CEO compensation, corporate governance, and audit fees: Evidence from New Zealand

New Zealand has continued to strengthen its financial reporting and auditing landscape after major corporate collapses highlighted audit failures contributing to investor losses. Jointly, investors have criticized exorbitant compensation paid to CEOs. While the PCAOB's (Public Company Accounting Oversight Board) emphasis on executive compensation has prompted several studies in the United States, this study is the first to examine executive compensation in the evolving setting of New Zealand. Specifically, we examine the incentive-based components of CEO compensation arrangements, finding both short-term incentive and stock option compensation to be significant and positively associated with audit fees. We also examine moderating effects of client governance factors and find evidence that internal governance (audit committee effectiveness, board resources, and board and audit committee diligence) moderates the association between short-term incentive and stock option compensation, and audit fees. Taken together, our evidence suggests that auditors consider CEO performance-linked compensation a risk factor and are pricing it into the financial statement audit, with client governance moderating this pricing effect.