Effects of Auditing Fee on Auditing Quality: Evidence From a Natural Experiment in China

44 Pages Posted: 31 Dec 2018 Last revised: 1 Feb 2019

See all articles by Huasheng Gao

Huasheng Gao

Fanhai International School of Finance, Fudan University

Yunfei Qi

University of International Business and Economics (UIBE)

Chenxi Xu

University of International Business and Economics (UIBE)

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University

Date Written: January 11, 2019

Abstract

This paper exploits a natural experiment to investigate the causal effects of the auditing fees on auditing quality: China recently imposed a minimum auditing fee requirement which forces some auditing firms to charge higher fees to their clients. We find a significant decrease in auditing quality for auditing firms affected by the rule, relative to those not affected. This effect is more pronounced when client firms are more price sensitive to auditing fees and when auditing firms face stronger competition in the auditing market. Our evidence supports the economic theory of auditor independence: a higher auditing fee impairs auditor independence and thus causes a decrease in auditing quality.

Keywords: auditing fee, auditing quality, earnings quality

JEL Classification: M42

Suggested Citation

Gao, Huasheng and Qi, Yunfei and Xu, Chenxi and Zhu, Julie, Effects of Auditing Fee on Auditing Quality: Evidence From a Natural Experiment in China (January 11, 2019). Available at SSRN: https://ssrn.com/abstract=3300576 or http://dx.doi.org/10.2139/ssrn.3300576

Huasheng Gao (Contact Author)

Fanhai International School of Finance, Fudan University ( email )

Beijing West District Baiyun Load 10th
Shanghai, 100045
China
2165642222 (Phone)
2165642222 (Fax)

Yunfei Qi

University of International Business and Economics (UIBE)

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Chenxi Xu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Julie Zhu

Fanhai International School of Finance(FISF), Fudan University ( email )

220 Handan Road
Shanghai, 200433
China

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