Controlling shareholders in a ceo position and audit fees: Evidence from large business groups*

Focusing on large business groups in Korea, this study examines audit pricing for firms in which founding family members controllin g the business groups serve as CEOs. Based upon a sample of public firms of large business groups in Korea during 2013-2019, the study reveals the following. First, audit fees are lower for firms whose CEO positions are retained by founding family members of the business groups, which is primarily driven by decreased audit fees per hour, not by reduced audit hours. In addition, this association is more pronounced when firms belong to larger business groups such that the firms’ auditors have relatively lower bargaining power. Consistent with the results of the effect on audit fees, further analysis shows that firms with founding family CEOs are less likely than those without to be audited by industry specialist auditors. This evidence suggests that these firms with founding family CEOs have a low demand for high-quality audit service. In addition, this study finds a non-significant difference in audit quality between firms with founding family CEOs and those without. Collectively, the results suggest that founding family members’ engagement in management decreases agency conflicts between managers and shareholders and thus reduces audit fees in general, but it potentially increases agency conflicts between major and minor shareholders and, consequently, leads auditors to internalize the downward pressure of audit fees by reducing audit premiums rather than audit hours.