Do abnormal IPO audit fees signal IPO audit quality and post-IPO performance? A principal-agent analysis based on evidence from China
Author(s)
Author(s)
Mo, P. L. L.
Zhang, W.
Date Issued
2021
Publisher
American Accounting Association
Journal
Journal of International Accounting Research
Volume
20
Issue
1
Start page
1
End page
29
Abstract
We assess the unexplained information content of abnormal audit fees using a sample of initial public offering (IPO) audits in China. We find that abnormal IPO audit fees are positively associated with manipulation of pre-IPO real activities, suggesting lower audit quality for IPO financial statements. We further find that abnormal IPO audit fees are negatively associated with post-IPO financial performance. These results suggest a strong alignment of interests between the principal (pre-IPO shareholders), whose main interest is to gain listing status, and its agent (the auditor), who is willing to cooperate with the principal for extra economic rents (abnormal audit fees). Our findings that abnormal IPO audit fees are associated with lower audit quality and can help predict post-IPO financial performance have important implications for audit regulators, IPO market participants, and the applicability of agency theory in the context of IPO audits.
SFU Affiliated Publication
Yes
Availability at SFU Library
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