Research On The Influence Of Compensation Regulation On Audit Fees

The independent third-party audits perform audit services by providing an unbiased assurance on financial statements.However,in an increasingly complex business environment and accounting standards,it becomes increasingly challenging to accurately and objectively identify the reliability of the quality of accounting information.The auditor’s decision-making behavior depends not only on changes in the client’s internal environment,but is also influenced by external policies,or both.The sky-high salaries of executives at listed state-owned enterprises has long been criticized.In order to realize the socialist ideal of common prosperity,the government has conducted several rounds of exploration on the reform of the salary system.The Reform Plan of Salary System for Heads of Central Management Enterprises implemented,which began to be implemented in 2015,has elevated the government’s determination on compensation governance to an unprecedented height,and the compensation regulation of SOEs has entered a new stage.At present,whether and how the business decision-making action of micro-companies is affected by compensation control is the focus of academic discussion,but there is little literature on its impact on the decision-making behavior of external auditors.Therefore,this paper selects audit fees as the entry point to explore the expected effect of compensation regulation.Based on the tournament theory and social comparison theory,article uses the data of listed state-owned enterprises manually collected and takes 2011-2019 as the sample period under the special background of the Reform Plan of Compensation System for Heads of Centrally Managed Enterprises implemented in 2015 to construct the PSM-DID model to explore the intrinsic link between compensation regulation and audit fees.The results show that the implementation of the compensation regulation has significantly reduced the audit fees of central enterprises compared with those of private enterprises,supporting the social comparison theory.The results held up after robustness tests such as parallel trend test,placebo test,and reconsideration of events.The mechanism shows that compensation control reduces the audit risk and audit fees by reducing the business risk of enterprises.After heterogeneity analysis,studies have shows that the negative effect between compensation control and audit fees is more significant when the pay gap is larger,the tenure of senior executives is shorter,the concentration of ownership is higher,and the proportion of institutional investors’ shares is higher.Finally,we further distinguish the audit cost and risk premium,and found that the reduction of audit fees includes the adjustment of auditor’s effort level and the reduction of risk premium compensation.The above research findings can not only reassess the effect of the incremental policy of compensation regulation,enrich the research on the economic consequences of compensation regulation,but also provide reference for local state-owned enterprises to carry out compensation reform and tuning corporate managemant.