Audit Committee Characteristics as Determinants of Non-Audit Fees in UK FTSE 350 companies

This study examines trends in audit committee characteristics of companies and associates characteristics subject to major change with a fee-based proxy for audit committee effectiveness. The research adopts an empirical approach. Using descriptive and inferential statistics, observations for 253 Financial Times Stock Exchange (FTSE) 350 companies’ audit committee characteristics gathered from annual reports at the beginning and end of a five-year period are evaluated against averaged non-audit fees (NAF) as a proportion of total audit fees. Audit committee composition shows increased incidence of female membership and of members with previous audit experience. The increase in members with previous audit experience is more marked where this is gained with the incumbent auditor. An increase is also shown in Chief Financial Officers (CFOs) with previous audit experience. Previous audit experience is associated with reduced NAF as a proportion of total fees. This is marked where audit experience has been gained with the incumbent auditor. These results suggest that the benefits of financial expertise gained from audit experience outweigh impairments to independence due to social ties. Nevertheless, other studies indicate concerns about independence are still well-founded. This paper’s original contribution is to evaluate the potential effect of previous audit experience on those involved in audit committees in the light of concerns raised in the literature and by regulators that external auditor independence should be maintained. The innovative fee-based proxy for audit committee effectiveness facilitates an evaluation as to which influence prevails.