Audit Fees and Deeds of Cross Guarantee: An Empirical Evaluation


  • The authors would like to thank Graeme Dean, Mike Bradbury, Liz Carson, David Hay, Stewart Jones, Lee Moerman, Gary Monroe, the participants at the 2009 AFAANZ conference, members of the Sydney-based research group MEAFA ( and the two anonymous reviewers for their helpful comments on earlier drafts of this work. Sandra van der Laan would like to acknowledge the financial assistance provided by the R. J. Chambers Scholarship.

Sandra van der Laan ( is an Associate Professor and Demetris Christodoulou ( a Lecturer in the Discipline of Accounting, Sydney University Business School, The University of Sydney.


Since 1985, directors of Australian corporate groups have had the opportunity to execute a regulatory financing instrument, currently described as a deed of cross guarantee (DXG), between a holding company and one or more subsidiaries. This unique Australian regulatory intervention was advanced and justified on the basis that relieving subsidiaries from financial reporting requirements with associated cross-guaranteeing debt obligations would reduce the regulatory burden on groups of companies, and subsequently reduce audit and administration costs. Given the claims of regulators' and others in the business community, this paper examines whether, ceteris paribus, the DXG has a significant mitigating effect on audit fee determination. Specifically, the study evaluates whether a particular engagement attribute decreases audit complexity and subsequently audit risk and audit fees. After controlling for size and group structure complexity of the auditee, the study finds that first-time adopters of a DXG pay less in audit fees relative to non-DXG groups, but there is lack of evidence to support ongoing audit fee savings from having a DXG in place. On the contrary, results show that a group with an established DXG pays much higher audit fees, which may be a consequence of the DXG introducing added complexity to the audit. The study also contributes to the methodological development of the standard audit fee model, particularly for the Australian context.