IPO audit contingent fees and earnings reversal

This study investigates how contingent fees in initial public offering (IPO) audits affect earnings reversals. Using a sample of Chinese firms with IPOs, we find that higher contingent fees are associated with a greater likelihood of post-IPO performance deterioration and worse firm outcomes. This effect is more pronounced among non-state-owned (vs. state-owned) firms and those facing weaker regulatory oversight, lower information quality and higher economic policy uncertainty. Further analysis shows that contingent fees significantly accelerate the IPO process, and that firms are likely to retain the same accounting firm that conducted their IPO audit after going public. We also observe that firms paying higher contingent fees experience worse long-term market performance following their listing. Overall, our results indicate that contingent fees in IPO audits undermine the independence of audits. This study not only contributes to the academic literature on contingent fees in the IPO context but also offers empirical support for regulatory efforts to enhance IPO audit pricing oversight.