CFO narcissism and audit fees: Evidence from listed companies in China

This paper examines the effects of CFO narcissism on audit fees in China.Using the size of CFO signatures in annual audit reports to measure individual narcissism,we find that CFO narcissism is associated with higher audit fees.We find empirical evidence that CFO narcissism significantly increases the audit fees of listed companies,and this effect is stronger in state-owned enterprises.This paper also explores the mediating effects of financial information and the engagement of prestigious Big-4 and Big-10 firms.The results show that companies with narcissistic CFOs have lower quality financial information and prefer more prestigious firms,which leads to higher audit fees.This research highlights the importance of CFO narcissism in corporate performance and provides new evidence that will be useful for listed companies that plan to hire senior executives.

Risk-preparedness mechanism and audit quality:Evidence from mandatory increase of professional indemnity insurance and professional risk fund

We examine the risk-preparing benefits of Chinese audit firms’professional indemnity insurance(PII)and professional risk fund(PRF)by using the Notice on Adjusting the Application Requirement of Audit Firms for Securities Qualifications as an exogenous shock.This policy requires audit firms to raise the sum of the cumulative compensation limit of their PII and PRF from 6 million to 80million yuan.It is found,first,that the capital market regards this policy revision as a signal to strengthen investor protection and responds positively;client firms with high audit risks have a stronger response.Second,auditors’governance of financial information has strengthened,resulting in the significant improvement of their clients’financial reporting quality,with a stronger effect on firms with higher earnings management risk.There is no evidence that audit firms pass the costs on to their clients.Finally,the mismatch between auditors and new client firms is alleviated.We show that in an emerging market with weak investor protection,establishing a sound risk-preparedness mechanism for audit firms and strengthening the capacity for civil compensation ex post greatly improve the adaptive degree between international auditing standards and the legal environment of China,thereby enhancing the overall service quality of the audit market.

Adjustment costs of institutional tax changes from the audit pricing perspective: Empirical evidence from the VAT reform

Institutional changes inevitably impose adjustment costs on firms while also generating benefits.However,empirical evidence regarding the adjustment costs of institutional changes is limited,with much of the focus centered on benefits.Using data on China’s A-share listed companies from 2010 to 2018 and the nation’s staggered adoption of the"business tax to value-added tax reform"(hereafter,"VAT reform")as a natural experiment,we examine the impact of this reform on a particular corporate cost:audit fees.We find audit fees to be 8.11%higher for VAT reform firms than for non-VAT reform firms.This difference does not exist before or after the reform year.That is,it is only observed in the year of VAT reform implementation.This indicates the existence of an adjustment cost specifically related to the VAT reform.Furthermore,we observe larger fee increases among firms audited by Big 4 international audit firms,firms that require more audit work,firms that are more complex,and firms with weak internal controls.From the audit pricing perspective,we provide evidence of the economic consequences of tax reform.The corporate adjustment costs that arise from institutional changes deserve more attention from decision-makers.

Do supply shocks in the audit partner labor market affect auditor choice?Evidence from a quasi-natural experiment

We examine whether supply shocks in the audit partner labor market induce clients to switch audit partners.We argue that audit partners in their early careers(i.e.,junior partners)charge low audit fees to attract clients,which induces client firms to switch from senior partners to junior partners when there are more junior partners available.Utilizing the Big4 localization policy,we find that Big4 clients are more likely to replace senior auditors with junior auditors to cut costs after the policy.Furthermore,the results are mainly driven by clients who are charged high fees.Our empirical evidence enriches the understanding of auditor choice determinants and informs the ongoing debates surrounding new regulations for Big4 firms in China.