Digital Transformation and Risk Premium of Audit Fee: Exploring the Mediating Role of Auditor Effort

Although digital transformation generates operational efficiencies for firms, it simultaneously introduces novel complexities into the audit process. Using a longitudinal panel of China’s A-share listed firms from 2007 to 2020, we examine how digital transformation affects the risk premium of audit fee via multivariate regressions that control for industry, year, and firm fixed effects. Endogeneity problem are addressed using two-stage least squares (2SLS) estimation, propensity score matching (PSM), and lagged independent-variable specifications to mitigate reverse causality. We find that digital transformation is positively associated indicating that auditors price technological disruption into fee structures. Path analysis reveals that auditor effort fully mediates this relationship, establishing it as the key transmission mechanism. This effect is amplified among non-state-owned enterprises, in non-high-tech industries, and with non-Big four auditors. The findings withstand endogeneity concerns, as demonstrated by instrumental-variable and quasi-experimental robustness tests. This study contributes to the audit pricing literature by (1) establishing digital transformation as an emerging determinant of risk premium, (2) providing empirical evidence for the previously understudied auditor effort mechanism, and (3) identifying the institutional factors that condition technology-audit interactions. The findings call for a re-evaluation of audit pricing in the digital economy era.