An investigation into the determinants of auditor selection and audit fees in China
This thesis has two interrelated objectives. First, it examines the demand-side determinants of auditor choice of listed Chinese companies. Unlike most previous studies just based on agency theory or signalling theory, I consider an institutional perspective on auditor selection and audit fee determinants. The traditional theories focus on the nature of companies and the companies' inherent motivations to safeguard reliable accounting information. However, the theory in relation to institutions argues that external institutional factors such as legal system and government intervention impose legal and political costs on companies and auditors, which in turn affect the demand for, and supply of, auditing services. The second objective is to study the determinants of audit fees. I pay particular attention to the impact of auditor selection bias on audit pricing, which has been largely neglected in most prior studies. This study adopts a multi-strategy research design including an exploratory qualitative interview study and a quantitative cross-sectional study. The latter is based on a sample of 933 listed Chinese companies and estimates two-stage empirical models: a multinomial logit model (MNL) for auditor selection in the first stage and weighted least squares (WLS) regression models for audit fee determinants in the second stage. The results show that the Chinese listed companies' internal motivations to select high quality auditors are not strong, but the institutional factors impose legal and political costs on companies, which in turn motivate those with a large size or a high level of state ownership to hire high quality auditors. In addition, this work documents evidence of the existence of selectivity bias in audit fees in China. Controlling for the selection bias, company size and the number of subsidiaries are significant fee determinants for all Chinese auditors while company net cash flow and auditor tenure have a differential influence on audit fees charged by Big Four firms, large and small local firms. The study also provides evidence that all Chinese auditors do not have their audit fees sensitive to company risks, and Big Four firms do not have a fee premium relating to large local firms. Listed companies select auditors between Big Four firms and large local firms who can minimise their audit fees, controlling for other fee determinants and selectivity bias.
views in local repository
downloads in local repository
The information is available from the following content providers: