The International Journal of Accounting
, 2017
, 52
(1)
, 64-76
ScopusABDC-A
Abstract
Before the public disclosure of audit fees was mandated, it was unlikely for an audit client to have accurate information about how much other companies were charged by their auditors. Public fee disclosure decreases the cost of auditees' access to audit fee information for the auditor's portfolio of clients and is thus likely to increase the relative bargaining power of auditees over auditors when they negotiate audit fees. Using both proprietary and public audit fee data before and after public fee disclosure was mandated in China, we provide evidence consistent with the preceding conjecture. We find that public fee disclosure reinforces the magnitude of audit fee decreases for overcharged clients and weakens auditors' ability to raise audit fees for undercharged clients. These findings suggest the existence of unintended consequences of public fee disclosure regulation, the original rationale of which was a concern about audit pricing practices that could undermine auditor independence.
Keyword
Audit fee adjustments
;
Bargaining power
;
China
;
Public fee disclosure
The International Journal of Accounting
, 2016
, 51
(1)
, 1-22
ScopusABDC-A
Abstract
In China's audit market, audit clients occasionally follow an audit partner who moves to another audit firm in an unforced setting (i.e., not due to the predecessor audit firm suffering regulatory sanctions). By examining a sample of Chinese listed companies during 2001–2013, we find that turnover audit partners are significantly less likely to issue a modified audit report to their unforced follower clients, as compared either with all other audits in the same successor audit firm in the same year, or with post-follow audits of forced follower clients (where the predecessor audit firm suffers regulatory sanctions). We also document evidence of turnover partners treating unforced follower clients favorably prior to the partner turnover event. Our evidence suggests that a close audit partner–client bonding impairs audit quality when lacking regulatory and public attention, and has implications for regulators, investors, and audit firms' quality control in emerging markets where clients are usually closely tied to audit partners rather than to the audit firm, and where a non-compete agreement between an audit partner and the audit firm is unavailable or weakly enforced.
