The impact of comment letters on audit fees: Evidence from spillover effect

Abstract

This study examines whether comment letters have spillover effects on audit fees. By examining listed companies in China, we find that the frequency of comment letters received by peer firms is positively associated with focal firms' audit fees. The spillover effect is stronger when companies have the same audit firm as their peers and the comment letter is longer, asks more questions, is more negative, or contains more risk information. Furthermore, the effect is more pronounced (weaker) for companies with higher growth (audited by Big Four audit firms). Our findings suggest that comment letters have regulatory effectiveness, which influences companies' and auditors' behavior on a large scale.