Research On The Relationship Between Litigation Risk, Accounting Conservatism And Auditing Fee

In 1980,Simunic founded the research framework of audit fees from the aspects of profitability,size and financial leverage,which laid the groundwork for the study on the costs of the audit.After that,some scholars refer to the framework to study the influencing factors of audit fees from corporate governance,earnings management,audit opinions shopping,internal control,media analyses and so on for expansion and extension.From the theoretical analysis of "insurance",audit not only have information delivery,but also have the insurance value,which reduce information asymmetry.The Operators for the benefit of their interests,to minimize economic losses,tend to shift the risk to the "insurer".When the litigation risks of listed companies tend to higher,the auditor who is the "insurer" facing potential insurance claims likely to rise.To compensate for this loss,the auditor will ask the "applicant" for additional risk premiums,the costs of the audit will also increase.Accounting conservatism principle requires companies to promptly confirm the loss,refused to confirm income.This principle as the control mechanism,which can reduce the information asymmetry and increase the transparency of financial reports.This principle also can increase the credibility of accounting information,thus reducing the inherent risk of auditor,and reducing their misstatement.When listed companies faced with the risk of litigation,whether the principle of accounting conservatism still can act as the object for auditors to reduce risk? Whether accounting conservatism still can play a role in the auditor's professional judgment and decision,and helping auditors to enhance audit efficiency,thereby reducing audit fees?Therefore,this paper discusses the relation between litigation risks of listed companies,accounting conservatism and auditing fees,and discusses when listed companies faced with litigation risk;the effective accounting conservatism can inhibit effects of litigation risk on audit feesFirstly,this paper reviewed the relationship between litigation risk,accounting conservatism and audit fees by the research literatures.Secondly,through insurance theory,risk premiums theory and signaling theory,and these theories provided the theoretical basis to study the relationship between the three.Then,this paper selected 4559 of China's non-financial listed companies as the object of study,from 2013 to 2015.It referenced thepaper of Givoly and Hyan in 2000,which raised the cumulative non-operating profit negative models as the substitution variables of accounting conservatism.Reference to Mao Xinshu'paper in 2013,this paper used the annual report of companies involved in major litigation cases and the amounts involved in the lawsuit to measure litigation risk.We established an empirical model to study the relationship between litigation risks,accounting conservatism and the audit fees.Through empirical studies,we found out these conclusions.Firstly,the litigation risks of listed companies and audit fees are closely related.The higher of litigation risk,the surplus management motive is stronger,and the transparency of accounting information is lower.In order to giving a precise audit opinion,auditors require more manpower and material resources.The cost of audit charged by is the higher.Secondly,sound conservatism in accounting policy of listed companies increased financial reporting information fidelity,which would reduce the risk premium,and can significantly reduce audit fees.Thirdly,litigation risks of listed companies have an impact on audit fees together with accounting conservatism,namely the higher when litigation risks of listed companies faced,the accounting conservatism have negative effect on audit costs is stronger.Thus the effects of accounting conservatism inhibit on audit fees are more and more strong.Finally,based on theoretical and empirical studies,combining with the current legal system in China,this paper give this proposes.The listed companies should establish a sound legal risk management system,and the government needs to improve relevant laws and proposals to strengthen legal supervision.This paper also stressed the need to maintain a certain level of accounting conservatism in the listed companies.