Corporate power centralisation, geographic dispersion, and audit fees

This study investigates the individual and interactive effects of corporate power centralisation (CPC) and corporate geographic dispersion (CGD) on audit fees of group companies. According to agency theory, higher CPC limits agency behaviour of subsidiaries by reducing delegation of authority from the parent company whereas greater CGD exacerbates intra-group monitoring costs and agency conflicts by lowering the parent−subsidiary geographical proximity. Our analyses of Chinese data indicate that increasing CPC reduces audit fees of group companies while greater CGD increases them, consistent with internal agency conflicts heightening audit engagement risk. We also find that the negative association between CPC and audit fees is more pronounced when CGD is greater, while the positive effect of CGD on audit fees is weakened by increasing CPC. Moreover, such individual and interactive effects of CPC and CGD are partially mediated by client financial reporting risk and business risk. Overall, our work advances the extant knowledge on the impact of complex group structures on group audits.