When the Group Matters: Audit Pricing of Affiliated Companies

ABSTRACT This study examines how the relative financial strength of business groups, compared with their affiliated companies, affects audit pricing, using data from publicly listed companies in China. We find that affiliates of financially stronger business groups pay significantly lower audit fees, suggesting that group‐level financial strength reduces auditors' perceived risk and the required audit effort. This effect is more pronounced when auditors are located in the same province as the parent company, facilitating better access to private information, and when affiliates are more operationally integrated with their parent companies, such as sharing industry classification or board members. These findings indicate that auditors incorporate group‐level financial information into audit pricing only when the benefits of doing so outweigh the costs of acquiring and processing such information. We also find that affiliates of financially stronger groups engage in more related‐party transactions (RPTs) for risk‐sharing purposes, but no evidence of decreased RPTs for expropriation purposes, and the effect of group financial strength on audit fees is stronger for distressed affiliates compared with non‐distressed ones. Overall, the study highlights the importance of considering group‐level financial characteristics in understanding audit fee variation among group‐affiliated companies.