Abstract
Managers make numerous subjective judgments about other comprehensive income (OCI) due to the fair-value measurement, which increases the auditing risks and challenges for auditors. This study investigates the relationship between audit fees and the volatility of OCI in China using a large sample of Chinese A-share listed companies from 2014 to 2018. Such relationship cannot be confirmed for these companies, including those audited by Big 4 firms and the top 10 accounting firms in China, but is significantly positive for those audited by experienced auditors. Results indicate that audit firms in China generally do not seriously consider risks concerning the volatility of OCI. However, auditors with long tenures are more aware of these risks and have correspondingly higher prices compared with their peers.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Industry dummy variables are added on the basis of industry category on the official website of Shanghai Security Exchange and Shenzhen Security Exchange. The detailed variable categories are as follows: farming, forestry, animal husbandry, and fishery (1001–1200); mining (1201–1400); manufacturing (1401–1600); electricity, heat, gas, and water production and supply (1601–1800); construction (1801–2000); wholesale and retail (2001–2200); transportation, storage, and post (2201–2400); lodging and catering (2401–2600); information transmission, software, and information technology services (2601–2800); real estate (3001–3200); leasing and business services (3201–3400); scientific research and technical services (3401–3600); water conservancy, environment, and public facilities management (3601–3800); resident services (3801–4000); education (4001–4200); health and social work (4201–4400); culture, sports, and entertainment (4401–4600); and conglomerates (> 4600). Financial companies (2800–3000) are excluded from this study.
References
Abbott, L.J., S. Parker, and G.F. Peters. 2006. Earnings management, litigation risk, and asymmetric audit fee responses. Auditing: A journal of Practice & Theory 25 (1): 85–98.
Ahn, J., R. Hoitash, and U. Hoitash. 2019. Auditor task-specific expertise: The case of fair value accounting. The Accounting Review 95 (3): 1–32. https://doi.org/10.2308/accr-52599.
Bao, M.X., Billett, M.T., Smith, D.B. and Unlu, E., 2019. Does other comprehensive income volatility influence credit risk and the cost of debt? Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2939958 or http://dx.doi.org/10.2139/ssrn.2939958.
Cannon, N.H., and J.C. Bedard. 2017. Auditing challenging fair value measurements: Evidence from the Field. The Accounting Review 92 (4): 81–114. https://doi.org/10.2308/accr-51569.
China Accounting Standards Committee. 2006. Accounting Standard for Business Enterprises No. 30—Presentation of Financial Statements.
China Accounting Standards Committee. 2009. Enterprise Accounting Standards Interpretation No. 3.
China Accounting Standards Committee. 2014a. Accounting Standard for Business Enterprises No. 2—Long-Term Equity Investments.
China Accounting Standards Committee. 2014b. Accounting Standard for Business Enterprises No. 9—Employee Compensation.
China Accounting Standards Committee. 2014c. Accounting Standard for Business Enterprises No. 30—Presentation of Financial Statements.
China Accounting Standards Committee. 2014d. Accounting Standard for Business Enterprises No.37—Presentation of Financial Instruments.
China Accounting Standards Committee. 2014e. Accounting Standard for Business Enterprises No.39—Measurement at Fair Value.
China Accounting Standards Committee. 2017a. Accounting Standard for Business Enterprises No. 22 —Recognition and Measurement of Financial Instruments.
China Accounting Standards Committee. 2017b. Accounting Standard for Business Enterprises No. 24 —Hedging.
China Accounting Standards Committee. 2017c. Accounting Standard for Business Enterprises No.42—Non-current Assets Held for Sale, Disposal Groups, and Discontinued Operations.
Chen, M., 2018. Theoretical and Empirical Research on the Impact of Other Comprehensive Income on Audit Fees.
Choi, J.H. and Wong, T.J., 2002. Audit markets and legal environments: An international investigation. Available at SSRN 337840.
Davidson, R.A., and D. Neu. 1993. A note on the association between audit firm size and audit quality. Contemporary Accounting Research 9 (2): 479–488. https://doi.org/10.1111/j.1911-3846.1993.tb00893.x.
DeAngelo, L.E. 1981. Auditor size and audit quality. Journal of Accounting and Economics 3 (3): 183–199. https://doi.org/10.1016/0165-4101(81)90002-1.
Deloitte, 2018. Deloitte insight on accounting principle – New financial instruments (5): Fair value changes through other comprehensive income in equity instrument investments. Retrieved from: https://www2.deloitte.com/cn/zh/pages/audit/articles/insights-on-new-accounting-standard-5.html#. Accessed 7 Oct 2020.
Ding, Z. 2019. Other comprehensive income, auditor practice experience and audit pricing. American Journal of Industrial and Business Management 9 (1): 233–252.
Doliya, P., and J.P. Singh. 2016. An interpretive structural modeling approach to analyze the interaction between factors of the fair value measurement audit process. Journal of Emerging Technologies in Accounting 13 (2): 37–48. https://doi.org/10.2308/jeta-51477.
Ettredge, M.L., Y. Xu, and H.S. Yi. 2014. Fair value measurements and audit fees: Evidence from the banking industry. Auditing: A Journal of Practice & Theory 33 (3): 33–58.
Financial Accounting Standards Board (FASB), 1997. Statement of Financial Accounting Standards No. 130. Retrieved from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220124511&acceptedDisclaimer=true. Accessed 10 Aug 2020.
Francis, J.R., and D. Wang. 2005. Impact of the SEC’s public fee disclosure requirement on subsequent period fees and implications for market efficiency. Auditing: A Journal of Practice & Theory 24 (s-1): 145–160.
Graham, R.C., and K. Lin. 2017. The influence of other comprehensive income on discretionary expenditures. Journal of Business Finance & Accounting 45 (1–2): 72–91. https://doi.org/10.1111/jbfa.12284.
Griffin, J.B. 2014. The effects of uncertainty and disclosure on auditors’ fair value materiality decisions. Journal of Accounting Research 52 (5): 1165–1193. https://doi.org/10.1111/1475-679x.12059.
Heninger, W.G. 2001. The association between auditor litigation and abnormal accruals. The Accounting Review 76 (1): 111–126.
Huang, H.W., S. Lin, and K. Raghunandan. 2015. The volatility of other comprehensive income and audit fees. Accounting Horizons 30 (2): 195–210.
Hunton, J.E., R. Libby, and C.L. Mazza. 2006. Financial reporting transparency and earnings management (retracted). The Accounting Review 81 (1): 135–157.
International Accounting Standards Board (IASB). 2009. IAS 21—The Effects of Changes in Foreign Exchange Rates.
International Accounting Standards Board (IASB). 2011. IAS 1—Presentation of Financial Statements.
International Accounting Standards Board (IASB). 2013. IFRS 9—Financial Instruments.
International Accounting Standards Board (IASB). 2018. IAS 19—Employee Benefits.
Kim, J.B., X. Liu, and L. Zheng. 2012. The impact of mandatory IFRS adoption on audit fees: Theory and evidence. The Accounting Review 87 (6): 2061–2094.
Koh, Y., H. Choi, and S. Woo. 2014. The relationship between an auditing firm’s characteristics and the incidence rate of its clients subject to AAERs. Journal of Applied Business Research (JABR) 30 (5): 1313. https://doi.org/10.19030/jabr.v30i5.8789.
KPMG, 2017a. IFRS 9—Changes needed to be noticed. Retrieved from https://home.kpmg/cn/zh/home/insights/2017/10/prepayment-features-modifications-financial-liabilities-changes-ifrs9-181017.html. Accessed 7 Oct 2020.
KPMG, 2017b. Insights on Enterprise Accounting Standards Interpretation No. 9. Retrieved from https://home.kpmg/cn/zh/home/insights/2017/06/9th-accounting-standards-interpretations.html. Accessed 7 Oct 2020.
KPMG, 2020. IFRS compared to US GAAP. Retrieved from https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/03/ifrs-us-gaap-2020.pdf. Accessed 10 Aug 2020.
Lee, C., and M.S. Park. 2013. Subjectivity in fair-value estimates, audit quality, and informativeness of other comprehensive income. Advances in Accounting 29 (2): 218–231.
Li, C., F.M. Song, and S.M. Wong. 2008. A continuous relation between audit firm size and audit opinions: Evidence from China. International Journal of Auditing 12 (2): 111–127. https://doi.org/10.1111/j.1099-1123.2008.00374.x.
Liu, L., and N. Subramaniam. 2013. Government ownership, audit firm size and audit pricing: Evidence from China. Journal of Accounting and Public Policy 32 (2): 161–175. https://doi.org/10.1016/j.jaccpubpol.2012.11.004.
Martin, R.D., J.S. Rich, and T.J. Wilks. 2006. Auditing fair value measurements: A synthesis of relevant research. Accounting Horizons 20 (3): 287–303. https://doi.org/10.2308/acch.2006.20.3.287.
Pannese, D., and A. DelFavero. 2010. Fair value accounting: Affect on the auditing profession. Journal of Applied Business Research (JABR) 26 (3): 43–50. https://doi.org/10.19030/jabr.v26i3.292.
PricewaterhouseCoopers, 2014. IFRS and US GAAP: similarities and differences. Retrieved from https://www.pwc.com/cz/en/ucetnictvi/ifrs-publikace/pwc-ifrs-and-us-gaap-similarities-and-differences.pdf. Accessed 10 Aug 2020.
PricewaterhouseCoopers, 2018. IFRS 9: Financial Instrument. Retrieved from https://www.pwccn.com/zh/services/audit-and-assurance/ifrs/financial-instruments-ifrs-9.html. Accessed 7 Oct 2020.
Public Company Accounting Oversight Board (PCAOB). 2010. Audit Risk. Auditing Standard No. 8.
Ruihua, 2015. Ten significant reform documents published by the Ministry of Finance this year. Retrieved from http://www.rhcncpa.com/newsContent.php?id=555. Accessed 7 Oct 2020.
Seay, S.S., and W.H. Ford. 2010. Fair presentation—An ethical perspective on fair value accounting pursuant to the SEC study on mark-to-market accounting. Journal of Legal, Ethical and Regulatory Issues 13: 53–66.
Shi, L., P. Wang, and N. Zhou. 2017. Enhanced disclosure of other comprehensive income and increased usefulness of net income: The implications of Accounting Standards Update 2011–05. Research in accounting regulation 29 (2): 139–144.
Touron, P. 2018. Performance measures and components of other comprehensive income (OCI): Volatility and impact for a sample of European companies over ten years. Paper presented at 6th Symposium on Accounting Research, Paris. Retrieved from http://www.anc.gouv.fr/files/live/sites/anc/files/contributed/ANC/3.%20Recherche/D_Etats%20generaux/2016/PolicyEN/PP_TR5_TOURON_VE.pdf.
United States Securities and Exchange Commission. 2008. Report and recommendations pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on mark-to-market accounting. Retrieved from https://www.sec.gov/files/marktomarket123008.pdf. Accessed 10 Aug 2020.
Yang, S. 2013. Influence of fair value measurement on auditing fee and auditing quality: An empirical analysis of a-share listed companies during 2003–2010. Contemporary Finance & Economics 339 (2): 119–129.
Zamora-Ramírez, C., and J. Morales-Díaz. 2019. The use of fair value measurement in financial reporting: A literature review. Estudios de Economía Aplicada 36 (2): 489. https://doi.org/10.25115/eea.v36i2.2540.
Zhan, J., Y. Her, and K. Chen. 2020. Audit quality and audit size: Evidence from auditor mergers in China. Journal of Corporate Accounting & Finance 31 (3): 170–184. https://doi.org/10.1002/jcaf.22447.
Author information
Authors and Affiliations
Corresponding author
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Rights and permissions
About this article
Cite this article
Rahman, M.J., Wu, T. Volatility of other comprehensive income and audit fees: evidence from China. Int J Discl Gov 18, 1–15 (2021). https://doi.org/10.1057/s41310-020-00100-2
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1057/s41310-020-00100-2