Financial report readability and audit fees: Evidence from China

Abstract

This study investigates the impact of the readability of financial reports on audit fees. Moreover, it explores how various contextual factors affect the relationship between readability and audit fees from the perspectives of information provision, transmission and reception. Considering listed firms in the Chinese market, this study demonstrates the significant negative effect of financial report readability on audit fees. However, this association is weakened by annual report similarity, the board secretary's social capital and auditors' industry expertise. Furthermore, this study demonstrates that audit fees increase because of both prolonged audit delays and information asymmetry resulting from low readability. By presenting empirical evidence to substantiate the rationale and necessity for enhanced textual readability requirements, this research can provide valuable insights for corporations to improve the effectiveness of their information communication to external stakeholders, which is very important for enhancing financial report quality and aligns with the primary focus of standard setters.