The Impact Of Social Capital On Audit Fees

The audit industry plays an important role in maintaining the market order,improving the efficiency of information transmission and ensuring the effective allocation of market resources.Analysis of audit fees is an important channel for examining and understanding audit quality and independence.The audit pricing method and charging system in China is different from west countries.In December 2014,Development and Reform Commission issued a notice "On the release of part of the service price" that requires lifting the control over the guiding price of audit services.Thus,it is necessary to speed up the study of audit charging mechanism.In 1980,Simunic proposed the audit pricing model which laid the foundation for the study of factors influencing audit fees.He argued that the audit fee was determined by the resources invested by the auditor and the expected losses.And through the empirical test he confirmed that the audit fees are mainly affected by the asset size,business complexity and audit risk.Researchers later identified more specific factors.In 2001,the China Securities Regulatory Commission issued a document requiring listed companies to disclose audit fees in the annual report.Since then,the study of audit fees in China rose and achieved a lot of results.But there is little literature to examine the impact of informal system factors such as social capital on audit fees.Social capital includes trust,norms,and networks that can facilitate cooperations and transactions and reduce transaction costs.A large number of empirical studies have confirmed that the cultivation of social capital has a positive effect on regional economic development and also has an influence on the micro-corporate decisions.Domestic researches show that there are differences in the degree of mutual trust and cooperation among provinces in China,so the transaction costs of economic activities are not the same.So,as a kind of transaction cost,will the cost of audit contract be affected by social capital?Can the auditor identify the regional differences in social capital and adjust their audit behaviors?Therefore,this paper attempts to analyze the audit pricing from the perspective of social capital.In this paper,we use the sample of A-share listed companies in Shanghai and Shenzhen Stock Exchange from 2009 to 2014 to study the impact of social capital on audit fees.In the normative research section,we divide social capital into cognitive social capital and structured social capital.And then we analyze the influence mechanism of social capital on audit fees.This paper argues that social capital will affect and reflect the level of integrity of managers,and whether the manager is honest is the key factor for CPA to consider the audit pricing.In the empirical research part,this paper uses the multiple regression and Logistic model to test the impact of social capital on audit fees.The empirical results confirm that firms headquartered in Chinese provinces with high social capital pay lower audit fees.Further researches find that on the one hand,high social capital can reduce auditors’ human resources investments,on the other hand,it decreases audit-related litigation risks.The empirical results are still robust when we cluster the standard errors at the corporate level,replace trust with the commercial environment credit index,use regional fixed effects,and add the corporate governance variables.Our study makes an important contribution to the auditing literature and it also deepens the study of the relationship between regional characteristics and audit fees.In the practical sense,this paper provides the basis for the government to actively rebuild social trust.