Research On The Correlation Between Abnormal Audit Fees, Audit Quality And IPO Pricing: Evidence From Chinese A-share Stock Market

It is known that the information asymmetry of initial public offering(IPO)is serious.Investors are more dependent on the independent third party to provide information,especially the financial information provided by accounting firms,which is an important basis for investors to make investment decisions.However,the failures of IPO auditing are frequent in recent years.The reasons are that the accounting firms have not been diligent and conscientious in the audit process,and have not kept proper professional prudence.Namely,the relevant projects have not been fully verified and the corresponding audit procedures have not been added to the abnormal situations.Considering the balance between revenue and cost,audit fee is an important factor affecting the audit input of accounting firms.Chinese CPA Association has repeatedly interviewed the accounting firms whose audit fees were reduced or too low,worried that the accounting firms have reduced the necessary audit resources and audit procedures for the purpose of low-balling.Then,does the difference in audit fees affect the audit quality in the IPO market,and then affect the IPO pricing efficiency?This study explores the relationship between abnormal audit fees and audit quality,and analyzes the impact of audit quality on initial public offering(IPO)pricing in the Chinese market using a sample of 1119 firms over the period from 2006 to 2012.Firstly,this article analyzes whether the abnormal audit fees can be used as the substitute index of audit quality.Because discretionary accruals is a proxy variable to measure audit quality,we can indirectly test the effectiveness of abnormal audit fees as an alternative indicator of audit quality by analyzing the correlation between abnormal audit fees and discretionary accruals.Secondly,this study incorporates the abnormal audit fees into the pricing model to test its impact on the pricing of IPO.The results of various regressions find that the association between abnormal audit fees and audit quality is asymmetric,depending on the sign of the abnormal audit fees.Also,the relationship between abnormal audit fees and IPO pricing is asymmetric.For the full sample,abnormal audit fees are irrelevant to audit quality and long-term performance but negatively related to IPO underpricing.Similarly,for observations with negative abnormal audit fees,abnormal audit fees are unrelated to audit quality and IPO pricing.In contrast,for observations with positive abnormal audit fees,abnormal audit fees are negatively associated with IPO underpricing,while abnormal audit fees are positively related to audit quality and long-term performance.Our findings suggest that abnormally high audit fees reflect audit efforts,which do not impair audit quality.Therefore,regulators should pay more attention to the risks of negative abnormal audit fees.