Gender‐diverse boards and audit fees: What difference does gender quota legislation make?

• Date: 01 January 2020
• Author: Mehdi Nekhili,Tawhid Chtioui,Ammar Ali Gull,Ikram Radhouane
• DOI: http://doi.org/10.1111/jbfa.12409
• Published date: 01 January 2020

DOI: 10.1111/jbfa.12409

Gender-diverse boards and audit fees: What

difference does gender quota legislation make?

Mehdi Nekhili1Ammar Ali Gull2Tawhid Chtioui3

Ikram Radhouane4

1LeMans University, Avenue Olivier Messiaen,

LeMans, France

2GIK Institute of Engineering Sciences and

Technology,Topi,Khyber Pakhtunkhwa (KP),

Pakistan

3Emlyon Business School, Lyon,France

4ICD International Business School, Paris,France

Correspondence

MehdiNekhili, Le Mans University (GAINS-

ARGUMANS),Avenue Olivier Messiaen, 72085,

LeMans, France.

Email:mehdi.nekhili@univ-lemans.fr

Handcollected data not shared

Abstract

We investigate the effect of board (audit committee) gender diver-

sity on audit fees in the French context. We also examine whether

the relationship between the proportion of female directors and

audit fees is moderated by the enactment of the gender quota law in

2011. We use the system GMM estimation approach on a matched

sample of Frenchfirms listed in the SBF 120 index between 2002 and

2017. Consistent with the supply-side perspective, we contend that

female independent directors and female audit committee members,

by improving board monitoring effectiveness, affect the auditor’s

assessment of audit risk, resulting in lower audit fees. Our findings

also document that, by breaking the glass ceiling, the effectiveness

of the gender quota law lies not in increasing the proportion of

female insider directors, but in boosting the appointment of female

independent directors and female audit committee members. Using

the difference-in-difference approach, our results revealthat female

independent directors and female audit committee members are

more willing to assert their monitoring skills after the quota law,

leading to lower audit fees. Moving beyond tokenism, we show

that, after the quota law, the negative impact on non-audit fees is

strengthened only for female independent directors.

KEYWORDS

audit fees, female directors, French context,gender quota law

JEL CLASSIFICATION

G30, J16, M41

1INTRODUCTION

The core objective of statutory audit is to protect the rights of shareholders by detecting incidents of expropriation

by insiders (Newman, Patterson, & Smith, 2005). More specifically, externalauditors verify that all stakeholders are

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2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/jbfa JBus Fin Acc. 2020;47:52–99.

NEKHILI ET AL.53

treated equally and that financial records comply with statutory requirements. In the external audit process, auditors

view the board of directors as their client, because the board reviews the scope ofthe audit and the proposed audit fee

(Blue Ribbon Committee, 1999). The board is responsible for making sure that “appropriatei nformation and reporting

systems” are in place for providing timely and accurate information to ensure corporate compliance and performance.

Directors can avoid liability claims by being duly diligent and by making sure that standards are met. The board of

directors generally does this by purchasing high quality audits in order to protect its reputation capital, to avoid legal

liability,and to promote shareholders’ interests (Carcello, Hermanson, Neal, & Riley,2002). Boards of directors exercise

their monitoring function through independent directors and audit committees (Fama & Jensen, 1983; Klein, 2002). In

response to corporate failures such as Enron, WorldCom, and Parmalat, there has been increased interest in the role

played by the board of directors (audit committees) in providingefficient monitoring. Existing studies investigate how

board characteristics such as CEO duality,board independence, ownership structure, gender diversity, and the consti-

tutionof the audit committee affect the quality of financial reporting (e.g., Carcello et al., 2002; Carcello, Hollingsworth,

& Neal, 2006; DeFond& Francis, 2005; Gull, Nekhili, Nagati, & Chtioui, 2018; Harjoto, Laksmana, & Lee, 2015; Ittonen,

Miettinen, & Vähämaa,2010; Lai, Srinidhi, Gul, & Tsui, 2017; Mitra, Hossain, & Deis, 2007).

In the literature, there is no consensus regarding the relationship between corporate governanceeffectiveness and

audit fees. However, two perspectives are frequently discussed, and lead to somewhat differing results (e.g.,Cohen,

Krishnamoorthy, & Wright, 2004; Hay, Knechel, & Wong, 2006; Knechel & Willekens, 2006; Zaman, Hudaib, & Han-

iffa, 2011). Audit fees may be affected by both the demand for audit services by the client firm and the supply of audit

services by an external auditor (Carcelloet al., 2002; Harjoto et al., 2015; Ittonen et al., 2010; Lai et al., 2017). From a

demand-side perspective, boards (audit committees) that are more effective are likely to demand higher audit effort,

resulting in higher audit fees. Conversely,the supply-side argument suggests that a more effective board (audit com-

mittee) ensures the quality of firms’ internal audit and internal control systems. In doing so, a more effective board

(audit committee) may reduce the assessed level of control risk and thereby reduce the need for assurance from the

external auditor,thus reducing audit fees (Hay et al., 2006). Although these two perspectives do not necessarily lead

to the same conclusions, the demand-side and supply-side arguments are not mutually exclusive(Ittonen et al., 2010).

Barroso, Ben Ali, and Lesage (2018) put forward the audit setting puzzle and document that the demand side and the

supply side of audit services are markedly affected both by the level of agency conflicts between management and

shareholders and by the degree of shareholder protection. Gender-diverse boards may act as a substitute mechanism

for weak corporate governance (Gul,Srinidhi, & Ng, 2011). Studying the effectiveness of French board (audit commit-

tee) gender diversity through the assessment of the demand and supply of external audit services might add a new

piece to the puzzle.

In this study,we explore the relationship between board (audit committee) gender diversity and audit fees. Specif-

ically,we examine the relationship between female directors (audit committee members) and audit fees by emphasiz-

ing the importance of female positions on the board. Existing studies suggest that women behave differently than men

when appointed to the same positions (Adams & Ferreira, 2009; Bennouri, Chtioui, Nagati, & Nekhili, 2018; Harjoto

et al., 2015; Lai et al., 2017). Along similar lines, empirical studies provide strong grounds for believing that female

directors (audit committee members) substantially affect the fees paid to incumbent auditors (Harjoto et al., 2015;

Huang, Huang, & Lee, 2014; Ittonen et al., 2010; Lai et al., 2017). Four reasons can be put forward as to why our

research is important. First, a major current in the corporate governance literaturesuggests that female directors are

more diligent monitors than male directors, exhibit higher levelsof independence, and are more likely to be concerned

about shareholder interests (Adams & Ferreira,2009; Bennouri et al., 2018; Gul et al., 2011; Gull et al., 2018; Gyapong,

Monem,& Hu, 2016; Lai et al., 2017). Second, there is a consensus among scholars that female directors tend to be more

risk averse and more concerned about ethical issues than men when making organizational decisions (Byrnes, Miller,

& Schafer, 1999; Schubert, 2006). In particular,female independent directors and female audit committee members

help strengthen internal controls and are likely to reduce the levels of inherent and control risk (Pucheta-Martínez,

Bel-Oms, & Olcina-Sempere, 2016). Third, there has been a substantial upsurge in regulatory and academic interest

in the role of board (audit committee) gender diversity in strengthening corporate governance, particularly after the

54 NEKHILI ET AL.

enactment of gender quotas for corporate boards. Despite the recent increase in the number of female directors on

corporate boards following gender quota legislation, there is a paucity of studies exploring the link between board

gender diversity and audit fees.

There are few studies that empirically examine the relationship between board (audit committee) gender diversity

and audit fees. Lai et al. (2017) conducted a study in a US context to examine the impact of board gender diversity

on audit quality, measured by audit fees and auditor choice. Their findings indicate that boards with female directors

pay more for audit services and tend to appoint industry specialist auditors compared to boards composed solely of

male directors. Another study,by Hay et al. (2006), conducted a meta-analysis of the last 25 years’ audit research and

revealed that the majority of studies have been conducted using Anglo-Saxon data. They also note inconsistencies,

anomalies, and gaps in the existing literature, and suggest studying the effects of different forms of ownership and

of local institutional factors on audit fees. Our study adds to the existing literature in various ways. We examinethe

French context, where there is a different ownership pattern and a different legal and institutional environment than

in the United States and other Anglo-Saxon economies. The main features of Frenchcompanies are the concentration

of ownership and the separation of ownership and control (Bennouri, Nekhili, & Touron,2015; Faccio & Lang, 2002; La

Porta, Lopez-de-Silanes, Shleifer,& Vishny, 1998), whereas in the US ownership is dispersed. With regard to external

auditing, two unique features of French companies are joint auditing (Audousset-Coulier,2015; Bennouri et al., 2015)

and the appointment of statutory auditors by the board of directors ratherthan by the audit committee, in accordance

with Article L. 225–228 of the French Commercial Code. Our study thus augments the existing literatureby providing

empirical evidence on the relationship between board gender diversity and audit fees in a Frenchcontext.

Followingthe worldwide wave of promotion of gender equality, in January 2011 France introduced mandatory quo-

tas in order to increase gender diversity on corporate boards. As a result, French firms were required to appoint at

least 40% women to their board of directors by the end of 2016. Although firms face serious consequences for not

complying, this reform does not provide any guidelines as to the roles that should be assigned to female directors.

Nevertheless, the independence of the board (e.g.,Carcello et al., 2006; Klein, 2002) and the promotion (and the char-

acteristics) of audit committees (e.g., Compernolle, 2018; Ittonen et al., 2010; Turley& Zaman, 2004) are assumed to

strengthen the corporate governance effectiveness. Consistently,both independent directorships and board commit-

tee membership are regarded as senior board positions, as these roles call for the implementation of specific tasks and

duties, for which the individuals concerned must have relevant expertiseand skills (Nekhili & Gatfaoui, 2013). Senior

board positions such as independent directorships and audit committee membership are of central importance from

the standpoint of auditing, because of the monitoring function of the board of directors. In light of the tokenismtheory

of Kanter (1977), we also investigate whether gender quota legislation affects the board decision-making process, as

female directors may not be able to assert their legitimacy due to their minority status before the implementation of

the quota law (e.g., Erkut, Kramer,& Konrad, 2008). Consistently, we investigate whether the implementation of the

mandatory gender quota impacts the relationship between board (audit committee) gender diversity and audit fees

and to what extentfemale directors may assert their monitoring skills differently in mandatory and voluntary settings.

Tothe best of our knowledge, no empirical evidence exists in support of the moderating role of gender quota legislation

in the relationship between board (audit committee) gender diversity and audit fees.

Using a sample of the largest Frenchfirms listed in the SBF 120 stock market index from 2002 to 2017, we find that

board (audit committee) gender diversity has a substantial impact on audit fees. In contrast to the study by Lai et al.

(2017) in the US context, our findings reveal that board gender diversityis negatively correlated with the demand for

audit effort, as measured by audit fees. This preliminary finding provides evidence on the differences in governance

and the legal structure between the US and other countries. Importantly, in looking at female positions on boards

of directors, we find that female independent board directors and female audit committee members, but not female

insider directors, have a negative effect on audit fees. These results are in line with the supply-side perspective and

support the argument that a higher proportion of female independent directors (audit committee members) enhances

the monitoring ability of the board (audit committee), resulting in the reduction of audit risk as well as the need for

assurance providedby external auditors in terms of audit effort. Our study takes into account the French gender quota