Volatility of other comprehensive income and audit fees: evidence from China
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ORIGINAL ARTICLE
Volatility of other comprehensive income and audit fees: evidence from China Md Jahidur Rahman1 · Tong Wu1 Received: 10 March 2020 / Accepted: 27 October 2020 © Springer Nature Limited 2020
Abstract Managers make numerous subjective judgments about other comprehensive income (OCI) due to the fair-value measurement, which increases the auditing risks and challenges for auditors. This study investigates the relationship between audit fees and the volatility of OCI in China using a large sample of Chinese A-share listed companies from 2014 to 2018. Such relationship cannot be confirmed for these companies, including those audited by Big 4 firms and the top 10 accounting firms in China, but is significantly positive for those audited by experienced auditors. Results indicate that audit firms in China generally do not seriously consider risks concerning the volatility of OCI. However, auditors with long tenures are more aware of these risks and have correspondingly higher prices compared with their peers. Keywords Other comprehensive income · Audit fees · Audit tenure · Big 4 firms
Introduction This study examines the relationship between the volatility of other comprehensive income (OCI) and audit fees in China. This study is motivated by the increasingly detailed regulations in the field of OCI and the complexity and subjectivity of fair-value measurements, both leading to difficulties in audits. Moreover, previous studies indicate that the volatility of OCI may significantly add audit risks. As such, this topic requires further attention from companies, accounting firms, and related agencies. Changes in accounting standards show that the Chinese government is gradually recognizing the importance of OCI in recent decades. Detailed regulations are implemented in OCI, from its addition, classification, and application. The old version of Accounting Standards for Business Enterprises (CASC 2006) neither identifies nor requires the OCI terms to be listed separately in the income and the owner’s equity statements. Then, in 2009, the Chinese Ministry of Finance required companies to add the OCI under earnings per share in the income statement (CASC 2014b). In 2014, * Md Jahidur Rahman [email protected] 1
Department of Accounting, Wenzhou-Kean University, 88 Daxue Road, Ouhai, Wenzhou 325060, Zhejiang Province, China
OCI is required to be stated separately in the Owners’ Equity Statement, rather than combined with the additional paid-in capital, and most of its components need to be fair-valued (CASC 2014c). In addition, OCI is suggested to be listed separately in the income statement for financial companies, possibly leading to greater profits in fair-valued financial instruments categorized in OCI. In the new version of accounting standards, OCI is identified as the income that is not recognized in the current profit or loss according to other related accounting standards. OCI is also required to be divided into two categories. The first category comprises components that cannot be reclassified
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