In the wake of high-profile corporate collapses, the rules regarding company governance have changed internationally. The Sarbanes-Oxley (SOX) legislation affected major changes in the US and, in New Zealand, companies are now required to meet tighter regulations imposed by the NZX and NZ IFRS (International Financial Reporting Standards).

But how do these changes interact with auditing fees? Dr David Lont, of Otago's Department of Accountancy and Business Law, says that this interaction raises significant issues for the accounting profession.

In post-SOX research undertaken with teaching fellow Yuan Sun and Professor Paul Griffin (University of California, Davis), he argues that while SOX imposed substantial cost on companies, increased spending on governance can also result in audit fee savings for companies.

He says theirs is the first research to reconcile a positive and negative effect - a fee-increasing relation because auditing services provide a means to attain better governance, partially offset by a fee-decreasing relation because auditors reduce the price of risk to reflect the benefits of better governance.

After controlling for the increased costs imposed by SOX, Lont and his colleagues conclude that better governance also reduces the cost of auditing, because even though better governance (including auditing) is costly, it enhances the quality of financial statements and internal controls, enabling auditors to decrease audit and control risk, and therefore results in reduced fees.

"This moderates the price of audit risk for the average US company by about six per cent, which we calculate implies a dollar offset to the average company's audit fees of approximately $180,000 [5.8 per cent of average audit fees], and more than $500,000 for the larger companies [11.9 per cent of average audit fees] in our sample." Lont's results suggest better governance and reporting in New Zealand might also lead to audit fee offsets here.