Auditors can benefit from industry-related operational information (IOI), as it gives them a broader horizon when assessing client risk. This study aims to exploit the staggered issuance of industry-based information disclosure guidelines (IIDGs) in China to investigate how mandatory IOI disclosure shapes auditors’ pricing behavior.
The authors use 18,076 firm-year observations from Chinese A-share listed companies spanning from 2010 to 2019, using a staggered difference-in-differences (DiD) research model.
The authors find that auditors charge significantly lower fees to IIDG-regulated clients following mandatory IOI disclosure, relative to nonregulated firms. Mechanism analyses show that IOI disclosure curbs managerial opportunism and enhances regulatory oversight, thereby lowering perceived operational and litigation risk. The authors further find that firms with more extensive IOI disclosure experience a significant decline in total risk, which is also associated with lower audit fees. Consistent with the risk-reduction hypothesis, the authors find that the fee reduction is more pronounced among clients of industry-specialist auditors, who are better positioned to recognize and incorporate the risk-mitigating benefits of enhanced IOI disclosure. The cross-sectional analyses show that the effect of the IOI mandate on audit fees is concentrated in state-owned enterprises and firms with a high level of analyst coverage. Further analyses discover that auditors change their client portfolio by incorporating more IIDG-regulated clients once they have worked for at least one client subject to the mandate. A complementary analysis shows a negative association between the IOI mandate and auditor change.
This study contributes to the accounting and auditing literature by demonstrating the role of unstructured operational information in audit pricing decisions. The findings support the call for incorporating industry-specific and contextual factors into audit risk evaluation by providing evidence on their risk repricing role and offering insights for regulators in emerging and developed markets alike.
