Narrow Results

The aim of this study is to investigate whether the adoption of convergent-International Financial Reporting Standards (IFRS) in China affects the audit fees of initial public offerings (IPO) firms. An empirical regression analysis using panel data for 1,094 nonfinancial IPOs (excluding season equity offers) of A-shares listed on the Shanghai and Shenzhen Stock Exchanges between 2003 and 2012 is adopted. The results reveal that audit fees increase following convergent-IFRS adoption in China and additionally suggest that convergent-IFRS adoption eases the intense price competition that previously existed in China’s audit market and thus has important policy implications for regulators. To the best of the authors’ knowledge, this study represents the first reported attempt to adopt the IPO setting to examine the effects of convergent-IFRS adoption on audit fees and fills the gap in literature. Using a setting of IPOs enables this paper to further exclude the influence of quasi-rents derived from low-balling after initial audit engagement when testing audit fees.

Our study explores a possible benefit of conforming book income to taxable income. We expect that increased book–tax conformity can reduce audit fees by simplifying tax accruals and increasing tax authorities’ monitoring, which reduce audit workload and audit risk, respectively. Consistent with our expectations, we find that a higher country level of required book–tax conformity leads to lower audit fees. Moreover, firm-level book–tax differences are positively associated with audit fees. We also find that the negative association between country level of required book–tax conformity and audit fees is mitigated among firms with larger book–tax differences. Our findings are robust to including country-level legal investor protection or other extra-legal institutions. Overall, our results suggest that one benefit of increasing book–tax conformity is the reduction in audit fees. In the appendix we extend our main empirical test by including firm fixed effects and clustering standard errors of regression coefficients, and we find that these do not change our conclusions.