Will Local Government Debt Risk Affect Audit Price?

The report of the 20th Party Congress points out that China’s development has entered a strategic opportunity period where risks and challenges coexist,and various uncertain and unpredictable factors have increased.In order to prevent systemic financial risks and ensure the quality development of China,the risk of local government debt should not be underestimated.After the "quadrillion" plan,local governments engaged in a large number of leveraged financing activities and used the funds obtained to expand public infrastructure construction,becoming a booster of regional economic development.In recent years,along with the gradual increase in the debt burden of local governments,the academic community has shifted its focus to how to maintain an appropriate debt scale and scientifically prevent debt risks.In the existing literature,scholars have focused more on the possible impact of local government debt expansion on the macro economy and less on the impact of local government debt expansion on micro enterprises and firms.From a macro perspective,the increased risk of local government debt is a manifestation of the increased uncertainty in the external environment of firms,which has the potential to trigger systemic risks,deteriorate the business environment of firms and affect their normal operations.From a micro perspective,local governments are more likely to be favoured by banks and other financial institutions in the credit market,crowding out corporate credit resources,further crowding out corporate investment and financing,and increasing their financial risks.Under the risk contagion theory,enterprises,as one of the market players,may bear the negative impact of local government debt when its risk increases and become a new source of risk contagion.In a risk-based audit,the financial statements are a reflection of the business conditions of the enterprise,and as the financial risk of the enterprise rises,the likelihood of the auditor facing audit failure increases,and the resulting practice risks prompt the auditor to increase the audit pricing to compensate for the increased audit input and hedge the practice risks.The question of whether auditors are able to perceive changes in corporate financial risk arising from local government debt risk and adjust their audit pricing when taking on engagements has become a topic of discussion.Due to the quantifiable nature of the additional cost of risk contagion to the auditor,this thesis chooses audit pricing as a starting point to test whether firms and auditors perceive the negative effects of rising local government debt risk.This thesis empirically examines the impact of local government debt on corporate audit costs and further analyses the role of financial risk in the relationship between the two,based on local government debt data from 31 provinces,autonomous regions and municipalities directly under the Central Government(excluding Hong Kong,Macau and Taiwan)and corporate micro data.On this basis,heterogeneity is analysed by internal control,external supervision,risk-taking level,firm characteristics and location characteristics.The study found that(1)there is a significant positive relationship between the level of local government debt and corporate audit fees;(2)local government debt expansion can increase corporate financial risk,as evidenced by the elevated likelihood of corporate misconduct such as short loans and long investments,debt defaults,and leverage manipulation,thereby increasing corporate audit fees;(3)companies with good internal controls and higher external media attention can mitigate the impact of local government debt expansion on audit fees by constraining the behaviour of company management to mitigate the impact between the two;(4)the positive impact of local government debt expansion on audit fees is more significant for companies with higher levels of risk-taking;(5)mature companies and state-owned enterprises are less affected by the crowding-out effect of local government debt expansion and the relationship between the two is weaker;(6)regions with high fiscal transparency,where companies have more access to financing and lower costs,audit fees The rise is not significant.This study takes a risk contagion perspective and confirms that local government debt risk is indeed transmitted to enterprises through the market,and that the financial risk of enterprises rises,which in turn affects auditor decisions.This thesis enriches the research in the areas of local government debt and corporate audit fees,clarifies the correlation between the two and the inherent transmission mechanism,and further improves the research on the economic consequences of local government debt on micro enterprises;quantifies the negative impact of excessive local government debt burden on enterprises from the perspective of audit pricing,and expands the economic consequences of local government debt risk from the perspective of the auditor as an external subject The heterogeneity analysis from different perspectives enables a better understanding of the impact of local government debt risk on different enterprises and regions,so that countermeasures can be targeted and the awareness of different subjects of local government debt risk prevention can be improved.