Audit fees-audit quality relationship: Does employee board representation matter?

Owusu, Andrews and Atif, Muhammad and Holmes, Mark and Omoteso, Kamil (2025) Audit fees-audit quality relationship: Does employee board representation matter? The British Accounting Review. ISSN 1095-8347

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Abstract

We examine the effect of employee board representation on audit fees and whether the interplay between audit fees and employee board representation has an impact on audit quality, as measured by discretionary accruals. Using a sample of 3,142 firm-year observations across seven European countries over the period of 2005-2019, we show that employee board representation is negatively associated with audit fees, and this association is primarily observed when the number of employee directors reaches two or more. In addition, we test the possible channels through which employee board representation affects audit fees and show that the effect is stronger in firms with weak corporate governance. We also document that audit committee effectiveness moderates the relationship. Finally, we show that the observed lower audit fees lead to an improvement in audit quality, probably due to a stronger control environment and reduced audit risk in the presence of employee directors. Our main results are unchanged when using alternative measures, additional controls, subsample analysis, alternative econometric techniques, and identification strategies.

Item Type:	Article
Identification Number:	10.1016/j.bar.2025.101766
Dates:	Date Event 26 September 2025 Accepted 29 September 2025 Published Online
Uncontrolled Keywords:	employee directors, audit fees, audit quality
Subjects:	CAH17 - business and management > CAH17-01 - business and management > CAH17-01-08 - accounting
Divisions:	Business School > Accountancy, Finance and Economics Business School > Accountancy, Finance and Economics > Centre for Accountancy Finance and Economics
Depositing User:	Gemma Tonks
Date Deposited:	06 Oct 2025 10:25
Last Modified:	06 Oct 2025 10:25
URI:	https://www.open-access.bcu.ac.uk/id/eprint/16659

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