Does Corporate Governance moderate CEO and CFO Equity-Based Compensation- Audit Fee Relationship? Evidence from the United Kingdom

Abstract

Motivated primarily by the concern of PCAOB (2013), the equity-based compensation plays a signicant role in earning management, which, in turn, aects audit work and fees. The purpose of this study was to empirically test auditors responses to the proportion of EBC held by CEO/CFO in auditing price decisions, and determine whether the CG can moderate the link between CEO/CFO equity-based compensation and audit fees by analysing data from 2013 to 2018 in a UK setting. The results show contradictory evidence to the PCAOB view that CEO equity-based compensation is negatively and signicantly associated with audit fees and no signicant correlation between CFO equity-based compensation and audit fees. The ndings indicate that auditors do not perceive heightened audit risks to be correlated to CEO equity-based compensation. Furthermore, the results show that the CG quality does not in uence the association between CEO/CFO equity-based compensation and audit fees. The study's ndings suggest that auditors perceive CEO/CFO equity-based compensation as benecial for aligning the interest between shareholders and management for UK listed rms. These results may have important implications for the boards to eectively design the executives' pay package and for the auditors that make their pricing decisions according to the auditee's risks.