Peer Group and Audit Fees in Chinese Firms

• In Event: Auditing in China

Abstract

Drawing on herding behavior theory, prior studies regarding the use of peers for investment decisions and compensation practices and the recent reports which suggest that firms use peer information for audit pricing, we examine the effect of peer groups on audit pricing process of a sample of Chinese firms. Using observations for the years 2001-2012, and matching groups based on the Industry, Industry/Region, Industry/Big4 and Industry/Size to define peer group, we find that peer group information is used in audit pricing. We also find evidence that peer group information are more likely to be used in firms in low technology industry, less developed region, and firms audited by non-Big 4 CPA firms compared to those in high technology industry, more developed region, and firms audited by Big 4 CPA firms. Finally, we find that clients with lower audit fees than their peer groups in the previous period could be more likely increase audit fees in the current period. In contrast, clients with higher audit fees than their peer groups in the previous period would be less likely to decrease audit fees. These are consistent with the herding theory that peer group information is most likely used in conditions when information asymmetry risk is high.

Authors

• Haiyan Zhou, The University of Texas–Pan American

• Heibatollah Sami, Lehigh University

• Junxiong Fang, Fudan University

• Ferdinand A. Gul, Monash University, Sunway Campus