Audit fee premium: The effect of King-III

Abstract

In the wake of recent corporate scandals at world-renowned companies such as Enron and WorldCom, public confidence in the role of the auditing profession plummeted. At the time, the profession was no longer perceived to be acting in the best interests of the public thus prompting regulatory authorities and civic organisations to initiate certain intervention measures. In America, the Sarbanes-Oxley Act of 2002 (SOX) was enacted which introduced mandatory sweeping corporate governance initiatives. When SOX was introduced, it was criticised for triggering increased compliance costs as well as creating fee opportunities for the audit profession (Griffin & Lont, 2007). In South Africa, corporate reforms came in the form of King-I to III codes of corporate governance. In particular, King-III introduced the concept of integrated reporting (IR) which recommends that companies report holistically on both financial and sustainability (economic, social and environmental) issues. In contrast to SOX, the application of King-III is voluntary on an “apply or explain” basis. Using a quantitative approach with multiple regression analysis and Analysis of Variance (ANOVA as the statistical techniques, three sets of models were run to examine two hypotheses. The first hypothesis sought the evidence pointing to whether the BIG4 audit firms were charging an audit fee premium in response to the recommendation of King-III on IR, while the second hypothesis examined if there was a relationship between audit fees and non-audit service fees. The empirical results of the study attested to the BIG4 firms charging an audit fee premium while also proving a statistically significant relationship between the two types of fees. The findings of the research study have implications for both the auditing profession and for the regulators, and will also add a South African dimension to the existing body of knowledge on the subject.