Abstract

This study examines the association between audit fees and credit ratings evaluated by credit rating agencies. Especially, this study examines if the association differ between listed and non－listed firms. Both credit rating agencies and auditors use financial statement information. If both the agency and auditor use the financial information in the same extent, the credit ratings are expected not to be or only weakly associated with audit fees. It is because financial variables directly collected from financial statement will capture the same effect rather than credit ratings in determining audit fees. In contrast, if credit ratings represent not only financial information collected from financial statements but also other information which is not included in the financial statement, and if the information is important, auditors are expected to use the credit rating information in setting audit planning. Because credit rating represents the firm－specific risk, it is expected that the risk influences audit fees in the latter case. Using 34,520 non－listed firms’ and 6,061 listed firms’ data collected over the period of 2004 to 2007, this study empirically examines these predictions. Our findings are summarized as follows. First, we find that non－listed firms’ audit fees are associated with credit ratings, whereas listed firms’ audit fees are not. Specifically, the credit ratings of prior period is incrementally associated with current audit fees after controlling for other known factors which are related to audit fees. This result implies that auditors set higher fees by observing poor credit ratings. These associations become stronger for smaller companies, like the firms subject to external audit law. When this study separates auditors to Big 4 and non－Big 4, this study finds the same association for both groups of auditors. These results suggest that both auditors and credit rating agencies use not only financial statement information but also other information in setting audit fees or credit ratings for non－listed firms. It could be due to the fact that the quality of financial statement information of non－listed firms is not as reliable as that of listed firms.

Keywords

• credit ratings
• credit risk
• audit fees
• non－listed firms
• listed firm
• auditor type

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