Excess Goodwill,Disclosure Of Key Audit Matters And Audit Fees

The mergers and acquisitions market in China has become increasingly active in recent years,and M&A in the form of diversified transactions has become a popular choice for many companies to transform their businesses and improve their business performance.At the same time,the state has also introduced policies to optimise the M&A market environment and encourage M&A activities among enterprises.The total goodwill of A-share companies in China increases from 334.395 billion to 1,223.707 billion between 2014 and 2021,an increase of 266%.The impairment risk implicit in goodwill on such a large scale is beginning to emerge with the fading of the M&A boom.Goodwill explosions are frequent among listed companies,which not only worsen the business conditions of enterprises,but also seriously damage the interests of investors and affect the healthy development of the capital market.Under the modern risk-based audit model,excess goodwill arising from premium mergers and acquisitions signals to the capital market the existence of business risks,and the risks that may exist in the process of mergers and acquisitions and subsequent integration of enterprises will inevitably attract the key attention of auditors as the main force of external supervision and thus influence their decision-making behavior.2016 China’s Ministry of Finance issued the CSA 1504 standard,which requires auditors to disclose key audit matters to reveal enterprise risks and further improve the information content of audit reports.The promulgation of the new standard has placed higher demands on auditors’ awareness of risk prevention and their ability to identify and respond to it.Against this backdrop,it is relevant to explore the impact of excess goodwill on the auditor’s pricing strategy in relation to the potential risks posed by the enterprise.In summary,this article selects a sample of A-share listed companies that disclose key audit matters in China from 2016-2021 to empirically test the impact of excess goodwill on audit fees.The number of disclosures of key audit matters is also used as a mediating variable to test the mechanism of the effect of excess goodwill on audit fees.This paper finds that:(1)Excess goodwill has a significant positive impact on audit fees;(2)The higher excess goodwill of enterprise through mergers and acquisitions,the greater the number of key audit matter disclosures;(3)The number of key audit matter disclosures plays an intermediary effect in the relationship between excess goodwill and audit fees.The empirical results show that excess goodwill generated by managers’ irrational M&A behavior takes the enterprise resources and increases its business risks.The recognition and measurement of excess goodwill and its impairment involves complex estimates and professional judgement,and in order to cope with the high level of uncertainty in the measurement of goodwill auditors need to perform more detailed audit planning and disclose their judgement and response procedures in the form of key audit matters,which in turn leads to an increase in audit fees.In addition,further research found that the positive impact of excess goodwill on audit fees was more meaningful in enterprises with higher management shareholding and lower quality of internal control,while there is no significant difference between firms of different sizes.Finally,this paper makes policy recommendations at three levels: listed companies,accounting firms and regulators.It is expected to give insights to effectively prevent and mitigate M&A risks,promote the implementation of the new auditing reporting standards and alleviate CPA audit dilemmas.