Does Fee Disclosure Form Matter?

What is it about?

Although public disclosure of audit fees allows investors to assess potential conflicts of interest between the company and its auditor, which might in turn strengthen auditor’s independence, such fee transparency policy may also lead to price competition in the audit market as the clients know the fees charged to other clients by their incumbent auditors and the fees charged to companies by non-incumbent auditors. Some regulators such as the Public Company Accounting Oversight Board (PCAOB) in United States have expressed its concern about the potential negative impact of competitive pricing on audit quality. To address this concern, we take advantage of a regulatory change in Taiwan that required all public companies to disclose audit fee information but allowed two alternative disclosure forms (fee amount disclosure or fee range disclosure) and analyse whether fee range disclosure, as an alternative for fee amount disclosure, can mitigate the impairment of price competition on audit quality. Our evidence suggests that, because fee range disclosure is less accurate than fee amount disclosure, it could mitigate price competition and its negative impact on audit quality, while still maintaining some fee information transparency.

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Why is it important?

Given that most of the countries mandating audit fee disclosure only allow fee amount disclosure, our evidence provide some implications for regulators and other stakeholders in jurisdictions beyond Taiwan.