Investigating the relationship between ownership concentration and audit fees in companies listed on the Tehran Stock Exchange

Dissertation

Master's degree

Department: MBA

Abstract

The current research examines the effect of ownership concentration on audit fees in companies listed on the Tehran Stock Exchange. The amount and nature of external audit fees requested by auditors, with three descriptive factors; The volume of the operation, the complexity of the operation and the audit risk are related. The research showed that the composition of the company's ownership as one of the key factors of corporate governance can affect the audit fees through the influence on these three descriptive factors. Since different classes of shareholders have different goals and motivations for investing in companies, in this research, the concentration of ownership is a factor of the ownership structure of companies, from two institutional and managerial aspects, and 114 companies admitted to the Tehran Stock Exchange during the period of 2016-2018 were selected as a sample. This research is a descriptive-correlation study. The findings of the research showed that there is a significant negative relationship between the ownership concentration coefficient of institutional investors and audit fees and a significant negative relationship between the concentration coefficient of the board of directors and audit fees in companies listed on the Tehran Stock Exchange. Persian keywords: institutional ownership concentration - management ownership concentration - audit fees - board of directors

Chapter One

Introduction to the generalities of the research

1- Introduction

Corporate governance [1] consists of a set of internal and external control mechanisms of a company and determines how and by whom the company will be managed, so that it performs better in all fields. The composition of shareholders or ownership structure [2] is one of the important issues of corporate governance. Several definitions of the ownership composition of companies have been presented and various terms such as the composition of shareholders or the ownership structure are used for this concept. "Ownership structure or composition of shareholding means the way of distribution of shares[3] and ownership rights in terms of voting rights[4] and capital[5] plus the nature and existence[6] of share owners[7]". [15].  The ownership structure has two dimensions, one is the concentration of ownership and the other is the identity of the shareholders, the concentration of ownership as the basic dimension of the ownership structure has been raised in recent years as one of the important issues in the corporate governance literature and its impact on the combination of ownership and management of companies in countries and growing economies and world markets.

The ownership structure of a company can be considered from various dimensions. For example, in the first place, it is classified according to two variables including internal shareholders or shares held by internal shareholders[8] and external shareholders. According to these two variables, shares in the hands of institutional shareholders [9] and the government are considered as the main parts of the external ownership of companies and are investigated. Other types of ownership classification can be considered as ownership concentration or decentralization, institutional or real, and management or non-management of shareholders. [15].

In recent years, the concentration of ownership and its impact on different dimensions of companies among the growing economies and nascent markets of Europe and Asia has been raised as one of the important issues in corporate ownership. Concentration of ownership may bring about positive changes in the organization by increasing monitoring and eliminating the problem of fraudulent financial reporting. But other mechanisms may work in the opposite direction. One of the issues that have been discussed more is that large shareholders and owner-managers may use their control rights to gain personal benefits and cause exploitation of other shareholders. These possibilities and the uncertainty of the effect of concentration of ownership on various aspects of the company have led to the presentation of various theories regarding the behavior of managers. After the formation of joint-stock companies and the separation of ownership from management and the selection of managers on behalf of the owners, economists realized that All groups related to a joint stock company do not work for a common purpose. Rather, there is a conflict of interest between different groups present in the company. This conflict of interest, under the title "representation problem [10]" was proposed in the 1970s by Jensen and Meckling[11]. According to them, "agency relationship is a contract based on which the employer or owner appoints an agent or agent on his behalf and delegates decision-making authority to him". [15]. This theory mainly deals with the issue of conflict of interest between owners and managers, but there are other types of conflict of interest between major and minority shareholders.For example, according to the theory of strategic alignment, sometimes the expectations of institutional shareholders may be tied to the interests of managers, and due to the alignment of the interests of these two groups, the interests of small shareholders may be ignored. In the meantime, based on studies, the nature of ownership can also affect the risk of expropriation as well as the performance of companies and other aspects of business.

Audit is usually proposed in situations where agency relationships prevail to reduce conflict of interest. In addition, one of the main factors of proper corporate governance is auditing. Professional auditing services are an opportunity for varying degrees of audit intensity and negotiation. Company owners and other stakeholders seek efficient resource allocation and other important financial decisions based on the reported numbers obtained by a company's auditing system. [66].

In order to use audit services, an amount must be paid as an audit service fee. Audit fee is a reflection of an economic cost in the organization. The studies conducted on the factors that determine the audit fee show that auditors pay more attention to the size, complexity, risks and other inherent factors of the audit to determine the amount of their requested fee and determine their fee by evaluating the volume and risk of the audit work. [66].

In the present study, we investigate the empirical relationship between ownership concentration and audit fees. If the ownership composition of a company determines the effectiveness of its governance and internal control. Examining the relationship between ownership concentration and audit fees enhances our understanding of corporate governance. The concentration of ownership leads to an increase in the quality of information. Considering the limited research that has not been done in this field in the world and especially in Iran, in this research, this issue has been investigated more closely in the Tehran Stock Exchange. What is worthy of attention in this research is that we have tried to pay more attention and precision to the use of the ownership concentration criterion, because it may be claimed that one of the reasons for the previous researchers to achieve contradictory results is the lack of attention to the appropriate criterion for measuring the ownership concentration. While according to studies, shareholder ownership has become more concentrated. Because the weak support of the shareholders has provided an incentive to collect more shares for better control over the company's managers. As a result, in countries where there is weak support for shareholders, first-type representation problems will decrease, but representation problems between minority and majority shareholders (second-type representation problems) will increase. The risk of expropriation or wealth transfer from minority shareholders may increase the demand for audit, which is usually measured by audit fees. From this point of view, the audit is considered a monitoring cost that depends on the level of the company's representative problems. [66].

Institutional shareholders are one of the other groups that play an important role in the ownership structure and are distinguished from other owners due to their high ability to perform professional financial analysis. This category of owners give importance to the quality of information and due to their inherent characteristics and special influence on management, they encourage them to use quality audit services and ultimately lead to an increase in audit fees [26]. Of course, increasing the concentration of such owners and their active monitoring of the company's operations reduces agency costs and control risk in financial reporting, and as a result reduces audit fees. [66].

In the agency theory, control is the most important task of the board of directors, and the structure of the board of directors plays an important role in increasing control performance. The structure of the board of directors as a control tool in the company determines the power of the board of directors. Recent studies have shown that the role of the board of directors and the audit committee as part of the administration of affairs is in determining the amount of audit fees. We show that a firm's ownership concentration affects the level of control and risk non-detection and determines the demand for external audit assurance services. In addition, in the desired balance of interests between managers and shareholders, the adverse effect of agency costs in the financial reporting process reduces audit risk, which in turn reduces audit fees. [52].