New business as a bargaining factor in audit pricing: evidence from emission trading schemes

Abstract

In this study, we examine whether auditors use a new business as a bargaining chip in audit pricing. Taking the launch of China’s pilot regional emissions-trading schemes (ETSs) as a quasi-natural experiment, we find that mandatory participation in an ETS results in increased audit fees subsequent to implementation of the regulation. Adopting both empirical and textual analyses to exclude three alternative explanations (auditing effort, audit risk, and reporting risk), our results suggest that a new business is used as a bargaining chip by auditors when they negotiate audit fees with their clients. Additional empirical tests suggest that pilot companies experience an increase in audit fees after ETS implementation only when the companies have less importance to the auditors, companies' CFOs do not have experience working in an accounting firm and signing auditors are better educated. These findings demonstrate that the mandatory implementation of an ETS creates a new accounting business and alters the auditor–auditee bargaining dynamics.