The Effect of Audit Fee Disclosure Regulation on Audit Fees: Korean Evidence

Abstract

[Purpose]This paper examines how audit fees change in response to mandated audit fee disclosure in Korea. [Methodology]We use the difference－in－differences approach by comparing changes in audit fees of listed firms who are required to disclose the fees with changes in the fees of unlisted firms who are exempt from the requirement between 1999 and 2002. [Findings]Difference－in－difference analyses show that audit fees of listed firms increase following the disclosure mandate relative to the fee of unlisted firms. Additional analyses show that the overall increase in audit fees is driven by the decrease in negative abnormal audit fees (i.e., reduction in undercharges), not by the increase in abnormal audit fees. Lastly, cross－sectional analyses reveal that the increase in audit fees after the adoption of the disclosure requirement is smaller for larger firms and firms audited by big N auditors, but more pronounced for initial audit engagement. [Implications]This study adds to the literature on how disclosure affects contracts between audit firms and clients by showing a clear causal link between audit fee disclosure and audit fees. We also provide regulatory implications by documenting the consequences of the disclosure regulation.