Eliminating the Form 20-F Reconciliation and Audit Pricing

• In Event: Auditing II

Abstract

This study examines the impact of the Securities and Exchange Commission (SEC)’s policy in 2007 to eliminate the form 20-F reconciliation requirements for foreign cross-listed firms following International Financial Reporting Standards (IFRS) on audit pricing. We find that the elimination of form 20-F requirements increases audit fees, and the association is stronger when foreign cross-listed firms engage auditor industry specialists. Our evidence reinforces the arguments that reconciliation items in the form 20-F reconciliation contain useful and value-relevant information for public investors (Chen and Sami 2008; Hopskin et al. 2008), and thus auditors need to invest more audit effort to mitigate the information asymmetries between management and shareholders (Niemi 2005) post-elimination. The results also support SEC’s (2007) expectations that the potential cost could be incurred for issuers to avoid investors’ confusion as the information loss is contained in the form 20-F reconciliation.

Authors

• Yi-Hung Lin, National Cheng Kung University

• Hua-Wei Huang, National Cheng Kung University