The Formation Mechanism Of Abnormal Audit Fees And Its Influence On Audit Quality

As one of the important infrastructure of market economic system, the certified publicaccountants auditing principle supervises the information disclosure of listed public companies,playing a crucial role in guaranteeing the authenticity and fairness of accounting information oflisted companies.But from domestic outbreak of listed company financial fraud cases, it can beobserved that accounting firms did not play its role properly in information supervision role.Onthe one hand,using "low-balling" as the main form of malignant price competition with securitiesauditing market, certified public accountants undertake auditing business of listed companiesat theprice lower than the audit cost in order to increase customer number or expand market share.Thelow audit fees, are not only harmful to the long-term development of the certified publicaccountants industry, but is bound to affect the certified public accountants in practice in theprocess of independence and audit quality is difficult to guarantee, threatening investors such asthe social public interests.On the other hand, high audit fee for the audit opinion or reduce thetolerance of certified public accountants to earnings manipulation of listed company is also verycommon. Targeting at the messy situation of securities auditing market in China, as well as thepast defects and the insufficiency of the related studies, this study reviews the related problems ofthe abnormal audit fees and conducts in-depth analysis.It follows the path of “audit pricingmechanism, abnormal audit fees, audit quality” as the main research line, through rigorousmathematical, game theory, and the rigorous empirical analysis process to solve the followingproblems:(1) economic analysis framework of audit pricing,(2) the formation mechanism of theabnormal audit fees, and (3) the influence of abnormal audit fees on audit quality.In addition to the influence of the audit cost, audit fees are also affected by market supply anddemand, the degree of information asymmetry, market competition situation and the influence offactors related to accounting profits.But overall, the basis of the normal and reasonable audit fees for the audit cost, under the influence of other factors in a certain range, and should not beexcessively deviated from the range.Based on the principal-agent theory, through the analysisunder the condition of asymmetric information and the design of the audit contract underasymmetric information, it can be concluded that the ceiling of reasonable interval of audit fees isthe optimal audit contract under the condition of asymmetric information in which clients have topay for certified public accountants audit fees. In another word,it is the sum of fixed income andcost of the optimal effort level of effort for certified public accountants. The bottom line of auditfees range is audit fees that assure audit quality required by auditing standards, which is the sumeof fixed income, the cost under the optimal level of efforts and risk premium. Audit fees deviatedfrom this interval excessively high or low, all refers to abnormal audit fees.Secondly, the abnormal audit fees refers to the deviated difference between the actual audit feeand the normal audit fee under the influence by related factors.That is to say, the actual audit feeconsists of two parts, one part is the reflects the value of audit quality, which is the reasonable partof audit fee; the other part is deviated part from the reasonable audit cost of a part of the audit cost,namely the abnormal audit fees.Abnormal audit fees can be categorized into positive abnormalaudit fees and negative abnormal audit fees.When there is abnormal audit fees, it suggests that theaudit fee is higher than the normal audit fee and positive abnormal audit fees is essentially aproducer surplus; when there is negative abnormal audit fees, negative abnormal audit fees islower than the normal audit fee, suggesting it essentially belongs to the consumersurplus.Abnormal audit fees has its necessity and realistic possibility.Audit service is differentfrom the physical commodity, whose price is the signal and the reflection of quality.Normally, theprice determined by the level of quality while it is hard to influence quality.But the audit service isprovided after being paid, namely after price determination, this time lag makes audit serviceproviders tend to be opportunistic andarrange service work, according to the price of the service.Thus, price will have a major impact on quality.Audit service is different from other serviceactivities in the nature of private goods.For general service activities, service costs and benefits isconsistent, customers receive service to pay the cost of the service, on the other hand, enjoying thecorresponding economic interests on the basis of the principle of equivalent exchange.Auditservice is a kind of highly external service activities, listed companies pay the audit fees ascustomers.However, they are not only one of the beneficiaries of auditing services, a large number of beneficiaries are the external investors, creditors and other stakeholders.Due to the above tworeasons, audit market price failures will occur and produce abnormal audit fees.Finally, the existence of the abnormal audit fees is harmful to audit quality. Through theanalysis of the negative and positive abnormal audit fees of certified public accountants and theauditees management under the condition of complete information dynamic game theory model, itis found that the weak legal system environment in China, the abnormal sub-gambling refiningNash equilibrium suggests that audit fee will be damaging to audit quality.The empirical researchconclusion also support this idea.Positive abnormal audit fees will be applied to buying or makingcertified public accountants audit to improve the tolerance of the manipulation of accountingsurplus, thus leads to the low audit quality, explaining that the higher actual audit fee is thannormal, the more detrimental to audit quality. It can be explained that actual audit fee is lower thanthe desired audit fees in order to achieve necessaryaudit quality at this point.Certified publicaccountantscertainly will tend to shorten the audit time, simpler audit program in order to obtaincertain profit, thus audit quality cannot be guaranteed, and the actual audit fee is lower than thenormal audit fee, audit quality is poorer.Seven related factors are analysed on the regulation ofrelationships between abnormal audit fees and audit quality effect, it is found that under the actionof the adjustment of the different variables, the influence degree of the abnormal audit fees onaudit quality is different, even in the corresponding condition, the abnormal audit fees has positiverole in promoting the quality of audit, which suggests that abnormal audit fees path and the effectof audit quality, will be under the impact of the external factors associated with variable change,especially the certified public accountant reputation, corporate governance and legal environmentfor the regulating effect of the relationship between them, beingis the most obvious.Theconclusion and findings providethe path and empirical evidence for improving the relationshipbetween the abnormal audit fees and audit quality and promoting audit quality improvement.This paper points out that the existence of abnormal audit fees has its inevitability in the theoryand its possibility in real practice. Asymmetric auditing, as a result of the relations of paradox arethe root causes of abnormal audit fees.The weak legal environment of the Chinese securitiesauditing market, low market concentration and lack of spontaneous characteristics such as highquality audit requirements for the abnormal audit fees long-standing provide existing conditionsfor abnormal audit fees. Therefore, though it is unable to solve the current mode under asymmetric audit relations, we could strengthen securities auditing market legal environment, the constructionof accounting firm reputation mechanism, and enhance the level of governance of listedcompanies and other aspects, which is the permanent cure for the comprehensive securitiesauditing market.