e winsorized. As it is shown in Table 2, |Da| represents audit quality, which is the

Table 2. Descriptive statistics.

absolute value of earnings management level, the maximum value of |Da| is 2.0771 and the minimum is close to 0. Resfee represents abnormal audit fees, with the maximum value of 4.2135 and the minimum value of −4.1199, indicating that some firms charge higher than expected levels of audit fees, while some companies are below expected levels. The result of Lnfee for audit fees varies greatly, with a maximum of 18.3694, a minimum of 9.2103 and a standard deviation of 0.7647. In other variables, Sqsub for the complexity of the audit business has obvious otherness, with a standard deviation of 0.6218 and Cscore has a maximum of 0.4247, a minimum −0.5919 and a mean of 0.0109, which is less than the mean in Khan and Watts (2009), indicating that the accounting conservatism of listed companies in our country is less than that of US listed companies.

In Table 3, according to the median of the abnormal audit fees (Resfee and Dlnfee), sample companies were divided into two sub-samples, which were lower than the median and higher than the median. For |Da| it can be seen that, Resfee sample with high abnormal audit fee has higher mean and median than the low, and it also has highly significant T-statistic of −4.4790 and Wilcoxon signed rank test value of −5.154, indicating that there are significant differences between different abnormal audit fees samples. As for the audit quality expressed in Cscore, the accounting conservatism of the high Resfee samples has negative mean and median, suggesting that sample companies with high abnormal audit fee do not have conservatism. Accordingly, the positive mean and median of the low Resfee samples’ accounting robustness undoubtedly indicate that sample firms with low abnormal audit fees have accounting conservatism, and the T test value and the Wilcoxon signed rank test value are highly significant. Similarly, in the two sub-samples of Dlnfee , the mean and median value of the high Dlnfee samples were higher than those of the low, and the T-statistic and the Wilcoxon signed rank test also were highly significant. The differential test in Table 3 shows that there is a significant difference in companies’ audit quality under different levels of abnormal audit fees, which initially confirms our hypothesis.

4. Regression Analysis

In order to verify the hypothesis of this paper, regression is performed according to the regression model (2). The results are as follows. In Table 4, the regression (1) considers the influence of abnormal audit fees plus the company’s financial indicators on the audit quality. In this regression, the regression coefficient of the abnormal audit fees (Resfee) is 0.0719, which is highly significant, indicating that an increase of 1% of the abnormal audit fee will lead to |Da|’s growth of 7.19 percent. Since the dependent variable |Da| is the inverse indicator of the audit quality, the economic meaning of the regression (1) is that the audit quality is reduced by 7.19% for every 1% increase of the abnormal audit fee, which verifies the hypothesis 1. The regression (2) considers the impact of abnormal audit fees plus the audit-related indicators on the audit quality. The regression coefficient of the abnormal audit fee is 0.0719, with high significance at 1 percent, and the regression result is consistent with the regression (1), confirming the hypothesis 1. In regression (3), all variables were put into the regression equation, and the regression coefficient of Resfee is 0.0719 and is highly significant, which is also consistent with the previous regression (1), regression (2), similarly confirms the hypothesis 1. However, the control variables vary in regression (1), regression (2) and regression (3), which directly results in the difference between the F- statistic and the coefficient of determination in the regression model. In regression (4), the independent variable is positive abnormal audit fees, with a highly significant regression coefficient of 0.0736, indicating that the positive abnormal audit fees lead to a decline in corporate audit quality, which confirms the hypothesis 2a of this paper. It also suggests that companies impair the auditor’s

Table 3. Differences in audit quality under different standards.

Note: Significance (two-tailed) at: *0.10, * *0.05 and ***0.01 levels, respectively.

Table 4. Abnormal audit fees and audit quality.

Notes: Significance (two-tailed) at: *0.10, * *0.05 and ***0.01 levels, respectively.

independence by paying auditors positive abnormal audit fees to satisfy the earnings management objectives. In regression (5), the independent variable is negative abnormal audit fees, with a significant regression coefficient of 0.0384, indicating that negative abnormal audit fees also lead to a decline in corporate audit quality, which well confirms the hypothesis 2b, verifies that excessively low audit costs impel auditors to reduce audit effort and finally jeopardize audit quality. This regression result also confirms the impact of companies’ bargaining power on audit quality. The conclusion of regression (4) and regression (5) is consistent with that of Asthana and Boone (2012), therefore this paper argues that abnormal audit fees will reduce audit quality for Chinese listed companies.

In the control variables, the financial leverage (Lev) and the audit quality is negatively correlated. The cash return rate (Roa) has a negative correlation with the audit quality. Cashflow (cashf) has no significant correlation with the audit quality. The regression coefficients of the big 10 firm (Big10) are positive and significant; the regression coefficient of stock level (Inv) is negatively significant; the complexity of audit services (Sqsub) has a negative correlation with audit quality.

5. Robustness Test

5.1. Variable Substitution

In order to verify the robustness of the conclusion, dependent variables |Da| were replaced with accounting conservatism (Cscore), which is the positive indicators of the audit quality, which means that accounting conservatism is positively correlated with the audit quality. In the regression result of Table 5, the regression coefficient of Resfee is −0.0601 with high significance. The data indicates that the higher the abnormal audit fees are, the worse the audit quality is, which is consistent with the hypothesis 1 of this paper. In regression (2), control variable were changed, Resfee has a highly significant regression coefficient of −0.0599, and this regression result is similar to regression (1), suggesting that there is a negative correlation between abnormal audit fees and audit quality. In regression (3), all the control variables were taken into consideration. Resfee’s regression coefficient is −0.0588, with high significance at 1% level, indicating that the abnormal audit fees will lower the audit quality. Regression (4) verifies the relationship between positive abnormal audit fees and audit quality. It can be seen that the regression coefficient of Resfee is −0.0583 and highly significant, indicating that the abnormal audit costs will reduce the audit quality. The regression results obviously support the Hypothesis 2a and are similar to the conclusion made through Table 4. Regression (5) is the result of the negative abnormal audit fees and the audit quality. Resfee’s regression coefficient is −0.0437 and highly significant; showing that the negative abnormal audit costs will impair the audit quality, which statistically suppor the hypothesis 2b. The regression results of the control variables are similar to those in Table 4, therefore no more tautology here.

Table 5. Robustness test of abnormal audit fees and audit quality (1).

Notes: Significance (two-tailed) at: *0.10, * *0.05 and ***0.01 levels, respectively.

In Table 6, dependent variable was substituted and the abnormal audit fee was measured by the logarithm of annual change value of audit charges. In regression (1), the regression coefficient of Dlnfee is 0.0420, with relatively high significance at 5 percent. According to the regression result in regression (1), it can be apparently seen that the abnormal audit fees are negatively correlated with the audit quality, which is consistent with Hypothesis 1. In regression (2), the regression coefficient of Dlnfee is 0.0519, with relatively high significance, which is consistent with regression (1). In regression (3), the regression coefficient of Dlnfee is 0.0407 and is relatively significant. Analysis in Regression (1), regression (2), and regression (3) shows that the abnormal audit fees will hinder the audit quality, which is consistent with the regression results in Table 4 and Table 5. However, the regression coefficient level in Table 6 is less significant than in Table 4 and Table 5. Regression (4) is the regression result of positive abnormal audit fees and audit quality. Dlnfee’s regression coefficient of 0.0299and is relatively significant, indicating that the abnormal audit costs have negative influence on the audit quality. Similarly, in regression (5), the negative exception audit cost regression coefficient is 0.1238 and relatively significant; suggesting that negative abnormal audit costs will degrade the audit quality. For other control variables, since the coefficient value and significance level are similar to those in previous analysis, no more tautology here.

Table 6. Robustness test of abnormal audit fees and audit quality (2).

Notes: Significance (two-tailed) at: *0.10, * *0.05 and ***0.01 levels, respectively.

5.2. Other Issues to Be Considered

Clustering may happen when performing regression. Since the Pooled data we used is intertemporal, the sample company reluctantly appears in the regression, resulting in clustering phenomenon and accordingly leads to underestimation of the standard error and overestimation of the significance level. Therefore, we referred the practice of Petersen, re-performed regression with hierarchical clustering and heteroscedasticity being control, the results did not change significantly.

Distinguish the direction of audit quality. Since the dependent variable is the absolute value of the discretionary accruals, the discretionary accruals are divided into two categories according to the direction, and then operate the regression. Results shows that positive abnormal audit fees are positively correlated with positive discretionary accruals and negative abnormal audit fees has positive correlation with the discretionary accruals, which authenticates our conclusions.

In the above analysis, we replace the independent variables and dependent variables respectively to verify the robustness of the conclusions of this paper; and a variety of means was adopted to avoid the impact of endogenous problems on the conclusions. Moreover, the effects of self-selection bias are also taken into consideration. To sum up, all the above measures are taken to prove the validity of our conclusions.

6. Conclusions

Companies employ auditors and pay audit fees, which actually constitutes an economic bond between auditors and companies. And the impact of this economic dependency on audit quality has become a hot issue in audit research. This paper examines the impact of auditors’ excessively high or low abnormal audit fees on audit quality. The research adopted the data of China listed companies from 2007-2013, co-opted the abnormal audit fee model of Chen et al. (2005), Asthana and Boone (2012), and Blankley (2012), and finally discovered that there are abnormal audit fees in Chinese listed companies and its existence debases the audit quality. After considering the direction of the abnormal audit fee, empirical results show that the positive abnormal audit fees have negative correlation with audit quality, which demonstrates that auditors’ collection of high audit fees does not only impair the audit independence, but also acquiesce companies’ earnings management behavior, and finally jeopardizes audit quality. We also found that negative abnormal audit fees and audit quality are negatively correlated, indicating that the firm’s strong bargaining power will reduce the auditor’s audit fees and audit quality; simultaneously, lower audit fees will also impel auditors to reduce audit efforts, such as cutting substantive analysis and testing to control audit costs for profitability.

Unavoidably, there are still some limitations of this paper. Due to difficulty in the acquisition of certain data, the effects of auditors’ composition, the distribution of audit work, and internal audit on the audit quality are not considered, which may weaken the conclusions of this paper. Still, this is the direction of author’s follow-up research.

Cite this paper
Zhang, H. (2017) The Relationship of Abnormal Audit Fees and Accruals: Bargain Power or Cost Control?. Open Journal of Accounting, 6, 82-94. doi: 10.4236/ojacct.2017.63007.
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