The influence of private family firm characteristics on audit fees: the family name as a red flag

Abstract

Purpose This study aims to examine the relationship between family firm characteristics and audit fees. It also examines the extent to which the family name is considered a red flag during the risk assessment of these firm characteristics. Design/methodology/approach Using an external panel data set that includes 1,252 firm-year observations of 204 private German firms with a time series from 2010-2016, regression analyses were conducted to test the hypotheses. Findings This study's results indicate that family involvement in management and the supervisory board are negatively related to audit fees, suggesting less demand and supply of audit effort due to lower Type I agency conflicts. Family ownership is found to be positively associated with audit fees due to higher Type II agency conflicts. Moreover, the negative effect of family involvement in management on audit fees becomes weaker if the firm name contains the family name, indicating that it is considered a red flag by auditors during their risk assessment. Originality/value Prior studies that examined audit fees in family firms mainly compared family firms to non-family firms. However, auditors are not likely to look at firms in a dichotomous way during their risk assessment, especially as there are numerous definitions of family firms. Instead, they will assess the underlying characteristics regarding management, ownership and governance, although a firm name containing the family name may influence this assessment. This study contributes to the literature by accounting for the heterogeneity of family firms and examining how auditors will assess this heterogeneity.