RELATIONSHIP BETWEEN ABNORMAL AUDIT FEES AND THE EARNINGS RESPONSE COEFFICIENT: AN ANALYSIS OF CHINA'S LISTED COMPANIES

10.6293/AQAFA.202212_(19).0006

Wen-Jye Hung；Tsui-Lin Chiang；Yamin Wang；Jian Hua

Abnormal Audit Fee ； Earnings Response Coefficient ； Earnings Quality

Advances in Quantitative Analysis of Finance and Accounting

19期（2022 / 12 / 31）

187 - 212

英文

As a key indicator of earnings quality, the earnings response coefficient has been widely examined in the context of financial distress for two decades. When managers use their reporting discretion to smooth earnings over time, how informative earnings information is can be either improved or impaired depending on the managerial incentives underlying the earnings manipulations. In addition, abnormal audit fees and audit quality are strongly related. Therefore, this paper investigates the impact of abnormal audit fees on earnings quality using the earnings response coefficient as a proxy. Based on 890 firm-year observations from the Shanghai Stock Exchange and Shenzhen Stock Exchange in China, the empirical results indicate a significant positive relationship between informative firms' earnings information and abnormal audit fees.

1. Hung, W.-J.,Chiang, T.-L.,Ruan, Y.-Y.(2021).Is accountant industry specialization a panacea? Perspective of financial crisis in china.Advances in Quantitative Analysis of Finance and Accounting
   連結：
2. Shu, P.-G.,Chen, T.-K.,Hung, W.-J.,Hsu, W.-F.(2018).Audit industry specialization and client cash holdings: An information asymmetry perspective.Advances in Quantitative Analysis of Finance and Accounting,16,1-36.
   連結：
3. Asthana, S. C.,Boone, J. P.(2012).Abnormal audit fee and audit quality.Auditing: A Journal of Practice & Theory,31(3),1-22.
4. Ball, R.,Brown, P.(1968).An empirical evaluation of accounting income numbers.Journal of Accounting Research,6,159-178.
5. Balsam, S.,Krishnan, J.,Yang, J. S.(2003).Auditor industry specialization and earnings quality.Auditing: A Journal of Practice & Theory,22(2),71-97.
6. Barth, M. E.,Beaver, W. H.,Landsman, W. R.(2001).The relevance of the value relevance literature for financial accounting standard setting: Another view.Journal of Accounting & Economics,31,77-104.
7. Beaver, W. H.,Clarke, R.,Wright, W. F.(1979).The association between unsystematic security returns and the magnitude of earnings forecast errors.Journal of Accounting Research,17,316-340.
8. Beaver, W.,Lambert, R.,Morse, D.(1980).The information content of security prices.Journal of Accounting & Economics,2,3-28.
9. Beneish, M. D.(1997).Detecting GAAP violation: Implications for assessing earnings management among firms with extreme financial performance.Journal of Accounting and Public Policy,16,271-309.
10. Boehmer, E.,Masumeci, J.,Poulsen, A. B.(1991).Event-study methodology under conditions of event-induced variance.Journal of Financial Economics,30,253-272.
11. Burgstahler, D.,Dichev, I.(1997).Earnings management to avoid earnings decreases and losses.Journal of Accounting & Economics,24,99-126.
12. Burgstahler, D.,Eames, M.(2006).Management of earnings and analysts’ forecasts to achieve zero and small positive earnings surprises.Journal of Business Finance & Accounting,33,633-652.
13. Chakrabarty, A.,De, A.,Gunasekaran, A.,Dubey, R.(2015).Investment horizon heterogeneity and wavelet: Overview and further research directions.Physical A: Statistical Mechanics and Its Applications,429,45-61.
14. Choi, J.-H.,Kim, C. F.,Kim, J.-B.,Zang, Y.(2010).Audit office size, audit quality, and audit pricing.Auditing: A Journal of Practice & Theory,29(1),73-97.
15. Choi, J.-H.,Kim, J.-B.,Zang, Y.(2010).Do abnormally high audit fees impair audit quality?.Auditing: A Journal of Practice & Theory,29(2),115-140.
16. Collins, D. W.,Kothari, S. P.(1989).An analysis of intertemporal and cross-sectional determinants of earnings response coefficients.Journal of Accounting & Economics,11,143-181.
17. Craswell, A. T.,Francis, J. R.,Taylor, S. L.(1995).Auditor brand name reputations and industry specializations.Journal of Accounting & Economics,20,297-322.
18. Davidson, R. A.,Neu, D.(1993).A note on the association between audit firm size and audit quality.Contemporary Accounting Research,9,479-488.
19. DeAngelo, L. E.(1981).Auditor size and audit quality.Journal of Accounting & Economics,3,183-199.
20. Dechow, P. M.,Dichev, I. D.(2002).The quality of accruals and earnings: The role of accrual estimation errors.The Accounting Review,77(Suppl. 1),35-59.
21. Dechow, P.,Ge, W.,Schrand, C.(2010).Understanding earnings quality: A review of the proxies, their determinants and their consequences.Journal of Accounting & Economics,50,344-401.
22. Defond, M. L.,Raghunandan, K.,Subramanyam, K. R.(2002).Do non-audit service fees impair auditor independence? Evidence from going-concern audit opinions.Journal of Accounting Research,40,1247-1474.
23. DeFond, M.,Zhang, J.(2014).A review of archival auditing research.Journal of Accounting & Economics,58,275-326.
24. Dhaliwal, D. S.,Lee, K. J.,Fargher, N. L.(1991).The association between unexpected earnings and abnormal security returns in the presence of financial leverage.Contemporary Accounting Research,8,20-41.
25. Easton, P. D.,Zmijewski, M. E.(1989).Cross-sectional variation in the stock market response to accounting earnings announcements.Journal of Accounting & Economics,11,117-141.
26. Erickson, M.,Wang, S.-w.(1998).Earnings management by acquiring firms in stock for stock mergers.Journal of Accounting & Economics,27,149-176.
27. Etemadi, H.,Mohammadi, A.,Nazemi Ardakani, M.(2009).The relationships between auditor industry specialization and earning quality in listed companies on Tehran Stock Exchange.Journal of Financial Accounting Research,1(1),17-32.
28. Francis, J. R.(1984).The effect of audit firm size on audit prices: A study of the Australian market.Journal of Accounting & Economics,6,133-151.
29. Francis, J.,LaFond, R.,Olsson, P.,Schipper, K.(2005).The market pricing of accruals quality.Journal of Accounting & Economics,39,295-327.
30. Francis, J.,Philbrick, D.,Schipper, K.(1994).Shareholder litigation and corporate disclosures.Journal of Accounting Research,32,137-164.
31. Garman, M. B.,Ohlson, J. A.(1980).Information and the sequential valuation of assets in arbitrage-free economies.Journal of Accounting Research,18,420-440.
32. Ge, W.,Matsumoto, D.,Zhang, J. L.(2011).Do CFOs have style? An empirical investigation of the effect of individual CFOs on accounting practices.Contemporary Accounting Research,28,1141-1179.
33. Gerayli, M. S.,Yanesari, A. M.,Ma’atoofi, A. R(2011).Impact of audit quality on earnings management: Evidence from Iran.International Research Journal of Finance and Economics,66,77-84.
34. Hanlon, M.,Krishnan, G. V.,Mills, L. F.(2012).Audit fees and book-tax differences.Journal of the American Taxation Association,34(1),55-86.
35. Higgs, J. L.,Skantz, T. R.(2006).Audit and nonaudit fees and the market’s reaction to earnings announcements.Auditing: A Journal of Practice & Theory,25(1),1-26.
36. Hoitash, R.,Markelevich, A.,Barragato, C. A.(2007).Auditor fees and audit quality.Managerial Auditing Journal,22,761-786.
37. Hope, O.-K.,Kang, T.,Thomas, W. B.,Yoo, Y. K.(2009).Impact of excess auditor remuneration on the cost of equity capital around the world.Journal of Accounting, Auditing & Finance,24,177-210.
38. Hotchkiss, E. S.,Strickland, D.(2003).Does shareholder composition matter? Evidence from the market reaction to corporate earnings announcements.The Journal of Finance,58,1469-1498.
39. Hribar, P.,Kravet, T.,Wilson, R.(2014).A new measure of accounting quality.Review of Accounting Studies,19,506-538.
40. Hunt, A. K.,Lulseged, A.(2007).Client importance and non-Big 5 auditors’ reporting decisions.Journal of Accounting and Public Policy,26,212-248.
41. International Auditing and Assurance Standards Board. (2011). Audit quality: An IAASB perspective. Retrieved from https://www.ifac.org/system/files/publications/files/audit-quality-an-iaasb-per.pdf
42. Kasznik, R.(1999).On the association between voluntary disclosure and earnings management.Journal of Accounting Research,37,57-81.
43. Kim, Y.,Park, M. S.(2005).Pricing of seasoned equity offers and earnings management.Journal of Financial and Quantitative Analysis,40,435-463.
44. Kinney, W. R., Jr.,Libby, R.(2002).Discussion of the relation between auditors’ fees for nonaudit services and earnings management.The Accounting Review,77(Suppl. 1),107-114.
45. Knechel, W. R.(2009).Audit lessons from the economic crisis: Rethinking audit quality.
46. Knechel, W. R.,Krishnan, G. V.,Pevzner, M.,Shefchik, L. B.,Velury, U. K.(2013).Audit quality: Insights from the academic literature.Auditing: A Journal of Practice & Theory,32(Suppl. 1),385-421.
47. Kormendi, R.,Lipe, R.(1987).Earnings innovations, earnings persistence, and stock returns.The Journal of Business,60,323-345.
48. Lennox, C.,Pittman, J. A.(2010).Big five audits and accounting fraud.Contemporary Accounting Research,27,209-247.
49. Li, C.,Song, F. M.,Wong, S. M. L.(2008).A continuous relation between audit firm size and audit opinions: Evidence from China.International Journal of Auditing,12,117-127.
50. Lobo, G. J.,Zhao, Y.(2013).Relation between audit effort and financial report misstatements: Evidence from quarterly and annual restatements.The Accounting Review,88,1385-1412.
51. Mitra, S.,Deis, D. R.,Hossain, M.(2009).The association between audit fees and reported earnings quality in pre- and post-Sarbanes-Oxley regimes.Review of Accounting and Finance,8,232-253.
52. Ohlson, J. A.(1983).Price-earnings ratios and earnings capitalization under uncertainty.Journal of Accounting Research,21,141-154.
53. Okolie, A. O.,Izedonmi, F. O. I.,Enofe, A. O.(2013).Audit quality and accrual-Based earnings management of quoted companies in Nigeria.IOSR Journal of Economics and Finance,2(2),7-16.
54. Palmrose, Z. V.(1988).An analysis of auditor litigation and audit service quality.The Accounting Review,63,55-73.
55. Patell, J. M.(1976).Corporate forecasts of earnings per share and stock price behavior: Empirical test.Journal of Accounting Research,14,246-276.
56. Payne, J. L.,Robb, S. W. G.(2000).Earnings management: The effect of ex ante earnings expectations.Journal of Accounting, Auditing & Finance,15,371-392.
57. Reynolds, J. K.,Francis, J. R.(2000).Does size matter? The influence of large clients on office-level auditor reporting decision.Journal of Accounting & Economics,30,375-400.
58. Sharma, D. S.,Sidhu, J.(2001).Professionalism vs commercialism: The association between non-audit services (NAS) and audit independence.Journal of Business Finance & Accounting,28,563-594.
59. Simon, D. T.,Francis, J. R.(1988).The effects of auditor change on audit fees: Tests of price cutting and price recovery.The Accounting Review,63,255-269.
60. Simunic, D. A.(1980).The pricing of audit services: Theory and evidence.Journal of Accounting Research,18,161-190.
61. Sloan, R. G.(1996).Do stock prices fully reflect information in accruals and cash flows about future earnings?.The Accounting Review,71,289-315.
62. Teoh, S. H.,Welch, I.,Wong, T. J.(1998).Earnings management and the long-run market performance of initial public offerings.The Journal of Finance,53,1935-1974.
63. Teoh, S. H.,Welch, I.,Wong, T. J.(1998).Earnings management and the underperformance of seasoned equity offerings.Journal of Financial Economics,50,63-99.
64. Teoh, S. H.,Wong, T. J.(1993).Perceived auditor quality and the earnings response coefficient.The Accounting Review,68,346-366.
65. Teoh, S. H.,Wong, T. J.,Rao, G. R.(1998).Are accruals during initial public offerings opportunistic?.Review of Accounting Studies,3,175-208.
66. Titman, S.,Trueman, B.(1986).Information quality and the valuation of new issues.Journal of Accounting & Economics,8,159-172.
67. Xie, H.(2001).The mispricing of abnormal accruals.The Accounting Review,76,357-373.
68. Zmijewski, M. E.(1984).Methodological issues related to the estimation of financial distress prediction models.Journal of Accounting Research,22,59-82.