Abstract

Purpose: Audit, as an independent process, plays a critical role in verifying the accuracy and reliability of financial reports. This role necessitates fair and appropriate remuneration for audit firms, and determining this compensation accurately and fairly has consistently been one of the primary challenges within the auditing profession. Neglecting the factors influencing audit fees can compromise the auditor's independence and the quality of their work. Political connections and corporate governance are among the significant ownership and managerial characteristics of companies that can affect the determination of audit fees. The aim of this study is to examine the relationship between companies' political connections and audit fees, with corporate governance serving as a moderating factor.

Method: The statistical sample includes 141 companies ( 1,551 firm-years) from companies listed on the Tehran Stock Exchange over the period from 2012 to 2022. The research hypotheses were tested using panel data and ordinary least squares (OLS) regression analysis.

Results: The results indicated that companies' political connections have a significant negative impact on audit fees. Additionally, corporate governance mechanisms show varied effects on this relationship: board independence has a strengthening effect, while board gender diversity and institutional ownership have a weakening effect on the relationship between political connections and audit fees.

Conclusio : Companies with strong political connections tend to enjoy better financial standing due to economic benefits and government support. As a result of their favorable financial performance, the likelihood of earnings misreporting or financial information manipulation in these companies is reduced, which in turn lowers the audit risk. Consequently, auditors demand lower fees for auditing these firms. Furthermore, greater board independence reduces the likelihood of financial report manipulation, thereby lowering audit risk assessment and audit fees as well. On the other hand, board gender diversity and institutional ownership increase the demand for high-quality audits, moderating the negative impact of political connections on audit fees. This can lead to higher fees due to the need for more rigorous auditing.

Contribution: This research can contribute to expanding the audit fee literature by highlighting findings related to political connections. Given that most companies listed on the Tehran Stock Exchange are state-owned or semi-state-owned, the study's findings can also aid in the selection of managers, support board independence in choosing independent auditors, and enhance managerial decision-making