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Board characteristics and demand Board

characteristics
for audit quality: a meta-analysis and demand for
audit quality
Deepali Kalia
Department of Accounting and Finance, Indian Institute of Management Ranchi,
Ranchi, India 153
Debarati Basu Received 14 May 2022
Department of Finance, Accounting and Control, Shiv Nadar University, Revised 9 August 2022
28 August 2022
Greater Noida, India, and Accepted 29 August 2022
Sayantan Kundu
Praxis Business School, Kolkata, India

Abstract
Purpose – The study explores extant knowledge on the nature of the relationship between internal and
external corporate governance mechanisms, particularly board characteristics and audit quality, respectively,
while also investigating how the relationship varies across geographies.
Design/methodology/approach – The extant knowledge is synthesized using a meta-analysis, which is
conducted using a sample of 56 empirical studies from publications of varying grades. The studies span over
25 years (1996–2021) and cover 147 empirical samples (343,787 firm-year observations) across more than 20
countries. The dependent variable is audit fees, and the independent variable captures 12 different measures of
board characteristics.
Findings – Overall, the results reveal a positive association between board characteristics and audit fees,
indicating complementarity between governance mechanisms. Effect size analysis shows board characteristics,
like size and independence, are positively associated with audit fees. However, heterogeneity is noted for some
characteristics, and further analysis by geography (developed vs emerging countries) explains the heterogeneity.
Practical implications – This study helps multiple stakeholders like firms, shareholders, boards, regulators
and policymakers in designing and strengthening governance frameworks.
Social implications – Both governance and auditing literature benefit from identifying specific board
characteristics that drive audit quality consistently across different institutional settings and samples.
Heterogeneity analysis helps improve the understanding of contradictions documented in prior literature.
Originality/value – This meta-analysis is the first to explore the interplay between internal and external
corporate governance mechanisms, with a focus on board characteristics and audit quality. The study provides
valuable insights on how different governance mechanisms influence each other while highlighting, for the first
time, how the interaction between governance mechanisms varies by a country’s level of development.
Keywords Heterogeneity, Audit fees, Emerging markets, Internal and external governance
Paper type Research paper

1. Introduction
Regulators across the world use multiple compensatory mechanisms to structure effective
corporate governance frameworks that can mitigate agency problems. These mechanisms may
be internal, including the board of directors with varying attributes such as diversity, expertise,
and independence or external such as audit, with emphasis on auditor tenure and expertise.
While regulators have carved out individual roles for each mechanism, they also perceive these
mechanisms as parts of a whole (Jim
enez-Angueira, 2018). Real-world examples show that
effective and optimal governance structures often rely on a bundle of mechanisms (Brickley and

The authors thank Divya Aggarwal, Subhasree Mukherjee, Subro Sarkar and Tarun Kumar Vashisth Asian Review of Accounting
Vol. 31 No. 1, 2023
for their valuable feedback. The authors also thank Zhifeng Yang and Haiyan Zhou along with pp. 153-175
participants of Annual International Accounting Symposium of Asian Review of Accounting (2022) and © Emerald Publishing Limited
1321-7348
AFFANZ (2022) for their constructive feedback. DOI 10.1108/ARA-05-2022-0121
ARA Zimmerman, 2010). Extant literature also acknowledges the significance of the association
31,1 between these mechanisms. However, the results of interactions between the two are ambiguous,
and thus our understanding remains incomplete and hampered. This meta-analysis is a
significant step in understanding how governance mechanisms, particularly internal and
external mechanisms, interact.
Governance literature majorly focuses on the ability of both internal and external
mechanisms to reduce agency problems independently; however, the examination of inter-
154 relationships between the two is infrequent. Also, studies have been more piecemeal, dealing
with specific characteristics across specific markets. The few studies using governance
mechanisms together emphasize on their impact on firms and not on the inter-relationship
between the mechanisms. Overall, we know little about how internal governance mechanisms
influence external governance mechanisms.
We thus conduct a meta-analysis that synthesizes past results. This study explores the
robustness of relationships documented in prior literature and helps identify gaps in our current
understanding. We particularly focus on the interaction between the board of directors as an
internal mechanism and audit quality as an external mechanism. This meta-analysis also furthers
our understanding of how governance mechanisms interact by addressing heterogeneity.
The board of directors is a key internal governance mechanism that not just monitors but also
participates in business strategy and policy setting (Arzubiaga et al., 2018). The board of directors
(hereafter, board) are a group of experts elected by the shareholders to represent and protect their
interests [1]. Various characteristics of the board, such as independence, size, meeting frequency,
attendance, gender, and expertise, influence its effectiveness (Li and Chen, 2018; Chen, 2020; James
et al., 2020). An effective board can reduce opportunistic behavior by management and
concentrated insider owners (Fama and Jensen, 1983; Jensen and Meckling, 1976). The board thus
helps mitigate agency problems. Board characteristics are associated (mostly positively) with firm
performance (Jackling and Johl, 2009; Larmou and Vafeas, 2010; Mishra and Kapil, 2018; Manna
et al., 2020), monitoring effectiveness (Anderson and Reeb, 2004; Li and Wahid, 2018), strategic
decision making (Ruigrok et al., 2006) quality of mergers and acquisitions (Liu and Wang, 2013;
Cao et al., 2019), and improved earnings quality (Klein, 2002; Kapoor and Goel, 2017).
Literature also focuses on the characteristics of board committees, particularly the audit
committee, and their association with governance objectives (Abbott et al., 2003; Beasley et al.,
2009; Ittonen, 2010; Ghafran and O’Sullivan, 2017; Raimo et al., 2021). Thus, while these internal
mechanisms effectively govern, how does the presence of the board, its different attributes,
committees and their roles influence the need for and scope of external governance mechanisms?
We specifically focus on the statutory auditor – a key external governance mechanism. The
statutory auditor is a reputed external agent who monitors the firm and helps determine whether
its financial reporting presents a true and fair view [2]. The external auditor, like the board, is also
accountable to the owners of the firm. While the board is responsible for the proper functioning of
internal control systems and the preparation of financial statements, the auditor reassesses the
governance systems established by a firm and attests to their validity, ensuring that the board
receives accurate information for its functioning. Thus, there exists a cyclical relationship between
the roles of the board and the auditor, where one’s output feeds into another’s process and vice
versa. These interdependencies beget questions about the relationships between the two
governance mechanisms. Better understanding of the same is essential because these inter-
linkages will also drive firm choice with respect to board and auditor characteristics.
Country-specific governance codes, for example, the UK Corporate Governance Code
(1992), the US Sarbanes-Oxley Act of 2002 or the Clause 49 of the Listing Agreement (2004)
and Companies Act (2013) in India, suggest board attributes such as diversity, meeting
frequency, independence, and the existence of a separate audit committee can help in
enhancing audit quality. However, corporate governance and auditing literature provide
contrasting results. Tsui et al. (2001) and Liu and Wang (2006) suggest a negative relationship
between board independence and external audit quality. Wu (2012) documents that Board
substituting a high-quality auditor with strong boards reduces audit quality. Moreover, characteristics
major financial scandals such as Enron, Satyam and WorldCom also highlight the low audit
quality of firms despite having boards with desired characteristics such as independence and
and demand for
expertise (Habbash and Alghamdi, 2017). audit quality
The above contradictions highlight the gaps that exist between governance theory and
practice. While we know about the impact each mechanism has on desired outcomes of effective
governance (like better firm performance or lower agency costs), there exists very little 155
understanding of and consensus on the interlinkages among the governance mechanisms. This
understanding is particularly significant given that the inter-linkages will play a critical role in
designing the firm’s entire governance framework and the effectiveness of its operations.
In light of the above, and given the increasing interest of academics, regulators,
policymakers and practitioners in understanding how governance frameworks can be made
more effective, we explore the relationship between board attributes (as internal governance
mechanisms) and the demand for audit quality (as an external governance mechanism). We
conduct a meta-analysis to integrate findings of existing studies exploring this relationship and
examine whether there exists a consensus on which board characteristics enhance audit quality
and which do not. In this study, we specifically explore the following board characteristics–
board size, board independence, CEO duality, board meeting frequency, and board diversity,
along with specific attributes of the audit committee, including audit committee meeting
frequency, audit committee expertise and diversity. We also document the proxies used in
literature to measure each of these characteristics [3]. We explore the relationship these
characteristics have with audit fees, the most popular audit quality proxy in audit literature.
Our study is closest to Hay (2006, 2013), which meta-analyze various firm attributes that
impact audit fees. Some of these are fundamental, like firm complexity, industry, and leverage
and some governance and audit related like Big N and auditor location. However, our study is
different from these in crucial ways and thus, contributes significantly to expanding extant
knowledge on governance frameworks. We detail these differences below.
First, Hay (2006, 2013) focus on exploring the determinants (firm traits) of audit fees
(an expense for the firm). On the other hand, we focus on how internal governance
characteristics impact the demand for external governance mechanisms. The theories and
perspectives that inform are, therefore, very different. Second, we explore various important
governance attributes not included in these studies, such as board size and board
independence. These variables are interesting from a meta-analysis perspective since
previously documented results with audit quality are conflicting. Third, with development in
corporate governance literature, studies now explore many additional governance
characteristics such as gender diversity and expertise of the board (financial and non-
financial). These traits are more recent and not covered in earlier meta-analyses.
Fourth and most significantly, the samples of these papers suffer from two major
limitations. One, the sample focuses on developed markets with almost no coverage of
emerging markets. Only 10% of the Hay (2013) studies stem from emerging markets. Given the
increasing global importance of emerging markets and the stark differences in firm structures
and ownership patterns across these markets, a lack of understanding of emerging markets
becomes a significant hindrance. The methodology of Hay (2006, 2013) does not provide scope
for heterogeneity testing. Therefore, they do not explore the presence of variations and the
reasons behind them. Two, for Hay (2013), the duration of the sample ends at 2007, which is also
an important limitation since the world has witnessed large-scale changes to governance
frameworks post the 2008 financial crisis. Interestingly, studies conducted post-2007 in
emerging markets have documented both positive and negative associations of governance
characteristics with audit quality (proxied by audit fees). In addition to bridging these gaps, our
study resolves existing heterogeneity and significantly informs the literature.
ARA We focus specifically on governance characteristics and how they impact demand for
31,1 audit quality (proxied by audit fees) and are more comprehensive as we include previously
unexplored governance traits. By doing so, we enrich the corporate governance and audit
quality literature. 56% of our sample studies are post 2007. Overall, 14 developing nations are
a part of the final sample, including the previously unexplored MENA regions such as Oman
and Saudi Arabia. Thus, our study extends both geographical boundaries and the sample
time frame. Additionally, we test for variations in results with a heterogeneity analysis and
156 explore and explain the reasons behind the same.
Our study responds to Hay (2013) and Hay (2019), who call for further research in auditing
literature, specifically the demand for audit quality. We evaluate and summarize a large body
of work in this area undertaken over the last 25 years and provide conclusive evidence of the
relationship between demand for audit quality and board characteristics.
In doing this, our study significantly contributes to multiple strands of literature. First, the
meta-analysis helps identify specific board characteristics that drive audit quality
consistently across different institutional settings and samples. More importantly, this has
implications for firms, practitioners, and regulators who can use the results to strengthen
governance frameworks more effectively. Second, our study also explores the relationship
between independent variables which were not a part of any other meta-analysis related to
audit fees. This exercise helps identify gaps in our understanding of board characteristics
and audit quality and opens up more avenues for future research. Third, our study considers
different measurements of the variable and sample characteristics like country (developed
versus emerging) and period settings which may explain mixed results or significant
variations in results documented in prior literature. The analysis will help tease out different
empirical interpretations of similar constructs more cleanly and help narrow down those
theories that explain the heterogeneity. This study furthers our understanding of
contradictory applications of popular governance theories.

2. Literature review
Audit quality broadly refers to the quality of the monitoring and verification services
provided by the external auditor engaged by the client firm (DeFond and Zhang, 2014).
Various factors, including a firm’s incentive to enhance corporate governance, drive the
demand for audit quality (AlQadasi and Abidin, 2018). Better audit quality improves
reporting and disclosures and reduces information asymmetry and agency costs, thus
enhancing investor trust and reducing the cost of capital (Jensen and Meckling, 1976; Cohen
et al., 2002; Kim et al., 2011; Wardhani, 2019).
The auditor’s ability to perform a quality audit also depends on the freedom granted by the
firm to the auditor. The presence of agency issues (stemming from ownership structure and
board composition) may limit such freedom. A series of monitoring mechanisms are thus put in
place to create an effective governance structure that can align the objectives of management
and insider owners with those of the shareholders and mitigate these agency problems. The
board of directors is a key component in this governance structure (Boone et al., 2007). Dey (2008),
Larcker et al. (2007) and Khan et al. (2020) document how firms with heightened agency issues
deploy better governance mechanisms (also see Bushman et al., 2004; Garanina and Kaikova,
2016; Singh et al., 2018). Thus, internal and external governance mechanisms, like the board and
the auditor, work as complements to ensure that shareholder objectives are protected.
However, external auditors may be less effective as monitors when conflicts of interest arise.
Unusually high audit fees or the provision of non-audit services like tax consulting create
auditor-client relationships that compromise auditor independence and negatively affect audit
quality (DeFond et al., 2012; Krauss et al., 2015; Chen et al., 2018). A free-riding or passive board
may overlook such conflicts of interest (Jensen, 1993). Overconfident boards may consider
mechanisms like the external auditor a substitute in the governance framework (Kind and Board
Twardawski, 2016; Beavers and Mobbs, 2020). This may be due to overestimation of skills, characteristics
prior experience, or overvaluation of private information (Moore and Healy, 2008). Thus,
overconfident boards may disregard the auditor and decide against better audit quality.
and demand for
Thus, the association between board characteristics and audit quality is not obvious. For audit quality
example, an independent board (the most common proxy for good governance) is a better
monitor than executive directors (Fama and Jensen, 1983). Independent non-executive
directors are unbiased in their roles as monitors and enhance the firm’s audit quality (Beasley, 157
1996; Davidson et al., 2005; Peasnell et al., 2005). They are thus expected to improve
governance. However, contrary to the above, independent directors are often found to be
passive, given their limited engagement with and knowledge of the firm (Masulis, 2019),
insufficient remuneration (Goh and Gupta, 2016) and busyness (Lei and Deng, 2014). Their
passivity would provide non-independent directors and management the opportunity to
choose their desired level of audit quality. If agency costs exist and non-independent directors
and management seek private benefits, the desired audit quality would be lower (Armstrong
et al., 2014). The Enron and Satyam failures in the US and India are examples of auditing
oversight where firms and auditors seek private benefits.
Similarly, prior research documents that the existence of the audit committee (as an
additional layer of monitoring and control) and its composition also impact audit quality
(DeFond and Jiambalvo, 1991; Stewart and Munro, 2007; Sultana et al., 2019). However,
assuming an automatic relationship between audit committees and audit quality should be
practised with caution (Turley and Zaman, 2004). Various studies across different countries
have raised concerns about the effectiveness of audit committees (Beasley, 1996; Tumwebaze
et al., 2021) as they lack independence and expertise needed to demand enhanced audit quality
(Abott and Parker, 2000; Suliman, 2017; Lisic et al., 2019). Given the ambiguity in literature, it is
crucial to provide conclusive evidence on this relationship. These contradictions are the
primary motivation behind the meta-analysis proposed in this study.
Moreover, the application of meta-analysis in auditing research is not frequent (Hay, 2019).
The few studies applying this methodology focus on supply-side measures such as auditor size,
auditor tenure, and industry specialization (Salehi et al., 2019; Alareeni, 2019), or outcomes like
discretionary accruals (Inaam and Khamoussi, 2016), audit report lag (Durand, 2019), and audit
opinions (Habib, 2013). Although there are meta-studies on audit fees (Hay et al., 2006; Hay,
2013), to the best of our knowledge, these studies do not approach audit quality from the
demand perspective, and the focus is not on exploring its association with internal governance
characteristics.

3. Methodology
3.1 Sample selection
We follow a comprehensive four-step approach. First, we consult prior review articles and
meta-analyses (Hay et al., 2006; Hay, 2013) and their reference lists. Second, we explore three
electronic databases – Google Scholar, Scopus and EBSCO, for relevant articles. We use
keywords such as “audit quality”, “audit fee”, “board characteristics”, “board composition”,
“internal corporate governance mechanisms”, and “audit committee characteristics” for this
search. Next, we perform a manual search in journals with themes significantly related to
corporate governance, auditing and accounting research. Finally, we go through the reference
list of the identified papers to include any additional studies.
We include empirical studies that meet the following criteria: (1) either in English or for
which a translation (in English, by the author) is available, (2) reports either the correlation
coefficient or any other statistic that can be converted into the correlation coefficient, and (3)
uses the natural log of audit fees as a measure of audit quality.
ARA Extant literature uses multiple proxies for audit quality, of which audit fees and big N are
31,1 the most commonly used. We focus on audit fees. Higher audit fees indicate better audit
quality based on more resources for conducting the audit. It is also more widely used and
finds similar application across markets irrespective of audit market structure. For example,
in many emerging markets (like India), the big N variable is not as representative due to the
presence of many local audit firms. Thus, using a single proxy (audit fees) helps prevent
complications which may arise from varying interpretations of different proxies, especially
158 across markets. For the board of directors, we include 13 variables commonly used in
literature, grouped into two categories – overall board-based and audit committee-based.
Table 1 lists the variables and their definitions. We exclude those board variables that are
infrequent in literature (used in less than three studies) [4].
Our final sample has 56 studies covering 1996–2021 (covering an aggregate sample period
from 1991 to 2018). The selection is comprehensive in its geographic coverage, spanning 20
countries and all possible continents. The studies are also from varying publication grades
[5]. Table 2 provides detailed information on the studies included in the sample.

3.2 Effect size computation

The Pearson correlation coefficient is scale-free and captures both the direction and the
magnitude of a relationship and is an appropriate measure of effect size (ESr Þ (Bachiller et al.,
2021). If the correlation coefficient is unreported, we record the t-statistic and/or F-ratio and
follow Lipsey and Wilson (2001) to obtain the required effect size. For example, the calculation
of ESr from t-statistic is as follows:
1
ESr ¼ pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi (1)
t 2 þ n1 þ n2 þ 2

where n1 and n2 are the number of observations in groups 1 and 2, respectively, and t is the
t-statistic.
To test the statistical significance of r
1
ESr ¼ pffiffiffiffiffiffiffiffiffiffiffiffiffiffi (2)
t þ df
2

where df is the degrees of freedom.

If a study reports multiple effect sizes for the same variable, we follow Schmidt and Hunter
(2014) and report each effect size separately (Byron and Post, 2016; Mutlu et al., 2018;
Schommer et al., 2019; Parashar and Gupta, 2020). We also apply appropriate corrections for
statistical artefacts to each correlation (Hedges and Olkin, 1985; Hunter and Schmidt, 1990).
We make corrections for artificial dichotomizations in the measurement of independent
variables (Hunter and Schmidt, 1990) as these correlations suffer from downward distortion.
We correct this bias using Hunter and Schmidt (1990):
ES pffiffiffiffiffi
ES 0 ¼ pq (3)
fðcÞ
where p and q are the split proportions of the observations in the two groups (q 5 1p), c is the
cut-off score which splits the standardized normal distribution into proportions p and q, and
fðcÞ is the normal curve ordinate for the cut-off score c.
Finally, we transform the correlations into Fisher’s Z coefficients (Hedges and Olkin,
1985). It normalizes the distribution of the effect sizes (Rosenthal, 1991) and accounts for
undesirable statistical properties of correlations (Lipsey and Wilson, 2001).
Variable Definition
Board
characteristics
Board characteristics and demand for
CEO duality 1 if the CEO is also the board chair
Board independence Number of external directors on the board audit quality
Proportion of external directors on the board
Proportion of independent directors on the board
Proportion of non-executive directors on the board 159
Proportion of non-executive independent directors on the board
Percentage of independent directors on the board
Percentage of non-independent directors on the board
Percentage of outside directors on the board
Percentage of non-executive independent directors on the board
Board meeting frequency Number of board meetings
Natural Log of number of board meetings
Women on the board 1 if there is at least 1 woman on the board
Proportion of female directors on the board
Number of female directors on the board
Outside directorships Average number of outside directorships held in other firms by board
members
Average number of outside directorships held in other firms by outside
directors
Average number of outside directorships held in other firms by non-
executive directors
Average number of outside directorships held in other firms by
independent directors
Natural log (1þ no. of outside directorships held by the board)
Board size Number of people on the board
Natural log of number of people on the board
Audit committee characteristics
Audit committee independence Proportion of independent directors on the audit committee
Proportion on non-executive independent directors
1 if all members of the audit committee are independent and non-executive
1 if all the members of the audit committee are independent
1 if more than half the audit committee is composed on independent audit
committee members
1 if a non-executive director is a member of the audit committee
Percentage of independent directors on the audit committee
Percentage of non-executive directors on the audit committee
Audit committee financial Number of accounting experts on the audit committee
expertise 1 if a chartered accountant is present on the audit committee
1 if at least 1 accounting expert is present on the audit committee
1 if at least 1 financial expert is present on the audit committee
1 if at least 1 financial or accounting expert is present on the audit
committee
Percentage of audit committee members with financial expertise
Percentage of audit committee members with accounting expertise
Percentage of audit committee members with experience in auditing,
accounting, and finance
Percentage of audit committee members with accounting and financial
expertise
Percentage of audit committee members with qualifications in accounting
and finance Table 1.
Proportion of financial experts on the audit committee Independent variables
Proportion of accounting or financial experts on the audit committee and their definitions
(collated from sample
(continued ) under study)
ARA Variable Definition
31,1
Audit committee non-financial Percentage of audit committee members who have prior experience on
expertise audit committees
Proportion of management experts on the audit committee
Proportion of legal experts on the audit committee
Proportion of consultancy experts on the audit committee
160 Proportion of industry experts on the audit committee
Average age of the directors on the audit committee
Percentage of foreign directors sitting on the audit committee
Percentage of members with non-accounting expertise on the audit
committee
Proportion of audit committee members who are on the boards of more
than 3 listed companies
Audit committee meeting Ln number of meetings held by the audit committee
frequency 1 if more than 3 audit committee meetings held in a year
1 if more than 4 audit committee meetings held in a year
Number of meetings held in a year
Natural logarithm of the number of meetings held in a year
Females on audit committee At least 1 female director on the audit committee
At least 2 female directors on the audit committee
Number of women on audit committee
Percentage of female directors on audit committee
Proportion of female directors on audit committee
Table 1. Size of audit committee Number of members on the audit committee

The Z–transformed effect size is calculated as follows:

ð1 þ rÞ
ESZr ¼ 0:5 log e (4)
ð1  rÞ

where r is the correlation coefficient, and loge is the natural logarithm. The mean effect size is
converted into r before being tabulated. We use the Hedges and Olkin (1985) method to
compute the main effects (Lagasio and Cucari, 2019) and apply the random effects model.
This model is a suitable choice because: (1) preliminary analyses suggest heterogeneity in
selected studies, i.e., the studies have varying effect sizes and have homogenous
characteristics (such as sample period, country setting and sample choice). (2) Our study
aims to make inferences beyond those included in the selected studies.
We calculate the mean effect size (ES), the 95% confidence interval (CI), and the
heterogeneity statistic (Q). If the confidence interval includes 0, it implies an insignificant
relationship. The Q statistic follows the Chi-square distribution with n‒1 degrees of freedom
and determines the heterogeneity of the results. An insignificant Q implies that sampling
error sufficiently explains variability in effect sizes, and no further analysis is needed. The
presence of heterogeneity highlights the need for further analysis.

4. Results
Tables 3 and 4 report the results of HOMA (Hedge’s and Olkin Meta-Analysis) for board
characteristics and audit committee characteristics, respectively. Overall, we find a positive
relationship between board characteristics and audit fees. Based on 147 samples and 343,787
firm-year observations, our results conclude that board governance characteristics increase
firms’ audit quality. A detailed analysis of each independent variable, however, reveals some
mixed results.
Serial Journal
no. Study Journal Author(s) and year rank Country Sample size Sample duration

1 Audit committee effectiveness and audit fees European Accounting Collier and Gregory (1996) A* UK 315 1991
Review
2 Board characteristics and audit pricing post European Accounting O’Sullivan (1999) A* UK 146 1995
Cadbury: A research note Review
3 The impact of board composition and ownership British Accounting Review O’Sullivan (2000) A* UK 402 1992
on audit quality: Evidence from large UK
Companies
4 Audit Committees, Cadbury code and audit fees: Managerial Auditing Journal Goddard and Masters (2000) A UK 456 1994–1995
An Empirical Analysis of UK Companies
5 The determinants of audit fees – Evidence from Accounting and Business Beattie et al. (2001) A UK 210 1998
voluntary sector Research
6 CEO domination, growth opportunities and their Journal of Accounting, Tsui et al. (2001) A Hong Kong 650 1994–1996
impact on audit fees Auditing and Finance
7 Board characteristics and audit fees Contemporary Accounting Carcello et al. (2002) A* Fortune1000 258 1992–1993
Research
8 The impact of ownership governance and non- International Journal of O’Sullivan and Diacon (2002) A UK 117 1992
audit services on audit fees: evidence from Auditing
voluntary sector
9 The association between audit committee Auditing: A Journal of Abbott et al. (2003) A* USA 492 2001
characteristics and audit fees Practice and Theory
10 The Relationship of Audit Committee Quarterly Journal of Business Lee and Mande (2005) B USA 780 2000
Characteristics with Endogenously determined and Economics
Audit and Non-Audit Fees
11 Relation between external audit fees, audit Accounting and Finance Goodwin- Stewart and Kent A Australia 401 2000
committee characteristics and internal audit (2006)
12 Governance structures, ethnicity, and audit fees of Managerial Auditing Journal Yatim et al. (2006) A Malaysia 736 2003
Malaysian listed firms
13 The Impact of Board Composition and Ethnicity Malaysian Accounting Salleh et al. (2006) C Malaysia 100 2002
on Audit Quality: Evidence from Malaysian Listed Review
Companies
14 The role of risk management and governance in Journal of Business Finance Knechel and Willekens (2006) A* Belgium 50 2001
determining audit demand and Accounting
15 CEO duality, audit committee effectiveness and Managerial Auditing Journal Bliss et al. (2007) A Malaysia 447 2001
audit risks: A study of the Malaysian market

(continued )
161
audit quality
and demand for
Board
characteristics

Table 2.

included in the meta-

Description of studies

analysis
 31,1

162
ARA

Table 2.
Serial Journal
no. Study Journal Author(s) and year rank Country Sample size Sample duration

16 The association between audit committees, Review of Quantitative Vafeas and Waegelein (2007) B USA 767 2001–2003
compensation incentives and corporate audit fees Finance and Accounting
17 Evidence on the impact of internal control and International Journal of Hay et al. (2008) A New Zealand 130 1995
corporate governance on audit fees Auditing
18 Evidence on the impact of internal control and International Journal of Hay et al. (2008) A New Zealand 80 2005
corporate governance on audit fees Auditing
19 Effect of regulatory oversight on the association Accounting and Finance Boo and Sharma (2008) A USA 469 2001
between internal governance characteristics and
audit fees
20 The impact of audit committee quality on financial Journal of Contemporary Rainsbury et al. (2009) A New Zealand 87 2001
reporting quality and audit fees Accounting and Economics
21 Does female representation on audit committee Quarterly Journal of Finance Ittonen et.al. (2010) B USA 941 2006–2008
affect audit quality and Accounting
22 Audit Committee Compensation and demand for Journal of Accounting and Engel et al. (2010) A* USA 5,465 2000–2004
monitoring of the financial reporting process Economics
23 Corporate governance quality, audit fees and non- Journal of Business Finance Zaman et al. (2011) A* UK 540 2001–2004
audit service fees and Accounting
24 Does CEO duality constrain board independence? Accounting and Finance Bliss (2011) A Australia 799 2003
Some evidence from audit pricing
25 The association between audit committee and International Journal of Redmayne et al. (2011) A New Zealand 204 1998–2000
audit fees in the public Sector Auditing
26 Audit committee and CEO ethnicity and audit fees: The International Journal of Johl et al. (2012) A Malaysia 559 2005
Some Malaysian evidence Accounting
27 Multiple large ownership structure, audit Journal of Applied Adelopo et al. (2012) B UK 209 2005–2006
committee activity and audit fees: Evidence from Accounting Research
UK
28 Independent audit committee member’s board Accounting and Finance Chan et al. (2013) A USA 1,524 2005–2006
tenure and audit fees
29 Who’s Really in Charge? Audit Committee versus The Accounting Review Beck and Mauldin (2014) A* Audit analytics 9,214 2006–2009
CFO Power and Audit Fees and morning
star
30 Corporate executive’s gender and audit fees Managerial Auditing Journal Huang et al. (2014) A USA 8402 2003–2010
31 The Impact of demographic characteristics of CEO Managerial Auditing Journal Harjoto et al. (2015) A USA 12,153 2000–2010
and directors on audit fees and audit delay

(continued )
Serial Journal
no. Study Journal Author(s) and year rank Country Sample size Sample duration

32 Audit committee accounting expertise, CEO power Asia – Pacific Journal of Karim et al. (2016) B USA 6470 2003–2010
and audit pricing Accounting and Economics
33 The impact of Audit Committee Effectiveness on Accounting Research Journal Kim et al. (2017) B Australia 591 2007–2009
audit fees and non-audit fees services: Evidence
from Australia
34 Board Structure and Audit Committee monitoring: Journal of Accounting, Ghafran and O’Sullivan A Compustat 11,422 2000–2011
Effect of audit committee monitoring incentives Auditing and Finance (2017)
and board entrenchment on audit fees
35 Female audit committee members and their Accounting and Finance Ali et al. (2018) A Australia 624 2011
influence on audit fees
36 The Impact of Audit Committee Expertise on The British Accounting Nehme and Jizi (2018) A* UK 991 2007–2010
Audit Quality: Evidence from UK Audit Fees Review
37 The Efficiency of Corporate Boards and Firm’s Pacific Accounting Review Aldamen et al. (2018) B UK 221 2011–2015
audit Fees: The Case of FTSE Financial
Institutions
38 Problem Directors and audit fees International Journal of Bala et al. (2018) A USA 9,175 2004–2010
Auditing
39 The relationship between audit committee Journal of Social Science Rani (2018) - Nigeria 440 2012–2016
attributes and audit fees of listed companies in Research
Nigeria
40 Gender diversity on audit committees and its Accounting Research Journal Jizi and Nehme (2018) B India 742 2010–2014
impact on audit fees: evidence from India
41 Board monitoring and audit fees: The moderating Managerial Auditing Journal Habib et al. (2019) A USA 664 2009–2015
role of CEO/chair dual roles
42 Female audit committee directorship and audit Managerial Auditing Journal Miglani and Ahmed (2019) A Sweden 790 2013–2017
fees
43 Independent audit committee, risk management Cogent Business and Sellami and Cherif (2020) - Indonesia 510 2014–2016
committee, and audit fees Management
44 Corporate governance and audit fees evidence Journal of Corporate Larasati et al. (2019) - Bangladesh 230 2013–2017
from Bangladeshi Listed Banks and NBFI Governance Research
45 Experience of audit committee members and audit European Accounting Ghosh (2019) A* Australia 13,155 2001–2012
quality Review

(continued )
163
audit quality
and demand for
Board
characteristics

Table 2.
 31,1

164
ARA

Table 2.
Serial Journal
no. Study Journal Author(s) and year rank Country Sample size Sample duration

46 Antecedents of audit quality in MENA countries – Journal of International Sultana et. al. (2019) B Egypt, Jordan, 600 2009–2014
the effect of firm level and country level Accounting, Auditing and Oman Saudi
governance mechanisms Taxation Arabia and
UAE
47 How does the type of Equity Compensation of Advances in Accounting Schrader and Sun (2019) A USA 467 2012
audit committee affect audit fees?
48 Audit committee compensation, best practices and South African Journal of Schrader and Sun (2019) C Korea 1,159 2010–2016
audit fees Business Management
49 Audit committee effectiveness: Relationship Journal of Commerce and Park (2019) C India 1,410 2006–2012
between audit committee characteristics and audit Accounting Research
fees and non-audit fees services
50 Reputation capital of directorships and demand for European Accounting Fredriksson et al. (2020) A* Finland 940 2007–2016
audit quality Review
51 Female tainted directors, financial reporting Journal of Contemporary Bhuiyan et al. (2020) A USA 5,047 2004–2010
quality and audit fees Accounting and Economics
52 Audit committees, female directors and the type of Journal of Business Research Abbasi et. al. (2020) A UK 770 2009–2017
female and male financial experts: further evidence
53 CEO compensation, corporate governance and International Journal of Sharma et. al. (2020) A New Zealand 810 2004–2012
audit fees: Evidence from New Zealand Auditing
54 Investigating the effect of corporate governance on Investment Management and Soliman (2020) B Egypt 412 2015–2018
audit quality and its impact on investment Financial Innovations
efficiency
55 The relationship between audit fees and audit International Journal of Drogalas et al. (2021) B Greece 126 2017
committee characteristics: Evidence from Athens Disclosure and Governance
stock exchange
56 The relationship between audit committee Journal of Asian Finance, Januarti et al. (2020) - Indonesia 130 2016–2017
effectiveness and audit fees: Evidence from Economics and Business
Indonesia
57 Audit committee and audit quality: An empirical Journal of International Allahbabsah and Yekini B Jordan 1,035 2009–2017
analysis considering industry expertise legal Accounting, Auditing and (2021)
expertise and gender Taxation
Note(s): The final sample is 343,787 firm-year observations for studies published from 1996 to January 2021. A*, A, B, and C are the journal rankings of the Australian Business Deans
Council (ABDC-2019)
4.1 Overall board variables Board
Board characteristics reveal a significant positive association between four of the six characteristics
variables (board size, board independence, board meeting frequency and women on the
board) and audit quality. These associations confirm better audit quality given stronger
and demand for
governance. Board size and meeting frequency also reveal significant Q statistics indicating audit quality
heterogeneity.
The mean effect size for the relationship between CEO duality and audit quality is
negative but insignificant. Additionally, a significant Q-statistic also indicates heterogeneity 165
in the sample. Till now, the more popular notion has been that CEO duality leads to more
principal-agent issues (Tang, 2017; Hsu et al., 2021) and so would reduce governance quality.
Alternatively, in some cases, CEO duality helps reduce agency issues through more effective
governance in family-run or group-affiliated firms (Lam and Lee, 2008). The heterogeneity in
our results raises questions about the expected influence of CEO duality on the firm’s
governance quality.
We find no significant relationship between board expertise and audit quality. While
literature measures board expertise as the number of outside directorships held, this measure
also captures board busyness. The number of directorships held by directors increases their
expertise until their efficacy starts to reduce as they become too busy, revealing an inverted-U
relationship with governance quality. Similar implications would extend to the relationship of
this board characteristic with audit quality. This measurement issue may explain the
insignificant results when used in a linear association with audit quality. This variable thus
warrants more research to clarify the nature of the relationship (linear or quadratic), what it

Board characteristics K N Mean SE CI 95% Q test Critical value

CEO Duality 13 32,371 0.008 0.041 0.089/0.071 38.817** 21.026

Board size 8 17,637 0.410** 0.065 0.262/0.515 14.248** 14.067
**
Board independence 25 58,246 0.219 0.051 0.115/0.317 27.212 36.415
Board meeting frequency 11 13,908 0.168 **
0.039 0.090/0.243 19.061 **
18.307 Table 3.
HOMA results for
Outside directorships 6 11,951 0.003 0.066 1.274/0.013 10.401 11.070
board characteristics
Women on the board 15 15,680 0.146** 0.063 0.0214/.270 6.891 9.488 (independent variable)
Note(s): K is the number of samples, N is firm observations, SE is the standard error of the mean correlations, and their impact on
CI 95% is the 95% confidence interval around the meta-analytic mean, Q test is the Hedges and Olkin (1985) chi- audit quality
square test for homogeneity. **p < 0.05 (dependent variable)

Critical
Audit committee characteristics K N Mean SE CI 95% Q test value

Audit committee size 11 19,259 0.271** 0.058 0.156/0.385 18.158 18.307

Audit committee independence 14 20,130 0.214** 0.047 0.122/0.306 9.238 9.236
Audit committee meeting 17 22,968 0.291** 0.051 0.191/0.390 14.817 26.296
frequency
Audit committee financial 18 54,461 0.217 0.202 0.179/0.613 5.864 27.587
expertise Table 4.
Audit committee non-financial 11 55,485 0.150** 0.063 0.027/0.272 5.047 18.307 HOMA results for audit
committee
expertise characteristics
Women on the audit committee 12 41,821 0.151** 0.042 0.069/0.234 19.120 19.670 (independent variable)
Note(s): K is the number of samples, N is firm observations, SE is the standard error of the mean correlations, and their impact on
CI 95% is the 95% confidence interval around the meta-analytic mean, Q test is the Hedges and Olkin (1985) chi- audit quality
square test for homogeneity. **p < 0.05 (dependent variable)
ARA measures and the related effect on overall governance quality and external governance
31,1 quality (audit included).

4.2 Audit committee variables

The results for audit committee characteristics are similar to that of board characteristics.
Audit committee size, independence and meeting frequency are positively associated with
166 audit quality. Additionally, we divide audit committee expertise into financial and non-
financial to better understand the relationship. Although the relationship between financial
expertise and audit quality is positive, it is insignificant. On the other hand, non-financial
expertise impacts audit quality significantly.
Many countries are making financial qualifications necessary for audit committee members.
For example, in India, the audit committee must comprise at least three independent directors,
and at least one must have financial, accounting or auditing expertise. Literature suggests that
given their deeper understanding of possible pitfalls of poor governance (Zalata et al., 2018),
financial experts on the board will improve audit quality. In contrast, audit committees’ financial
expertise may also lead to either complacency or overconfidence in their ability to perform the
audit function (Badolato et al., 2014). Therefore, the expertise of the audit committee and its
impact on audit quality remains an open question. Answering this would help regulators
understand the trade-offs between a financially capable audit committee (that displays more
depth) and an audit committee with more mixed expertise (that displays more width).

4.3 Heterogeneity analysis

We perform a subgroup analysis to explore the heterogeneity in the results of variables with
significant Q statistics. As developing nations differ from developed nations in many aspects,
such as institutional setup, regulatory frameworks, enforcement of regulations, judicial
processes, organization structures and supply of governance mechanisms (like auditors and
directors), we classify the data based on the level of development of a country. Such factors
affect the demand for governance quality and may influence the association between internal
and external governance mechanisms. Table 5 documents the results.
The division of the nations into developed and developing economies explains the
variations documented in board size and board meeting frequency (Q statistic becomes
insignificant). However, this division cannot explain away the heterogeneity in CEO duality,
particularly in developing nations.

Variables K N Mean SE CI 95% Q test Critical value

Board size
Developed countries 5 16,071 0.510* 0.081 0.311/0.515 1.511 9.487
Developing countries 3 1,566 0.239* 0.106 0.026/0.316 0.188 5.991
Board meeting frequency
Developed countries 8 12,383 0.121* 0.033 0.033/0.269 7.821 14.067
Developing countries 3 1,525 0.294* 0.140 0.075/0.139 3.56 5.991
CEO duality
Developed countries 11 31,324 0.012 0.044 0.099/0.613 7.920 18.307
Table 5.
HOMA Results with Developing countries 2 1,047 0.153* 0.031 0.092/0.272 25.751* 3.841
sub–group analysis Note(s): K is the number of samples, N is firm observations, SE is the standard error of the mean correlations,
based on level of CI 95% is the 95% confidence interval around the meta-analytic mean. Countries are classified into developed
development of and developing countries based on United Nations World Economic and Situations Prospect report. Q test is the
country Hedges and Olkin (1985) chi-square test for homogeneity. *p < 0.05
5. Discussion and conclusion Board
Literature highlights the need to bundle internal and external governance mechanisms to characteristics
increase the efficiency of governance frameworks. However, there is no clear understanding
of how the two mechanisms interact. The few studies which do examine this inter-
and demand for
relationship document contrasting results. Thus, the literature exploring the relationship audit quality
between internal and external governance mechanisms lacks consensus. Our study answers
this key question. We examine how internal governance mechanisms (the board) influence
external governance mechanisms (the auditor). 167
We do this with a meta-analysis of 343,787 firm-year observations from 56 empirical
papers on how internal governance mechanisms, particularly board and audit committee
characteristics, influence external governance mechanisms, particularly audit quality. Our
study provides a quantitative generalization of results based on studies spanning almost
three decades in different geographical boundaries. Our results show positive relationships
between various board and audit committee characteristics and audit fees. We also explain
the variations documented in prior literature with the heterogeneity analysis. Additional
analysis shows a country’s level of development moderates the relationship.
These results are useful in improving the effectiveness of the overall governance
frameworks and therefore carry relevance for shareholders, practitioners, regulators and
policymakers. The study also highlights several areas that would benefit from future
research. First, the relationship between non-financial expertise of the audit committee and
the demand for audit quality is positive and significant. The reasons behind this association
remain unexplored. Second, a limited number of studies focus on the relationship between
CEO duality and demand for audit quality in emerging economies. We encourage more
research on these characteristics as sharing the position of CEO and chairman enables
opportunistic behavior, especially in emerging economies with weak regulations. Further
research could also focus on the gender of the CEO and its impact on audit quality.
Notes
1. However, factors like director busyness and lack of independence have often been cited as reasons for
their passive and ineffective behavior (Bhagat and Black, 2001; Ahn et al., 2010; Goodwin and Wu, 2016).
2. However, the statutory auditor is hired by the firm and the receiving of fees for both audit and non-
audit services often leads to a conflict of interest that questions their independence and so, quality of
audit (Quick and Warming – Rasmussen, 2009).
3. For example, if we consider audit committee (AC) expertise, it can be measured as the number of
financial experts on AC, number of accounting experts on AC, directors with multiple directorships
and AC members who have served as CEO/CFO in a similar industry. We discuss this is more detail
in the following sections.
4. Such as board ethnicity, CFO compensation, gender of the CEO and political connections of the board.
5. The publications range from A* to C (as per the Australian Business Dean Council, 2019 list) and also
include studies from journals not included in this list. However, 38 out of our final sample of 56
studies are from well-ranked journals which confirm reliability of our results.

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Further reading
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Auditing and Taxation, Vol. 35, pp. 85-107.

Appendix

Country Setting Articles up to 2007 Articles after 2007 Total articles

New Zealand Listed public sector firms 0 1 5

Listed firms 0 4
UK Insurance firms 1 0 11
Listed firms 3 2
Top 350 listed firms 0 3
Charitable foundations 1 0
Top 1,000 listed firms 1 0
USA Listed firms 4 10 17
Top 500 listed firms 0 1
Small cap 600 listed firms 0 1
Commercial banks 0 1
Australia Listed firms 1 3 5
Public firms 0 1
Hong Kong Listed firms 1 0 1
Malasiya Listed non-financial firms 2 0 4
Listed firms 0 1
Listed industrial sector firms 1 0
Belgium Listed firms 1 0 1
Nigeria Listed firms 0 1 1
India Listed firms 0 2 2
Finland Listed firms 0 1 1
Egypt Listed firms 0 2 2
Greece Listed firms 0 1 1
Indonesia Listed manufacturing firms 0 1 2
Listed firms 0 1
Jordan Listed firms 0 1 2
Table A1. Listed non-financial firms 0 1
Number of articles by Oman Listed firms 0 1 1
country and setting Saudi Arabia Listed firms 0 1 1
(Comparison with UAE Listed firms 0 1 1
sample period in Bangladesh Listed banks and NBFI 0 1 1
Hay (2013)) Republic of Korea Listed firms 0 1 1
About the authors Board
Deepali Kalia is a doctoral student at department of accounting and finance, Indian Institute of
Management, Ranchi. Her research focuses on board characteristics; specifically, centrality of directors characteristics
and the centrality of firms, and contributes to corporate governance, financial accounting, and auditing and demand for
literature. Deepali Kalia is the corresponding author and can be contacted at: deepali.kalia18fpm@ audit quality
iimranchi.ac.in
Debarati Basu is a Finance faculty at School of Management and Entrepreneurship, Shiv Nadar
University, India. Her research contributes to both financial reporting and corporate finance and 175
primarily focuses on their interactions with corporate governance. She also works on market shocks,
internationalization and the role of history and institutions and has co-authored publications in journals
like Journal of Contemporary Accounting and Economics, Global Business Review and Finance India and
has received several academic awards.
Sayantan Kundu is currently an Assistant Professor at Praxis Business School, Kolkata. His
research and teaching interests lie in Capital Markets, Asset Pricing, Corporate Finance, Decision
Sciences and Econometrics. Dr Kundu has published several papers in reputed indexed journals and is a
reviewer of a few reputed journals.

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