Accounting Standards, Earnings Transparency and Audit Fees: Convergence with IFRS in China

Abstract This study investigates the effect of China's new accounting standards (which converged with International Financial Reporting Standards (IFRS) in 2007) on a new market‐based attribute of earnings quality – earnings transparency (defined as the explanatory power of the returns–earnings relation at firm level) – and their association with audit pricing. Using China's listed companies from 2001 to 2012 as a sample, we find that the adoption of China's new accounting standards, specifically the introduction of fair value measurement and the change in the accounting treatment of minority interest income, increases earnings transparency. We also find that earnings transparency negatively impacts audit fees, and the adoption of new accounting standards attenuates the negative association between earnings transparency and audit fees. This study has implications for standard setters, auditors and managers regarding the change in the information environment of investors resulting from IFRS convergence in China from a new perspective.