Abstract
This paper uses the empirical data of listed companies in China from 2007 to 2013 to examine the relationships between abnormal audit fees and accruals (audit quality), and tries to find out the mechanism and the consequences of abnormal audit fees affecting accruals (audit quality). The research found that abnormal audit fees were negatively correlated with accruals. After taking the positive and negative nature of the abnormal audit expenses into consideration, research found that the abnormal audit fee reflects the economic bond between the auditor and the company, which impair the independence of auditors and degrade the audit quality. Negative audit fees reflect strong bargaining power of companies, and lower audit fees impel auditors to reduce audit effort, control audit costs to achieve a certain profit target, which will also degrade audit quality.
Highlights
The financial report auditing is the joint effort of the company and the auditor, which requires the company, the auditor to negotiate and bargain in the course of the audit [1]
After taking the positive and negative nature of the abnormal audit expenses into consideration, research found that the abnormal audit fee reflects the economic bond between the auditor and the company, which impair the independence of auditors and degrade the audit quality
Da =α0 + α1Resfee + α2Big10 + α3Inv + α4Sqsub + α5Roa + α6Lev + α7Cashf + α8Ind/Year +θ. In this model, |Da| is the absolute value of the earnings management level, it is calculated according to the method of Dechow et al [16], which represents the audit quality; regression coefficient of the abnormal audit fees (Resfee) is the abnormal audit fees, calculated according to model (1); the other variables are interpreted in the same way as the above-mentioned
Summary
The financial report auditing is the joint effort of the company and the auditor, which requires the company, the auditor to negotiate and bargain in the course of the audit [1]. One possible explanation is that the auditor’s employment and the audit fee payment depend on the company This economic dependency reduces the independence of auditor and increases the likelihood of the auditors’ acquiescence of company’s earnings management. Based on the empirical data of Chinese listed companies, this paper analyzes the relationship between abnormal audit fees and audit quality. After considering the positive and negative nature of the abnormal audit fees, result shows that the independence of auditors can be decreased by abnormal audit fees, and the auditor’s economic dependence on entrusting company leads to the impairment of audit quality. Negative abnormal audit fees reflect the company’s strong bargaining power, but lower audit fees impel auditors to reduce audit efforts, control audit costs to ensure a certain profit, which will jeopardize the audit quality. This paper studies audit quality from the perspective of abnormal audit fees, expands the literature of abnormal audit fees and audit quality, which gives reference to the improvement of the audit fee rule
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