Fair Value Hierarchy and Audit Fees: An Empirical Analysis based on the Listed Banks in China

Zhang Qingyu,Y Ahn,F Wu

doi:10.1051/e3sconf/202021402022

Abstract

The key to the criticism of fair value lies in the lack of measurement in the active market quotation, while the fair value hierarchy hopes to make up for the reliability of fair value information by increasing disclosure. Using listed commercial bank data from 2007 through 2016, this paper documents that the assets and liabilities measured by fair value are significantly positively associated with audit fees. The positive association between audit fees and the fair value obtained via Level 2 or Level 3 inputs is greater than that Level 1.These results indicate that when the fair value needs to be estimated, the auditor needs to increase audit effort with resulting in higher audit fees. Moreover, the balance of assets and liabilities that fair-valued using Level 2 inputs is the largest and accounts for the highest proportion, which leads to more substantial changes in audit expenses. This result is consistent with the scale determinism of audit expenses. At the same time, due to the impact of professional judgment on the fair value hierarchy and the absence of corresponding supervision, the management has the motivation to use hierarchy for earnings management. The assets and liabilities that fair-valued using Level 2 inputs may represent the characteristics of fair value earnings management, audit risk is higher.

Highlights

Chinese economic development needs to deepen the reform of the financial system, enhance the financial sector's ability to serve the real economy, increase the proportion of direct financing, and promote the healthy development of the multi-tiered capital market
The coefficient on FV is 0.189, which is significantly positive at the 0.1% level, indicating that the fair value has a significant impact on the audit fees, rejecting the null
Using Chinese listed commercial bank data from 2007 through 2016, this paper discusses the relationship between fair value hierarchy and audit fees

Summary

Introduction

Chinese economic development needs to deepen the reform of the financial system, enhance the financial sector's ability to serve the real economy, increase the proportion of direct financing, and promote the healthy development of the multi-tiered capital market. The effective operation of capital market depends on the quality of information, especially the quality of accounting information. High quality accounting information is the premise of the healthy development of the capital market, which determines the efficiency of market allocation of resources. Audit is one of the effective means to supervise the information quality of the capital market. The determinism of audit fees scale refers to the important role of clients scale in the audit cost pricing. The larger the client size, whether it is traditional sample audit or possible detailed audit in the case of auditing intelligence, as well as the complexity of the project, the more audit resources need to be paid, and the auditor needs to increase the audit fees to compensate. Audit fees risk determinism refers to the fact that audit risk plays a decisive role in the pricing of audit cost. Because of the high risk of material misstatement among clients, auditors need to implement more audit procedures to reduce audit risk to an acceptably low level, resulting in higher audit fees

Methods

Results

Conclusion