DETERMINANTS OF AUDIT FEES IN THE BANKING INDUSTRY
Abstract
This research examines determinants of audit fees in the banking sector.The main objective is to find out if there is any relationship between audit firm size and audit fee and also to verify if profitability has significant impact on audit fee. Using Ordinary Least Square (OLS) regression technique with the aid of a computer software, the empirical findings revealed among other things that, there is no significant relationship between audit firm size, firm profitability, firm tangibility, net income and audit fee. It furthermore reveals that there is a significant relationship between firm size, firm turnover and audit fee. The study concludes that the nature of audit fee has attracted attention in recent times because of its effect on auditor independence and by implication the audit quality. The study recommends that corporate organizations in Nigeria should pay proper attention to their firm size and firm turnover as they are the major determinants of audit fee in the Nigeria banking sector as observed in this study.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
According to Swanson (2008), it is as important for corporations to know that their corporate structure and strategic decisions affect audit fees as it is for the auditor to adequately understand and evaluate the liability risk associated with that audit engagement. Auditors accept engagements to perform services and issue an opinion on the representations of the financial statements. There is, however, a great deal of risk associated with the process. An auditor is liable to the corporation, its shareholders, and other foreseeable third parties, such as banks or regulators, for its performance of the audit.
According to Chersan, Robu, Carp and Mironiuc (2012), studies regarding the audit market and its actors (auditors and auditees) have been performed for more than 30 years. Many of them point the audit fees and their determinants. Consequently, more and more determinants of audit fees have been identified during this time, and it has been settled that the impact of these factors on the fees level is mostly contradictory. Among the determinants of the audit fees, they mentioned are: the auditee’s size and the geographical dispersion, the size of the audit company, the level of consulting services, the quality of the auditee’s internal control system, the type of contract regarding fees (fixed fees against variable fees). Moreover, they remark that the Big companies the existence a fee raise request, called fee premium. Although most of the studies have pointed out an unidirectional connection between determinants and audit fees, there are studies which prove the existence of a circular causality, meaning that, although they are influenced by some determinants, the audit fees are determinants in their turn for different elements characterizing the auditees and the auditors (for example, the stake holders’ perception of the Communications of the transparency of the audited companies and their performances, as well as the hierarchy of the audit companies).
Since the early work on the pricing of audit services by Simunic (1980) substantial progress has been made in understanding the factors which determine audit fees. In the light of past financial scandals, regulators around the world have passed stricter laws to ensure appropriate financial reporting and audit quality. The newly created and widely debated Public Company Accounting Oversight Board (PCAOB) has implemented a system of periodic independent inspections of audit firms in the U.S. The purpose of these inspections is to improve audit quality.
Accordingly, effort adjustments are expected to be largest in those settings of high fee pressure. Audit firms have certain flexibility in adjusting effort due to excess capacity, shifts from non-public clients, hiring of new employees, and more work done by existing team members. Given the assumption that the market for audit services is competitive, adjustments in audit effort are reflected in audit fees.
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