Does financial asset allocation term structure affect audit fees? Evidence from China

The financialization of real enterprises presents a dilemma for China’s economic development. This study examines the impact of the financial asset allocation term structure on audit fees using a sample of Chinese A-share listed companies from 2009 to 2019. I…
Shantel Reichert · 7 days ago · 2 minutes read


Financial Asset Allocation and Audit Fees: A Study of Chinese Firms

Introduction

Chinese real enterprises face a downturn in the economy, increased competition, and financialization. This article explores the impact of financial asset allocation on audit fees for Chinese companies from 2009 to 2019.

Financial Asset Allocation Term Structure

Hypothesis 1: Allocating short-term financial assets reduces audit fees. *Short-term financial assets enhance risk management and reduce the need for extensive audit work.* Hypothesis 2: Allocating long-term financial assets increases audit fees. *Long-term financial assets involve higher returns and risk, resulting in complex audits and higher fees.*

Mediating Role of Financial Risk

Long-term financial asset allocation increases financial risk, leading to greater audit costs.

Moderating Role of Independent Directors Characteristics

Female Independent Directors and Financial Expertise: *Positive impact on reducing the relationship between long-term financial assets and audit fees.* Overseas Experience and Academic Background: *Negative impact on the relationship between long-term financial assets and audit fees.*

Empirical Results and Analysis

Results support Hypothesis 2, indicating a positive relationship between long-term financial assets and audit fees. Financial risk partially mediates the impact of long-term financial assets on audit fees. Female independent directors, those with financial backgrounds, and those with overseas or academic experience differ in their effects on the relationship between long-term financial assets and audit fees.

Discussion

* Long-term financial asset allocation significantly increases audit fees, highlighting the effect of risk on audit pricing. * Independent directors play a vital role in moderating this relationship, emphasizing the importance of effective governance.

Implications

* Financial risk should be considered as a key factor in determining audit fees. * Independent directors need to enhance oversight and decision-making capabilities to mitigate financial risks and reduce audit fees. * Firms should optimize financial asset allocation to balance risks and minimize audit fees. * The findings have important implications for Chinese firms and the broader financial landscape.