The Asian Financial Crisis, Accounting Conservatism and Audit Fees: Evidence from Hong Kong

Abstract

In this paper, we first show that Hong Kong suffered a financial downturn during 1996-97 and that the downturn was associated with a decrease in accounting conservatism, as measured by the Basu model. One of the consequences of less conservative accounting is an increase in audit effort and the resulting fee. Using observations from Hong Kong listed companies and the standard audit fee model we show that there is an association between significant differences in conservatism between the downturn years (1996-1997) and non-downturn years (1994-1995) and audit fees. We also use seven years of observations from Hong Kong listed companies to show an inverse association between yearly accounting conservatism and average audit fees. These results are robust to adjustments for inflation and other sensitivity tests.

Keywords: financial downturn, accounting conservatism, audit fees, inherent risk

JEL Classification: M41, M44, M49, G14