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Agency Problems and Audit Fees: Further Tests of the Free Cash Flow Hypothesis
Paul A Griffin, University of California Davis
David H Lont, University of Otago
Yuan Sun, University of Otago
ABSTRACT. This study provides further evidence on whether audit fees vary in relation to the agency problems that can arise in companies with free cash flow (FCF). We test and show that agency problems, which can be particularly acute in high FCF/low growth companies, induce auditors to charge higher fees as compensation for the additional audit risk and effort. Our results, based on US companies over 2000-2005, show that the FCF hypothesis extends to markets beyond those studied earlier (Hong Kong, Australia). We also find that higher debt levels moderate the higher audit fees, but that other mitigation mechanisms (not studied earlier) such as dividend payout and share repurchases do not.
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