AN EMPIRICAL EXAMINATION OF THE RELATIONSHIP BETWEEN AUDIT FEE AND FIRM PERFORMANCE

D. K. Malhotra
Raymond Poteau
Philip Russel
Philadelphia University
ABSTRACT
Corporate governance in general and audit quality in particular became the focus of
regulators since the Enron and WorldCom debacle. The resultant legislation in the form of
Sarbanes-Oxley Act (SOX) of 2002 provides specific guidelines for the audit committee to ensure
effective corporate governance. The financial failure on Wall Street in 2008 further initiated the
passing of the Dodd-Frank bill in 2010 and as a result, companies have taken measures to improve
corporate governance by creating transparency. The role of audit committee and auditor is central
in ensuring good governance so that management acts in the best interest of shareholders to create
value for them. This study empirically examines the relationship between audit fees and a firm’s
performance over a period of 2001 to 2011. The study finds a negative relation between audit fee
and firm performance as measured by return on assets and return on equity. The study is restricted
to thirty companies that are part of the Dow Jones Industrial Average (DJIA).