رابطه بین کمیته حسابرسی، مشوق های پرداخت غرامت و حق الزحمه های حسابرسی شرکت های بزرگ در پاکستان

The objective of the study is to examine the association between audit committees, compensation incentives and corporate audit fees in Pakistan by using the data of fifty firms that are listed on the Karachi Stock Exchange (KSE), Pakistan during the years of 2007–2011. Panel data technique is used in this study, as the data set contains cross-sectional units over several time periods. Panel data control for cross sectional heterogeneity by observing individual firm and reduces the risk of biasness and collinearity among variables. The result of panel regression indicates that audit committee activity and committee member's independence are significantly associated to audit fee levels, consistent with the argument that audit committees complement the work of external auditors in monitoring management. In contrast, chief executive officers (CEO) pay incentives both short term and long term neither complement nor substitute for audit effort in disciplining Pakistan's firm management. Further results on the full sample of firms reveal significant differences in determinants of audit fees between the years examined. Finally, the results of control variables suggest a significant association between non-audit fee, board meetings, ROA (return on assets), sales and firm foreign operations with the audit fees in the selected market.

The problem of separation of ownership and control in a firm has given rise to the concept of corporate governance, which includes all measures, policies and procedures that align manager's interest and the interests of shareholders and all the other stakeholders of the firm. Auditing, as one measure of corporate governance, has received increased attention through the various corporate scandals such as Enron or WorldCom. In most of these corporate scandals, managers acted in their own self interest which results in collapse of those companies and destruction of shareholders' wealth. Coffee (2005) opines that auditors act as a gatekeeper that prevents these collapses from happening. In response to these scandals, the Sarbanes–Oxley act was passed in 2002, which had a severe impact on the audit fees charged by auditors thereafter. Audit fees reflect an economic cost to the firm and determination of its determinants is important for two reasons. First, external auditing as a form of governance assures reliable financial reporting of the entity (Cohen et al., 2002a and Cohen et al., 2002b). Second, audit fees paid to the auditors as a measure of governance results in an effective loss of profit to the shareholders. Audit fees research has identified a number of its determinants such as firm size, complexity, profitability, riskness and other characteristics of audited entity (Simunic and Stein, 1996, Gul and Tsui, 2001, Ferguson et al., 2003 and Hay et al., 2008). Vafeas and Waeglein (2007) suggest that effectiveness of audit committee and executive compensation incentives as determinants of audit fee partly drive the cost of corporate audit fee. A brief glance at corporate governance guidelines formed in the wake of various corporate scandals suggests a significant role for the audit committees. According to Cadbury report (1992), audit committees as a governance mechanism protect the interests of shareholders, ensure transparent reporting and improve audit quality. This study focuses on the audit committee effectiveness as a determinant of audit fees in developing country like Pakistan. Following the enactment of Sarbanes–Oxley Act, the Securities and Exchange Commission of Pakistan (SECP) required audit committees to be directly responsible for the remuneration paid to external auditors. Pratt and Stice (1994) show that auditors charge higher audit fees from clients with greater earning manipulation risk to cover litigation risk. An unprecedented number of accounting and governance scandals have triggered an extensive research on use of incentive based compensations for corporate executives (Bedard and Johnstone, 2004). Prior studies in the accounting and finance literature suggest that incentive based compensation encourages executives to manage earnings for personal financial gains (Cheng and Warfield, 2005, Feng et al., 2011 and Jiang et al., 2010). The audit committee effectiveness and executive compensation incentives as determinants of audit fees is studied both in developed (US, Australia, Canada) and developing economies (Hong Kong, Malaysia, Singapore). However, much of the substantiation to date is from developed countries where corporate governance systems are mature and the role of audit committees is better defined in contrast to those in developing countries. In their studies, Bushman and Piotroski (2006) and Gul (2006) also acknowledged the differences in organizational and managerial incentives across different nations due to political economy, security laws, taxation regime and cultural factors. In addition, they also state that there can be systematic differences in developed and developing countries' implications for financial reporting quality and related assurance processes. The above discussion confirms an association between audit committee effectiveness and executive compensation incentives as determinants of audit fees. In this study, an analysis has been carried out to find a statistical relationship between audit committee effectiveness, executive compensation incentives and audit fees in Pakistan using secondary data from fifty listed companies in Pakistan during the period of 2007–2011. 1.1. Objectives of the study This study is conducted to investigate the relationship between measures of audit committee effectiveness, executive compensation incentives and corporate audit fees in Pakistan. More research objectives are: I. To review the developments in the roles and responsibilities of the audit committee as corporate governance mechanisms in Pakistan. II. To determine the type of relationship that exists between the measures of audit committee effectiveness, executive's compensation incentives and corporate audit fees in Pakistan. 1.2. Hypotheses of the study The study used six hypotheses based on the literature. In this study, four empirical measures of audit committee effectiveness would be used i.e. committee independence, committee member expertise, committee size and committee meeting frequency. The study hypothesizes positive relationship between measures of audit committee effectiveness and external auditor's fee. The first four hypotheses of the study relevant for the association between audit committee effectiveness and corporate audit fees are given below i.e., H1. There exists a positive relationship between audit committee independence and audit fees H2. There exists a positive relationship between audit committee size and audit fees H3. There exists a positive relationship between committee meeting frequency and audit fees H4. There exists a positive relationship between committee member expertise and audit fees Prior studies provide evidence that bonuses based on annual earnings increase the possibility that managers would manage earnings to maximize the value of their bonus awards. So, a higher external audit effort is required to detect these earning manipulations. On the other hand, firms with long-term performance plans employ less earnings management than firms without that plans. The hypotheses related to CEO compensation incentives and audit fees are stated as i.e., H5. There exists a positive relationship between CEO compensation derived from bonuses and audit fees H6. There exists a negative relationship between CEO long term pay for performance and audit fees. 1.3. Significance of the study Since the introduction of corporate governance laws in Pakistan in 1998 by the Institute of Chartered Accountants of Pakistan (ICAP), corporate governance is drawing much attention. The important purpose of studying audit fees and its determinants is that audit fees paid to the auditors as a measure of governance results in an effective loss of profit to the shareholders. Prior studies have shown inconsistent and mixed results on the relationship between audit committee effectiveness, executive compensation incentives and corporate audit fees. Furthermore, the study on audit fee determinants in developing countries like Pakistan has been given limited attention. So there is a need to find out the extent to which audit committee effectiveness and executive compensation incentives determine the amount of audit fees paid to external auditors. This study contributes to the growing literature by focusing on the associations between auditing, different elements of internal control and managerial incentives in developing countries like Pakistan. The study is organized as follows: after the introduction which is provided in Section 1 above, literature review is carried out in Section 2. Section 3 develops the hypothesis in the context of Pakistan. Data sources and the methodological framework are explained in Section 4. The estimation and interpretation of results are mentioned in Section 5. The final section concludes the study.

The recent corporate scandals have also raised public attention in the field of corporate governance and auditing. The SEC regulations on the disclosure of audit and non audit fee payments in the corporate proxy statements have called an explosion of academic studies on the determination of its determinants and consequences. In auditing, audit fees have received special attention as it results in an effective loss of shareholder wealth. Earlier literature has identified a number of its determinants such as firm size, complexity, profitability, riskiness and other characteristics of the audited entity. Audit fee research shows that corporate governance measures can have either increasing or decreasing effects in audit fees. In fact, corporate governance reforms make certain that management of the firm is making reliable financial reporting. Corporate governance measures related to the effectiveness of audit committee and executive compensation incentives also act as a determinant of audit fee and are expected to partly drive the cost of corporate audit fees. Good governance indicates that audit committees having independence, financial experience and literacy, time commitment and sense of accountability effectively monitor the financial reporting process and support the external auditors. External auditors charge their fees in accordance with the demand of audit quality by these audit committee members. Similarly, CEO compensation is expected to influence audit fees in such a way that the auditor considers the compensation practices ahead of time and determines his effort as well as risk in accordance with these schemes. Vafeas and Waeglein (2007) had also proved this relationship in their study. The Security and Exchange Commission of Pakistan (SECP) enforces the codes of corporate governance in Pakistan. This is basically done with the purpose of enhancing governance, transparency and improving the disclosure in financial reporting of companies for protecting the interests of company's investors. Since corporate governance in Pakistan is still in its infancy, the government is taking keen interest in developing new models for growth in the form of protectionist policies. This study has used the publicly available data for examining the relationship between audit committees and executive compensation with corporate audit fees. Our results are consistent with the argument that audit committees support the external auditors in monitoring of firm financial reporting processes. The findings of the study are in accordance with the policy reforms suggested by the Blue Ribbon Committee (BRC, 1999) and adapted by the major stock exchanges in the world. The results highlight the role of an audit committee in handling disputes between the auditors and management that occur during the financial reporting mechanism. In the pooled regression model, the committee insider dummy appears to be inversely related with the audit fees, suggesting that firms having independent committee members pay higher audit fees. The results are consistent with the capital reputational theory, which asserts that audit committee entirely composed of independent directors demand higher quality financial reporting from external auditors in monitoring firm's financial reporting. Results of the regression also suggest a positive relationship between audit committee meeting frequency and audit fees. The increase in audit fees is due to increase in audited hours, as external auditors spend extra time in preparation for and attendance at audit committee meetings. For Pakistan, results indicate that there is no support for the hypothesis that audit fees are positively associated with the audit committee expertise and size. The regression results suggest that compensation incentives neither complement nor substitute for audit effort in disciplining firm management. Therefore, executive compensation incentives only align the interest of managers and shareholders in a firm but does not lead to the increase or decrease in audit fees. The findings of our study are inconsistent with the study of Bedard et al., 2004a and Bedard et al., 2004b and Vafeas and Waeglein (2007) that provided an evidence of greater audit fees for audit clients that have greater earning manipulation and corporate governance risks. Results suggest that auditors in Pakistan don't pay special attention to their clients' pay practices while determining the fee charged or effort exerted in the audit process. Results of control variables indicate a significant association between non-audit fee, board meetings, ROA (return on assets), sales and firm foreign operations with the audit fees. The significant association between audit and non-audit fees raises the issues of audit dependence and effectiveness of regulatory arrangements in minimizing the use of audit engagements to obtain well-paid non-audit service contracts. Similarly, the findings of the study show that a board that meets frequently complements the external auditor's effort and is related to the greater amount of audit fees paid. Results suggest that lower fees are paid by small size firms, firms having lower business complexity and firms that report positive earnings in their annual reports. Notably, the results of the study are sensitive to the time period examined. The coefficients estimates vary widely when the audit fees model is estimated separately for each year. Considering this year wise analysis, we conclude that little is yet understood about the way firm audit fees are determined by external auditors. The limitations of this study unlock the opportunities for future research. First, non availability of data on executive stock and equity based compensation restricts the scope of this study. Future studies can widen the scope by incorporating wider incentive plans if SECP mandates the disclosure of this information in corporate proxy statements. The studies conducted by the inclusion of equity based incentives could confirm or assess the influence of incentive schemes on audit fees in a better way. Secondly, future research can cover the comparative study of Pakistan with other developed or developing countries' data to see the impact of diverse institutional settings on audit fees. These studies will be helpful in explaining how different regulatory requirements impact the audit fees in different institutional settings. Third, the sample size for the study is relatively very small. A sample of 50 companies is used for the period of 2007–2011. This was basically selected due to shortage of time and resource constraints. There are chances that the results could be different if the study is conducted for all the companies listed on the Karachi Stock Exchange (KSE). Future studies can assess the determinants of audit fees by increasing the size of the sample their studies and can provide further valuable insights about the true nature of corporate audit fees in Pakistan. Finally, this paper revisits prior literature and also adds to the stream of literature by developing a first study on the audit fees and its determinants in Pakistan. Specifically, it examines how the external auditor perceives and reacts to firms who have established audit committees and launched executive compensation incentives. This study has potential implications for the policy makers in Pakistan. The indication of audit committee expertise as a weak and insignificant determinant of audit fees contradicts the Ibrahim's argument on inclusion of legal advisor in audit committee. He argues that the presence of a legal advisor will assist the audit committee members in compliance with applicable laws and empower them in deciding about the criticism lodged by the minority shareholders, while the findings of our study suggest that the audit committee's expertise and knowledge have an insignificant association in audit fees determination.