The Effect Of Internal Control Over Financial Reporting On Audit Fees Over Financial Statement

CPAs and entities have been focusing on audit fees over financial statements (AFFS) fora long time and as development of internal control, the effect of internal control over financialreporting (ICFR) on audit fees over financial statements appears to be paid more attention ofpublic. In Apr.2012, the Ministry of Finance, associating with other fore ministries, acted anew institution of internal control. Under the new institution, part of listed companies (thestate-controlled companies) are obliged to hire CPAs to audit internal control and thendisclose an audit’s report on the effectiveness of internal control, instead of doing these twothings willingly for all the listed companies like before. Such a change, leads a newbackground for the study of the effect of internal control over financial reporting on audit feesover financial statements.This study, based on information and data of Chinese A-shared listed companies in2012,investigates the effect of internal control over financial reporting on audit fees over financialstatements, under the new institution, by empirical analysis methods. We found that thequality of internal control over financial reporting was negatively related to audit fees overfinancial statements. It means that the higher the quality of internal control over financialreporting is, the lower the audit fees over financial statements are. Also, we found that,comparing to the companies, which are not forced to disclose a report of internal control froman audit, the quality of ICFR of companies, which are under a situation of mandatorydisclosure, have a significant effectiveness on AFFS. In addition,76.28%of the companies,which disclosed a report of internal control quality from an audit under mandatory disclosure,disclosed their audit fees for internal-control auditing. However,43.43%of those companies,which are under the situation of willing disclosure, did not disclose the audit fees forinternal-control auditing. This indicated that, although CPAs gave a report on theeffectiveness of internal control, they, without being paid, might not do the audit efforts forthe assessment of internal control. So the report on the effectiveness of internal control maynot release the reality of internal control information from listed companies. That might be areason why the effect of ICFR on AFFS was not significant under the institution of willingdisclosure.The study can not only be a supplement of research on AFFS, but also can inspect thathow the institution is acted in Chinese capital market. The results of this study can be boththeoretically and empirically significative of making decisions for regulators, investors andmanagers.