Impact of Audit Fee on Financial Reporting Quality: Evidence from Listed Companies in China

Abstract

The high incidence of financial fraud in listed companies in recent years has raised more concerns about the quality of financial reporting (FRQ) for sound development purposes. Although auditing is used to ensure FRQ for listed companies, more and more companies are subject to financial and regulatory penalties for financial fraud or non-compliance even after receiving standard unqualified audit opinions. Recent new government regulations in China make it more difficult to change auditors, so companies now tend to use audit fee as a proxy to influence audit opinions. Therefore, it is crucial to investigate the relationship between audit fees and FRQ in the Chinese context. This research takes this perspective to measure and discuss FRQ of listed companies in China using the proxy audit fee. In this research, 25,482 A-share listed companies in China are selected to empirically investigate the relationship between audit fee and FRQ, and the authors innovatively divide the audit fee into abnormal audit fee and reasonable audit fee, and use the proportion method to calculate whether the audit fee is abnormal. The research finds that there is a positive relationship between reasonable audit fee and FRQ, while the relationship between abnormal audit fee and FRQ is negative. The results show that the division and measurement of audit fee is a good proxy to measure FRQ, which will contribute to the healthy development of listed companies and the capital market as a whole.