EMPRICAL RESULTS AND ANALYSIS

1875 lnSub, type of audit firm Big4, loss made within the last 2 years Loss and acquisition Acq, are associated with NAS fees. We run the model three times, referred to as Model 1a, 1b, and 1c. The results are shown in Table 3. The F-value for each model is significant at the 1 level and the adjusted R 2 for each of the three models is between 21 and 23. TAKE IN TABLE 3 Results in Model 1a show that board meetings, role duality, company size, type of audit firm and the test variable ACE are all found significantly associated with level of NAS fees but no significant relationship for the other variables tested. The fact that board meetings, role duality, company size and type of audit firm are significant suggest that large companies chaired and managed by the same director, audited by big-four and with frequent board meetings tend to buy more NAS. As predicted the negative coefficient and significance level for the test variable indicate that the probability of higher purchase of NAS decreases with ACE. In Model 1b, we substituted TAD and ACE with ACCXD and ACCnXD for the former and ACM, ACX and ACI for the latter. As can be seen in Table 3, the overall findings are similar to the earlier model except that ACX was found to be significant and negatively associated with lnNAS. The result suggests that financial expertise in the audit committee team is the main driver for reducing the demand on NAS. As for model 1c, all variables are similar to model 1a except for TAD and ACE. In this model, we substituted TAD with ACCXD and ACCnXD as in model 1b and replaced ACE with a new refined ACE i.e. 1876 refined.ACE = ACE less ACCS 347 . The results are again similar to model 1a but leverage is now found to be significant. We further found the newly defined variable refined.ACE to be significant and negatively associated with NAS. This is an interesting finding as it supports the position of the Smith Report 2003 which considered independence of the audit committee i.e. members drawn from outside the company rather than not holding shares as important for audit committee effectiveness. Hence, our results in all three models show that the existence of effective audit committees, as measured by ACE, exerts a significant negative influence on the level of NAS fees, thus supporting our hypothesis 1 i.e. there is a negative relationship between ACE and the level of NAS fees. Table 4 shows the results of Model 2 which focuses on the association between audit fees, the composite ACE and the control variables. As in Model 1, we also run this model three times and refer to them as Model 2a, 2b and 2c. TAKE IN TABLE 4 In Model 2a, results indicate role duality, large shareholdings and gearing to be significantly associated with AF but with negative coefficients. Audit committee chair‘s shareholdings, number of board meetings, size, type of audit firm, residuals and the composite test variable ACE were also found to be significant but with positive coefficients. 347 Smith Report confines independence of audit committee to only those drawn from outside the company and did not address the issue of their shareholdings. As such, we exclude from the sample non-executive directors who hold shares in companies where they act as AC chairmen and we refer to this variable as refined.ACE in Model 1c. 1877 This suggests that the propensity to increase audit fees is associated with companies having highly diffused shareholders, low gearing and with role duality. However, large companies audited by large audit firm tend to pay higher audit fees due to the size effect. In addition, companies with highly effective audit committee and those chaired by directors with shareholding ACCS also tend to demand higher audit service and consequently, higher audit fees. The significant residual variable which is used as one of the control variables in the model suggests that the purchase of NAS is often associated with the increase likelihood of buying audit. In Model 2b, we substituted TAD and ACE with ACCXD and ACCnXD for the former and ACM, ACX and ACI for the latter. As can be seen in Table 4, the overall findings are similar to the earlier model except that role duality and ACX are not significant. We found ACM and ACI to be significant and positively associated with higher AF, suggesting that audit committees with such characteristics demand wider audit scope, thus increasing the AFs. As for Model 2c, we found the results to be similar to Model 2b with the exception of gearing. We also found ACCXD to be significantly associated with AF, but in the negative direction. This suggests that AC chairs who are executive directors in another company tend to reduce AF, suggesting that such chairs perceive AF as unnecessary burden and hence tend to demand lower level of AF. We further found the newly defined variable refined.ACE to be insignificant with AF, suggesting that AC chairs who have no shareholdings do not affect the level of AF. Hence, our results in all the three models show that the existence of effective audit committees, as measured by ACE, exerts a significant positive influence on the level of AF, 1878 thus supporting our hypothesis 2 i.e. there is a positive relationship between ACE and the level of AF.

4. SUMMARY AND DISCUSSION

Our results show that the existence of effective audit committees, as measured by ACE in our models, exerts a significant negative influence on the level of NAS fees implying that such audit committees are likely to be concerned about protecting perceived auditor independence and thus purchase lower levels of NAS from the incumbent auditors. Our results also show that number of board meetings, duality, company size and big-four auditor have a positive significant association with levels of NAS fees. To test the effect of governance quality, in particular of AC effectiveness, we run the regression with AF as our dependent variable. The results show that our AF models are statistically significant at the 1 level with an adjusted R 2 between 66 and 68 and ACE audit committee effectiveness has a positive significant association with audit fees lnAF. This suggests that high quality audit committees are likely to subject the financial reporting and audit process to greater scrutiny and demand higher level of audit which is in turn reflected in higher AF. Our findings are consistent with the US study of Abbott Parker 2000 who noted that active audit committees are more diligent and therefore require higher audit quality in order to protect themselves from financial and reputational loss. It is noteworthy that in contrast to the US study of Carcello et al. 2002 who concluded that audit committee variables provide no incremental explanatory power when board variables are included in the audit fee model, we provide evidence that ACE has a significant positive effect on AF after controlling for board characteristics. It is possible that the Carcello et al 2002 findings are insignificant with respect to audit committees because their data relates to 1879 1992 when audit committees may not have had relatively significant oversight responsibility for financial reporting and audit. Consistent with Carcello et al. 2002 however the variable for board meetings in our model has a significant positive association with audit fees. We also find that ACCS audit committee chair holding shares, lnTA company size, lnSubs number of subsidiaries, and auditor type Big4 all have a significant positive association with AF. Consistent with Firth‘s 1λλ7 findings, NSH5 number of shareholders owning 5 or more shares has a significantly negative association with AF which may suggest that large shareholders may use different methods to monitor managerial actions as opposed to heavily relying on the audit and so defused shareholding companies relied more on external audit function. The negative relationship of leverage seems to contradict the findings in Parkash Venable 1993 and Firth 1997 where audit fees were seen to increase with higher leverage. This is interesting and provides an area for further investigation as many studies on audit fees have found leverage to be positively associated with audit fees Hay et al. 2006b. We undertook a number of additional tests relating to our hypotheses concerning the influence of ACE on audit and NAS fees. We replaced ACE in the NAS fee model lnNAS with the individual components of ACE, i.e. with ACI, ACX and ACM. The adjusted R 2 is unaffected and the model is still significant at 1. However, we find that only audit committee financial expertise ACX is significant suggesting that an audit committee‘s financial expert contributes positively to greater monitoring. Audit committee independence ACI is negative, but not significant. Contrary to our expectations, audit committee meetings ACM has a positive, but not significant, association with NAS fees. When testing the NAS fee model using the individual components of ACE the control variables which were found to be significant and positive in the composite ACE model still remain positive and significant. Similarly, we also tested our AF model, replacing ACE with its individual components. The