Derivative Financial Instruments, Audit Fees And Audit Quality

Derivative financial instrument is based on the basic products or basic variables, whose price depends on changes of the underlying financial products’(or variables’) price, including the forward contract, futures, swaps and options, and a instrument that has the characteristics of forward contract, futures, swaps or options. Derivative financial instrument is a tool of risk management, it has the characteristics of uncertainty, high risk and high leverage.If the enterprise use derivative financial instruments reasonably, it can reduce the risk of the enterprise at the most, but if the enterprise operate the derivative financial instruments improperly, it will bring huge losses to the enterprise. To the general assets of the company, the derivative financial tool innovates very fast and its structure is very complicated. Although the derivative financial tool is use of managing risk, itself also has high risk. The use of derivatives depends largely on the subjective judgment of enterprise management, it causes opportunism, "moral hazard" and "adverse selection" problem. Therefore, it increases the uncertainty of derivative financial instruments. At the same time, it leads to the control and audit risk of the enterprise. In order to reduce audit risk and ensure high audit quality, auditors must collect sufficient audit evidence and implement more audit procedures in the process of auditing. These external work increases the cost of time of the public accounting firm. In addition, the derivative financial instruments innovate very fast, auditors must have the corresponding professional competence, which in turn increases the cost of human of the public accounting firm. Therefore, an accounting firm may charge a higher audit fees to cover their costs. According to the principle of high-risk and high-yield, in the face of the high risk of derivative financial instruments, in addition to the normal cost effectiveness, the public accounting firm will also receive the risk premium. Thus, it further increases audit fees of the enterprise that use the derivative financial tools. However, the accounting firm charges high audit fees, whether it can provide high audit quality is a issue that deserve us to discuss.Around these problems, this article selects the public companies of A share of Shanghai and Shenzhen as research samples from 2007 to 2013 and constructs two regression models to study the difference of audit fees between the enterprise that use the derivative financial instruments and don’t use the derivative financial instruments, The paper also studys the relationship between audit fee and audit quality when the enterprises use derivative financial tools. Through empirical test, this paper draws following conclusions:First, the difference of audit fee between the enterprise of using derivative financial tools and not using derivative financial tools is significant and audit fee of using derivative financial tools is higher than that of not using the derivative financial instruments.Second, when the enterprises use derivative financial tools, audit fee is negatively related to audit quality, namely the enterprise of using derivative financial tools charge higher audit fee, but does not provide high audit quality.