The Influence Of Firm Politival Connection On Audit Fee And Audit Quality

According to China’s IPO system,under the approval system,the Issuance Examination Committee(IEC)established by the China Securities Regulatory Commission(CSRC)is responsible for the review of the company’s listing application materials;Under the registration system,the listing review committee(LRC)set up by the stock exchange is responsible for the review of the company’s listing application materials.The company applying for IPO can only be listed if it is approved by the committee.In order to improve the professionalism of the committee,the IEC(LRC)hired professionals from audit firms,law firms,asset management companies,fund companies and other institutions.A large proportion of committee members come from audit firms,which provides a way to establish political connections between audit firms and committee members.Audit firms provide IPO audit services for clients,and at the same time,some personnel serve in the IEC(LRC)to review the application materials of IPO companies.The dual identity of audit firms brings conflicts of interest for them.Although CSRC has stipulated the withdrawal system of committee members,it is still possible for audit firms to help their clients hidden rent-seeking.Does the political connection between the audit firm and IEC(LRC)lead to higher audit fees and affect the audit quality?With the development of the capital market,the Science and Technology Innovation Board(STIB)and the Growth Enterprise Board(GEB)implemented the registration system in 2019 and 2020 respectively.Under the registration system,the approval right of IPO is transferred from the CSRC to the stock exchange.On the one hand,the registration system relaxed the listing conditions for companies,allowing unprofitable companies to go public;On the other hand,under the registration system,the LRC focuses on information disclosure and no longer makes substantive judgment on the value of the IPO company,which is obviously different from the approval system.Whether the registration system loosens the listing conditions or changes the review focus,it objectively reduces the rent-seeking willingness of IPO companies.Then,does the registration system have an impact on the relationship between the political connection of the firm and the audit fee and the relationship between the political connection of the firm and the audit quality?Based on the above questions,this paper uses the data of China’s A-share IPO companies from 2004 to 2021 for empirical research,which includes A total of 3023 observations.The findings are as follows: First,the audit fees of audit firms with political connections are significantly higher than those without political connections,indicating that audit firms can obtain higher returns by providing rent-seeking possibilities for IPO clients.Second,the audit quality of audit firms with political connection is significantly lower.Political connections bring higher audit fees to audit firms while reducing audit quality,which indicates that audit firms may use political connections to help clients seek rent-seeking listing.Third,the IPO registration system inhibits the positive correlation between political connections and audit fees,while the registration system has no effect on the negative correlation between political connections and audit quality,which indicates that the registration system inhibits rent-seeking behaviors to a certain extent.On the one hand,the registration system was implemented in 2019,and the implementation time is relatively short.On the other hand,the registration system is only piloted in the STIB and the GEB at present,and the scope of implementation is small.Therefore,the implementation effect of the registration system may not be fully reflected.At the same time,the registration system needs to be further improved in terms of restraining rent-seeking in the IPO process.Fourth,for non-Big Four audit firms and non-state-owned enterprises,the influence of political connections on audit fees and audit quality is more prominent,indicating that clients of non-Big Four audit firms and non-state-owned enterprises have stronger rent-seeking motives.Fifth,after the robustness test by replacing the measurement method of dependent variable,the above research conclusions are still valid.Finally,after the implementation of propensity matching score(PSM)to solve the endogeneity problem,the above conclusions are still valid.This study has the following contributions:(1)It enriches the research of IPO system.China’s IPO system is shifting from approval system to registration system.In 2019 and 2020,the registration system was implemented in the STIB and the GEB respectively,but there are few studies on the audit behavior under the registration system.Starting from the changes of China’s IPO system,this study finds that the registration system inhibits the positive correlation between the political connections of firms and audit fees,indicating that the registration system can inhibit the rent-seeking behavior of IPO,and provides experience for the implementation of the registration system.(2)It enriches the study of political connection.In this paper,the political connection of audit firms is measured by the fact that when an audit firm provides IPO audit for clients,its personnel serve as members in the IEC(LRC).The research finds that the political connection between audit firms and IEC(LRC)is positively correlated with audit fees and negatively correlated with audit quality,indicating that audit firms may help IPO companies seek rent through political connection.It provides experience on the influence of political connection of firm on audit behavior.