Does Convergent-IFRS Adoption in China Increase Audit Fees?

Review of Pacific Basin Financial Markets and Policies
Vol. 23, No. 1 (2020) 2050006 (21 pages)

°
c World Scientific Publishing Co.
and Center for Pacific Basin Business, Economics and Finance Research
DOI: 10.1142/S021909152050006X
Does Convergent-IFRS Adoption in China

Increase Audit Fees?
by 36.71.234.71 on 01/06/21. Re-use and distribution is strictly not permitted, except for Open Access articles.
Rev. Pac. Basin Finan. Mark. Pol. 2020.23. Downloaded from www.worldscientific.com
Yu Ling Tsai
College of Management
National Cheng Kung University, Taiwan
r18011036@mail.ncku.edu.tw
Hua-Wei Huang*
Distinguished Professor
College of Management & Center for Innovative FinTech Business Models
National Cheng Kung University, Taiwan
hwawei7@yahoo.com.tw
Published 30 April 2020
The aim of this study is to investigate whether the adoption of convergent-

International Financial Reporting Standards (IFRS) in China affects the audit fees of
initial public offerings (IPO) firms. An empirical regression analysis using panel data
for 1,094 nonfinancial IPOs (excluding season equity offers) of A-shares listed on the
Shanghai and Shenzhen Stock Exchanges between 2003 and 2012 is adopted. The
results reveal that audit fees increase following convergent-IFRS adoption in China
and additionally suggest that convergent-IFRS adoption eases the intense price
competition that previously existed in China’s audit market and thus has important
policy implications for regulators. To the best of the authors’ knowledge, this study
represents the first reported attempt to adopt the IPO setting to examine the effects
of convergent-IFRS adoption on audit fees and fills the gap in literature. Using a
setting of IPOs enables this paper to further exclude the influence of quasi-rents
derived from low-balling after initial audit engagement when testing audit fees.
Keywords: IFRS; IPO; audit fee; China; convergent.
1. Introduction
The International Financial Reporting Standards (IFRS), a set of interna-
tional accounting standards issued by the International Accounting
*Corresponding author.
2050006-1
Yu Ling Tsai & Hua-Wei Huang
Standards Board, is widely used to compile financial reports related to in-

formation disclosure. IFRS adoption is an important issue globally. Many
streams of research are derived from the adoption of IFRS. Among these
streams, one of the most important is that investigating the cost issues
associated with IFRS implementation. Some prior studies examine the
effects of IFRS adoption on the audit fees of listed companies in established
markets, such as Europe (Kim et al., 2012) and Australia (De George et al.,
2013). However, this study is the first to take the setting of initial public
offerings (IPOs) for this type of investigation. This study investigates the
effects of IFRS adoption on the audit fees (a main IFRS implementation

cost) of IPOs in China, the second largest economy and the largest emerging
market in the world.
One of the Chinese government’s attempts at adopting IFRS is to increase
both audit fees and the independence of auditors as well as the quality
of accounting information. The findings of this research are expected to
provide evidence on whether or not the implementation of IFRS meets the
expectation of regulators.
When examining the effects of IFRS adoption on audit fees in an
extremely competitive, low-balling audit market, like China, the investi-
gated samples should be carefully chosen. The current literature indicates
that the initial engagement to audit public-use financial statements may
significantly decrease the audit fees, and lead to higher quasi-rents as a result
(DeAngelo, 1981; Deis and Giroux, 1996). Consequently, there exists the
concern that the results of increased audit fees documented from the adop-
tion of IFRS in fact might come from quasi-rents (sequentially higher audit
fees as a result of low-balling) when using the setting of listed firms. In
addition, in order to be compliant with a greater number of procedures when
auditing IPOs, there are different auditor responsibilities for IPO audits and
listed-firm audits (Venkataraman et al., 2008). It is not appropriate to in-
clude both IPOs and listed firms in the investigative setting. Therefore, to
conclusively dispel the above concerns, there is a genuine need for further
investigation into the relationship between audit fees and IFRS adoption
using a pure IPO setting simultaneously to minimize the potential risk of
bias from future higher quasi-rents in China.
Although Lin and Yen (2016) document that IFRS adoption increases
audit fees in China through testing a set of listed A-share companies (IPOs
not included) in the period from 2005 to 2008, they do not take into con-
sideration the important phenomenon known as \low-balling," which is
documented in the Chinese audit market at least from 2002 to 2011 (Huang
2050006-2
Does Convergent-IFRS Adoption in China Increase Audit Fees?
et al., 2015). In other words, increased audit fees might be caused by se-
quential quasi-rents following undervalued initial audit engagements rather
than IFRS adoption itself. This study, by investigating the effects of IFRS
adoption in China on audit fees in a different setting, IPOs, can eliminate the
concerns of sequential quasi-rents and in turn fill the gap in the literature.
It should be noted that the aim of the study is not to test low-balling in
China by itself, but rather to document if audit fees increase following IFRS
adoption in an IPO setting to minimize the potential risk of bias due to

future higher quasi-rents coming after low-balling of the initial audit en-
gagement. In addition, according to the \EY Survey Report of Universal
IPO Markets" published by Ernst and Young (Taiwan), the global IPO
market comprises 1,624 IPOs in 2017, of which 436 (27%) involves A-
shares in China. As a result, IPOs in China have attracted growing interest
in leading accounting and finance journals in recent years. The results of this
study are expected to be of significant interest to auditors, investors, and
regulators, both in China and throughout the world.
The remainder of this paper is organized as follows: Sec. 2 presents the
background on the audit market in China, reviews previous related studies
in the field, and develops the proposed research hypothesis. Section 3
describes the sample selection process and the methodology adopted in this
study. Section 4 presents and discusses the empirical results and test find-
ings. Finally, Sec. 5 provides some brief concluding remarks.
2. Background and Hypothesis Development

Firms in China can choose to go public on the Shanghai Stock Exchange or
the Shenzhen Stock Exchange, but they cannot operate on both exchanges
simultaneously. These firms can issue A-shares or B-shares1 or both in
Mainland China, and H-shares, N-shares, S-shares, and L-shares on the Hong
Kong, New York, Singapore, and London Stock exchanges, respectively.
A-shares listed on these exchanges are classified as either tradable shares or
nontradable shares, where the latter shares include state-owned shares (re-
ferred to hereafter as SOE shares2) and legal-entity-owned shares. A more
1
There have been no new B-share IPOs on the Shanghai Stock Exchange or Shenzhen Stock
Exchange since 2001. In other words, the historically political aim of B-shares (to attract
foreign capital) has now come to an end. For this reason, this study considers only A-shares.
Moreover, the sample A-share IPOs are selected from the CSMAR database and involve only
IPOs issued for the first time before any other type of share issuance (e.g., B-shares or cross-
listed H-shares).
2
SOE shares were wholly nontradable before the SOE revolution in April 2005.
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detailed institutional background can be found in prior literature (Qu

and Leung, 2006; Qu et al., 2013). Financial reports concerning B-shares
had always been compiled in accordance with International Accounting
Standards. By contrast, those related to A-shares were compiled in accor-
dance with the old Chinese Accounting Standards (CAS) prior to the im-
plementation of the new Chinese substantially IFRS-convergent standards
in 2007.
The CAS can be traced back to \The Accounting Regulations of the

People’s Republic of China for the Joint Ventures Using Chinese and For-
eign Investment" promulgated on March 4, 1985, by the Ministry of Finance

(MOF) of China. Together with the establishment of the Shanghai and
Shenzhen stock exchanges in 1991, the financial accounting information
requirements from these external markets led to the development of ac-
counting systems in China, which were subsequently converged toward the
regulations prescribed in the IFRS in 2007.
The Chinese Independent Auditing Standards promulgated since 1995
form only one part of the Certified Public Accountants Practice Guidelines
formulated by the Chinese Institute of Certified Public Accountants
(CICPA) issued by the MOF to regulate the auditing work of certified public
accountants and ensure the quality of auditing. With its mixed legal system
of civil law and socialist law, China is regarded as a code law country, with
less protection to investors than that in common law countries (La Porta
et al., 1998). This may account, at least in part, for the low litigation risk
faced by auditors in China.
In addition to the internationally reputable Big4 auditors (i.e., Deloitte,
PwC, EY, and KPMG), audit market suppliers in China include numerous
local CPA firms. It is worth mentioning that contrary to the US and Eur-
ope, the internationally reputable Big4 auditors do not own the main audit
market share in China. In fact, no auditor (Big4 or local CPA firms) has a
complete monopoly in the audit market. Rather, each auditor has an av-
erage low market share. The resulting intense competition, together with
the low litigation risk described above, has led to a serious low-balling
phenomenon and concomitant concerns regarding the independence of
auditors and the quality of the audited financial reports (Asthana et al.,
2019). Public trust in financial reports has been further degraded due to the
earnings management behavior found in many enterprises (Ding and Su,
2008). One of the serious goals of the new Chinese substantially IFRS-
convergent standards (referred to hereafter simply as IFRS in China), is-
sued on January 1, 2007, as they relate to the authorities, is to increase
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both audit fees and the independence of auditors in order to improve the
information quality of financial reports.
The literature contains a stream of studies on the effects of IFRS on costs in
developed markets. For example, Marden and Brackney (2009) indicate that
the adoption of IFRS increases management judgement as well as flexibility
and, in turn, increases audit risks and audit costs. When stating an economic
activity in the form of financial reports prepared in accordance with so-called
principles-based standards such as IFRS, the task of management in ensuring

compliance is simplified and allows a greater scope for judgment. However,
the audit process becomes relatively more complex precisely because of the
need to evaluate these judgements in accordance with IFRS (either in body or
in spirit) rather than simply examining compliance based on rule-based
GAAP. In addition, conflicts in judgement between management and audi-
tors may occur, leading to a higher audit risk if the auditors fail to modify
their opinion on materially misstated financial reports. Likewise, Armstrong
et al. (2010) indicate that the costs related to IFRS implementation and
transition may increase over the benefits. Kim et al. (2012) find that while
IFRS adoption in Europe increases audit fees, it is positively associated with
audit complexity and negatively associated with an improvement in the
quality of financial reporting. De George et al. (2013) similarly observe a 23%
increase in audit costs in Australia in the IFRS transition year.
However, in contrast to the above developed markets, there exists serious
competition and SOE share concerns in China’s audit market. DeAngelo
(1981) argues that low-balling is a competitive reaction to the expectation of
future quasi-rents stemming from an initial audit engagement. Meanwhile,
low-balling is documented from 2002 to 2011 in China’s audit market
(Huang et al., 2015). As a result, the work of Lin and Yen (2016) indicates
that IFRS adoption increases audit fees for listed A-share companies on the
Shanghai and Shenzhen stock exchanges in the period from 2005 to 2008 will
provide an alternative explanation suggesting that the documented higher
audit fees in the post-IFRS period are caused by quasi-rents (sequentially
higher audit fees from low-balling).3 Investigations of IFRS adoption might
3
For example, the audit fees are 100 million RMB in 2006 for a listed firm before IFRS
adoption, but, ceteris paribus, the listed firm is charged 80 million RMB as firm’s initial
engagement of successor auditor in 2008 and subsequently 120 million RMB in 2009 as a
quasi-rent. In the audit-fee regression model, the control variable \Initial" is intended to
control for the initial audit engagement in 2008. However, the increased audit fees of 120
million RMB in 2009 actually are resulted from low-balling rather than IFRS adoption. In
other words, the audit fee dose not actually change significantly as a result of IFRS adoption.
2050006-5
have similar effects on the audit fees for companies filing for IPOs as for those
in a listed-firms (post-IPO) setting if the concerns regarding low-balling and
subsequent future higher quasi-rents are invalid. However, in fact, they are
not. In this case, we are still not sure as to whether audit complexity or audit
risk influences post-IFRS audit fees more than intense auditor competition
or improved financial reporting quality in China. Therefore, whether IFRS
adoption has a similar effect as found in established markets on audit costs in
China’s emerging market, which is characterized by a unique historical

background and political system, need further examination, where the IPO
setting is tested separately from that of listed companies. Notably, by con-

sidering the case of audit engagement in a pure IPO setting, this study
effectively removes the possible effects of higher quasi-rents arising from the
initial audit engagement and therefore does not need to be concerned with
the difference in audit risks between an IPO and a listed firm (Venkatara-
man et al., 2008).
In summary, after adoption of IFRS in China, audit fees might be in-
creased due to audit complexity and audit risk, as documented in the de-
veloped markets, while they might be reduced due to intense auditor
competition, improved quality of financial reporting, or the proportion of
state-owned shares. To determine the effect of IFRS adoption in China on
audit fees more carefully, the following hypothesis is proposed:
H1: Audit fees are increased after the adoption of IFRS in China’s IPOs.
Prior studies argue that the government has a \grabbing hand" on state-
owned companies (Shleifer and Vishny, 1998; Eng et al., 2018). Therefore,
local governments have both motivations and political influences that might
cause agency problems. Likewise, Chen et al. (2008) indicate that local
governments are in need of more capital to develop local economies, and
their interests are aligned with those of SOEs. Qu et al. (2013) indicate that
ownership structure might contribute to the agency problems in China.
Further, Nikkinen and Sahlstr€ om (2004) find a negative relationship be-
tween audit fees and agency costs. Liu and Subramaniam (2013) posit that
SOEs pay significantly lower audit fees than non-SOEs based on an obser-
vation of Chinese listed companies from 2001 to 2008.
However, Marden and Brackney (2009) indicate that the adoption of IFRS
increases management judgement as well as flexibility. This increased man-
agement judgement and flexibility might cause SOEs to suffer more agency
problems, which would decrease audit fees. We therefore wonder whether the
2050006-6
increasing impacts of IFRS adoption on audit fees will be moderated by SOEs

in China. The second hypothesis is thus developed as follows:
H2: The association between adoption of IFRS and audit fees is influenced
by the proportion of state-owned shares in China’s IPOs.
3. Method
3.1. Data collection

Since there are different audit risks between IPO audits and listed-firm
audits (Venkataraman et al., 2008) as well as concerns related to expecta-

tions of future quasi-rents arising from low-balling of initial audit engage-
ments (DeAngelo, 1981; Deis and Giroux, 1996), this research focuses solely
on IPOs4 in investigating the effect of IFRS adoption on audit fees. To avoid
confusion, we have to indicate that all samples in our setting are IPOs of
issuing A-shares for the very first time who had not issued B-shares or any
other types of shares (Seasoned Equity Offerings are not included, either.),
each firm (IPO) only appears once in the sample period. IFRS convergence
applies only to the samples from 2008 to 2012, and hence the samples from
2003 to 2006 are used as benchmark in the study. Therefore, we eliminate the
differences in risk between an IPO and a listed (post-IPO) firm as much as
possible. In addition, since the engaged auditor is to audit the firm to be
listed for the first time, the risk of financial misstatements requiring addi-
tional assurance functions from incumbent auditors is mitigated. Most im-
portant of all, this research can also reduce the possibility that the result of
increased audit fees came from quasi-rents while low-balling was docu-
mented from 2002 to 2011 in China’s audit market (Huang et al., 2015).
The database used in this research is constructed using data extracted
from the CSMAR and TEJ databases,5 and covers a 10-year period from
4
If the observations of this work include both IPOs and post-IPO firms, we will encounter
some problems. First, since the audit fee models for IPOs and post-IPO firms, respectively,
are quite different, the investigating regression model would lack of explanatory power as a
result of different audit risks between IPOs and listed firms (it is difficult adopting control
variables to account for these differences). Second, it is difficult to identify the years of quasi-
rents stemming from low-balling after an initial audit engagement and to determine whether
the change in audit fees is due to IFRS adoption or quasi-rents. Therefore, we deliberately
exclude listed firms from our observations in order to better investigate the effect of IFRS
adoption on audit fees.
5
The IPO information is taken mainly from the CAMAR database, but it was supplemented
with underwriter information and consolidated subsidiaries information acquired from the
TEJ database.
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Table 1. Sample selection.
Observations
A-share IPOs in CSMAR from 2003 to 2012 1,335

Less: IPOs during 2007 (126)
Less: IPOs of financial services industries (15)
Less: IPOs with missing data (100)
Observations used 1,094
2003 to 2012. As shown in Table 1, the initial sample comprises 1,335 IPOs
taken from the CSMAR database. IPOs occurring during the transition year
(2007) are removed. Fifteen IPOs associated with financial service indus-
tries and 100 IPOs with missing data are also excluded from the sample.
Consequently, the final sample comprises 1,094 observations of interest.
The associated audit fees and financial variables are acquired from the
CSMAR database, which gathers related IPO information (e.g., the pro-
spectus) prior to listing on the Shanghai Stock Exchange or the Shenzhen
Stock Exchange. Consequently, all the financial variables are derived from
the latest financial information available before listing (i.e., the audited
prospectus). Accordingly, the research captures the forces that affect the
IPO itself and eliminates the concern of using post-IPO variables (Ball and
Shivakumar, 2008).
Although the China Securities Regulatory Commission (CSRC) has re-
quired public firms to disclose their audit fees and other service fees since
December 24, 2001, the ranking of the Top 14 audit firms announced by the
CICPA has only been available since 2003. In addition, the IPO application
mechanism in China was suspended for the entirety of 2013, and it was
restarted on January 2014 but soon suspended again for 3 months thereafter.
In light of the unstable issuing of IPOs since 2013 and the main purpose of
this study to investigate the performance of convergent-IFRS in China
(before adoption with 4-year-data and after adoption with 5-year-data), the
time length for the data should be long enough. The convergent-IFRS in
China has been implemented since January 2007 for all companies going
public or listed on the Shanghai and Shenzhen Stock Exchanges. The sample
period (2003–2012) is thus divided into two separate periods, pre-IFRS
(from 2003 to 2006) and post-IFRS (from 2008 to 2012). Following the work
of Hong et al. (2014), this study also ignores the transition year (2007) to
avoid potential confounding effects.
2050006-8
3.2. Research methodology

The literature contains several sophisticated audit fee models for investi-
gating the factors affecting audit fees (Simunic, 1980; Ferguson et al., 2003;
Huang et al., 2015). The audit fee regression model used in this research is
based mainly on the work of De George et al. (2013), adjusted with the
specific variables affecting audit fees in the IPO market in China in order to
investigate the relationship between audit fees and convergent-IFRS adop-
tion. The following ordinary least squares (OLS) model is used to test the
proposed hypothesis (H1):
Model 1: Fee ¼ 0 þ 1 ðPostÞ þ 2 ðUDWRÞ þ 3 ðRepuÞ þ 4 ðTAÞ

þ 5 ðSUBÞ þ 6 ðINVÞ þ 7 ðRECÞ þ 8 ðCRÞ þ 9 ðLEVÞ
þ 10 ðROAÞ þ 11 ðTaccrÞ þ 12 ðFIÞ þ 13 ðAucomÞ
þ 14 ðSOEÞ þ 15 ðEXGÞ
þ ðIndustry and Year dummiesÞ: ð1Þ
In accordance with prior research, Fee (i.e., the dependent variable in the
model) is taken as the natural log of fees paid to auditors (De George et al.,
2013). In order to capture the effect of convergent-IFRS adoption on audit
fees, Post (i.e., the independent variable of interest in the hypothesis) is
modeled using a dummy variable equal to 1 for IPOs occurring in the post-
IFRS adoption period (2008 to 2012), and 0 otherwise.
DeFond et al. (2000) report that underwriters strongly influence the choice
of auditors for IPO firms. As a result, it is possible that the reputation of a
particular underwriter may also play a role in determining audit fees. How-
ever, there appears to be no objective consensus regarding the most reputable
underwriters in China. Consequently, in this research, the underwriter
quality is modeled using the UDWR (underwriter reputation) variable based
on the market share of each individual underwriter (Carter et al., 1998). In
particular, UDWR is measured by dividing the underwriter’s total credits
(amounts) by the year total. To reflect audit practice in China, the control
variable, Repu, is modified likewise in the audit fee model of De George et al.
(2013) and is equal to 1 if the IPO is audited by one of the Top14 auditors in
China. In the work of DeFond et al. (2000) and Yang (2013), the top-tier audit
firms are identified as a group of 14 firms comprising four joint venture firms
(JVFs) and the 10 largest domestic firms in China. However, the auditor
rankings in these studies are not globally recognized. As stated above, there
appears to be no consensus regarding the best auditors in China during the
considered sample period. Consequently, the Top14 audit firms are
2050006-9
determined based simply on the synthesized valuations of the CICPA. An

inspection of the CICPA website shows that the ranking of the Top14 ranked
audit firms in China varied from year to year as a result of no auditor having a
stable market share. Consequently, in this research, the Top14 audit firms are
separately determined for each year in the sample period of 2003 to 2012.
The total assets (TA) and number of subsidiaries included in the con-
solidated financial statements of an IPO (SUB) are used in the model to
capture the effects of audit complexity on audit fees. In addition, the in-
ventories (INV), receivables (REC), current ratio (CR), leverage (LEV),
return on total assets (ROA), and total accruals (Taccr) variables are used
to capture the audit risk and some part of the reporting quality. Since Huang
et al. (2016) indicate that strong corporate governance improve financial
reporting quality, the percentage of foreign shares (FI), audit committee
(Aucom), and state-owned enterprises (SOE) variables are used to control
for the effects of corporate governance. A stock exchange (EXG) variable,
with a value set at 1 for IPOs listed on the Shanghai Stock Exchange (and 0,
the Shenzhen Stock Exchange) is used to control for regional disparity.
Finally, industry and year fixed effects are considered as a control for the
influence of any possible omitted variables. The appendix provides detailed
definitions of the above variables in our analysis.
To test our second hypothesis, we further incorporate SOE Post, an
interaction term between Post and SOE, to investigate the interaction effect
between mandatory adoption of Chinese IFRS (Post) and the percentage of
state-owned shares of IPOs (SOE) on audit fees. We center the continuous
independent variable (SOE) on the mean before it interacts with Post to
avoid the problem of multicollinearity. The following model is formed to test
the second hypothesis (H2):
Model 2: Fee ¼ 0 þ 1 ðPostÞ þ 2 ðUDWRÞ þ 3 ðRepuÞ þ 4 ðTAÞ
þ 5 ðSUBÞ þ 6 ðINVÞ þ 7 ðRECÞ þ 8 ðCRÞ
þ 9 ðLEVÞ þ 10 ðROAÞ þ 11 ðTaccrÞ þ 12 ðFIÞ
þ 13 ðAucomÞ þ 14 ðSOEÞ þ 15 ðSOE PostÞ
þ 16 ðEXGÞ þ ðIndustry and Year dummiesÞ: ð2Þ
4. Empirical Analysis
4.1. Descriptive statistics and univariate analysis
Table 2 shows the total number of IPOs, the mean audit fees, the mean
reputable auditor, the mean total assets, the mean audit committee, and the
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Table 2. Means of main variables of IPOs by year and by pre- and post-period.
Mean Audit Mean Reputable Mean Total Mean Audit Mean

List Year N Fee Auditor Assets Committee SOE
2003 28 14.31455 0.21429 0.20973 0.35714 0.38446

2004 60 14.13023 0.30000 0.06531 0.65000 0.23411
2005 12 14.45597 0.16667 0.07642 0.00000 0.21363
2006 62 14.38283 0.27419 0.42808 0.30645 0.26104
2008 67 14.25202 0.46269 0.41424 0.86567 0.15129

2009 96 14.51192 0.47917 0.52691 0.13542 0.12314
2010 339 14.55956 0.53687 0.11527 1.01180 0.08021
2011 277 14.54819 0.50542 0.15256 0.75451 0.04426
2012 153 14.64489 0.56863 0.11731 0.41176 0.06997
List Mean Audit Mean Reputable Mean Total Mean Audit Mean
period N Fee Auditor Assets Committee SOE
Pre- 162 14.28289 0.26543 0.22993 0.41975 0.26889

Post- 932 14.54317 0.52146 0.19058 0.73605 0.07738
mean SOE per year from 2003 to 2012 (omitting the transition year, 2007).
In general, the results indicate that audit fees increase following the adoption
of IFRS in 2007.
Panel A in Table 3 shows the full-sample descriptive statistics for all the
variables in the OLS model. Meanwhile, Panel B in Table 3 shows the uni-
variate test results for all the variables grouped by the pre- and post-IFRS-
adoption periods, respectively. The mean value of Fee is shown to be signifi-
cantly larger after the adoption of IFRS in China, which provides preliminary
support of the main research hypothesis. Moreover, the mean values of
UDWR, Repu, SUB, REC, CR, ROA, Taccr, FI, and Aucom are also sig-
nificantly larger in the post-IFRS-adoption period, while those of LEV, SOE,
and EXG are significantly smaller. In other words, in the post-IFRS-adoption
period, the IPOs are underwritten by underwriters having a greater market
share, audited by auditing firms with a higher reputation, include a greater
number of subsidiaries in their consolidated financial reports, enjoy a greater
number of current assets, a greater return on assets, a greater number of
accruals and a higher percentage of foreign-shares, and are more likely to be
supervised by an audit committee. Further, the condition of the firms’ fi-
nancial leverage prior to listing is improved; the percentage of state-owned
shares is reduced, and the number of IPOs operating on the Shenzhen Stock
Exchange is greater than that on the Shanghai Securities Exchange.
Table 4 shows the Pearson correlation matrix for all the variables used in
the OLS model. The results confirm that the adoption of IFRS is positively
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Table 3. Descriptive statistics.
Panel A: Descriptive statistics of full sample
Mean Std Dev Min Median Max
Fee 14.505 0.615 12.301 14.486 18.963

POST 0.852 0.355 0.000 1.000 1.000
UDWR 0.043 0.046 0.001 0.028 0.419
Repu 0.484 0.500 0.000 0.000 1.000
TA 0.196 1.019 0.007 0.046 20.417

SUB 6.856 14.544 0.000 3.000 207.000
INV 0.172 0.114 0.000 0.157 0.819
REC 0.170 0.119 0.000 0.158 0.714
CR 1.860 1.422 0.179 1.507 14.777

LEV 0.480 0.161 0.062 0.484 0.977
ROA 0.140 0.073 0.012 0.126 0.485
Taccr 0.011 0.082 0.307 0.006 0.479
FI 0.048 0.128 0.000 0.000 0.735
Aucom 0.689 1.380 0.000 0.000 6.000
SOE 0.106 0.214 0.000 0.000 0.846
EXG 0.144 0.352 0.000 0.000 1.000
Panel B: Descriptive statistics Pre- and Post-adoption of IFRS
Pre-adoption of Chinese IFRS Post-adoption of Chinese IFRS
Std Std
Mean Dev Min Median Max Mean Dev Min Median Max Difference
Fee 14.283 0.575 12.899 14.260 16.517 14.543 0.614 12.301 14.528 18.963 0.260***
UDWR 0.035 0.050 0.002 0.024 0.311 0.044 0.045 0.001 0.029 0.419 0.008**
Repu 0.265 0.443 0.000 0.000 1.000 0.521 0.500 0.000 1.000 1.000 0.256***
TA 0.230 0.853 0.010 0.044 6.906 0.191 1.046 0.007 0.046 20.417 0.039
SUB 4.296 10.668 0.000 2.000 110.000 7.302 15.077 0.000 4.000 207.000 3.005***
INV 0.168 0.134 0.000 0.155 0.814 0.173 0.110 0.000 0.158 0.819 0.004
REC 0.136 0.100 0.000 0.125 0.424 0.176 0.121 0.000 0.165 0.714 0.040***
CR 1.307 0.550 0.179 1.230 3.270 1.956 1.503 0.243 1.560 14.777 0.648***
LEV 0.548 0.137 0.142 0.566 0.868 0.468 0.161 0.062 0.470 0.977 0.079***
ROA 0.092 0.043 0.014 0.086 0.214 0.148 0.074 0.012 0.134 0.485 0.055***
Taccr 0.023 0.073 0.250 0.024 0.186 0.016 0.082 0.307 0.011 0.479 0.039***
FI 0.030 0.097 0.000 0.000 0.728 0.051 0.132 0.000 0.000 0.735 0.020**
Aucom 0.420 1.157 0.000 0.000 5.000 0.736 1.411 0.000 0.000 6.000 -0.316***
SOE 0.269 0.280 0.000 0.163 0.846 0.077 0.187 0.000 0.000 0.811 0.191***
EXG 0.401 0.492 0.000 0.000 1.000 0.100 0.300 0.000 0.000 1.000 0.301***
Note: *, **, *** Indicate statistical significance at the 10 percent, 5 percent, and 1 percent
levels, respectively.
associated with audit fees. In particular, all of the independent variables are
correlated with audit fees with the expected sign (i.e., positive or negative)
except for Taccr, Aucom, and SOE. In addition, most of the correlation
coefficients are low, indicating the absence of a multi-collinearity effect.
2050006-12
Table 4. Pearson correlation matrix.

Correlation coefficients (n ¼ 1; 094)
Variable POST UDWR Repu TA SUB INV REC CR LEV ROA Taccr FI aucom SOE EXG Fee
POST 1.000
UDWR 0.066 1.000
Repu 0.182 0.098 1.000
TA 0.014 0.353 0.106 1.000
SUB 0.073 0.159 0.097 0.341 1.000
INV 0.013 0.025 0.004 0.002 0.039 1.000
REC 0.121 0.097 0.037 0.082 0.139 0.066 1.000
CR 0.162 0.047 0.006 0.090 0.092 0.131 0.143 1.000
2050006-13
LEV 0.177 0.017 0.021 0.235 0.198 0.283 0.076 0.661 1.000
ROA 0.271 0.019 0.012 0.186 0.169 0.141 0.076 0.528 0.683 1.000
Taccr 0.171 0.008 0.009 0.054 0.052 0.254 0.344 0.181 0.161 0.206 1.000
FI 0.056 0.043 0.007 0.030 0.002 0.067 0.057 0.004 0.042 0.062 0.008 1.000
Aucom 0.081 0.025 0.011 0.051 0.011 0.014 0.015 0.035 0.038 0.017 0.023 0.037 1.000
SOE 0.317 0.099 0.003 0.287 0.185 0.085 0.205 0.146 0.192 0.298 0.173 0.127 0.045 1.000
EXG 0.305 0.167 0.014 0.305 0.282 0.052 0.177 0.162 0.244 0.268 0.106 0.010 0.030 0.455 1.000
Fee 0.150 0.279 0.198 0.446 0.378 0.008 0.072 0.068 0.178 0.141 0.029 0.050 0.021 0.108 0.254 1.000
4.2. Multivariate analysis

To remove the effects of outliers, the Fee variable and all of the scaled
variables are winsorized by limiting extreme values in the top and bottom
1% of their respective distributions. Table 5 lists the regression results for
the proposed hypotheses. As shown, the explanatory power of the models in
H1(a) and H1(b) (i.e., the Adjusted R-squared value) are equal to 0.3260 and
0.3508, respectively, with both having a statistically significant overall fit
(p < 0:001). A variance inflation factor (VIF) test is performed using OLS to
check whether the results are inflated by multicollinearity. The VIF statis-
tics for the test variables are all found to be less than 4.6 Thus, the results
support the proposed hypothesis (H1).
Table 5. Regression results of hypotheses.

H1: Fee ¼ 0 þ 1 ðPostÞ þ 2 ðUDWRÞ þ 3 ðRepuÞ þ 4 ðTAÞ þ 5 ðSUBÞ þ 6 ðINVÞ
þ 7 ðRECÞ þ 8 ðCRÞ þ 9 ðLEVÞ þ 10 ðROAÞ þ 11 ðTaccrÞ þ 12 ðFIÞ
þ 13 ðAucomÞ þ 14 ðSOEÞ þ 15 ðEXGÞ
þ ðIndustry dummiesÞ þ ðYear dummiesÞ;
H2: Fee ¼ 0 þ 1 ðPostÞ þ 2 ðUDWRÞ þ 3 ðRepuÞ þ 4 ðTAÞ þ 5 ðSUBÞ þ 6 ðINVÞ

þ 7 ðRECÞ þ 8 ðCRÞ þ 9 ðLEVÞ þ 10 ðROAÞ þ 11 ðTaccrÞ þ 12 ðFIÞ
þ 13 ðAucomÞ þ 14 ðSOEÞ þ 15 ðSOE PostÞ þ 16 ðEXGÞ
þ ðIndustry dummiesÞ þ ðYear dummiesÞ:
Variables Pred. Sign H1 H2
Intercept 13.85580*** 13.99530*** 13.83580*** 13.98607***

(26.63) (26.94) (26.59) (26.92)
Post þ 0.32036*** 0.35675*** 0.31561*** 0.34809***
(6.08) (4.15) (5.75) (3.98)
UDWR þ 1.33728*** 0.97509** 1.34062*** 0.98209**
(3.45) (2.51) (3.46) (2.53)
Repu þ 0.11715*** 0.10612*** 0.11659*** 0.10511***
(3.59) (3.30) (3.56) (3.26)
TA þ 0.15696*** 0.16926*** 0.15620*** 0.16807***
(8.14) (8.79) (8.04) (8.67)
SUB þ 0.00796*** 0.00790*** 0.00792*** 0.00784***
(6.15) (6.21) (6.09) (6.13)
INV
0.35129** 0.36333** 0.35042** 0.36150**
(1.98) (2.08) (1.97) (2.06)
REC
0.09846 0.05337 0.09659 0.05015
(0.58) (0.32) (0.57) (0.30)
6
This value lies below the cutoff value of 10.00 noted by Belsley et al. (1980).
2050006-14
Table 5. (Continued )
Variables Pred. Sign H1 H2
CR
0.02572 0.02058 0.02575 0.02064
(1.61) (1.31) (1.62) (1.31)
LEV þ 0.37226** 0.45502*** 0.37151** 0.45399***
(2.19) (2.68) (2.18) (2.67)
ROA
0.47464 0.25229 0.46685 0.23860
(1.51) (0.81) (1.48) (0.76)

Taccr þ 0.09667 0.04141 0.09428 0.03774
(0.43) (0.18) (0.42) (0.17)
þ 0.24576* 0.19009 0.24446* 0.18855
FI
(1.92) (1.50) (1.9) (1.48)
Aucom þ 0.00072 0.00026 0.00080 0.00042
(0.06) (0.02) (0.07) (0.04)
SOE
0.19901** 0.13195 0.24034 0.20623
(2.11) (1.40) (1.49) (1.29)
SOE Post
0.05845 0.10568
(0.32) (0.58)
EXG þ 0.23235*** 0.22553*** 0.23399*** 0.22669***
(4.12) (3.63) (4.13) (3.64)
Industry dummy Yes Yes Yes Yes
Year dummy No Yes No Yes
n 1,094 1,094 1,094 1,094
Adjusted R 2 0.3260 0.3508 0.3254 0.3504
p-Value model < 0:0001 < 0:0001 < 0:0001 < 0:0001
Notes: *, **, ***Indicate statistical significance at the 10%, 5%, and 1% levels, respectively,
using a two-tailed test.
The estimated parameter of the independent variable of interest, Post, is

found to be positively significant (see Table 57). In other words, the finding
that audit fees increase after IFRS adoption in China is confirmed. Notably,
the remaining results in Table 5 are mostly consistent with those of previous
related studies, with the exception of Aucom, representing corporate gov-
ernance, which is not found to be significant. The parameter estimates for
UDWR, Repu, TA, SUB, LEV, FI, and EXG are all positive and significant,
while those for INV and SOE are negative and significant. In other words,
the results indicate that reputable auditors in China (as ranked in the
CICPA website) charge more than other auditors. The estimated parameter
of UDWR has a value of 1.34, which is positively significant and implies that
underwriters in China tend to favor more reputable auditors, who then
7
We only discuss the multivariate analysis of column 1 of Table 5 (H1(a)) for simplification,
where it can be seen that the documented results of columns 1 and 2 of Table 5 are almost the
same.
2050006-15
Table 6. Additional Test subsamples of observations with and without SOE.

Model : Fee ¼ 0 þ 1ðPostÞ þ 2ðUDWRÞ þ 3ðRepuÞ þ 4ðTAÞ
þ 5ðSUBÞ þ 6ðINVÞ þ 7ðRECÞ þ 8ðCRÞ
þ 9ðLEVÞ þ 10ðROAÞ þ 11ðTaccrÞ þ 12ðFIÞ
þ 13ðAucomÞ þ 14ðSOEÞ þ 15ðEXGÞ
þ ðIndustry dummiesÞ þ ðYear dummiesÞ:
Variables Pred. Sign (with SOE) (without SOE)

Intercept 14.11040*** 14.40529***

(21.84) (29.36)
Post þ 0.34099* 0.36556***

(1.96) (3.30)
UDWR þ 0.83422 0.82801*
(1.09) (1.77)
Repu þ 0.16942** 0.09523***
(2.26) (2.68)
TA þ 0.16025*** 0.04817
(5.97) (0.45)
SUB þ 0.00760*** 0.00984***
(3.99) (3.79)
INV
0.74447** 0.16846
(1.91) (0.85)
REC
0.53719 0.16172
(1.25) (0.88)
CR
0.00977 0.01925
(0.14) (1.20)
LEV þ 0.18866 0.54254***
(0.48) (2.72)
ROA
1.18206* 0.00943
(1.70) (0.03)
Taccr þ 0.26023 0.24649
(0.50) (0.98)
FI þ 0.09374 0.22273*
(0.25) (1.68)
Aucom þ 0.00404 0.00216
(0.16) (0.16)
SOE
0.26186
(1.55)
EXG þ 0.37197*** 0.10815
(3.13) (1.38)
Industry dummy Yes Yes
Year dummy Yes Yes
n 330 764
Adjusted R 2 0.5336 0.1485
p-value model < 0:0001 < 0:0001
Notes: *, **, ***Indicate statistical significance at the 10%, 5%, and 1% levels,
respectively, using a two-tailed test.
2050006-16
charge higher audit fees. In other words, the results are consistent with the
proposed hypothesis positing that audit fees are associated with the adoption
of IFRS and that the relationship is positive.
In order to determine how the present results meet the expectation of
China’s regulators, the economic effects of adoption of convergent-IFRS on
audit fees are further discussed as follows: The coefficient of 0.32036 on Post
implies that a one standard deviation increase in Post is associated with a
0.78% increase in the natural log of audit fees relative to the mean. Similarly,
one standard deviation increase in UDWR, Repu, TA, and SOE are asso-
ciated with 0.42%, 0.40%, 1.10%, and 0.29% increases in audit fees, re-
spectively.
Columns 3 and 4 of Table 5 (H2) show the estimation results for the
Model 2 regression testing if SOE pay lower incremental audit fees after the
adoption of IFRS (H2). In addition to the original model in Table 5 (columns
1 and 2), an interaction term between Post and SOE, SOE Post, is in-
corporated to further investigate the impact of SOE on Fee in the period
after the adoption of the Chinese IFRS. The explanatory power of the models
(H2) are 0.3254 and 0.3504, respectively, with both exhibiting a statistically
significant overall fit (p < 0:001). The coefficient on the variable of interest,
Post, remains significantly positive, and the coefficients on all the other
variables are almost the same as the earlier regression results, in that audit
fees increase in the post-IFRS period, but the parameter of SOE as well as
the interaction term, Post SOE, are not significant. It seems that
the effects of IFRS adoption in China on audit fees are not reconciled by the
proportion of state-owned shares. These results imply that at least the
serious concern of SOEs in China is not worse after adoption of IFRS.
4.3. Additional tests

As stated above, the estimated coefficient of the interaction term,
Post SOE, is insignificant. To check whether this insignificance results
from multicollinearity as well as to verify the behavior of non-SOEs, sub-
samples are constructed of the IPOs for which SOE is not equal to zero and
for which SOE is equal to zero, and the regression analyzes described above
are repeated. With 330 and 764 observations, respectively, Table 6 shows
that the results of both subsamples are found to be similar to those reported
above, both the Post coefficients are significantly positive when testing H1,
while the Post coefficient of the group of non-SOEs is of larger magnitude
and greater significance.
2050006-17
A further sensitivity analysis is undertaken in which the dependent var-

iable, Fee, is replaced with the audit fees adjusted with the Consumer Price
Index (CPI) values acquired from the website of the National Bureau of
Statistics of the People’s Republic of China. The untabulated regression
results are again found to be consistent with those of the primary analyzes.
5. Conclusion
The audit market in China comprises numerous audit firms and thus suffers
from a serious low-balling effect as a result of intense competition. Fur-
thermore, the historical background of the audit market has caused auditors
to have low independence and responsibility. Consequently, one of the main
aims of the Chinese government in adopting IFRS in 2007 is to raise audit
fees and eliminate low-balling, thereby making auditors more accountable
and financial reports more credible to both Chinese and foreign investors.
Since the conclusion of Lin and Yen (2016) that IFRS adoption increases
audit fees based on the observations of listed firms in China (excluding IPOs)
offers an alternative explanation that subsequent higher quasi-rents from
low-balling also cause audit fees to increase, this research investigating the
effects of IFRS adoption on audit fees in a different setting (IPOs) fills the
gaps in the literature and provides objective documentation of IFRS adop-
tion in China. Notably, the research is not intended to test the low-balling
phenomenon per se, but rather to focus on a pure IPO setting so as to
decrease the alternative explanation described above and to eliminate as far
as possible the mixed effects of initial and noninitial audit engagements.
After controlling for all probable determinants of the audit fees, the results
show that IPOs pay higher fees for audit services following IFRS adoption in
China. In addition, this finding does not directly indicate the improvement
of independence of auditors following IFRS adoption, nor does it prove that
the low-balling phenomenon disappears. Existing literature indicates that a
positive relationship between the adoption of IFRS and audit fees is posi-
tively associated with a higher audit complexity and that it is negatively
associated with improved quality of financial reporting. Thus, the finding
that audit fees increase following the adoption of the new Chinese sub-
stantially IFRS-convergent standards indicates that the influence of in-
creased audit complexity or audit risk on audit fees outweighs that of
improved quality of financial reports or intense competition after adoption of
IFRS in China.
2050006-18
In contrast to the findings of Lin and Yen (2016) based on listed A-share
companies on the Shanghai and Shenzhen stock exchanges between 2005 and
2008, the present results show no evidence that SOEs pay decreased incre-
mental audit fees following IFRS adoption. In other words, the relation
between adoption of IFRS in China and payment of audit fees appears to be
unaffected by the behavior of SOEs.
It should be noted that while every attempt has been made in this study to
include all known determinants of audit fees in the regression model, the
possibility of bias due to omitted variables cannot be entirely discounted. In
addition, the findings of this work would call for future extended studies.
While the present results find that audit fees increase in China after the
adoption of IFRS (i.e., as reported in prior studies on developed markets),
future studies should investigate whether the adoption of convergent-IFRS
in China further influences the decision of firms on auditor choices. For
example, given factors such as an increased audit complexity, firms may
tend to hire more reputable and experienced auditors. Similarly, given a
higher audit risk, reputable auditors may choose to refuse audit engage-
ments, with the result that firms may have no choice but to engage auditors
of inferior quality. Furthermore, if more detailed information related to
IPOs in China on factors (e.g., discretionary accruals) addressing quality of
financial reports are to become available, future studies could investigate
more deeply the reporting quality of IPOs in China and determine the
proportion of influence of increased audit complexity, audit risk, and im-
proved quality of financial reports or intense competition on increases in
audit fees after the adoption of convergent-IFRS in China. Finally, future
studies might also usefully investigate whether the adoption of IFRS in
China improves the market efficiency of the primary market.
Acknowledgment
This research is partially supported by the \Higher Education SPROUT
Project" and \Center for Innovative FinTech Business Models" of National
Cheng Kung University (NCKU), sponsored by the Ministry of Education,
Taiwan, R.O.C.
Appendix A. Variable Definitions

Fee: natural log of audit fee;
Post: indicator variable equal to 1 if IPO goes public in or after year 2008;
UDWR: underwriter market share per year;
2050006-19
Repu: indicator variable equal to 1 if IPO is audited by a top-14 audit firm;

TA: total assets in 10 billion RMB;
SUB: number of subsidiaries included in consolidated financial statements of
IPO;
INV: inventories divided by total assets before listing;
REC: receivables divided by total assets before listing;
CR: current ratio (current assets divided by current liabilities) before listing;
LEV: leverage ratio (total liabilities divided by total assets) before listing;
ROA: net income divided by total assets before listing;
Taccr: value of accruals (i.e., difference between net income and cash flow
from operations) scaled by total assets before listing;
FI: proportion of foreign shares after listing;
Aucom: indicator variable equal to 1 if IPO sets audit committee before
listing;
SOE: proportion of state-owned shares after listing;
EXG: indicator variable equal to 1 if IPO goes public on Shanghai Stock
Exchange.
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2050006-21

Does Convergent-IFRS Adoption in China Increase Audit Fees?

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Review of Paciﬁc Basin Financial Markets and Policies

Vol. 23, No. 1 (2020) 2050006 (21 pages)

Does Convergent-IFRS Adoption in China

Published 30 April 2020

The aim of this study is to investigate whether the adoption of convergent-

Keywords: IFRS; IPO; audit fee; China; convergent.

Standards Board, is widely used to compile ﬁnancial reports related to in-

eﬀects of IFRS adoption on the audit fees (a main IFRS implementation

adoption in an IPO setting to minimize the potential risk of bias due to

2. Background and Hypothesis Development

detailed institutional background can be found in prior literature (Qu

The CAS can be traced back to \The Accounting Regulations of the

eign Investment" promulgated on March 4, 1985, by the Ministry of Finance

principles-based standards such as IFRS, the task of management in ensuring

China’s emerging market, which is characterized by a unique historical

setting is tested separately from that of listed companies. Notably, by con-

increasing impacts of IFRS adoption on audit fees will be moderated by SOEs

3.1. Data collection

audits (Venkataraman et al., 2008) as well as concerns related to expecta-

Table 1. Sample selection.

A-share IPOs in CSMAR from 2003 to 2012 1,335

3.2. Research methodology

Model 1: Fee ¼ 0 þ 1 ðPostÞ þ 2 ðUDWRÞ þ 3 ðRepuÞ þ 4 ðTAÞ

determined based simply on the synthesized valuations of the CICPA. An

Mean Audit Mean Reputable Mean Total Mean Audit Mean

2003 28 14.31455 0.21429 0.20973 0.35714 0.38446

2008 67 14.25202 0.46269 0.41424 0.86567 0.15129

2012 153 14.64489 0.56863 0.11731 0.41176 0.06997

Pre- 162 14.28289 0.26543 0.22993 0.41975 0.26889

Table 3. Descriptive statistics.

Panel A: Descriptive statistics of full sample

Mean Std Dev Min Median Max

Fee 14.505 0.615 12.301 14.486 18.963

TA 0.196 1.019 0.007 0.046 20.417

CR 1.860 1.422 0.179 1.507 14.777

Panel B: Descriptive statistics Pre- and Post-adoption of IFRS

Pre-adoption of Chinese IFRS Post-adoption of Chinese IFRS

Table 4. Pearson correlation matrix.

4.2. Multivariate analysis

Table 5. Regression results of hypotheses.

H2: Fee ¼ 0 þ 1 ðPostÞ þ 2 ðUDWRÞ þ 3 ðRepuÞ þ 4 ðTAÞ þ 5 ðSUBÞ þ 6 ðINVÞ

Variables Pred. Sign H1 H2

Intercept 13.85580*** 13.99530*** 13.83580*** 13.98607***

Variables Pred. Sign H1 H2

(1.51) (0.81) (1.48) (0.76)

The estimated parameter of the independent variable of interest, Post, is

Table 6. Additional Test subsamples of observations with and without SOE.

Variables Pred. Sign (with SOE) (without SOE)

Intercept 14.11040*** 14.40529***

Post þ 0.34099* 0.36556***

4.3. Additional tests

A further sensitivity analysis is undertaken in which the dependent var-

Appendix A. Variable Definitions

Repu: indicator variable equal to 1 if IPO is audited by a top-14 audit ﬁrm;

level industry expertise on audit pricing. The Accounting Review, 2, 429–448.

Huang, HW, K Raghunandan, TC Huang and JR Chiou (2015). Fee discounting

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Intercept 13.85580* 13.99530* 13.83580* 13.98607*

Intercept 14.11040* 14.40529*