The effects of IFRS experience on audit fees for listed companies in China

Abstract

Purpose – The purpose of this paper is to examine whether and how auditors’ and audit clients’ IFRS-related experience alters auditors’ pricing decisions in the initial years of IFRS adoption in China. Design/methodology/approach – The authors conduct the analysis by examining audit fees from 4,129 sample observations that issued A-shares in the Shanghai and Shenzhen stock exchanges from 2005 to 2008. The authors empirically test the association between audit premiums and auditors’ and auditees’ IFRS experience. Findings – The authors find that auditors with IFRS experience charged significantly higher audit premiums in the initial years of IFRS adoption. The authors also find that audit clients’ with IFRS experience paid significantly lower incremental fees. The authors further find that the increased fees charged by audit firms with IFRS experience are independent of the degree of changes in the financial reporting complexity of their clients. In contrast, audit clients with IFRS experience paid lower incremental fees only when they underwent a high degree of changes in financial reporting complexity. Originality/value – First, it is the understanding that this study is the first to provide evidence on the effect of audit clients’ experience on audit fees. Second, the measure of auditors’ expertise is independent of audit clients’ decisions and is a less noisy measure. Third, the findings complement the existing evidence from other countries regarding the effects of IFRS convergence on audit fees. Finally, this study empirically tests the effects of changes in financial reporting complexity on audit fees.