Do Abnormal IPO Audit Fees Signal IPO Audit Quality and Post-IPO Performance in Different Institutional Environments?

從不同制度環境審視企業上市審計費用與審計質量以及上市後企業財務表現的關係

Student thesis: Doctoral Thesis

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Award date9 Jul 2019

Abstract

The implication of abnormal audit fees is widely studied in accounting research. Some researchers view abnormal audit fees as evidence of economic bond between auditors and clients (e.g., Choi et al., 2010). However, other researchers consider abnormal audit fees as a measure of unobserved audit effort (e.g., Hribar et al., 2014; Doogar et al., 2015). In this thesis, I separately study the implication of abnormal IPO audit fees in mainland China and Hong Kong to investigate whether auditors behave differently in response to abnormal IPO audit fees in different institutional environments.

Using a sample of IPO audits in China, I find that abnormal IPO audit fees are positively associated with pre-IPO real activities manipulation, suggesting lower audit quality for the IPO financial statements. I further find that abnormal IPO audit fees are negatively associated with post-IPO financial performance, particularly for firms that switch to a new auditor after listing. These results suggest a strong alignment of interests between the principal (pre-IPO shareholders) whose main interest is to gain listing status, and its agent (the auditor) who is willing to cooperate with the principal for extra economic rents (abnormal audit fees). The findings that abnormal IPO audit fees are associated with lower audit quality and can help predict post-IPO financial performance have important implications for audit regulators, IPO market participants and the applicability of agency theory in the context of IPO audits in the emerging capital market.

In contrast, using a sample of IPO audits in Hong Kong, I find that in Hong Kong, abnormal IPO audit fees are negatively associated with pre-IPO real activities manipulation, suggesting higher audit quality for the IPO financial statements. IPO firms that pay abnormally high audit fees have no or even less RAM reversals and no post-IPO financial performance declines. These results suggest that under a strong investor protection environment, high abnormal IPO audit fees indicate additional audit efforts, and the increased audit efforts effectively constrain IPO clients’ earnings manipulation. However, the association between abnormal IPO audit fees and earnings manipulation is less negative for politically connected Chinese IPO firms. This suggests that the positive effect of strong institutional environment is less pronounced for Chinese firms whose controlling shareholders have political influence and strong motivation to take advantage of being listed in a developed market.

Taken together, my findings reveal that the implication of abnormal IPO audit fees in a strong institutional environment (e.g., Hong Kong) is different from that in a weak institutional environment (e.g., mainland China), which supports the notion that auditors behave differently in response to different institutional environments.