Hsu, E., and Wang, T. 2009. Audit Fee Floor and Audit Quality. NTU Management Review, 20 (1): 261-288
Ente Hsu, Associate Professor and Chairman, Department of Accounting, Tunghai University
Taychang Wang, Professor, Department of Accounting, National Taiwan University
Abstract
This paper aims to study the possibility of improving CPA's audit quality if a floor limit on audit fees is placed by the government. Audit fee floor can be referred as a government-imposed restriction on CPA attestation fee, which must be maintained above a pre-specified level. This mechanism has been implemented in Taiwan for years; however, the government and academics did not pay too much attention on the appropriateness of this restriction. Most companies in Asian countries are family-owned; and as such moral hazard is not considered as a key issue between enterprisers and managers. However, moral hazard problem occurs when there is a conflict in interest between enterprisers (major shareholders) and minor shareholders. In this paper, the relationships between audit fee and audit quality are analyzed. The effects of how audit fee floor impacting upon audit quality is also a part of our analysis. Strategic interactions between enterprisers and CPAs, price competition among the CPAs, and the Asian business traits are all considered in the analysis. Our results shows that CPA's audit quality can be improved if the government sets up an appropriate audit fee floor and legal liabilities are attached to the audit fee.
Keywords
CPA's legal liabilities audit fee floor audit quality