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Governance regulators currently place great emphasis on ensuring the presence of financial expertise on audit committees (Sarbanes-Oxley, 2002; UK Corporate Governance Code 2003-2016). Underlying this is a belief that greater expertise enhances the effectiveness of audit committees and, by extension, the quality of the external audit. This study investigates the impact of audit committee expertise on one measure of audit quality - audit fees paid by FTSE350 companies. Our analysis finds that audit committees possessing greater levels of financial expertise are associated with higher audit fees. When we segregate financial expertise between accounting and nonaccounting, we find that the positive impact identified is driven by non-accounting expertise. Furthermore, when we separate FTSE100 and FTSE250 firms we find the impact of financial expertise is confined to FTSE250 firms. Our findings are important as they highlight the usefulness of segregating financial expertise between specialists and non-specialists, something which regulators in the UK and in the US currently do not do. Our findings also highlight the potential value of audit committee expertise in smaller as opposed to larger listed firms, suggesting that the value of expertise to audit quality depends on the specific financial reporting challenges firms face.
This study investigates the impact of audit committee expertise on audit quality, as represented by audit fees, for a sample of FTSE350 firms. From a theoretical perspective our study links in with and provides evidence on a contemporary literature on the determinants of audit quality (DeFond & Zhang, 2014) while from a practical perspective the study feeds into current recommendations regarding the characteristics of audit committees. Our findings highlight that financial expertise has a significant impact on audit fees and this is especially the case in relation to the levels of nonaccounting expertise on audit committees. Furthermore, we find that the impact of expertise differs between FTSE100 and FTSE250 firms with the representation of non-accounting expertise being especially important in the case of smaller listed firms. We also find that greater audit committee experience does not impact audit fees, regardless of firm size. The absence of a link between the holding of multiple audit committee positions and audit fees suggests that any additional expertise such positions bring may be cancelled out by the expected additional busyness of such audit committee members. In many ways our main finding that audit quality is influenced by the extent of nonaccounting rather than accounting expertise is counter-intuitive since much theory and policy suggests that more effective audit committees are likely to be associated with greater accounting expertise. Specifically, current audit committee recommendations in the UK suggest a minimum level of financial expertise rather than the extent of such expertise while the Financial Reporting Council has deliberated whether that recommendation should be more focused to ensure at least one member with “accounting or auditing experience” (FRC, 2015) – equivalent to our accounting expertise category. Our study provides some valuable insights on this.