An Empirical Research On Audit Fee Disclosure As A Leading Indicator Of Listed Companies’ Risk

In recent years, the listed companies’violations have occurred frequently, such as,Enron’s failure, the accounting scandals at WorldCom, the failure of Yin Guang Xia,ect.All these behaviors have severely damaged the healthy development of securitiesmarket, at the same time, investors and other market participants suffered huge losses.The external stakeholders urgently need to find more information that reducesuncertainty surrounding firms. So to evaluate and predict the risks associated with thelisted companies, and to provide warning information to investors, creditors and othermarket participants is an important issue being studied by physical and academiacircles. In addition, one consequence of the recent scandals is a renewed respect forthe importance of auditing in maintaining credible financial markets, and its role inthe process of corporate governance. On the other hand, investors generate crisis ofconfidence on the auditing profession because of the occurrence of a series of listedcompanies’ frauds. To solve this situation, Regulators have issued a series ofdocuments that regulate the behavior of listed companies and firms. The regulatoryenvironment becomes stricter. So, whether the auditor’s risk perception has beenenhanced, and whether the auditors practice the services more cautiously.This paper researches whether the audit fees disclosure is a leading indicator oflisted companies’ future risk, and tries to find a channel to provide more relevantinformation for decision-making of investors and other market participants. At thesame time, the paper tries to see whether the auditors’ risk awareness has beenenhanced in the context of stricter regulatory environment. The following articleintends to researches the relationship between the audit fee disclosure and clients’risks in the future (clients’ business risk and clients’ regulatory risk).We try to studywhether external stakeholders can place disclosed audit fees as a sign of risk.Specifically, this study hypothesizes a link between observed audit prices andfuture reported changes in clients’economic condition, and a link between audit fees and Listed companies subject to regulatory penalties next year. As predicted, resultsfrom a traditional audit fee model, estimated using a large sample of listed companiesengagements spanning from2008-2012, reveal the audit fee disclosure is a leadingindicator of clients’ business risk and regulatory risk,if auditors have higher relativebargaining power.