Does Convergent-IFRS Adoption in China Increase Audit Fees?

Abstract

The aim of this study is to investigate whether the adoption of convergent-International Financial Reporting Standards (IFRS) in China affects the audit fees of initial public offerings (IPO) firms. An empirical regression analysis using panel data for 1,094 nonfinancial IPOs (excluding season equity offers) of A-shares listed on the Shanghai and Shenzhen Stock Exchanges between 2003 and 2012 is adopted. The results reveal that audit fees increase following convergent-IFRS adoption in China and additionally suggest that convergent-IFRS adoption eases the intense price competition that previously existed in China’s audit market and thus has important policy implications for regulators. To the best of the authors’ knowledge, this study represents the first reported attempt to adopt the IPO setting to examine the effects of convergent-IFRS adoption on audit fees and fills the gap in literature. Using a setting of IPOs enables this paper to further exclude the influence of quasi-rents derived from low-balling after initial audit engagement when testing audit fees.