Corporate Litigation Risk, Earnings Management and Audit Fees

Abstract

As China’s economy and society continue to develop and the legal system progressively advances, litigation has become a way for more and more companies to resolve disputes. However, while litigation protects the rights and interests, it also brings different aspects of impact to the company itself, the audit firm and the stakeholders. This paper limits the sample to non-financial listed companies in Shanghai and Shenzhen A-shares from 2012-2019, and constructs an earnings management mediating effect model to study the impact of corporate litigation risk on audit fees and its mechanism of action. It is found that (1) company’s litigation risk has a significant positive effect on audit fees; (2) company’s litigation risk has a significant positive effect on the degree of earnings management; (3) the impact of corporate litigation risk on audit fees will be partly realized by increasing the company’s earnings management activities in the course of its operations, in other words, the higher the company’s litigation risk, the higher the company’s earnings management, which will further lead to an increase in audit fees.