The purpose of this study is to examine how board co-option, where directors are appointed after a CEO’s tenure begins, influences auditors’ assessment of client audit risk and, subsequently, audit fees.
The authors used the Ordinary Least Squares methodology with industry and year-fixed effects. For robustness, the authors used the propensity score matching and generalized methods of moments approach.
The authors document a strong and positive relationship between the proportion of co-opted directors and audit fees; on average, firms in the 75th percentile of co-opted boards pay 3.5% more in audit fees compared to firms in the 25th percentile. They also find that co-opted boards are associated with deteriorated attendance rates at board meetings, above-average compensation packages and poor corporate governance quality, resulting in higher audit fees.
The findings of this study indicate that co-opted boards, closely aligned with CEOs, elevate audit risk and lead to a higher audit fee premium. This evidence highlights the need for regulatory reforms that strengthen board independence and enhance audit integrity. Standard setters and regulators should enforce stricter governance standards and clearer guidelines on board composition to mitigate risks associated with CEO influence. Moreover, these insights can guide audit committees in refining decisions on audit scope and auditor selection, thereby improving risk management and audit effectiveness. Such reforms will ultimately benefit investors and policymakers by promoting robust oversight and protecting shareholder interests.
This study advances corporate governance and audit fee research by focusing on board co-option, a relatively underexplored facet of board structure. By using multiple tenure-weighted proxies and robust empirical methods, the analysis demonstrates that co-opted boards, by undermining effective monitoring, lead to a significant audit fee premium through heightened audit risk. The findings contribute novel insights into how CEO-aligned board appointments affect auditor risk assessments, offering valuable implications for regulators, audit committees and investors seeking to improve governance practices and audit effectiveness.
