Related party transactions and audit fees: Indian evidence

Abstract

We examine the effect of related party transactions (RPTs) on audit fees in Indian public companies. RPTs can be used to manipulate financial statements or to transfer wealth between firms and their related parties, and the presence of RPTs increases audit risk. RPTs are relatively more important in India than in advanced economies, so we examine the association between RPTs and audit fees in the Indian setting. We find that audit fees increase by 3.58 percent moving from the first to third quartile of related party sales (RPS). The association between RPS and audit fees becomes prominent after the enactment of The Companies Act of 2013. Discussions with audit partners suggest that The Companies Act of 2013 led to increases in audit effort. Our results provide information regarding the corporate governance environment in India and highlight the importance of separately analyzing different types of RPTs.