Key audit matters and audit fees: Do two-tier board characteristics matter?

Purpose This study investigates the relationship between key audit matters (KAMs) and audit fees in the Chinese context. Furthermore, this study moderates the characteristics of the dual-board system (board of directors (BOD) and supervisory board (SB)) on the association between KAMs and audit fees. Design/methodology/approach The ordinary least squares (OLS), fixed effects (FE), and random effects (RE) were applied using a final sample of 17,286 firm-year observations from 2017 to 2022 to test the hypotheses. We relied on the instrumental variable using the two-stage least square (IV-2SLS) method and generalized method of moments (GMM) to address the endogeneity issue. Findings Our results show a positive and significant relationship between KAMs and audit fees. These findings indicate that audit fees are related to compliance with the requirements of China Standards on Auditing (CSA) No.1504 KAMs. Furthermore, our results indicate that factors such as board size, the level of board independence, and the size of the SB positively and significantly reinforce the association between KAMs and audit fees. However, the outcomes depict that SB independence has a significant and negative effect on the association between KAMs and audit fees. In contrast, the findings reveal that chief executive officer (CEO) duality does not have a statistically meaningful impact on the relationship between KAMs and audit fees. Finally, the robustness tests support the main findings and confirm their validity. Research limitations/implications Our paper focuses solely on the total number of KAM topics, while future studies could investigate how specific types of KAM disclosures, such as those related to revenue recognition, accounts receivable, and goodwill impairment, which are the most frequently reported KAMs, influence audit pricing in the Chinese context. Practical implications This study has theoretical and practical importance for regulators, auditors, practitioners, shareholders, and academics. For example, it can help regulators gain a clearer understanding of the impacts of the new Chinese auditing standard (CSA No. 1504) on audit fees. Social implications This study offers significant social implications by emphasizing the role of audit transparency and unique governance structures in protecting stakeholder interests, improving public trust in audit reports, and supporting economic development. Originality/value Our empirical findings provide novel evidence that contributes to the recent inconclusive literature on the impact of KAMs on audit fees. To the authors’ knowledge, this study provides the first empirical evidence in China that explores the moderating role of the dual-board system characteristics on the relationship between KAMs and audit fees.