Effects of Auditing Fee on Auditing Quality: Evidence From a Natural Experiment in China

Abstract

This paper exploits a natural experiment to investigate the causal effects of the auditing fees on auditing quality: China recently imposed a minimum auditing fee requirement which forces some auditing firms to charge higher fees to their clients. We find a significant decrease in auditing quality for auditing firms affected by the rule, relative to those not affected. This effect is more pronounced when client firms are more price sensitive to auditing fees and when auditing firms face stronger competition in the auditing market. Our evidence supports the economic theory of auditor independence: a higher auditing fee impairs auditor independence and thus causes a decrease in auditing quality.