Abnormal Audit Fees And The Business Risk Of Financial Distressed Clients

The outbreak of the financial turmoil and the resulting butterfly effect makes our economy adversely affected. In such a grim situation, China's enterprises, especially large enterprises and export enterprises are facing an increasing number of business risks. These operational risks all the time affect the survival and development of enterprises and may even lead to corporate bankruptcy. Therefore, the early assessment and prediction of the business risk and providing warning information to the enterprise's management, shareholders, creditors and other stakeholders in time have become the current focus of corporate governance research. The CPA audit as an external monitoring mechanism, whether in terms of improving the quality of accounting information of listed companies or improving their corporate governance mechanisms in order to reduce the likelihood of financial crisis, plays an important role.Modern audit is the risk audit that is independence, Certified Public Accountant must always understand and evaluate the operational risks associated with the customer, the inherent risk affects not only the audit risk, and under the circumstances of "deep pockets" theory prevailing, may also lead to expected loss of the Accounting Firm(Accounting firm's business risk). From the core idea of the audit fee model simunic established, in a competitive market, the negotiating parties should be fully consider audit risk and audit costs when they agree the audit fee. However, the client companies in financial distress will have varying degrees of deterioration in the financial condition and operating results. Their business risks are much higher than healthy client companies and this increase audit risk and the accounting firm's business risk beyond doubt, thereby affecting the audit fees. Related studies have shown that in the background of the West distressed client company, the audit fees can be considered as a risk signal. However, quite a few studies have shown that accounting firms few consider the audit risk when they agree to the audit fee. What is the reason leading to this situation? Is the reasons China's audit market, or variables unreasonable of the model design? Ultimately, with regard to China's distressed companies, whether the audit fees especially abnormal audit fees has the risk signal function? For this reason, this paper examines the relation between the abnormal part of audit fees and distressed clients'business risk. Specifically, it is the relation between abnormal audit fees and expected ST status (ST and non-ST) and the relation between abnormal audit fees and expected surplus (total assets yield).The results showed that abnormal audit fees are not associated with the possibility of expected ST status; however, are significant negatively associated with expected return on assets (ROA) of our customers. In comparison with expected ST status of distressed clients, abnormal audit fees charged in the period of China's transition better reflect potential risks in the expected ROA of the customers, shows the audit fees have a certain risk signal function.Features and innovations of this paper are: First, the financial distress and financial crisis is different, and the boundaries between the two have been re-classified. Second, in the audit fee determinants model, we introduction the risk indicators such as ZFC, RETURN, VOLATLTY, BTM and so on, so that the audit fee determinants model is more extensible. Third, we build the financial crisis (ST) and total return on assets (ROA) prediction model of the distressed clients under abnormal audit fee that is the non-financial indicator, and include some indicators associated with financial distress.