This study examines the impact of board interlocks on audit fees among firms listed on South Korea's KOSDAQ market. Board interlocks, created when directors serve on multiple boards, represent structural networks that can facilitate information exchange and coordination but may also compromise board independence. Although prior studies have explored the consequences of interlocks in mature markets, evidence from emerging, technology-oriented markets remains limited. This study addresses this gap by analysing whether board interlocks affect total and abnormal audit fees, which reflect auditors' risk assessments, effort, and pricing decisions. Using panel data, we estimate OLS and firm fixed-effects regressions and further validate the results through propensity score matching with fixed effects to mitigate endogeneity concerns. The findings show that inside directors' interlocks, initially associated with higher audit fees in OLS models, become significantly negative once firm-specific factors are controlled for, suggesting that inside directors' networks improve the information environment and reduce auditors' risk perception. Outside directors' interlocks show weaker and less robust negative effects. Overall, the results indicate that board interlocks can stabilise audit fees and enhance audit efficiency, contributing to the literature on corporate governance and audit pricing.
1. Introduction
This study examines the effect of board interlocks on audit fees, focusing on companies listed on South Korea's KOSDAQ (Korean Securities Dealers Automated Quotations) market. A board interlock refers to a network structure that emerges when a director simultaneously serves on the boards of two or more firms. Driven by neoliberal policies and the liberalisation of financial markets, South Korea's traditionally closed corporate governance framework has gradually evolved. Together with rapid advancements in information technology, these developments have contributed to the increasing prevalence of board interlocks. Moreover, economic shocks such as the 2008 global financial crisis and the recent COVID-19 pandemic have underscored the critical importance of internal controls and risk management, heightening interest in board-level networks.
Board interlocks are structural network mechanisms that extend beyond individual relationships, facilitating information exchange, resource access, and influence over strategic decision-making across firms. They are recognised as key mechanisms capable of reshaping corporate governance systems (Mizruchi, 1996; Gulati and Westphal, 1999). While some researchers contend that interlocks—particularly those involving directors with multiple board appointments—enhance inter-firm information flow, resource sharing, and decision-making efficiency (Haunschild, 1993; Gulati and Westphal, 1999), others highlight potential drawbacks, including diminished board independence, increased information asymmetry, and weakened external monitoring (Ferris et al., 2003; Fich and Shivdasani, 2006).
These network characteristics may influence external auditors' risk assessments and audit planning, potentially affecting audit fee determinations (Houston et al., 1999; Bell et al., 2001). Because auditors regard a firm's governance structure and internal control environment as central to evaluating audit risk, the presence of board interlocks may introduce uncertainty regarding internal control effectiveness, potentially leading to greater audit effort and intensity.
Despite growing academic interest, most prior studies have examined the consequences of board interlocks in large-scale or advanced markets, leaving relatively limited evidence on emerging or technology-oriented markets such as South Korea's KOSDAQ. The KOSDAQ market, characterised by small and medium-sized enterprises, lower levels of board independence, and greater information asymmetry, offers a unique institutional context in which the effects of board interlocks on audit fees may be more pronounced or differ in magnitude. By focusing on this market, the present study extends research beyond mature markets and large-cap firms and captures the dynamics of board interlocks under conditions of weaker governance and higher audit risk.
This study also advances the literature by distinguishing between normal and abnormal audit fees. Whereas prior research has often concentrated on aggregate audit fees, this distinction enables a more nuanced analysis. Abnormal audit fees, which capture unobservable elements such as bargaining power between management and auditors or auditors' risk aversion (Francis and Ke, 2006; Choi et al., 2010), may signal accounting complexity, governance weaknesses, or compromised audit quality (Hogan and Wilkins, 2008; Blankley et al., 2012). Incorporating this measure allows the study to shed light on how board interlocks influence both the observable and latent dimensions of audit pricing, providing a richer understanding of the governance–audit nexus.
Beyond these specific analyses, this study makes a broader contribution by bridging two research streams that have largely evolved in parallel: the literature on board interlocks and the literature on audit pricing. While prior studies have examined board interlocks primarily in relation to corporate strategy or firm performance, and audit fees mainly in connection with audit risk and governance quality, relatively little attention has been paid to the intersection of these domains. By investigating how board-level network structures shape auditors' risk perceptions and fee-setting behaviour, this study offers an integrative perspective that links corporate governance mechanisms with external audit outcomes.
Finally, the study responds to the growing interest in how board interlocks influence auditors' planning and risk assessments. This reflects heightened expectations for audit quality and concerns about the potential distortive effects of board structures on financial reporting. Against this backdrop, there remains a pressing need for empirical investigation into the association between board interlocks and audit fees. As audit fees serve not merely as compensation but also as indicators of a firm's information environment and governance framework, exploring their relationship with board interlocks may yield valuable insights for both academics and practitioners.
In summary, the results demonstrate that the effects of board interlocks differ by director type. OLS estimates suggest that inside directors' interlocks are associated with higher audit fees, whereas outside directors' interlocks are linked to lower total and abnormal audit fees. However, after accounting for unobserved firm heterogeneity using fixed-effects regressions and validating the results through PSM-FE analyses, inside directors' interlocks consistently show a significant negative association with both total and abnormal audit fees. These findings indicate that inside directors' networks enhance the information environment, lower auditors' risk perception, and ultimately promote audit efficiency, while outside directors' effects are weaker and less robust.
2. Literature reviews and hypothesis
Board Interlocks
A board interlock is a structural network phenomenon in which a single individual serves on the boards of two or more firms (Mizruchi, 1996). The effects of board interlocks on firms are commonly explained through two primary theoretical perspectives: agency theory and resource dependence theory.
According to resource dependence theory, board interlocks play a positive role by facilitating inter-firm information sharing, expanding access to critical resources, and enhancing opportunities for strategic alliances (Gulati and Westphal, 1999). Rosenstein and Wyatt (1994) empirically demonstrated that interlocked directors can more efficiently acquire information through these networks, thereby helping firms achieve excess returns. Gulati and Westphal (1999) also found that trust established through these networks strengthens collaboration during strategic decision-making. Dass et al. (2014) further emphasised that the effects of board interlocks are particularly significant in contexts characterised by high levels of information asymmetry. Field et al. (2013) argued that although increased interlocking may potentially weaken monitoring, directors' accumulated experience and networks enhance their advisory capacity, ultimately contributing positively to firm value. Other studies have also suggested that board interlocks improve firms' responsiveness to environmental change, promote organisational learning (Haunschild, 1993; Burt, 2000), and reduce transaction costs through enhanced inter-firm trust (Granovetter, 1985; Nahapiet and Ghoshal, 1998).
By contrast, agency theory highlights potential downsides of board interlocks, arguing that they may undermine board independence, create conflicts of interest, and reduce transparency in corporate governance (Core et al., 1999; Ferris et al., 2003; Fich and Shivdasani, 2006). Such effects can weaken the internal monitoring function and, in some settings, increase audit risk and audit fees (Houston et al., 1999; Bell et al., 2001).
Taken together, prior research suggests that the impact of board interlocks is theoretically ambiguous and contingent on whether the informational and resource benefits they provide outweigh the potential costs of weakened monitoring and increased agency problems.
Board Interlock and Audit Fees
According to resource dependence theory, board interlocks facilitate inter-firm information sharing, expand access to critical resources, and improve the quality of strategic decision-making (Gulati and Westphal, 1999; Rosenstein and Wyatt, 1994). Such networks can enhance board deliberations and governance mechanisms, enabling auditors to perceive a stronger control environment and a lower level of audit risk. Empirical evidence further suggests that well-connected directors contribute to higher board quality, promote organisational learning, and enable more effective responses to external environmental changes (Haunschild, 1993; Burt, 2000; Horton et al., 2012).
Conversely, agency theory highlights the potential downsides of interlocks. Directors with multiple board appointments may face conflicts of interest or limited time for monitoring, which can weaken internal oversight (Ferris et al., 2003; Fich and Shivdasani, 2006). These concerns may heighten auditors' risk assessments, prompting additional audit procedures and higher audit fees (Houston et al., 1999; Bell et al., 2001).
Empirical evidence on the relationship between board interlocks and audit fees remains mixed. Some studies report that interlocks are associated with higher audit fees due to elevated perceived risk (Carcello et al., 2002; Johansen and Pettersson, 2013), whereas others find that interlocks enhance information flow and governance quality, leading to lower audit fees (Zajac and Westphal, 1996; Haunschild and Beckman, 1998). Recent studies have further highlighted the importance of examining abnormal audit fees, which capture incremental risk assessments, non-standard audit efforts, and bargaining dynamics between auditors and management (Francis and Ke, 2006; Hogan and Wilkins, 2008).
The KOSDAQ market, dominated by small- and medium-sized technology-oriented firms, is characterised by weaker board independence, limited internal resources, and greater information asymmetry. This context provides a unique setting in which the informational and advisory benefits of board interlocks may be particularly pronounced, allowing researchers to investigate whether these benefits outweigh the potential monitoring costs and ultimately reduce perceived audit risk and audit fees.
Hypothesis
Drawing upon agency theory and resource dependence theory, board interlocks can exert both positive and negative effects on audit fees. While agency theory highlights potential monitoring weaknesses arising from conflicts of interest or limited director attention, resource dependence theory posits that interlocks enhance information flow, advisory capacity, and access to external resources (Mizruchi, 1996; Fich and Shivdasani, 2006; Gulati and Westphal, 1999; Rosenstein and Wyatt, 1994). In the context of KOSDAQ firms—characterised by smaller boards, weaker independence, limited internal resources, and greater information asymmetry—the governance-enhancing benefits of board interlocks are hypothesised to outweigh their potential drawbacks.
Accordingly, this study proposes the following hypotheses.
Board interlocks held by directors are expected to be negatively associated with audit fees.
The negative association is expected to be particularly pronounced for abnormal audit fees, reflecting auditors' incremental risk assessments and non-standard audit efforts.
These hypotheses imply that well-connected directors—both inside and outside—can strengthen governance quality and improve information transparency, thereby reducing both normal and abnormal audit costs for KOSDAQ-listed firms.
3. Study design and Sample Selection
Study Model
To investigate the effect of board interlocks on audit fees, this study estimates the following regression model. The definitions of the variables used in the model are provided in Appendix Table A1.
In Equation (1), the dependent variable is the natural logarithm of total audit fees. In addition, this study defines abnormal audit fees as the deviation from expected audit fees based on firm size—capturing situations where audit fees are significantly higher or lower than predicted. The residuals from the following model are used as a proxy for abnormal audit fees:
Since firm size is already included as the explanatory variable in Equation (2), it is excluded from the control variables when abnormal audit fees are used as the dependent variable in subsequent regressions.
This study focuses on whether an individual director concurrently serves on the boards of multiple firms. Such firms are considered interlocked. While prior research has often relied on a binary indicator (1 if any interlock is present, 0 otherwise), this study employs a more granular and continuous measure by capturing the actual number of interlocks. To account for variation in board size, the measure is normalised by calculating the average number of interlocks per director, thereby mitigating bias arising from larger boards naturally having more interlocks.
Although directors are collectively responsible for advancing organisational objectives, inside and outside directors may approach decision-making from different perspectives. These differences can influence the volume, nature, and quality of information exchanged within the boardroom. Recognising that outside directors may exercise limited influence in the Korean context, this study explicitly distinguishes between inside and outside directors in the empirical analysis.
To control for other factors known to affect audit fees, several firm-level attributes are included as control variables. Firm size (SIZE) is incorporated as a primary determinant, as larger firms typically have more complex financial reporting environments. Financial leverage (LEV) is included as a proxy for solvency risk, while profitability (ROA) captures firms' incentives to manage earnings. Growth (GRW) reflects organisational complexity arising from expansion or restructuring. The ratio of inventories and receivables to total assets (INVREC) is used to account for estimation risks in accounts susceptible to misstatement. Audit quality is proxied by a Big Four indicator, as these firms generally charge higher fees due to their reputation and service scope. Additional governance variables—ownership concentration (Noh and Park, 2024), foreign ownership (Lee et al., 2022), and board size—are also included. All continuous variables are winsorised at the top and bottom 1% to reduce the influence of outliers and improve robustness.
Sample Selection
Unlike many prior studies that focus primarily on companies listed on the KOSPI market, this study examines firms listed on the KOSDAQ (Korean Securities Dealers Automated Quotations) market. Characterised by a concentration of technology-oriented and venture-driven enterprises, the KOSDAQ has developed along a unique trajectory amid South Korea's rapidly evolving economic landscape. Since the 1980s, the rise of neoliberal policies, financial market liberalisation, and advances in information and communication technology have heightened the importance of inter-firm networks within this market. In this context, board interlocks have emerged as a key structural mechanism by which small and early-stage venture firms gain access to external resources and information. Accordingly, if board interlocks exert a positive influence on audit fees, such effects are expected to be more pronounced among KOSDAQ-listed firms than their KOSPI-listed counterparts.
However, the structural characteristics of the KOSDAQ market—namely, its relatively underdeveloped governance systems and weaker internal controls—may also amplify the potential negative consequences of board interlocks. Given that audit fees are a critical indicator of both financial reporting reliability and auditors' risk assessments, conflicts of interest and information asymmetries arising from interlocks may increase audit complexity and, in turn, audit costs. This concern is particularly relevant for KOSDAQ firms, which generally face weaker external monitoring mechanisms than larger firms listed on the KOSPI. Accordingly, in the KOSDAQ context, board interlocks may exacerbate concerns regarding financial transparency and audit quality.
Specifically, the sample for this study was constructed based on the following criteria.
firms listed on the KOSDAQ between 2018 and 2023,
non-financial firms with December fiscal year-ends, and
firms for which the financial data necessary for empirical analysis are available via TS-2000.
Applying these criteria yields a final sample of 7,256 firm-year observations.
4. Results of the empirical analysis
Descriptive statistics and correlation analysis
Table 1 presents the descriptive statistics for the sample. The mean value of Audit Fees is 11.71, with a standard deviation of 0.55, indicating relatively limited variation in audit fee levels across firms. This suggests a generally consistent level of audit service provision among the sampled firms. In contrast, Abnormal Audit Fees have a mean of 0.05 and a standard deviation of 0.44, with a minimum value of −3.26. This indicates that some firms pay significantly lower audit fees than would be expected based on firm size, potentially raising concerns about auditor independence or inconsistencies in audit quality.
The mean value of AvgID_Total is 0.16, reflecting a generally low incidence of board interlocks across the sample. Notably, the average AvgID_Inside is marginally higher than AvgID_Outside, suggesting a greater prevalence of interlocks involving inside directors. The average firm size (SIZE) is 18.61, suggesting that, on average, the sampled firms are smaller than those listed on the KOSPI market. The average leverage ratio (LEV) is 0.35, suggesting a relatively stable capital structure, although certain firms appear to be more highly leveraged.
Operating Cash Flow (CFO) and Return on Assets (ROA) average 0.02 and −0.02, respectively, indicating that some firms may be experiencing operational inefficiencies or profitability challenges. Given the substantial skewness observed in the distribution of the growth variable (GRW), a log transformation was applied to improve its distributional properties and mitigate the influence of extreme values. The transformed GRW variable has a mean of 0.03 and a standard deviation of 1.09, indicating substantial variation in growth trajectories across firms. The average ratio of inventories and receivables to total assets (INVREC) is 0.21, serving as a proxy for the efficiency of current asset management.
Regarding governance variables, the mean ownership stake of the largest shareholder (OWN) is 37%, indicating relatively strong insider control. While this may help mitigate agency conflicts, it may also heighten the potential for private benefit extraction. Foreign ownership (FOR) is relatively low at 5%, although it may still influence the firm's information environment and financial reporting transparency. The average Board Size is 1.78 (log scale), suggesting that most firms maintain relatively small boards. While smaller boards may facilitate agile decision-making, they may also limit oversight capacity and, consequently, governance effectiveness. Lastly, 28% of the firms in the sample are audited by Big Four accounting firms, indicating that a significant portion of KOSDAQ-listed companies rely on smaller auditors, potentially contributing to variation in audit quality.
Collectively, these descriptive statistics highlight the distinctive governance and operational environment of KOSDAQ-listed firms, underscoring the importance of investigating how board interlocks affect audit fees in this unique context.
Table 2 presents the results of the Pearson correlation analysis. A significant positive correlation is observed between Audit Fees and AvgID_Total, indicating that firms with higher levels of board interlocks tend to incur greater audit fees. This result can be interpreted in two contrasting ways. First, directors with extensive external networks may expose the firm to a wider array of information sources and stakeholders, thereby complicating its information environment. Consequently, auditors may perceive heightened audit risk, necessitating a broader audit scope and higher fees. Second, such networks may signal enhanced director expertise and a stronger commitment to accounting transparency and financial reporting quality. In this case, boards may demand higher-quality audits, prompting auditors to expand their procedures and adjust fees accordingly.
AvgID_Total is also significantly positively correlated with SIZE, suggesting that larger firms are more likely to appoint directors with extensive external affiliations. In contrast, firms with financial constraints tend to exhibit fewer board interlocks, as evidenced by the negative correlations with LEV and INVREC.
Audit Fees exhibit the strongest positive correlation with SIZE, implying that larger firms require more extensive audit services, thereby increasing auditor effort. Additionally, Audit Fees are significantly positively correlated with LEV, Big4, BoardSize, and FOR, suggesting that audit pricing reflects financial risk, external monitoring requirements, and governance structures. By contrast, OWN is negatively correlated with Audit Fees, indicating that firms with higher insider ownership may rely less on external assurance and consequently incur lower audit costs. Overall, the correlation coefficients among key variables remain below 0.3, indicating that multicollinearity does not pose a major concern for subsequent regression analyses.
Main Analysis
Table 3 reports the results of the OLS regression analyses that examine the association between board interlocks and both total and abnormal audit fees. To capture the effects of board interlocks more precisely, the analysis distinguishes among three measures: the average interlocks across all directors (AvgID_Total), those held by inside directors (AvgID_Inside), and those held by outside directors (AvgID_Outside). The results indicate that AvgID_Total is not significantly associated with either audit fees or abnormal audit fees, implying that the overall extent of board interlocks does not materially affect auditors' risk assessments or fee determinations.
By contrast, AvgID_Inside shows a significant positive association with audit fees, suggesting that auditors perceive interlocks held by inside directors as potential risk factors. Since inside directors are closely involved in managerial decision-making, multiple external appointments may raise concerns about information leakage, governance complexity, or weakened internal monitoring. These perceptions likely prompt auditors to expand the scope of audit procedures and charge higher fees accordingly. For abnormal audit fees, AvgID_Inside also exhibits a positive coefficient, implying that auditors incorporate incremental risk adjustments into pricing, although the effect is relatively modest and does not strongly reflect opportunistic behaviour.
In contrast, AvgID_Outside exhibits a significant negative association with both audit fees and abnormal audit fees. This finding suggests that outside directors' interlocks improve the firm's governance environment, strengthen board oversight, and reduce auditors' perceived risk, resulting in lower audit pricing. Taken together, the OLS results highlight the heterogeneous nature of board interlocks: while interlocks held by inside directors are viewed as risk-enhancing, those held by outside directors are interpreted as governance-strengthening. Nevertheless, because OLS models rely on cross-sectional variation only, they cannot control for unobserved firm-specific heterogeneity, motivating the use of panel data models to obtain more robust estimates.
Table 4 presents the results of the fixed effects (FE) panel regressions, which account for time-invariant firm-specific heterogeneity by exploiting within-firm variation over time. Standard errors are clustered at the firm level to address heteroscedasticity and serial correlation.
When audit fees are the dependent variable, the FE results show a significant negative association for AvgID_Total, indicating that increases in board interlocks within the same firm are associated with lower audit fees once unobserved heterogeneity is controlled for. Similarly, AvgID_Inside exhibits a negative and statistically significant coefficient, suggesting that interlocks held by inside directors strengthen the internal information environment, reduce auditors' risk assessments, and ultimately lower audit effort and fees. By contrast, AvgID_Outside displays a small and statistically insignificant coefficient, implying that outside directors' interlocks exert a more limited influence on auditors' pricing decisions.
Turning to abnormal audit fees, the negative effect of AvgID_Inside persists and remains significant, confirming that increases in inside directors' interlocks reduce the portion of audit fees unexplained by client fundamentals. This finding is consistent with the interpretation that such interlocks improve internal control quality and enhance reporting transparency, thereby mitigating auditors' need for additional procedures beyond the standard audit scope. AvgID_Outside continues to show no significant association with abnormal audit fees, indicating that these interlocks do not consistently affect auditors' qualitative risk assessments. Overall, the FE results underscore that the effect of board interlocks—particularly those held by inside directors—is better captured by within-firm changes over time rather than cross-sectional differences.
Table 5 presents the results of the regression analysis using a balanced panel dataset, in which the same firms are observed throughout the entire sample period. Building on the unbalanced panel results in Table 4, this approach serves as a robustness check that enhances statistical consistency and internal validity.
The results confirm that AvgID_Total continues to exhibit a significant negative association with abnormal audit fees, consistent with the earlier findings. This supports the view that board interlocks help constrain auditors' opportunistic fee-setting behaviour. However, the smaller coefficient magnitude and lower explanatory power suggest that the effect of interlocks is somewhat weaker in firms with structural stability and long-term continuity, implying that interlocks may exert stronger effects when adopted as part of broader governance changes.
AvgID_Inside also remains significantly negatively associated with abnormal audit fees, reinforcing the conclusion that inside directors' external appointments enhance the audit environment and allow auditors to adopt more risk-adjusted pricing. By contrast, AvgID_Outside remains statistically insignificant, indicating that expansions in outside directors' external networks do not systematically influence auditors' risk assessments or fee-setting behaviour in a stable, long-term sample.
Building on the OLS and fixed effects analyses, the next step is to address potential endogeneity concerns that may bias the estimated relationship between board interlocks and audit fees. Specifically, reverse causality—where audit fees may influence directors' external appointments—and omitted variable bias from unobservable firm characteristics may still remain, even after controlling for firm fixed effects. To mitigate these issues, this study employs propensity score matching (PSM), matching firms in the top 20% of each board interlock measure with comparable control firms based on observable covariates. This procedure produces a matched sample with similar characteristics, allowing for a cleaner estimation of the treatment effect of board interlocks on audit outcomes.
The ATT results show that firms with higher levels of board interlocks tend to incur moderately higher audit fees compared to matched controls. This pattern is interpreted as evidence that interlocked boards demand broader audit coverage and more comprehensive verification procedures, consistent with strengthened governance and improved monitoring quality. Rather than reflecting auditors' heightened risk perception or rent extraction, these higher fees likely represent governance-driven audit enhancements. The detailed ATT estimation results are reported in Appendix Table A2 and A3.
To further validate these findings, this study re-estimates fixed effects (FE) panel regressions using the PSM-matched sample, as reported in Table 6. The FE results reveal a robust negative association between AvgID_Inside and both audit fees and abnormal audit fees, suggesting that inside directors' interlocks enhance the internal information environment and reduce auditors' perceived risk, leading to more efficient audit contracting. AvgID_Outside also exhibits a modest but consistently negative association, implying that outside directors' networks contribute to improving audit efficiency, though to a lesser extent. Collectively, these results provide strong empirical support for H1 and H2, confirming that the informational and monitoring benefits of board interlocks outweigh potential agency costs—particularly in the governance environment of KOSDAQ-listed firms.
5. Conclusions
This study empirically examined the impact of board-level network structures—specifically, board interlocks—on audit fees among firms listed on South Korea's KOSDAQ market. Interlocking directorships were categorised into three measures: the average across all directors (AvgID_Total), inside directors (AvgID_Inside), and outside directors (AvgID_Outside). Their respective effects on total and abnormal audit fees were analysed via a sequence of panel data models—OLS, unbalanced and balanced FE models—augmented with propensity score matching (PSM) combined with FE estimation to address potential endogeneity concerns.
The findings indicate that the effects of board interlocks vary by director type. Inside directors' interlocks played a significant role in auditors' assessments of audit risk and fee determination. OLS results showed that inside directors' interlocks were associated with higher audit fees, whereas outside directors' interlocks were linked to lower total and abnormal audit fees. However, after controlling for firm-specific characteristics using fixed effects models—and further validating the results through PSM-FE analyses—inside directors' interlocks consistently exhibited a robust negative association with both total and abnormal audit fees. This pattern suggests that such interlocks enhance the firm's information environment, thereby lowering auditors' risk perception and contract pricing. By contrast, outside directors' interlocks showed negative but less robust effects in the balanced panel model, indicating that their influence may depend on firm-specific factors.
Taken together, these findings suggest that board interlocks can function as stabilising mechanisms that limit excessive deviations in audit fees and promote audit efficiency. They support the view that board-level networks reduce auditors' opportunistic pricing behaviour and strengthen the transparency and reliability of financial reporting.
This study offers several implications for practice and policy. For KOSDAQ-listed firms, interlocking directorships—particularly those held by inside directors—may serve as valuable governance tools for enhancing internal control systems and achieving more efficient audit outcomes. For auditors, the findings underscore the importance of considering not only the formal board composition but also the informational value of directors' external networks when assessing audit risk. For regulators and policymakers, instead of blanket restrictions on multiple board appointments, a focus on enhanced transparency and disclosure of interlock structures may better promote governance quality and support informed investor decision-making.
Nonetheless, several limitations should be acknowledged. The analysis treats interlocks quantitatively, without incorporating qualitative attributes such as the industry affiliation of interlocked firms or the relative influence of each director. In addition, the estimation of abnormal audit fees may be sensitive to model specification, and auditor-specific factors, such as engagement partner effects, are not explicitly controlled for.
Future research could refine the measurement of abnormal audit fees by employing more sophisticated modelling approaches, including machine learning-based prediction models or advanced econometric techniques such as dynamic panel estimators, to better isolate the portion of fees attributable to auditors' risk assessments or potential opportunism. Further studies could also consider director-level network centrality, differentiate interlock typologies (e.g. affiliations with large-cap versus SME firms), and include auditor-specific characteristics to provide deeper insights into the governance–audit nexus.
The supplementary material for this article can be found online.
