Does Excess Cash Lead to Higher Audit Fees? Evidence from China

Time: 3rd April 2019

Location: B401, meeting room, Newhuadu Business School

Guest: Dr. Nanting Guo (Vice Professor, Accounting, Business School, Nankai University)

Abstract: Our study uses China’s data to explore the association between audit fees and excess cash. Prior studies (Gul and Tsai 1998, 2001; Griffin et al. 2010; Gleason et al. 2015) suggest that this association is positive because agency problems from excess cash magnify auditor business risk, which induce auditors to charge higher fees as compensation. However, we find that this association is negative for Chinese listed companies. We further find that this negative association is attributable to the institutional features of China, where auditor liabilities are not extended beyond the assurance of financial statements. Overall, our results highlight the importance of institutional regimes in shaping auditor perceptions and decisions. Future studies extending Jensen’s (1986) free cash flow argument to auditing research must carefully consider the validity of such extension given the institutional features of their empirical environments.