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.
TABLE OF CONTENTS
Title
Page i
Certification
ii
Dedication
iii
Acknowledgements
iv
Abstract
v
Table
of Contents vi
Chapter One:
Introduction 1
1.1
Background to the Study 1
1.2
Statement of Problem 4
1.3
Research Questions 5
1.4
Objective of the Study 5
1.5
Statement of Hypothesis(es) 6
1.6
Significance of the Study 8
1.7
Scope of the Study 9
1.8
Limitations of the Study 9
1.9
Definition of Terms 10
Chapter
Two: Review of Related
Literature 12
2.1 Introduction
12
2.2 Conceptual
Framework 12
2.3
Audit
Firm Size and Earnings Management 25
2.4 Client
Firm Size 27
2.5 Audit Fee
31
2.6 Prior
Empirical Studies 33
Chapter
Three: Research Method and Design 37
3.1
Introduction 37
3.2
Research Design 37
3.3
Description of Population of the Study 38
3.4
Sample Size 38
3.5
Sampling Techniques 38
3.6
Sources of Data Collection 39
3.7
Method of Data Presentation 39
3.8
Method of Data Analysis 39
Chapter
Four: Data Presentation, Analysis and Interpretation 41
4.1 Introduction 41
4.2 Data Presentation 41
4.3 Data Analysis 41
4.4 Hypothesis Testing 52
Chapter
Five: Summary of Findings, Conclusion and Recommendations 57
5.1
Introduction 57
5.2 Summary of Findings 57
5.3
Conclusion 58
5.4
Recommendations 59
References 60
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.
To
what extent deficiencies mentioned in the inspection report present a
sufficient incentive for the auditor to adjust effort is uncertain for several
reasons. First of all, there has been extensive criticism of the inspectors’
technical and in- depth expertise (Glover, 2009). It takes an extended period
of time before the inspection results get published (Offermanns & Peek,
2010), the identity of the inspected clients remain unknown, and the high
quality Big4 audit firms have repeatedly received deficient inspection reports
in the US. Thus, the inspection result is unlikely to be perceived as signal of
an audit firm’s overall audit quality. Also, it is uncertain to what extent the
PCAOB will use its discretion in imposing sanctions on audit firms. If the
pressure of the PCAOB is sufficiently large, audit effort and fees are expected
to rise for clients of deficient firms, and particularly under conditions of
high pre-inspection fee pressure.
1.2
Statement of Problem
The
services rendered by auditors are obviously not for free the remuneration for
these services is popularly known as audit fee. Determining the actual amount
of total remuneration given to these auditors is a very difficult task, hence,
this research seeks to know the significant relationship between audit firm
size and audit fee, and relationship between firm profitability and audit fee,
also to what extent does firm size significant determine audit fee.
1.3 Research Questions
The following are the research questions of the
study;
1. Is there significant relationship between
audit firm size and audit fee?
2. What is the relationship between firm
profitability and audit fee?
3. To what extent does firm size significant
determine audit fee?
4. What is the relationship between firm
tangibility and audit fee?
5. To
what extent does firm turnover determine audit fee?
6. Is there significant relationship between
net income and audit fee?
1.4
Objective of the Study
The
primary aim of this study is to examine the determinant of audit fee in the
Nigerian banking sector. The following are the objectives of this study:
1. To determine whether audit firm size have
significant relationship with audit fee.
2. To verify if firm profitability have significant
impact on audit fee.
3. To ascertain whether firm size have
significant impact on audit fee.
4. To determine the relationship between firm
tangibility and audit fee.
5. To
find out the extent to which firm turnover determine audit fee.
6. To verify if there is significant
relationship between net income and audit fee.
1.5
Statement of Hypotheses
The
following hypotheses are formulated for the purpose of this study
Hypothesis
One
HO: Audit firm size does not have significant
relationship on audit fee.
HI: Audit firm size has significant relationship
on audit fee.
Hypothesis
Two
HO: Firm profitability does not have significant
impact on audit fee.
HI:
Firm profitability has significant
impact on audit fee.
Hypothesis
Three
HO:
Firm size does not significantly
determine on audit fee.
HI:
Firm size significantly determine on audit fee.
Hypothesis
Four
HO:
There is no significant relationship between firm
tangibility and audit fee.
HI:
There is a significant
relationship between firm tangibility and audit fee.
Hypothesis
Five
HO:
Firm turnover does not
determine audit fee.
HI:
Firm turnover determines audit fee.
Hypothesis
Six
HI:
There is no significant relationship
between net income and audit fee.
HI:
There is a significant relationship between net income and audit fee.
1.6 Significance of the Study
It
is true that a number of researchers have advanced research findings on the
determinant of audit fee.
Researchers:
this
research will in no small measure contribute to the body of knowledge on
current situation of non – audit fees and audit fees in auditing literature
across various sectors, it will also promote understanding of basic variables
contributing to the enlightenment of audit fees among firms and Nigeria at
large.
Auditor:
It
is also expected that it will be a useful tool in evaluating the adequacy of
auditor by shareholders and help auditors in fixing audit fees. The outcome of
the study can also be used by audit firms to determine audit fees. Companies
management can also use the results of the study to predict the amount of audit
fees that they will pay.
1.7
Scope of the Study
This
research is focus on the determinants of audit fee in the Nigerian banking
sector. The population of the study is the entire quoted banks in the Nigerian
Stock Exchange.
The
sample size will be restricted to ten (10) quoted on the Nigeria Stock Exchange
for the periods of six (6) years i.e. 2008 to 2014, Geographically, the study
will be conducted in Benin City, Edo State.
1.8
Limitations of the Study
It
is worthy to mention here that the information collected for this research such
as library references of various financial journal, textbooks, media, printing
and e-books on workshop and various seminars employed have their interest,
disadvantages or are very non-committed and subjective.
In
order to generalize the outcome of the study, the same study needs to be
conducted over a longer period of time. Other variables such as litigation,
regulation
of government, the market share of audit firm and economic conditions of the
country need to be included in the regression model in future research.
Nevertheless, we hope that this study will serve as a guide material for other
researchers who wish to carryout similar studies to work with.
1.9 Definition
of Terms
i.
Auditor: An auditor is an independent
person appointed to investigate the organization, its records, and the
financial statement prepared by them, thus form an opinion on the accuracy and
correctness of the financial statements.
ii.
Audit fee: Are fee paid by company to
an external auditor in exchange for performing an audit.
iii. Audit market: Analysis and evaluation of a
firm’s marketing approach, activities, aims and results achieved.
iv. Audit client: An audit client is any person
or organization that requests an audit.
v. Equilibrium price: The equilibrium price is
where the supply of goods matches demand or the price at which the quantity of
a product offered is equal to the quantity of the product in demand.
vi. Financial statement: Financial statements is
a collection of a report about an organization’s financial results, conditions
and cashflows.
vii. Accounting error: An accounting error is an
error in the process of systematically recording, measuring and communicating
information about financial transactions.
viii. Earnings management: Is defined as reasonable
and legal management decision making and reporting intended to achieve stable
and predictable financial results.
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