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
HO: Audit firm size does not have significant relationship on audit fee.
HI: Audit firm size has significant relationship on audit fee.
HO: Firm profitability does not have significant impact on audit fee.
HI: Firm profitability has significant impact on audit fee.
HO: Firm size does not significantly determine on audit fee.
HI: Firm size significantly determine on audit fee.
HO: There is no significant relationship between firm tangibility and audit fee.
HI: There is a significant relationship between firm tangibility and audit fee.
HO: Firm turnover does not determine audit fee.
HI: Firm turnover determines audit fee.
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.
Can't find what you are looking for? Hire A Researchproject Writer To Work On Your Topic or Call 0806-703-7559.
Proceed to Hire a Writer »