
Table 6 presents analogous results for board classification. In the selection model presented in Panel A, CLASS is regressed on a set of explanatory variables identical to the one
used to explain OVLAPDUMMY in the previous table. We find that firms are more likely
to have a classified board if they have large boards, CEOs who also serve as chair, low
age, low book-to-market ratio, and low log of market value. In the Test Model (1) presented in Panel B, we find that the coefficient of CLASS is .27 with a t statistic of 3.70 (significant at the 1% level). This result is surprising because it is the opposite of the one
indicated when we do not use endogeneity controls. This result is preserved in all six
models and is robust with respect to the inclusion of EQUITYCOMP as control and to the
exclusion of ROA and LOSS as controls. These results justify the use of endogeneity controls and indicate that consistent with the quiet-life conjecture of Zhao and Chen (2008),
managers of firms with classified boards wish to ensure a quiet life by expending more
resources in monitoring through the external audit.
Thus far, we presented robust results that the two governance mechanisms, overlapping
committees and classified boards, are significantly related to audit committee monitoring as

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Karim et al.

17

Table 5. (continued)
Panel B: Test Models.

Dependent variable

(1)

(2)

(3)

(4)

(5)

(6)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

9.8710***
(67.26)
20.0714**
(22.45)
20.1259
(21.29)
0.0207
(0.66)
0.0775**
(2.56)
20.0422***
(210.10)
20.2254***
(27.92)
0.3610***
(4.15)
20.0131
(20.33)
0.0943***
(4.27)
1.4700***
(17.98)
20.5428***
(26.22)
0.1299***
(13.49)
0.5702***
(102.27)

10.3184***
(42.70)
20.0836**
(22.42)
20.0731
(20.58)
0.0066
(0.20)
0.0782**
(2.33)
20.0345***
(26.80)
20.1819***
(25.09)
0.3701***
(3.45)
20.0376
(20.74)
0.0897***
(3.25)
1.5737***
(16.11)
20.6495***
(25.60)
0.1336***
(11.67)
0.5598***
(79.01)
0.0040
(1.21)
2000-2011
Yes
Yes
20,111.07
6,434

9.8401***
(67.00)
20.0756***
(22.59)
20.1193
(21.22)
0.0224
(0.71)
0.0793***
(2.61)
20.0445***
(210.69)
20.2457***
(28.68)
0.3482***
(4.00)
0.0198
(0.50)
0.1832***
(10.82)
1.4310***
(17.53)

10.2729***
(42.44)
20.0927***
(22.68)
20.0480
(20.38)
0.0081
(0.25)
0.0810**
(2.41)
20.0368***
(27.28)
20.2109***
(25.95)
0.3699***
(3.44)
0.0063
(0.13)
0.1874***
(8.66)
1.5441***
(15.80)

9.9065***
(67.54)
20.0714**
(22.45)
20.1257
(21.28)
0.0190
(0.61)
0.0779**
(2.57)
20.0412***
(29.87)
20.2349***
(28.28)
0.3533***
(4.06)
20.0078
(20.19)

10.3474***
(42.82)
20.0818**
(22.36)
20.0797
(20.63)
0.0056
(0.17)
0.0797**
(2.38)
20.0335***
(26.63)
20.1905***
(25.34)
0.3662***
(3.41)
20.0362
(20.71)

0.1321***
(13.70)
0.5672***
(102.11)

0.1375***
(12.00)
0.5570***
(78.85)
0.0038
(1.15)
2000-2011
Yes
Yes
20,110.46
6,434

1.4650***
(17.90)
20.7823***
(211.69)
0.1284***
(13.33)
0.5693***
(102.07)

1.5651***
(16.01)
20.8836***
(29.73)
0.1323***
(11.55)
0.5585***
(78.88)
0.0041
(1.24)
2000-2011
Yes
Yes
20,060.08
6,434

Variables
Intercept
OVLAP
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP
Testing period
Industry-fixed effect
Year-fixed effect
Wald x2
n

2000-2011
Yes
Yes
31,732.44
10,021

2000-2011
Yes
Yes
31,703.54
10,021

2000-2011
Yes
Yes
31,644.68
10,021

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

reflected in audit fees. But the role of the audit committee may have changed over time,
thereby influencing these relationships. Significantly, we note that the SOX of 2002
increased the role of the audit committee significantly (Hoi et al., 2007). Accordingly, we
separate the sample into two subperiods: the pre-SOX period (2000-2002) and the postSOX period (2003-2011).

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18

Journal of Accounting, Auditing & Finance

Table 6. Audit Fees and Board Classification: With Endogeneity Controls.

Panel A: Selection Equation.

Dependent variable

(1)a

(2)b

CLASS

CLASS

20.4803***
(23.56)
1.0444***
(15.63)
0.1820***
(6.10)
20.0291
(20.30)
20.1299***
(26.12)
20.1394***
(24.54)
0.0007
(0.59)
0.2004
(1.27)
20.1596***
(214.02)
0.0152
(0.28)

0.0641
(0.36)
0.9711***
(11.56)
0.1774***
(4.90)
20.0965
(20.76)
20.1151***
(24.31)
20.2937***
(25.88)
0.0012
(0.52)
0.0469
(0.21)
20.1997
(213.41)
0.1208
(0.08)

Variables
Intercept
BSIZE
CEODUAL
POUT
AGE
BM
DE
FCF
LNMV
REG
a

Without control for equity compensation in the test model

With control for equity compensation in the test model

(continued)

Table 7 presents our subperiod results. We use controls for endogeneity as in the previous two tables but for space considerations present the test model only. Panel A presents
results concerning committee overlap. Models (1) and (2) present the results for the two
subperiods using the baseline specification without controlling for equity compensation. In
these models, we find that the coefficient of OVLAP is significantly negative in both subperiods. During the pre-SOX period, the coefficient is 20.13 (t = 22.04), and during the
post-SOX period, it is 20.05 (t = 21.61). Models (3) and (4) control for equity compensation. Again, in both models, the coefficients of OVLAP are significant, both at the 10%
level. Overall, the use of subperiods appears to weaken the significance of OVLAP, and
there is a suggestion that SOX may have weakened the relationship somewhat. We confirm
that this is indeed the case: In an untabulated test, we run a combined-sample model and
use a dummy variable for SOX; we find that the interaction of SOX and OVLAP is significantly positive. This is consistent with the interpretation that SOX, by structurally making
the audit committee more responsible and creating monitoring incentives through this (and
possibly other mechanisms such as top official certification of financial statements), makes
it less likely that the firm will call for less monitoring when there is committee overlap.
Table 7, Panel B, presents analogous results concerning classified boards. We find that
the coefficient of CLASS is significantly positive in one of two models in the pre-SOX

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Karim et al.

19

Table 6. (continued)
Panel B: Test Models.

Dependent variable

(1)

(2)

(3)

(4)

(5)

(6)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

Log
(audit fees)

9.3458
(63.60)
0.2712***
(3.70)
20.0317
(20.30)
0.0235
(0.72)
0.0953***
(2.91)
20.0422***
(29.38)
20.2470***
(28.23)
0.4342***
(4.75)
20.0189
(20.43)
0.0896***
(3.82)
1.4342***
(16.79)
20.4974***
(25.34)
0.1272***
(12.47)
0.5905***
(100.30)

9.5948***
(39.13)
0.3581***
(3.85)
0.0979
(0.72)
0.0028
(0.08)
0.0972***
(2.81)
20.0347***
(26.56)
20.1976***
(25.35)
0.4176***
(3.76)
20.0538
(20.99)
0.0942***
(3.28)
1.5382***
(15.32)
20.6335***
(25.21)
0.1305***
(10.92)
0.5887***
(72.00)
0.0080**
(2.29)
2000-2011
Yes
Yes
17,860.14
5,803

9.3185***
(63.29)
0.2929***
(3.98)
20.0233
(20.22)
0.0260
(0.80)
0.0958***
(2.93)
20.0439***
(29.75)
20.2641***
(28.84)
0.4247***
(4.64)
0.0091
(0.21)
0.1711***
(9.49)
1.3987***
(16.40)

9.5272***
(38.72)
0.4026***
(4.29)
0.1244
(0.91)
0.0049
(0.15)
0.0986***
(2.85)
20.0368***
(26.96)
20.2239***
(26.10)
0.4209***
(3.78)
20.0179
(20.33)
0.1889***
(8.34)
1.5075***
(15.00)

9.3822***
(63.94)
0.2676***
(3.65)
20.0334
(20.31)
0.0213
(0.65)
0.0965***
(2.95)
20.0415***
(29.22)
20.2565***
(28.57)
0.4260***
(4.65)
20.0147
(20.34)

9.6382***
(39.35)
0.3443***
(3.72)
0.0890
(0.65)
0.0013
(0.04)
0.0989***
(2.86)
20.0340***
(26.43)
20.2068***
(25.61)
0.4114***
(3.70)
20.0506
(20.93)

0.1289***
(12.62)
0.5880***
(99.72)

0.1336***
(11.17)
0.5878***
(71.14)
0.0076**
(2.15)
2000-2011
Yes
Yes
17,420.57
5,803

1.4289***
(16.72)
20.7252***
(210.15)
0.1261***
(12.36)
0.5895***
(100.19)

1.5278***
(15.21)
20.8793***
(29.21)
0.1294***
(10.83)
0.5866**
(72.08)
0.0083**
(2.36)
2000-2011
Yes
Yes
17,913.58
5,803

Variables
Intercept
CLASS
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP
Testing period
Industry-fixed effect
Year-fixed effect
Wald x2
n

2000-2011
Yes
Yes
27,979.52
8,932

2000-2011
Yes
Yes
27,688.73
8,932

2000-2011
Yes
Yes
27,936.29
8,932

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

period and in both models in the post-SOX period. The coefficients appear larger in the
post-SOX period. In untabulated tests, we run an aggregate model (combined sample)
using a dummy variable for SOX and find that the interaction of SOX and CLASS is positive. This is consistent with firms with classified boards investing more in monitoring in
the post-SOX era and is consistent with SOX increasing the demand for monitoring by the
audit committee.

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Table 7. SOX Analysis.

Panel A: Committee Overlap.

Variables
Intercept
OVLAP
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE

(1)
Pre-SOX
(2000-2002)

(2)
Post-SOX
(2003-2011)

(3)
Pre-SOX
(2000-2002)

(4)
Post-SOX
(2003-2011)

8.1281***
(26.55)
20.1333**
(22.04)
20.1215
(20.79)
20.2806**
(2.50)
0.1163
(1.18)
20.0631***
(27.17)
20.3434***
(26.27)
0.2243
(1.11)
0.0461
(0.56)
0.1430***
(3.17)
1.8036***
(9.56)
20.4897***
(22.97)
0.1087***
(4.79)
0.6289***
(51.98)

10.0132***
(52.27)
20.0516*
(21.61)
20.1519
(21.12)
0.0419
(1.34)
0.0987***
(3.22)
20.0334***
(27.15)
20.1809***
(25.40)
0.4073***
(4.31)
20.0552
(21.20)
0.0658***
(2.61)
1.4244***
(15.99)
20.6940***
(26.66)
0.1347***
(13.03)
0.5535***
(88.46)

8.3167
(20.64)
20.2096*
(21.86)
0.1598
(0.63)
20.3194*
(21.71)
0.0228
(0.15)
20.0442***
(22.98)
20.3467***
(23.48)
0.5003
(1.33)
0.2209
(1.45)
0.2162***
(2.74)
2.1867***
(6.79)
0.0893
(0.28)
0.1130***
(2.89)
0.6404***
(29.35)
0.0013
(0.16)

9.8026***
(44.75)
20.0606*
(21.70)
20.1851
(21.22)
0.0283
(0.89)
0.0953***
(2.86)
20.0322***
(26.05)
20.1461***
(23.85)
0.3706***
(3.37)
20.1098**
(22.08)
0.0587**
(2.01)
1.4881***
(14.71)
20.8748***
(27.09)
0.1339***
(11.46)
0.5513***
(75.03)
0.0051
(1.41)

Yes
Yes
5,051.49
2,508

Yes
Yes
20,913.12
7,513

Yes
Yes
1,809.13
900

Yes
Yes
16,071.89
5,534

(1)
Pre-SOX
(2000-2002)

(2)
Post-SOX
(2003-2011)

(3)
Pre-SOX
(2000-2002)

(4)
Post-SOX
(2003-2011)

8.1770***
(27.27)
0.1103
(0.63)

8.9263***
(46.67)
0.1623**
(2.16)

7.4077***
(18.54)
0.5588*
(1.78)

9.2456***
(41.08)
0.2196**
(2.35)

EQUITYCOMP

Industry-fixed effect
Year-fixed effect
Wald x2
n
Panel B: Board Classification.

Variables
Intercept
CLASS

(continued)

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Karim et al.

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Table 7. (continued)
Panel B: Board Classification.

Variables
ACATTEND
ACEXPERT
BIG
CR
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE

(1)
Pre-SOX
(2000-2002)

(2)
Post-SOX
(2003-2011)

(3)
Pre-SOX
(2000-2002)

(4)
Post-SOX
(2003-2011)

20.0295
(20.17)
20.1732
(21.44)
0.0681
(0.56)
20.0569***
(25.57)
20.3587***
(26.03)
0.3908*
(1.76)
0.1088
(1.16)
0.1298***
(2.58)
1.7674***
(8.53)
20.4118**
(22.21)
0.1013
(4.06)
0.6384***
(50.65)

20.0473
(20.32)
0.0448
(1.39)
0.1302***
(4.03)
20.0374***
(27.61)
20.2074***
(25.93)
0.4638***
(4.73)
20.0744
(21.53)
0.0619**
(2.35)
1.4180***
(15.43)
20.6835***
(26.35)
0.1336***
(12.35)
0.5743***
(88.03)

0.4547*
(1.63)
20.3385*
(21.76)
20.0996
(20.61)
20.0343*
(22.05)
20.3712***
(23.52)
0.6324*
(1.60)
0.4792***
(2.83)
0.2177***
(2.58)
2.3526***
(6.78)
0.1918
(0.54)
0.1076***
(2.53)
0.6560***
(26.58)
0.0063
(0.76)

20.0699
(20.43)
0.0287
(0.88)
0.1207***
(3.53)
20.0350***
(26.39)
20.1654***
(24.23)
0.4134***
(3.64)
20.1327**
(22.36)
0.0645**
(2.14)
1.4509***
(14.05)
20.8644***
(26.80)
0.1312***
(10.84)
0.5764***
(68.38)
0.0089**
(2.28)

Yes
Yes
4,449.63
2,132

Yes
Yes
19,757.74
6,800

Yes
Yes
1,498.65
760

Yes
Yes
15,388.44
5,043

EQUITYCOMP

Industry-fixed effect
Year-fixed effect
Wald x2
n

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

Table 8 presents a robustness check. We report the results of FamaMacBeth regressions: We run out the test model annually and present the significance of the average coefficients of OVLAP and CLASS (Fama & MacBeth, 1973). To be consistent with earlier
tests, we use the treatment effects approach to control for endogeneity. We present results
without (Models (1) and (2)) and with (Models (3) and (4)) control for equity compensation. Although most annual estimates of the coefficients of OVLAP and CLASS are insignificant, they are of the same sign as reported earlier. The mean coefficients are significant
and consistent with the results presented earlier. Thus, our results are robust to an alternate
method.
In Table 8, Panel B, we once again use the FamaMacBeth method but use internal control weakness (SOX Section 404) as an additional control (e.g., Raghunandan & Rama,

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Journal of Accounting, Auditing & Finance

Table 8. FamaMacBeth Regressions.

Panel A: Main Specification.
Without control for equity compensation

Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

With control for equity compensation

Committee overlap
(1)
Estimate

Board classification
(2)
Estimate

Committee overlap
(3)
Estimate

Board classification
(4)
Estimate

20.0433
(20.40)
20.0907
(21.09)
20.2237*
(21.65)
20.1231
(21.37)
20.0212
(20.19)
20.0817
(20.81)
20.0041
(20.04)
0.0249
(0.28)
20.0036
(20.04)
0.0141
(0.16)
20.0928
(21.14)
20.1299*
(21.65)

20.1581
(20.58)
0.1085
(0.48)
0.1771
(0.52)
0.4905**
(2.29)
0.4594*
(1.86)
0.2876
(1.39)
0.0784
(0.37)
0.1203
(0.66)
0.3706
(1.49)
20.0315
(20.14)
20.1138
(20.57)
0.1633
(0.89)

20.1192
(20.57)
20.1616
(21.18)
20.2172
(20.98)
20.2475**
(22.08)
20.0325
(20.23)
20.1024
(20.76)
20.1121
(20.96)
0.0358
(0.36)
0.0167
(0.16)
0.0240
(0.26)
20.0411
(20.49)
20.1438*
(21.80)

0.4695
(0.94)
0.5809
(1.50)
0.5414
(1.13)
0.7523**
(2.52)
0.3339
(1.38)
0.0249
(0.09)
0.4423
(1.48)
0.0877
(0.37)
0.5020*
(1.72)
20.0456
(20.19)
0.0298
(0.15)
0.2602
(1.34)

20.0646***
(23.06)

0.1627***
(2.69)

20.0917***
(23.40)

0.2946***
(3.78)

Panel B: Controlling for Internal Control Weakness.

Without control for equity compensation

Year

With control for equity compensation

Committee overlap
(1)
Estimate

Board classification
(2)
Estimate

Committee overlap
(3)
Estimate

Board classification
(4)
Estimate

20.0263
(20.24)

0.4058*
(1.69)

20.0136
(20.10)

0.2919
(1.25)

2000
2001
2002
2003
2004

(continued)

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Karim et al.

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Table 8. (continued)
Panel B: Controlling for Internal Control Weakness.
Without control for equity compensation

Year
2005
2006
2007
2008
2009
2010
2011

With control for equity compensation

Committee overlap
(1)
Estimate

Board classification
(2)
Estimate

Committee overlap
(3)
Estimate

Board classification
(4)
Estimate

20.1062
(21.07)
20.0405
(20.41)
0.0212
(0.24)
20.0059
(20.06)
0.0152
(0.18)
20.0952
(21.17)
20.1283
(21.63)

0.2364
(1.17)
0.1209
(0.57)
0.1163
(0.64)
0.3519
(1.43)
20.0130
(20.06)
20.1090
(20.55)
0.1633
(0.89)

20.1102
(20.82)
20.1468
(21.27)
0.0298
(0.30)
0.0145
(0.14)
0.0225
(0.24)
20.0434
(20.52)
20.1428*
(21.79)

20.0296
(20.11)
0.5132*
(1.71)
0.0830
(0.35)
0.4838*
(1.67)
20.0254
(20.11)
0.0349
(0.18)
0.2605
(1.34)

20.0458**
(22.25)

0.1591***
(2.60)

20.0488*
(21.85)

0.2015***
(2.60)

***, **, and * indicate significance at the 1%, 5%, and 10% levels, respectively.

2006). This restricts our sample to the 2004-2011 period. In previous studies, there is a suggestion that internal control weaknesses reflect corporate governance weaknesses (e.g.,
Hoitash, Hoitash, & Bedard, 2009). But the same literature also finds that audit fees rise
with internal control weaknesses, perhaps because of the additional risk and effort for auditors. We find the same result. Turning to our test variables, we find that the mean coefficient of OVLAP is significantly negative and the mean coefficient of CLASS is significantly
positive. This result is invariant whether we control for equity compensation (Models (3)
and (4)) or not (Models (1) and (2)).

Summary and Conclusion

One perspective concerning audit fees is that they reflect the monitoring effort expended
by external auditors. It is therefore of interest to examine whether specific governance
mechanisms affect the level of monitoring and thereby audit fees. These relationships
would help us better understand the role of agency, incentives, and entrenchment in determining monitoring levels.
The focus of our study is on two recently researched governance mechanisms or indicators: committee overlap and board classification. Both mechanisms pertain to board structure and are reflective of incentives and entrenchment. Specifically, we argue that
committee overlap (the presence of common members in audit and compensation committees) is consistent with reduced incentives to monitor. Therefore, we hypothesize that committee overlap will decrease audit fees. Turning to the other board structure variable, we

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recognize that board classification (the use of staggered elections) is consistent with
increased entrenchment. But, consistent with a prior study indicating the desire for the
quiet life in firms with classified boards, we argue that in such firms there will be a
demand for monitoring, and the resources allocated to monitoring (audit fees) may be
thought of as the purchase of insurance against reporting problems. Therefore, we hypothesize that board classification would serve to increase audit fees.
We test our hypothesis using a sample from the period 2000-2011. We regress audit
fees on test variables (measuring committee overlap and board classification) and a number
of controls suggested by the literature on audit fees. When we control for endogeneity
using the treatment effects approach, we find that the coefficient of committee overlap is
significantly negative and the coefficient of board classification is significantly positive.
The result concerning committee overlap is consistent with this board structure feature signaling a weak governance environment. The result concerning board classification is consistent with the conjecture in Zhao and Chen (2008) that insiders in firms with classified
boards do not want to rock the boat.
We contribute to the audit fee literature that had earlier examined a variety of governance factors determining fees. In particular, our study relates to studies examining how
board structure (e.g., composition of board, composition of specific committees) affects
fees. We extend this literature by examining two newly researched board characteristics
affecting monitoring incentives (i.e., committee overlap) and entrenchment (i.e., board classification). Our results, especially those concerning committee overlap, are of interest to
regulators who have taken actions that may have inadvertently exacerbated the situation:
The rising demand for independent directors resulting from regulations may have indirectly

Appendix
Variable

Definition (data source)

Test model variables

LNAUDIT
OVLAP (Board overlap)

OVLAPDUMMY
CLASS (Board classification)

ACATTEND

ACEXPERT

BIG

CR

Log of total audit fees. (AuditAnalytics)

Total number of directors serving both the audit committee and
the compensation committee scaled by the total number of
directors serving the audit committee. (RiskMetrics)
Equals 1 if OVLAP . 0, 0 otherwise. (RiskMetrics)
Equals 1 if a firm has a classified board, and 0 if a firm has a
unitary board. Consistent with Bebchuk and Cohen (2005), we
assume that the governance provisions for any given year for
which data are not available are the same as those of the
preceding year. (RiskMetrics)
Total number of directors attending fewer than 75% of meetings
in audit committee scaled by the total number of directors in
audit committee. (RiskMetrics)
Total number of financial expert directors in the audit committee
scaled by the total number of directors in the same committee.
(RiskMetrics)
Equals 1 if auditor is PricewaterhouseCoopers, Ernst & Young,
Deloitte & Touche, KPMG, and Arthur Andersen, and 0
otherwise. (AuditAnalytics)
Current assets scaled by current liabilities. (Compustat)
(continued)

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Appendix (continued)
Variable
GROW
INV
LEV
LOSS
REC
ROA
SEG
SIZE
EQUITYCOMP
Selection model variables
AGE
BM
BSIZE
CEODUAL
DE
FCF
LNMV
POUT
REG

Definition (data source)

(Sales at time t 2 Sales at time t 2 1) / Sales at time t 2 1.
(Compustat)
Total inventories scaled by total assets. (Compustat)
(Debt in current liabilities + long-term debt) scaled by total
assets. (Compustat)
Equals 1 if income before extraordinary Items \ 0, and 0
otherwise. (Compustat)
Total receivables scaled by total assets. (Compustat)
Income before extraordinary items scaled by average of total
assets. (Compustat)
Log of number of segments. (Compustat)
Log of total assets. (Compustat)
Log of CEOs (total compensation 2 cash compensation), cash
compensation = salary + bonus. (ExecuComp)
Log of number of years listed on CRSP from 1925. (CRSP)
Total equity / (common shares outstanding 3 fiscal close price).
(Compustat)
Log of total number of directors on board. (RiskMetrics)
1 if CEO is chair, 0 otherwise. (RiskMetrics)
(Debt in current liabilities + long-term debt) / total equity.
(Compustat)
(Cash flows from operations 2 dividends) / total assets.
(Compustat)
Log of common shares outstanding 3 fiscal close price.
(Compustat)
Total number of outside directors / total number of directors.
(RiskMetrics)
1 if two-digit SIC code equals 49; 0 otherwise. (Compustat)

Note. CRSP = Center for Research in Security Prices; SIC = Standard Industry Classification.

led to individual directors used in multiple committees with governance consequences not
fully appreciated at the moment.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/
or publication of this article.

Funding
The author(s) received no financial support for the research, authorship, and/or publication of this
article.

Notes
1. For example, both National Association of Securities Dealers Automated Quotations (NASDAQ)
and New York Stock Exchange (NYSE) require their listed firms that have nominating or compensation committees to only have independent directors in these committees.

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Journal of Accounting, Auditing & Finance

2. If auditor is PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, or KPMG, BIG is
defined as 1.

3. We are unable to control for independence because most of our sample postdates legislation

4.
5.
6.

7.
8.

requiring independence of all audit committee members (i.e., SarbanesOxley Act [SOX]).
Furthermore, unlike studies using pre-SOX samples, we need a continuous and not a dummy
variable for expertise, as SOX requires at least one financial expert in the audit committee.
While our audit committee characteristic variables are consistent with Abbott, Parker, Peters, and
Raghunandan (2003), for the reasons outlined above, they are not identical. Finally, our results
remain unchanged whether or not we provide these controls.
We also display results without endogeneity controls because of continuing concerns that
Heckman selection models provide volatile results (Lennox, Francis, & Wang, 2012). This
allows the reader to form an independent assessment of results.
These variables are obtained from Compustat (BM, DE, FCF, LNMV, and REG), Center for
Research in Security Prices (CRSP) (AGE), and RiskMetrics (BSIZE, CEODUAL).
A recommended practice in the implementation of selection models is the use of the so-called
exclusionary variables. These are variables in the selection model that are excluded in the test
model. In our research design, we have multiple exclusionary variables. This arises naturally
because the variables identified in the board structure literature (used in the selection model) do
not coincide with the variables identified in the audit fee literature (used in the test model). For
example, committee overlap is conjectured to be related to other board characteristics such as
board size, CEO duality, and percentage of outsiders, while audit fees are rarely conjectured to
depend on these variables.
The mean of total assets is about US$5.7 billion and the median is about US$1.4 billion.
The mean of audit fees is about US$2.4 million and the median is about US$1.2 million.

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