Firm complexity and audit fees: the moderating roles of executive financial expertise and audit committee independence

This study examines whether firm complexity influences audit fees and how this relationship is moderated by executive directors’ financial knowledge (hereafter, ExeFinKnow) and by the independence of the audit committee. We define firm complexity ^[1] proxied by two observable factors: the number of subsidiaries or segments (organizational complexity) and the amount of significant accounting estimates scaled by total assets (reporting complexity ^[2]). In this study, we limit firm complexity to the two audit-relevant components that capture the scope and judgment demands of the client’s operations. Prior research has long recognized that more complex firms require greater audit effort, for example, companies with numerous subsidiaries or diversified operations tend to pay higher audit fees (Simunic, 1980; Hay et al., 2006). Hence, understanding the determinants of audit fees is important because audit fees reflect audit effort and risk, serving as an indicator of audit quality (Simunic, 1980; DeFond and Zhang, 2014). However, the impact of complexity on audit outcomes is not straightforward. On one hand, significant audit effort driven by complexity can improve accounting quality through more thorough verification. On the other hand, complexity may introduce higher risk and information asymmetry that compromise accounting quality or allow opportunistic financial reporting (DeFond and Zhang, 2014). Indeed, auditors may charge a risk premium for complex clients without necessarily catching all irregularities ^[3], especially if there are factors that undermine auditor independence (such as the provision of non-audit services) (Tepalagul and Lin, 2015). This ambiguity has led researchers to explore how contextual factors shape the complexity–audit fees relationship (Coulton et al., 2016).

One important contextual factor is the ownership and governance structure of the firm. In particular, many corporations in emerging economies are dominated by family ownership, which can fundamentally alter financial reporting incentives and audit demand. Wang (2006) outlined two competing effects of family control on earnings quality: an alignment effect and an entrenchment effect. Under the alignment effect, controlling family owners, motivated by long-term reputation and legacy, closely monitor management (Demsetz and Lehn, 1985) and are less inclined toward short-term earnings manipulations (Wang, 2006; Jiraporn and DaDalt, 2009). However, in environments with weak investor protection, the alignment effect often gives way to entrenchment (Young et al., 2008). The entrenchment effect posits that controlling shareholders may exploit minority investors, extracting private benefits at the expense of outsiders (Shleifer and Vishny, 1997). In such cases, family-controlled firms face pronounced type-II agency conflicts (between controlling and minority shareholders) (Faccio and Lang, 2002; Villalonga and Amit, 2006). This situation creates incentives to engage in complex or opaque accounting practices that mask the expropriation of minority shareholders (i.e. creative accounting to favor the controlling family) (Ho and Kang, 2013). Prior studies in family-dominated markets indeed find that these firms often exhibit lower earnings transparency and a lower demand for high-quality audits (Khan et al., 2015). As a result, the relationship between firm complexity and audit fees may differ in a family-firm context. Specifically, if complexity is used to obscure related-party dealings or aggressive accounting, controlling families might intentionally limit external audit scrutiny to avoid detection, leading to relatively lower audit fees despite high complexity (Khan et al., 2015; Ho and Kang, 2013). Our study focuses on this family-firm-dominated context (Bangladesh) to examine how complexity interacts with governance attributes to influence audit pricing.

We consider two internal governance attributes in particular: the financial expertise of executive directors and the independence of the audit committee. Top executives or board members with financial expertise are generally expected to improve financial reporting and oversight. For instance, prior research finds that firms led by financially expert chief executive officers (CEOs) or chief financial officers (CFOs) tend to have higher-quality accounting and more transparent disclosures (Kalelkar and Khan, 2016; Custodio and Metzger, 2014). Such expertise can facilitate better internal controls and communication with auditors, potentially reducing the auditor’s perceived risk. However, in a weak governance setting rife with type-II agency dilemmas and entrenchment, those same experts might leverage their sophisticated knowledge to help conceal earnings management or navigate around audit checks (Ngo and Nguyen, 2024). Thus, it is unclear whether executive directors’ financial knowledge will heighten the demand for rigorous audits (through improved financial reporting) or diminish it (by enabling management to preempt or sidestep audit scrutiny) in family-controlled firms.

By contrast, an effective audit committee is widely seen as a critical guardian of audit quality. Audit committees composed of independent, diligent members have strong incentives to demand thorough audits to protect their reputation and the interests of shareholders (Fama and Jensen, 1983; Abbott et al., 2003). Empirical evidence shows that companies with more independent and active audit committees pay significantly higher audit fees, consistent with greater audit effort and scope requested by the audit committee (Carcello et al., 2002; Ghafran and O'Sullivan, 2017). In theory, a truly independent audit committee should counterbalance any management attempts to reduce audit coverage, even in complex firms. Therefore, we expect audit committee independence to amplify the positive relationship between complexity and audit fees, i.e. Even if a firm is complex, a strong audit committee will insist on comprehensive auditing, resulting in higher fees. Conversely, if an audit committee lacks independence or effectiveness (for example, in a family-dominated board), audit scope may be curtailed and auditors may not fully address complexity-related risks (Beasley et al., 2009; Zaman et al., 2011).

In light of the above, our study addresses an important gap in the auditing and corporate governance literature. While prior research has extensively examined the determinants of audit fees (Simunic, 1980; Hay et al., 2006), there is limited insight on how firm complexity interacts with governance attributes (like executive directors’ financial expertise and audit committee effectiveness) in emerging economies. Prior studies on management financial expertise and audit fees are set in the developed market contexts (e.g. CEOs’ financial backgrounds in US firms), but not specifically the collective financial knowledge of executive directors on the board. In contrast, the institutional setting of Bangladesh, characterized by concentrated family ownership and evolving regulatory oversight, has been underexplored. Moreover, Khan et al. (2015) observed that despite the dominance of family-owned firms in countries like Bangladesh, the socioeconomic context of such markets has been largely ignored in prior accounting research. We emphasize that our study addresses this gap by examining whether and how internal governance (executive directors’ financial knowledge and audit committee independence) moderates the complexity–audit fees relationship in a family-dominated, emerging market context. We address this gap by using hand-collected data from 109 publicly listed firms, comprising 738 firm-year observations over the period 2013–2020, which corresponds to the post–corporate governance reform era in Bangladesh. Bangladesh provides a relevant empirical setting due to the predominance of family-controlled firms and relatively weak protections for minority shareholders (Farooque et al., 2007; Young et al., 2008). Our empirical analysis uses panel regression models to test the hypotheses and reports GMM and 2SLS estimates as additional sensitivity checks. These additional analyses are motivated by theoretically plausible concerns that firm complexity, governance attributes and audit fees may be jointly shaped by unobserved firm-level characteristics or audit-fee persistence.

We find that firm complexity is positively associated with audit fees on average, aligning with the idea that complexity necessitates more audit effort (Simunic, 1980; Hay et al., 2006). Next, we find that family ownership moderates this relationship: in the presence of high firm complexity, audit fees are significantly lower for family-controlled firms compared to nonfamily-controlled firms. This suggests that when complexity increases, audit scrutiny is relatively reduced in family firms (implying lower audit quality in those cases). However, we also find that this effect is significantly attenuated when executive directors have financial expertise: in highly complex firms with financially knowledgeable executives, audit fees are lower than expected. In contrast, we observe that audit committee independence strengthens the positive impact of complexity on audit fees – complex firms with strong, independent audit committees tend to pay higher fees, indicating that vigilant audit committees demand extensive auditing in the face of complexity (Abbott et al., 2003; Ghafran and O'Sullivan, 2017). Notably, we find that both the ExeFinKnow and audit committee independence moderating effects are even more pronounced in family-controlled firms than in nonfamily firms.

This study contributes to literature and informs standard setters and regulators in several ways. First, our findings suggest that audit oversight may be weaker in family-controlled firms when firm complexity is high, underscoring the need for regulators to pay greater attention to complex operations in family firms. Second, the finding on the effect of ExeFinKnow on audit fees contributes novel evidence to the literature and highlights a contextual difference: unlike developed markets, where a CFO’s or CEO’s financial background is associated with fee reductions through improved financial reporting, in an emerging market such as Bangladesh this effect appears to be driven by opportunistic earnings management facilitated by such expertise through advisory services, in the presence of weak governance, resulting in lower audit quality. It also provides evidence that “one size fits all” assumptions (drawn mostly from developed markets) may not hold in emerging markets. Researchers and practitioners may consider country-specific governance and ownership structures when evaluating audit fee determinants. Third, our results support the rationale behind the Institute of Chartered Accountants of Bangladesh (ICAB, 2016) Fee Schedule: by curbing audit fees undercutting (lowballing), auditors would have less incentive to acquiesce to client pressure and overall audit quality would likely improve. Ensuring that this fee schedule is respected (perhaps through Financial Reporting Council oversight) could reduce the bargaining power imbalance in 3 which clients push auditors to accept unnaturally low fees. Finally, we find that greater audit committee independence can raise audit fees, helping to mitigate type-II agency problems and discouraging entrenchment by controlling families. This, in turn, increases the demand for higher-quality audits.

The corporate sector of Bangladesh is largely dominated by family-owned businesses. The majority of publicly listed companies are controlled by founding families or sponsor shareholders, making family firms the prevalent form of listed companies (Khan et al., 2015). This concentrated ownership structure gives rise to principal–principal agency conflicts: controlling shareholders may expropriate minority shareholders’ interests through tunneling and other means, unlike the classic owner–manager agency problem observed in firms with dispersed ownership (Young et al., 2008). In the absence of strong investor protection, controlling owners face fewer constraints against such expropriation and thus have less incentive to demand rigorous external auditing as an oversight mechanism. Evidence from Bangladesh shows that family-controlled firms tend to purchase lower levels of audit services, paying significantly lower audit fees and often opting for lower-quality (non-Big 4) auditors compared to nonfamily firms (Khan et al., 2015). This outcome reflects that when internal control by family owners substitutes for external monitoring, the perceived benefit of a higher-quality audit declines, leading to a lower willingness to pay for audit assurance. However, audit quality demand in family firms is not monolithic; it can increase when external stakeholders exert pressure. For example, export-oriented family firms in Bangladesh pay higher audit fees and hire better-quality auditors than their domestic counterparts, a pattern consistent with external stakeholder (e.g. foreign buyer or joint-venture partner) demands for greater transparency (Khan et al., 2015). This scenario underscores that the institutional context of Bangladesh, characterized by concentrated family ownership, shapes audit pricing and auditor choice through its impact on agency dynamics and governance needs.

The audit market in Bangladesh has historically been characterized by low audit fees and a limited presence of international audit firms. For example, Siddiqui et al. (2013) documented that in the mid-2000s, the mean audit fees for a listed firm’s annual audit were only around US$1,300 (in our sample period, the mean is around US$3,000). One reason for such low pricing is the structure of the audit profession. Big4 affiliates audit only a small minority of listed companies; approximately 17% of firms are audited by Big4 affiliates (Siddiqui et al., 2013), while the proportion in our sample period is around 14.6%. Hence, most of the listed firms are audited by second-tier or local audit firms. Further, Big4 affiliates often do not charge higher fees than local firms for comparable engagements, except in cases where they are not concurrently providing non-audit services (Siddiqui et al., 2013). This implies that audit clients in Bangladesh generally do not perceive a major quality differential worth paying extra for, possibly due to the lack of strict enforcement of audit standards and accountability. The combination of low litigation risk and audit service surplus providers have kept fees at a price-competitive equilibrium with relatively weak incentives for delivering higher-assurance audits. Hence, investor and stakeholder demand for high-quality audits in Bangladesh has historically been low relative to developed markets, partly due to the concentrated family ownership.

Regulatory institutions in Bangladesh have only recently begun strengthening oversight of financial reporting and auditing, and enforcement remains a work in progress. The audit profession was traditionally self-regulated by the Institute of Chartered Accountants of Bangladesh (ICAB), which holds the legal mandate to license CAs and set auditing standards. All statutory auditors must be ICAB members, and ICAB historically oversaw audit practice through its own standards and practice review committee. However, weak enforcement of auditing and accounting standards has been a persistent issue, as noted by international assessments. For example, the World Bank (2003) and the BEI (2002) highlighted a lack of properly trained auditors and inadequate compliance, which contributed to the low demand for high-quality audits.

Recognizing these gaps, significant changes in corporate governance guidelines were introduced in Bangladesh in 2012; these reforms materially affected corporate reporting practices and internal governance of listed companies. Next, policymakers enacted the Financial Reporting Act (FRA) 2015, which established the Financial Reporting Council (FRC), an independent audit regulator, to improve audit oversight. In practice, the FRC’s implementation has faced challenges. The audit profession initially raised concerns that the FRC, in its early form, lacked the capacity and proper framework to achieve its objectives (Siddiqui, 2017). The World Bank’s 2015 ROSC review likewise cautioned that without addressing certain implementation issues, such as clarifying the FRC’s authority, resources, and coordination with ICAB and the Securities and Exchange Commission (SEC), the new regulator’s effectiveness could be undermined (Siddiqui, 2017). To date, enforcement actions by the FRC have been limited, and many rules (e.g. auditor enlistment criteria, inspection processes) are still evolving (Mala, 2025). This has direct implications for audit fees: historically, lax enforcement and low litigation risk meant auditors had little fear of penalties for sub-par audits, contributing to depressed fees. As of our study period, the audit regulatory regime in Bangladesh was still less robustly enforced than in many other jurisdictions, which helps explain the persistence of low audit fees and variable audit quality.

In sum, Bangladesh provides an institutional setting in which audit pricing and audit effort are shaped not only by client risk, but also by ownership concentration and enforcement constraints. The listed sector is largely family-controlled, which heightens principal–principal conflicts and can weaken the demand for transparent reporting when controlling shareholders can appropriate private benefits. At the same time, the audit market is characterized by limited Big4 participation, intense price competition and the persistence of lowballing, all of which reduce auditors’ ability and sometimes incentives to supply high-effort audits. These conditions are compounded by weak governance practices and comparatively loose regulatory enforcement, which can limit the credibility of external monitoring mechanisms and compress audit fees even when underlying business and reporting complexity is high. Within this environment, executive directors (may include family-backed directors) who frequently influence internal reporting choices and may also be closely involved in advisory and strategic decision-making can exploit institutional weaknesses to pursue private objectives. In this regard, the same expertise may enable more sophisticated concealment of opportunistic reporting choices, especially in complex firms where accounting estimates and group structures provide greater discretion, thereby dampening the effective demand for audit scrutiny.

Firm complexity refers to the extent of a company’s diversified and intricate operations, such as having numerous subsidiaries, business segments, or complex transactions. Complex firms inherently present a high level of nonlinearity in operations, involving multiple entities and voluminous transactions (Abbott et al., 2003). It also manifests through various characteristics, such as organizational structure, product lines, geographic operations, creative accounting tactics, financial engineering and the degree of information asymmetry (Loughran and McDonald, 2023). This operational complexity translates into greater audit complexity, since auditors must evaluate more transactions, varied operations and potentially convoluted financial reporting. A more complex firm requires auditors to expend additional effort in understanding the business structure, systems and risks, which increases the scope and difficulty of the audit. In other words, the complexity of a firm’s operations heightens the complexity of the audit itself. This linkage is well-documented in auditing research. For example, Simunic (1980)’s seminal audit fees model first posited that more complex clients demand more audit hours, and subsequent studies have consistently incorporated complexity as a key determinant of audit effort and pricing (Hay et al., 2006). In practice, auditors often charge higher fees to complex clients to compensate for the extra time and specialized expertise required to audit widespread operations and intricate accounts (Caramanis and Lennox, 2008). Thus, it is well established that firm complexity drives audit complexity, providing the theoretical basis for expecting a relationship with audit fees.

In our study, we capture two complementary proxies of firm complexity:

1. the number of subsidiaries; and

2. the proportion of accounting estimates (specifically, inventory, depreciation and receivables) to total assets.

These measures reflect both organizational and reporting complexity (see Section 4.2 for details). They align with prior literature’s view that complexity can stem from organizational structure (subsidiaries) and from financial reporting estimates, both of which complicate the audit task (Apadore and Letchumanan, 2016). Recognizing how firm complexity complicates audits is essential to formulating our expectations about audit fees in the next section.

A large body of research shows that audit fees tend to increase with client complexity. Complex companies, for example, those with many subsidiaries, international operations, or diversified product lines, demand greater audit effort, leading auditors to charge higher fees (Hay et al., 2006, for a review). A meta-analysis by Hay et al. (2006) finds that across numerous studies, various indicators of complexity (e.g. number of subsidiaries, foreign operations) exhibit a strongly positive association with audit fees. The rationale is straightforward: an auditor’s workload and risk increase with complexity, as more locations and transactions must be verified and more inherent risk factors (like complicated estimates or unusual transactions) must be evaluated. Empirical evidence from different contexts supports this positive relationship. For instance, studies in the USA and Europe document higher audit fees for firms with greater business segments or subsidiaries (Carcello et al., 2002; Antle et al., 2006). In emerging markets, similar patterns are observed: in South Africa, Davidson (2015) found audit fees rise with operational complexity, and in Pakistan, VulHaq and Leghari (2015) reported a significant positive complexity–fee link. Generally, auditors view complex clients as riskier and costlier to audit, justifying a fee premium (DeFond and Zhang, 2014).

However, not all studies find a universally positive effect. Musa et al. (2020), examining Nigerian listed firms, report that complexity does not significantly affect audit fees in their sample. Notably, their study focuses on consumer goods companies in Nigeria, and the insignificant result might reflect contextual factors such as relatively simpler operations or effective auditor familiarity within that sector. This divergence highlights the importance of setting: the complexity–fee relationship may vary across countries and industries. It underlines the need to explore the setting of Bangladesh, where corporate structures and the audit environment differ from those in prior studies. Bangladesh’s market features many family-controlled business groups, which could influence audit fee dynamics. For example, Waresul Karim and Hasan (2012) found that in Bangladesh, companies with higher insider ownership paid lower fees, consistent with reduced agency conflicts. They also found an anomalous negative or insignificant relationship between a traditional complexity proxy (inventory and receivables to assets) and audit fees. One explanation is that Bangladeshi conglomerates often have the same audit firm auditing multiple sister companies, yielding economies of scale that can dampen the fee impact of complexity. In addition, Karim and Hasan’s evidence was based on older (pre-2003) data under less developed regulatory conditions. Since then, Bangladesh has adopted international financial reporting standards (IFRS) based standards and implemented corporate governance reforms, potentially increasing both the complexity of financial reporting and the demand for audit assurance. These unique factors suggest that Bangladesh might exhibit a different complexity–fee dynamic compared to other emerging markets. Studying this context allows us to reconcile mixed findings (e.g. Musa et al., 2020’s no-effect result) and to understand whether complexity indeed commands a fee premium when auditing in an environment of concentrated ownership and evolving governance. Furthermore, as noted earlier, family-controlled firms often exhibit a lower demand for high-quality external audits due to entrenched ownership effects, which could lead to lower audit fees than their nonfamily counterparts (Ho and Kang, 2013).

Based on prevailing theory and the majority of prior evidence, we expect that even in Bangladesh, more complex firms will incur higher audit fees due to the greater audit effort and risk involved. At the same time, we anticipate that ownership structure will condition this effect. Specifically, family control may weaken the complexity–fee relationship if controlling owners resist extensive auditing. We formalize this expectation as follows:

Beyond firm characteristics, attributes of the leadership team can influence audit outcomes. In particular, the financial expertise of top executives or directors is thought to enhance financial reporting quality and oversight, which may in turn affect audit fees. Most prior studies on this topic have focused on CEOs’ expertise. For example, Kalelkar and Khan (2016) examined US firms and found that companies led by a financial expert CEO (a CEO with prior accounting or finance experience) pay approximately 8.5% lower audit fees than other companies. The reasoning is that a CEO with strong financial background can implement better internal controls and produce higher-quality financial reports (Custodio and Metzger, 2014), thereby lowering the auditor’s perceived risk and effort (and thus fees). In line with this, Kalelkar and Khan (2016) concluded that CEO financial expertise creates value through savings in audit fees.

Prior studies also consider financial expertise at the board level. Board’s financial expertise usually refers to having directors (executive or nonexecutive) with accounting or financial qualifications (such as CPA certifications or finance degrees). These individuals are better equipped to oversee financial reporting and to constrain earnings manipulation. Evidence from developing markets supports this: Githaiga et al. (2022), studying East African firms, reported that board financial expertise has a significant negative effect on earnings manipulation, contributing to higher reporting quality. In other words, when boards include financially knowledgeable directors, companies are less likely to engage in aggressive accounting, which implies lower inherent audit risk. This improved reporting environment can influence audit pricing. If management and directors are financially expert, auditors may anticipate fewer material misstatements and smoother audit processes, potentially reducing the hours and specialized testing needed. Consistent with this idea, a stream of research on audit committees finds that having accounting experts on the audit committee correlates with more reliable financial reports and, in some cases, lower audit fees (Krishnan and Wang, 2015; Tsui et al., 2001). This suggests that internal expertise and oversight can substitute for some external audit effort. However, when weak governance mechanism and lowballing in audit pricing exist in the country like Bangladesh (Waresul Karim and Hasan, 2012; Ghosh et al., 2020), the reduced audit fees does not reflect higher audit quality. Instead, higher audit fees usually indicate the higher quality audits (DeFond and Zhang, 2014).

Our study extends this literature by focusing on the financial expertise of executive directors, which includes the CEO and other inside directors on the board who have financial knowledge. This measure is broader than just CEO expertise, reflecting the collective financial expertise of the executive management team involved in governance. We clarify that ExeFinKnow in our context is measured by the presence of executive board members (e.g. Managing Director, Finance Director) with professional accounting qualifications or equivalent financial expertise. The inclusion of executive directors beyond the CEO is important in markets like Bangladesh, where boards often comprise a mix of family executives and professionals. The simultaneous presence of type-II agency problems and the entrenchment effect may prevent the formation of effective boards (Khan et al., 2015). In this context, an executive director’s financial expertise could impede higher-quality accounting outcomes. Such expertise might enable opportunistic directors to engage in earnings management and exploit complex transactions, potentially expropriating minority shareholders’ wealth. Consequently, a financially expert executive team may prefer lower-quality auditors (who charge lower fees), especially when firm complexity provides greater opportunities for earnings management ^[4]. Therefore, if a firm is complex but its executive directors are financially literate, it may diminish the positive impact of complexity on audit fees (by reducing perceived audit risk or by managing earnings through complexity). We hypothesize the following:

Effective corporate governance is another factor that can influence how complexity translates into audit costs. A key governance mechanism is the presence of independent directors on the board. Independent (nonexecutive) directors are expected to provide unbiased oversight of financial reporting and curb managerial opportunism, thereby potentially improving reporting quality (Fama and Jensen, 1983; Sen et al., 2022). As part of the process of confirming higher-quality corporate reporting, the audit committee is presumed to provide oversight over the corporate reporting process, monitoring the internal control mechanism and the tasks of the internal audit department and statutory auditors (Barua et al., 2010). Strong governance through board independence could affect audit fees in two plausible ways. First, it might serve as a substitute for some auditing: if independent directors rigorously monitor management and ensure high quality reporting even in complex firms, auditors may assess a lower residual risk, potentially leading to lower audit fees (Johl et al., 2016) than a comparable complex firm with weak governance. For example, Tsui et al. (2001) found that firms with a higher proportion of independent directors had improved controls and correspondingly paid reduced audit fees, consistent with the idea that auditors reward strong internal oversight with fee reductions. Similarly, Beasley (1996) notes that independent boards are associated with lower fraud risk, which could translate to less audit effort needed.

Conversely, the second perspective posits that effective governance can be complementary to auditing: independent boards and especially diligent audit committees may demand more extensive external audits to reinforce their monitoring (Chen et al., 2005; Bhattacharya and Banerjee, 2019). In this view, auditors could spend more time and perform additional procedures for complex firms because independent directors insist on rigorous assurance, thereby increasing audit fees. For instance, Abbott et al. (2003) found that companies with fully independent audit committees that meet frequently tend to pay higher audit fees, suggesting greater audit coverage at the behest of strong governance bodies. In that study, attributes of audit committees (independence, activity) were positively related to audit fee levels, indicating that vigilant boards do not reduce fees but rather encourage higher audit quality (and cost) to protect stakeholders. In addition, a higher proportion of nonexecutive (independent) directors on the audit committee correlates with the choice of industry-specialist audit firms (Chen et al., 2005). To ensure transparent and reliable financial reporting, audit committees dominated by independent directors often insist on hiring Big4 auditors (Bhattacharya and Banerjee, 2019).

Considering these two perspectives, the net effect of audit committee independence in our context will depend on which mechanism prevails. We expect that in Bangladesh’s setting of family ownership and weaker investor protections, the monitoring role of independent directors is crucial to ensure reliable reporting in complex firms. Independent directors in Bangladeshi firms (often instituted due to regulatory governance codes) can introduce much-needed scrutiny over complex operations that controlling shareholders might otherwise dominate. By doing so, they likely reduce information risk. At the same time, a demand-for-quality effect (i.e. more independent oversight leading to more audit efforts and higher fees) may arise from audit committee independence in complex firms. For example, a material weakness in internal control drives higher audit fees (Hogan and Wilkins, 2008); higher business risk leads to higher audit fees (Bedard and Johnstone, 2004); and restating earnings increases audit fees (Feldmann et al., 2009). Therefore, an independent audit committee is likely to insist on rigorous auditing for a complex firm, despite any reduction in risk, to ensure high-quality outcomes. Accordingly, we expect that:

We obtain data for this study from manufacturing firms listed on the Dhaka Stock Exchange (DSE) in Bangladesh. Table 1 details the composition of our sample. The sample period begins in 2013 and includes all firm-year observations of publicly traded manufacturing firms. This starting point aligns with significant changes in corporate governance guidelines in Bangladesh in 2012. Given that these guidelines exerted substantial influence on corporate reporting practices and internal governance within listed manufacturing firms, firm-year data preceding 2013 were deemed unsuitable for the purposes of this study. We focus on the manufacturing (nonfinancial) sector to maintain a relatively homogeneous sample and to avoid the confounding effects of industry-specific regulations that apply to financial institutions. Moreover, the Bangladesh Bank (the central bank) has mandated an approved panel of audit firms ^[5] eligible to conduct audits of banks and nonbank financial institutions. Consequently, in the financial sector both auditor selection and audit fees determination are largely restricted to a small pool of authorized audit firms, which is another reason we exclude financial firms.

There were 178 listed manufacturing firms on the DSE as of 2020. We collected hard copies of annual reports and visited company websites to gather information. Each variable was manually extracted and entered into spreadsheets. We then organized the data to make it compatible with statistical software. In this process, 69 firms were eliminated for various reasons, including poor corporate reporting, reliability issues and missing annual reports. In addition, newly listed firms with minimal data were excluded. As a result, the final sample includes 109 publicly traded manufacturing companies. Not all 109 companies were listed prior to 2013, but all have data in the 2013–2020 range. To ensure clarity in interpreting external audit fees data, any observation in which the reported audit fees included other professional or consulting costs was eliminated. Finally, we removed firm-year observations with missing dependent, independent, or control variables. The final sample comprises 738 firm-year observations (from 109 unique firms).

We use two proxies (i.e. complementary in nature) for firm complexity in this study: the number of subsidiaries (to capture organizational complexity) and the aggregate value of key accounting estimates (inventory, depreciation and receivables) scaled by total assets (to capture reporting complexity). Prior research argues that organizational complexity becomes evident when companies have many subsidiaries or significant foreign operations (Ashbaugh-Skaife et al., 2009; Loughran and McDonald, 2023). By contrast, reporting complexity in an auditing context is often linked to accounting estimates, which involve considerable management discretion (Kaplan and Reckers, 1995). For instance, the AICPA’s Statement on Auditing Standards No. 57 (AICPA, 1988) advises auditors to pay special attention to significant accounting estimates, as they can be used to manage earnings. Firms with a higher proportion of such estimates (e.g. large inventory or provisions relative to assets) have more complex financial reports that can increase audit difficulty. We label the subsidiary count proxy as FirmCmplx1 and the estimates-to-assets proxy as FirmCmplx2 for ease of reference.

There is no uniform measure of “financial knowledge” (Carcello et al., 2002). However, prior studies identify formal accounting/finance qualifications as evidence of expertise (Tanyi and Smith, 2015; Ghafran and O'Sullivan, 2017; Nehme et al., 2020). In line with the literature, we define a dichotomous variable for ExeFinKnow that equals 1 if the board of directors includes at least two executive directors with financial literacy (holding an MBA and/or a professional accounting/finance certification such as CA, ACCA, CIMA, CFA, CGMA or CMA) and 0 otherwise. This measure captures the collective financial expertise of executive board members, rather than focusing solely on the CEO. ExeFinKnow is particularly relevant in Bangladesh, where boards often include both family executives and professionals. In addition, the influence of type-II agency problems and entrenchment in Bangladesh (Khan et al., 2015) cannot be fully captured by only considering the CEO’s financial knowledge. We selected a threshold of at least two financially expert directors based on the idea of “diffusion of responsibility,” as suggested by social psychology research (Darley and Latane, 1968). When a task or decision involves two or more individuals, it becomes psychologically and socially easier to proceed because responsibility is shared, reducing each person’s sense of personal accountability. Bandura’s (1999) moral disengagement framework explains a similar pattern in unethical behavior: people are more likely to rationalize wrongdoing when responsibility is diffused, lowering guilt and self-sanction. In a board setting, this implies that a small coalition of financially knowledgeable insiders could normalize questionable actions and provide mutual justification, making opportunistic financial reporting more likely than if only one financially expert director were acting alone (Janis, 1972).

Consistent with existing literature (Ghafran and O'Sullivan, 2017; Nehme et al., 2020), we measure audit committee independence as the percentage of independent directors on the audit committee. We then define “high” audit committee independence by creating a dummy variable (AuditInd) that equals 1 if the ratio of independent directors in the audit committee exceeds 33% (one-third), and 0 otherwise. According to Bangladesh’s Corporate Governance Code (2018), Section 5(2), the audit committee should comprise at least three members, of whom at least one member must be an independent director. Given our interest in higher levels of independence, we adopt a more stringent criterion by setting the threshold above 33%, which in practice means the committee has more than the minimum required independent representation. Importantly, this cutoff corresponds to the fourth quartile of audit committee independence in our sample, representing approximately the top 25% (about 26% of firm-year observations in our sample), and reflects a stronger level of independent oversight.

La Porta et al. (1998) classified a firm as family-dominated when a family holds at least 20% ownership, an approach later adopted by Cascino et al. (2010) and Setia-Atmaja et al. (2011). Consistent with Cascino et al.’s (2010) view that family-firm status should not be determined using a single proxy, we apply the multi-criteria approach proposed by Meah et al. (2021) to distinguish family from nonfamily firms. Specifically, a firm is treated as family-controlled if any of the following conditions are met:

• disclosures in the annual report indicate that the chairman and CEO/Managing Director are related and belong to the same family;

• a female director serves as chairman or CEO/MD (used as an indicator of family control, except in the case of multinational corporations); or

• more than 50% of the directors, including the chairman and CEO/MD, share the same surname, suggesting family relationships in leadership.

We construct a dichotomous variable (FamInd) that takes the value 1 when any of the above conditions are met, and 0 otherwise.

We include several control variables known to influence audit fees to mitigate omitted-variable bias. Based on Hay et al. (2006), we control for auditor tenure using two proxies: a dummy for auditor change (1 if the auditor changed from the previous year, 0 otherwise) and the length of the auditor’s tenure in years. In a recent study, Hai et al. (2019) also found that audit engagement recurrence is a determinant of fees, so we include a dummy for recurring auditor engagements (1 if the company retained the same audit firm for at least two consecutive years, 0 otherwise). We control for firm performance by including a dummy for years in which the firm reported a net loss, since stakeholders might demand a higher-quality audit (and auditors might charge a risk premium) for poorly performing firms (Uang et al., 2006; Cahan et al., 2011). Conversely, some evidence suggests financially troubled firms in emerging markets may bargain for lower fees (Bhattacharya and Banerjee, 2019). We include a dummy for firms that are export-oriented, as export-heavy firms in family-dominated economies tend to spend more on audits (Khan et al., 2015). We control for audit seasonality with a dummy for busy season engagements (1 if the financial year ends in June, which is a peak reporting period in Bangladesh, 0 otherwise), as auditors often charge a premium for audits conducted during the peak season (Chen et al., 1993; Karim and Moizer, 1996). We also include a Big Four auditor dummy, given evidence of Big Four fee premiums in emerging economies (Khan et al., 2015; Bhattacharya and Banerjee, 2019; Darmadi, 2016). Finally, we control for firm age (measured as the natural logarithm of years since incorporation), as older firms may have more established systems and internal controls that could affect audit effort (Liu, 2017). Table 2 summarizes the measurement of each variable.

We estimate several regression models to test our hypotheses. Audit fees (the natural logarithm of the audit fees) are the dependent variable. To test H1 (the effect of complexity and family control), we include firm complexity (FirmCmplx) and the family firm dummy (FamInd), along with their interaction. To test H2 and H3, we include interaction terms between firm complexity and ExeFinKnow, and between firm complexity and AuditIndep, respectively. All regressions include the control variables discussed in Table 2.

To test H1, our regression model for audit fees is specified as follows:

To test H2, we extend the model to include ExeFinKnow and its interaction with complexity:

Similarly, for H3 we include AuditInd and its interaction with complexity:

Here, $i$ represents the $i−th$ company and $t$ (2013, 2006, …., 2020) represents time period for each company. $LnAduitFees$ represents the natural logarithm of audit fee. $FirmCmplxit$ represents two complementary proxies of firm complexity (either number of subsidiaries or estimates-to-assets ratio). $FamIndit$ is the family firm dummy. In equation (1), the coefficient β₁ captures the complexity effect on audit fees for nonfamily firms, while β₂ captures the incremental effect (moderation) for family firms. In equation (2), A negative and significant $δ3$ would support H₂, indicating that financial expertise attenuates the audit fees impact of complexity. Finally, in equation (3), a positive and significant interaction $θ3$ would support H₃, indicating that greater audit committee independence amplifies the complexity effect on fees. $Controlsit$ includes all control variables.

We estimate the main models using two-step system GMM. This approach is appropriate because audit fees may exhibit persistence over time and because firm complexity, governance attributes and audit fees may be jointly influenced by unobserved firm-level characteristics, such as internal control quality, governance culture, auditor–client relationships and managerial reporting incentives. Therefore, system GMM allows us to account for dynamic panel structure, unobserved heterogeneity and theoretically plausible simultaneity concerns.

In the GMM framework, we treat firm complexity and the related interaction terms as potentially endogenous or predetermined rather than strictly exogenous. Lagged values of these variables are used as internal instruments, assuming that past values of firm complexity are correlated with current complexity but not with contemporaneous shocks to audit fees. To reduce the risk of instrument proliferation, we restrict the lag structure and collapse the instrument matrix following Roodman (2009). We report the Arellano–Bond AR(1), AR(2) and Hansen tests to assess serial correlation and instrument validity.

We report the standard GMM diagnostics with the results. The Arellano–Bond AR(1) test is significant, as expected in first-differenced errors, while the AR(2) test is insignificant, indicating no evidence of second-order serial correlation. We also report the Hansen J-statistic for overidentifying restrictions; p-values above 0.10 suggest that the instruments are not rejected as invalid. In addition, we limit the lag structure and collapse the instrument matrix to reduce the risk of instrument proliferation. Overall, these diagnostics support the validity of the GMM specifications.

We also report 2SLS estimates as an additional robustness check. The Durbin–Wu–Hausman (DWH) tests in the 2SLS analysis fail to reject exogeneity where reported. Accordingly, we do not interpret the IV-based evidence as proof that endogeneity materially biases the baseline estimates. Rather, the 2SLS results provide a conservative sensitivity check, while system GMM remains our preferred estimator due to the dynamic panel features of the audit-fee setting.

Table 3 reports the descriptive statistics of the variables used in this study. It shows that the average audit fees are BDT. 370,930 ($3,370), and the minimum audit fees are BDT 18,400 ($165) in Bangladesh. We found the maximum number of subsidiary firms is 14 from 2013 to 2020. Next, we find the maximum number of audit tenures is 7 years, and the average tenure period is 2.1 years. Finally, the average firm age is 17.6 years, and the maximum age is 44 years.

Table 4 shows multicollinearity diagnostics. All variance inflation factors (VIFs) are below 10, and all pairwise correlations among independent variables are well below 0.7 in absolute value, indicating that multicollinearity is not a concern in our study.

Table 5 presents the influence of family control on the relationship between firm complexity and audit fees. The regression results indicate that in the presence of high firm complexity, audit fees are comparatively lower for family-controlled firms than for nonfamily firms. This suggests that, for complex firms, family ownership is associated with less extensive (and presumably lower quality) audits. In other words, complexity-driven audit effort appears to be curtailed in family firms, consistent with an entrenchment effect that lowers audit demand. This finding supports the second part of H1, confirming that the positive complexity–fee relationship is attenuated in family-controlled companies.

Table 6 presents the main regression results for firm complexity and ExeFinKnow. In the baseline specifications (without interactions), firm complexity (by either proxy) has a positive and significant coefficient, indicating that more complex firms tend to have higher audit fees (supporting the first part of H1). Executive directors’ financial knowledge itself shows a positive main effect on audit fees, suggesting that, on average, firms with financially knowledgeable executives pay slightly higher fees. However, when we include the interaction between firm complexity and ExeFinKnow (in the specifications that include the interaction term for each complexity proxy), the interaction term is negative and significant. This implies that the presence of financial expertise among executive directors attenuates the increase in audit fees associated with firm complexity. In other words, in highly complex firms, having financially expert executives leads to lower than-expected audit fees, which could imply a reduction in audit scope/effort (and potentially lower audit quality). This finding is consistent with H2.

Table 7 reports the results for firm complexity and Audit committee independence (AuditInd).

Like ExeFinKnow results, firm complexity is positive and significant across all models. AuditInd has a positive but generally insignificant effect on audit fees (with weak significance in only one specification). Importantly, the interaction between firm complexity and AuditInd is positive and significant (for both complexity proxies). This confirms that higher audit committee independence amplifies the audit fees impact of firm complexity. In complex firms with a highly independent audit committee, audit fees are significantly higher than for similarly complex firms with a less independent audit committee. This suggests that a highly independent audit committee leads to more extensive audits and thus higher fees (potentially lower audit quality) even in complex firms. This evidence supports H3.

Table 8 reports 2SLS robustness checks for the key moderation models. These tests are included to examine whether the main findings are sensitive to potential endogeneity concerns rather than to establish that endogeneity is empirically present. We use the second and third lags of firm complexity, and lagged interaction terms where applicable, as excluded instruments because firm complexity is persistent over time, while lagged complexity is less likely to be correlated with contemporaneous audit-fee shocks after controlling for firm characteristics and time effects.

Table 8 shows that the 2SLS estimates are broadly consistent with the main results: firm complexity remains positively associated with audit fees across both complexity proxies. With respect to moderation, the interaction between complexity and executive directors’ financial knowledge remains negative and statistically significant for the organizational complexity proxy (FirmCmplx1). Next, the interaction between complexity and audit committee independence remains positive and statistically significant for the reporting complexity proxy (FirmCmplx2), consistent with the view that more independent audit committees demand greater audit effort in complex firms. However, we do not find consistency for Models 4, 6, 8 and 10.

The diagnostic statistics generally support the relevance and validity of the instruments. The Kleibergen–Paap rk LM tests reject underidentification in most specifications, indicating that the excluded instruments identify the endogenous regressors. The Kleibergen–Paap rk Wald F-statistics are well above conventional weak-instrument thresholds, suggesting that weak instruments are not a concern. Hansen J tests fail to reject the null of instrument validity, providing no evidence against the exogeneity of the instruments. However, the DWH tests fail to reject exogeneity where reported. Therefore, the 2SLS results are interpreted as sensitivity evidence, not as proof that IV estimation is necessary.

Table 9 reports additional three-way interaction analyses after including the required lower-order main effects and two-way interaction terms. The coefficients on FirmCmplx × ExeFinKnow × FamInd are negative across both complexity proxies, suggesting that the audit-fee-reducing effect of executive financial knowledge in complex firms is stronger among family-controlled firms (see Models 11 and 12). In contrast, the coefficients on FirmCmplx × AuditIndep × FamInd are positive, indicating that audit committee independence increases audit fees more strongly in complex family firms (see Models 13 and 14). These findings support the argument that financially knowledgeable insiders may reinforce entrenchment in complex family firms, whereas independent audit committees act as a countervailing governance mechanism by demanding greater audit effort.

This study examines how firm complexity influences audit fees in an emerging market, and how two governance factors, which are executive directors’ financial expertise and audit committee independence (AuditInd), moderate this relationship. The findings provide new evidence on the debate over firm complexity and audit pricing by focusing on a family-firm-dominated setting (Bangladesh). Consistent with prior studies in developed markets, we find that complexity generally increases audit fees, suggesting that auditors charge more for more complex audits. However, this increase in audit fees is relatively lower for family-controlled firms compared to nonfamily firms. More importantly, we show that internal governance characteristics can significantly alter this effect in an emerging-market context. Specifically, we document that financial expertise among executives can, in a weak governance setting, lead to lower audit fees for complex firms, whereas independent audit committees lead to higher audit fees for complex firms. This nuanced insight extends prior research on audit fees by highlighting that the impact of complexity on audit pricing is not uniform but contingent on internal governance attributes, especially in environments characterized by concentrated family ownership and weaker investor protection.

Our findings on executive directors’ financial knowledge (ExeFinKnow) differ from typical expectations derived from stronger institutional settings. Consistent with Murphy (1985), apparent contradictions across studies can arise when similar empirical proxies reflect different underlying mechanisms across contexts. For example, Kalelkar and Khan (2016) reported that, in US firms, CEO financial expertise is associated with improved reporting environments and lower audit fees through risk-reduction channels; however, their focus is on CEO-level expertise rather than the collective financial knowledge of executive directors operating within the board/management interface. Likewise, Githaiga et al. (2022) found that financial expertise is associated with lower earnings manipulation, but their measure reflects broader board-level expertise that may combine monitoring (e.g. independent directors and audit committee members) with managerial/advisory influence (executive directors), making the dominant channel difficult to isolate in that context. In contrast, our ExeFinKnow measure captures financially literate executive directors, who are directly involved in internal decision-making, reporting discretion and advisory functions. For example, directors who are in leadership positions (e.g. CEO or board chair), particularly in the accounting-related advisory position (e.g. CFO) have more access to important accounting-related information and have a negative impact on the accounting behaviors (Chiu et al., 2013). In Bangladesh’s weaker governance environment, such expertise may facilitate more sophisticated reporting discretion and bargaining over audit scope, thereby reducing the effective demand for high-effort audits and resulting in lower audit fees. Put differently, a capability that strengthens reporting in high-enforcement regimes may, under weaker oversight, also be used to reinforce entrenchment incentives and compress audit scrutiny. By contrast, our evidence on audit committee independence aligns more closely with conventional theory: independent audit committees appear to demand greater audit effort in complex settings, thereby increasing audit fees and strengthening external monitoring.

Finally, this study sheds light on differences between family-controlled and nonfamily firms. The evidence suggests that type-II agency problems and entrenchment in family firms can be exacerbated by financially expert executive directors, leading to reduced audit oversight when firms are complex. However, a strong, independent audit committee places greater emphasis on protecting shareholders’ interests and ensuring higher-quality financial reporting for investors, even in family-controlled firms. In essence, in family firms the presence of multiple financially expert insiders may enable the family to better conceal complexities (thereby reducing audit demand), whereas truly independent audit committees serve as a countervailing force that compels auditors to do more, not less, in the face of complexity.

In conclusion, this study provides novel evidence on how firm complexity and governance mechanisms jointly affect audit pricing in an emerging-market setting. Using data from Bangladeshi listed firms, we show that while complexity generally drives audit fees upward, the presence of financially expert executive directors can moderate this effect by lowering audit fees, especially in family-controlled firms. In contrast, greater audit committee independence amplifies the complexity effect on fees, reflecting higher audit effort. These findings suggest that internal governance structures play a critical role in shaping auditors’ work and fees, beyond the traditional determinants of client size and risk.

Our study has important implications for regulators and practitioners. In countries like Bangladesh, where family ownership is prevalent, regulators should be aware that complex corporate structures might be used opportunistically to obscure financial reporting issues, especially when insiders possess significant financial expertise. Strengthening investor protection and ensuring the true independence of audit committees could counteract this tendency. Policy measures might include requiring a majority of independent directors on audit committees (as encouraged by the Bangladesh Securities and Exchange Commission) and empowering those committees with greater authority and resources to oversee the audit process. Our results support initiatives aimed at improving audit quality, such as enforcing minimum audit fees (to prevent lowballing) and enhancing the capacity of regulators like the FRC to monitor audit practices.

Finally, our study sheds light on the broader debate about audit pricing in emerging economies. By demonstrating that internal governance can either reduce or amplify the complexity effect on audit fees, we provide evidence that “one size fits all” assumptions (drawn mostly from developed markets) may not hold in emerging markets. Researchers and practitioners should consider country-specific governance and ownership structures when evaluating audit fee determinants.

Despite these contributions, our findings should be interpreted in light of important institutional limitations. Bangladesh represents a family-dominated emerging market characterized by relatively weak enforcement of corporate governance mechanisms, limited litigation risk and evolving audit regulatory oversight. Prior research suggests that institutional strength significantly shapes audit pricing, auditor independence and governance effectiveness (DeFond and Zhang, 2014; Francis, 2004; La Porta et al., 1998). In environments with stronger investor protection and enforcement regimes, the moderating role of executive financial expertise and audit committee independence may operate differently. Therefore, caution should be exercised in generalizing our results to jurisdictions with more developed legal systems and stronger regulatory enforcement. Future research could examine whether similar governance–complexity interactions persist in countries with higher institutional quality and more stringent audit oversight frameworks. Next, we focused on executive directors’ collective financial expertise and did not isolate the expertise of specific roles (e.g. the CEO or CFO) to pinpoint their individual effects. Also, we did not directly incorporate an earnings quality metric into our analysis; we inferred that higher audit fees generally indicate higher audit effort/quality, an assumption consistent with prior literature (DeFond and Zhang, 2014). Finally, although reverse causality and omitted-variable concerns remain theoretically plausible in audit-fee research (DeFond and Zhang, 2014), the DWH tests in our 2SLS specifications do not reject exogeneity. Therefore, we interpret the 2SLS results as conservative robustness checks rather than evidence that the main GMM estimates are required solely because endogeneity is empirically confirmed. System GMM remains our primary estimator because it better accommodates the dynamic panel structure, unobserved firm-level heterogeneity and theoretically plausible simultaneity in the audit-fee setting. Future research could build on our work by including explicit measures of financial reporting quality (such as accruals quality or incidence of restatements) to examine directly how the interplay of complexity, board expertise and audit committee oversight influences actual reporting outcomes.