Does International Accounting Network Membership Affect Audit Fees and Audit Quality? Evidence from Chinese Small Audit Firms

Regulators suggest that small audit firms should join international accounting networks to reduce their resource constraints in serving large clients and providing high-quality service. Bills, Cunningham, and Myers (BCM, 2016) investigate the issue in the U.S. and find that audit fees and quality are both higher for members of international accounting networks (i.e., member audit firms). We investigate the effects of network membership on audit fees and quality in China, a weak institutional environment. Using data of Chinese listed companies audited by non-Big N audit firms from 2001 to 2010, we find that member audit firms charge 3.9% higher fees than nonmember audit firms, much lower than 30% fee premiums charged by U.S. member audit firms (BCM, 2016). We fail to find consistent evidence that audit quality is higher for member audit firms. Overall, our results demonstrate that China’s weak institutional environment may overwhelm the quality control brought by international accounting networks and it may weaken or even offset the benefits of audit firms’ participation in these networks, resulting in smaller or even no effects of membership on audit fees and quality.