臺大管理論叢 NTU Management Review VOL.30 NO.2

Do Government Initiatives and Reasons for Auditor-Client Realignment Influence Audit Fees and Audit Quality? Evidence from China 220 already have preferential access to capital versus NSOEs. To compete for funding, those working for NSOEs may be under higher pressure than those employed at SOEs in order to leave a good impression on the regulators. Thus, the executives of NSOEs could have stronger motivation than those employed at SOEs to follow the government policies. Hence, the government initiative to expand and strengthen the domestic accounting profession may also motivate individuals who work for NSOEs to reveal their reasons to realign with auditors. According to these arguments, this study develops the first research question. Research Question 1: Do the government initiative and state ownership jointly influence managerial decisions to disclose the reasons for auditor-client realignment? Referring to the extant literature, researchers have conducted surveys to find out why auditor-client realignment occurs (e.g., Burton and Roberts, 1967; Carpenter and Strawser, 1971; Bedingfield and Loeb, 1974). One of the many reasons surfacing from these surveys is that realignments occur because corporate executives may view switching auditors as a window of opportunity to negotiate lower professional fees paid to accounting firms. Applying this argument to our research inquiry, the launching of this initiative by CICPA under the direction of the MOF in China offers such an opportunity for corporate executives to negotiate lower professional fees paid to accounting firms. As Johnson and Lys (1990) noted, clients are inclined to purchase audit services from the least costly suppliers. Therefore, the government initiative to expand and strengthen domestic accounting practices is likely to revamp fee structures in the audit market. Relating this logic to the reasons for auditor-client realignment, it is reasonable to expect that audit fee charges would be contingent upon the reasons for auditor switches. As Hackenbrack and Hogan (2002) report, the nature of the auditor-client realignment decision influences the responses of market participants, as measured by ERCs in the years surrounding auditor-client realignments. Specifically, they find that following the realignments, ERCs are lower when clients cite fee-related reasons for such decisions. In contrast, when clients cite service-related reasons for the realignments, audit fees tend to go up. These findings support the notion that the auditor-client realignment reasons probably have significant effects on audit fees. Moreover, Calderon and Ofobike (2007) find that auditor-initiated and client-initiated realignments can be driven by different interests. Consequently, the divergence of these interests also may affect audit fees.