Audit Committee Characteristics and Low-balling of Audit Fees

This paper aims to investigate whether audit committees with certain characteristics effectively avoid initial engagement year audit fee discounts or so called ‘low-balling’. Regulators have great concern on the potential detrimental effect of low-balling on audit quality. Effective audit committees may not be attracted with auditor’s fee cutting in the initial engagement year because the committees have a great concern in maintaining high quality of audit. We classify audit committees based on four aspects that signify the quality of the committees: independence, financial expertise, meeting frequency, and tenure. Consistent with prior research, we find that low-balling of audit fees exists in Korean audit market and audit committee independence and meeting frequency are positively associated with the level of audit fees. In particular, audit committees with frequent meetings prevent audit fee discounts in the first engagement year, suggesting that a diligent audit committee plays an important role to maintain high audit quality.