Operational Risk, Cash Flow And Audit Fees: Empirical Evidence From China

In this dissertation, a research has been made on the relations between clients' business risk and audit fees in China's special economic context and institutional environment.In the first place, on the basis of reviewing classic literatures, operational risks of the impact of audit risk is analyzed according to the request-proxy theory, the signal demonstrated theory and the insurance theory. Corresponding influence of audit fee is studied, and the article hypothesis is proposed taking account of the adjusted risk of the customer's budget soft restraint and the characteristics of the accounting firm.In the next place, an empirical research is carried through based on 2748 samples selected between 2005 and 2007, and we come to the conclusion that the empirical study result is consistent with our forecast. A significant positive relation between audit fees and the clients' business risk is discovered. And we also find that, if the clients are under certain circumstances, such as, the final controllers of the clients are state-owned enterprises, or the clients are in the region where the index of marketization is lower (the degree of government intervention is higher) or where the government has more serious budget deficit (the enterprise bears more burden of policy), their audit fees will be reduced for their higher soft budget restraint which may drop the operational risks under the same exhibition of cash flow. It appears that the Big 4 accounting firms are more sensitive about customers' business risks than others. And as a result, the positive relation between audit fees and the clients' business risk is much more significant. In the end of this article, we put forward the relative policy recommendations according to our research results.