Determinants Of Audit Fee In Quoted Firm In The Nigerian Stock Exchange
Corporate managements induce auditors through fees to alter the financial performance and position of their entities. These practices led to the studies on the determinants of audit fees in developed and developing economies. This study examined the determinants of audit fees of listed food and beverages firms in Nigeria. Correlational research design was employed on a sample of nine (9) listed food and beverages firms in Nigeria for a period of ten (10) years (2004-2013). Panel regression techniques of estimation were used in the analysis. The study found after controlling for firm profitability a significant positive relationship between audit firm size, auditor tenure, firm size and audit fees of listed food and beverages companies in Nigeria during the period covered by the study. The study in particular found that audit firm size has significant positive impact on audit fees of listed food and beverages firms in Nigeria. The study also found that auditor tenure has significant positive influence on audit fees. Moreover, the study found that client firm size has a significant positive impact on the audit fees of listed food and beverages firms in Nigeria. While firm complexity is found to be positive but statistically insignificant. The study concludes that audit firm size, auditor tenure and client firm size are significant determinants of auditor fees in the Nigerian food and beverages sector. The study, therefore, recommends that the regulators of the food and beverages firms in Nigeria should improve the guidelines for employing the services of external auditors and their remuneration, and consider firm size, auditor size and tenure as well as the firm profitability among the factors in the determination of auditors’ fees.
1.1 Background to the Study
Audit fee determination has become a fundamental area of audit research in recent times; especially following after the classical cases of audit failure experiences in Enron and other corporations. The disturbing dimension resulting from ex-post analysis and discourses of these cases of corporate failure is that often times the client had been given a “clear bill of health” and an unqualified auditor’s opinion by the auditor. This therefore suggests that there had been incentives for the maintenance of an ongoing relationship between auditor and client and the auditor independence as well as audit quality had to become the opportunity cost for the survival of the interest of both clients and the auditor.
The search for explanations for the auditor’s performance, the level of auditor independence and the audit quality has seen audit fee evolving as a critical factor and this is well documented in the literature (Simunic1980 Gist, 1995). Audit fee is an important issue and has a significant effect on auditor’s performance, their independence and more particularly audit failures. Thus, audit fee research may be seen as a subset of the general research areas concerned with issues of audit fee determination, auditor independence and audit quality. Audit fee is concerned with the determination of remuneration for audit services that relates directly and primarily to the audit function. Succinctly put, it deals with the determination of audit remuneration from the early work on the pricing of audit services to understanding the basic economics of fee determination.
Following the market framework, early studies such as Simunic (1980) explicitly saw the audit pricing as the determination of audit fee and initiated the use of the demand and supply functions to identify the determinants of audit pricing and hence the audit fee. This market theory covers both the demand side and the supply side determination that is determinants representing features from clients that demand audits and from auditors that supply audit services. Following the audit fee literatures, several determinants of audit fee have been identified
Corporate performance is an important concept that relates to the way and manner in which financial material and human resources available to an organization are judiciously used to achieve the overall corporate objective of an organization. There are two determinants of firm’s performance; the first is associated with external factors that are beyond the control of the firms. The second refers to factors that are internal and under the direct purview of the firms.
Corporate performance comes with several implications for audit fees. Firstly, companies reporting high levels of profits will be subject to rigorous audit testing in order to relate revenues and expenses and this entails more audit fees (Joshi and Al-Basaki, 2000). Also, some ability to pay largely influences the audit firm choice, it suggests that better performing companies may want to have audit services of the big 4 and this may signal more audit fee expenses. However, there is also the argument that under-performing companies are more likely to control their overheads and this would result in less audit work (Chan, McDonald & Miller, 2004). In relation to firm complexity, the theoretical expectation generally is that since audit fees are dependent on how much time auditors have to spend for an audit engagement, more complex firms will thus be associated with higher audit fees. Using listed food and beverages firms in Nigeria, the study objective is to provide empirical evidence on the relation between determinants of audit fees and the fees paid to auditors.
1.2 Statement of the Problem
There are several studies conducted on the determinants of audit fees in developed economies such as Butterworth and Houghton (1995), Palm rose, (1986), Taylor and Simon (1999). However, the findings have not been unanimous conclusive across researchers. The evidence from these studies revealed the presence of mixed findings in the literature which suggests that the issues involved on the auditor pricing and the determination of auditor remuneration are far from being settled empirically. Theoretically, the amount of fees for audit services that a client firm pays to it is audit firm reflects the level of audit work the latter has to perform in the auditing process. The definition of this level of work embodies the auditor’s assessment of the process’s complexity and the desired level of risk. In other words, all other things considered, if an auditor wishes to decrease the risk of issuing a clean opinion when there are materially relevant distortions in the client’s financial statements, he generally acts on the nature, extent and timing of audit procedures, which naturally influence the final amount of required fees.
Additionally, increasing audit efforts are determined by the firm’s likelihood of incurring future losses due to the engagement with that specific client (e.gSimunic and Stein,1996); Those losses include litigation costs, sanctions from regulatory entities, image and reputation damages. There is empirical evidence that when there is a perception of high levels of liability exposure, audit firms adjust their required fees (Simunic and Stein, 1996); audit fees are influenced by litigation environment (i.e. the regimes of different countries) where the audit firms operate on. In the face of increasing litigation costs, big audit firms have avoided engagements with risky clients. Pratt and Stice (1994) also found evidence of the existence of an additional premium (relative to increasing level of work) to cover litigation costs. An interesting recent finding is that audit fees reflect the client’s future performance, because auditors have access to some information that contains forward- looking judgments (e.g. uncollectable receivables, obsolete inventory, pension and warranty costs) (Stanley, 2011). Moreover, the disclosed audit fee is also found to be related with errors in forecasts of earnings made by financial analysts, which could indicate a superlative precision in the predictions of auditors when compared with the predictions of financial analysts. The potential usefulness of this evidence is a sign embed in the disclosed audit fee of the firm’s future economic condition. Also empirical tests provide evidence on the negative relationship between firm performance and audit fees. Specifically, increases (decreases) in operating performance are connected with` decreases (increases) in audit fees. However, while previous studies viewed firm performance in relation to audit fees, there are some factors such as firm size, auditor tenure, firm complexity and audit firm size that could potentially determine the fees paid to auditors. These variables have not been adequately researched, especially in developing economy like Nigeria.
In addition, most of the empirical studies conducted on the determinants of audit fees have been done in developed countries and to the best of my knowledge no single work has been done in the domain of food and beverages firms in Nigeria. This calls for the need for empirical evidence on the issues especially from developing economies and hence the need and relevance of the study.
1.3 Objectives of the Study
The main objective of the study is to examine the determinants of audit fees of listed
Food and Beverages firms in Nigeria.
The specific objectives include to;
- Investigate the influence of complexity on audit fees of listed Food and Beverages firms in Nigeria.
- Determine whether firm size impacts on audit fees of listed Food and Beverages firms in Nigeria, and
- Examine the effect of audit firm size on audit fees of listed Food and Beverages firms in Nigeria.
- Investigate the effect of auditor tenure on audit fees of listed Food and Beverages firms in Nigeria.
1.4 Research Questions
For the purpose of this study, the following research questions will be addressed:
- How does complexity Influence audit fees of listed Food and Beverages firms in Nigeria?
- To what extent does firm size impact on audit fees of listed Food and Beverages firms in Nigeria?
- What is the effect audit size on audit fees of listed Food and Beverages firms in Nigeria?
- How does audit tenure impact on audit fees of listed Food and Beverages firms in Nigeria
1.5 Statement of Hypotheses
In line with the objectives, the following hypotheses are formulated.
H01: Audit firm size has no significant influence on Audit fees of listed Food and Beverages firms in Nigeria.
H02: Auditor tenure has no significant impact on audit fees of listed Food and Beverages firms in Nigeria.
H03: Firm size has no significant effect on Audit fees of listed Food and Beverages firms in Nigeria.
H04: Complexity has no significant impact on Audit fees of listed Food and Beverages firms in Nigeria.
1.6 Significance of the Study
The study is of immense value to the following stakeholders and the outcome of the research will assist the corporate entities of the food and beverages firms in Nigeria to know whether or not determinants of audit fees made impact on Audit fees which will guide them in taking relevant investment decision.
Also the regulatory authorities will benefit from the outcome of the study, which will enable them examine the effectiveness of their monitoring instruments as well as review them as appropriate. Other stakeholders like government, employees and creditors will also benefit from the findings of the study by allowing them make informed decision about policies, employment and ratings respectively.
The findings of the study will also contribute to the existing empirical studies on determinants of audit fees in Nigeria. The study will also be useful to accounting students and researches. In addition, the outcome of the study will serve as an input or motivational factor for further research in the area.
1.7 Scope of the Study
The need to study the determinants of audit fees of listed food and beverages firms in Nigeria cannot be over emphasized as the industry contributed to the overall growth of the economy. The population of the study is all the twenty one Listed Food and Beverages firms quoted on the Nigeria Stock Exchange (NSE) as at 31st December, 2013. The period of ten (10) years is used which covers 2004 to 2013. As there are many changes in the sector which affected the industry before and after the chosen period of the study.
1.8 Limitations of the Study
Although the findings and conclusions from this study are robust and reliable, the study has some limitations. For instance, the study focuses on quantitative research method, complimenting the study with qualitative evidence from auditors and managers could have improved the results. Moreover, the study concentrated on food and beverages companies listed in the NSE market, covering more sectors would have shown a wider picture of the relation between auditor fees and the determinants of audit fees.
Summary, Conclusions and Recommendations
The study examined the determinants of audit fees of selected listed food and beverages firms in Nigeria from 2004 to 2013. The problem of the study emanates from the fact that fees paid to auditors comes with several implications for audit quality and the financial reporting quality in general. In the first instance companies reporting high levels of profits are subjected to rigorous audit testing in order to relate revenues and expenses and this entails more audit fees. On the contrary there is also the argument that underperforming companies are more likely to control their overheads and this would result to less audit work but at the same time attracts more audit fees when compared with the performing firms. To this end, there are some studies conducted in both developed and developing economies that established the possible effect of determinants of audit fees on audit fees of firms in different sectors.
In view of the above problem, the study hypothesized that there is no significant relationship between the determinants and audit fees of selected listed food and beverages firms in Nigeria. A return on assets was used as a control variable for firms’ financial performance of the listed food and beverages firms in Nigeria during the period 2004 to 2013. The study used correlational research design in determining whether significant relationship exists between the determinants and audit fees of listed food and beverages firms in Nigeria. Data for the study were secondary in nature and were sourced from the Nigerian stock exchange (NSE) fact book, and annual reports and accounts of the selected food and beverages firms in Nigeria from 2004 to 2013.
Relevant and related literatures on the determinants of audit fees and their composition were reviewed. The study found after controlling for firms financial performance a significant positive relationship between audit fees and the determinants of audit fees in listed food and beverages companies in Nigeria. The findings indicated that the size of the audit firm has significant statistical positive impact on the audit fees, suggesting that the size of the auditor is a significant determinant of fees paid to auditors. The study also found that auditor tenure has significant positive impact on the audit fees while client firm size has significant positive impact on the audit fees. However, the study found that complexity has positive but insignificant impact on the audit fees in the sampled food and beverages firms during the period.
The finding from this study revealed that the determinants of audit fees variables explained around 77% of the total variations in the dependent variable (audit fees), from the coefficient of determination for the ten years of the study period from 2004 to 2013.
The study concludes that the size of the audit firm has significant statistical positive impact on the audit fees, suggesting that the size of the auditor is a significant determinant of fees paid to auditors. This finding supports those of Vania, Antonio AndElisio (2012), Ahmed and Goyal, (2005), Akinpelu, Omojola and Ogunsaye (2013), Anderson and Zeghal (1994), who revealed that the size of the auditor enhances the audit quality and financial reporting in return.
The study also conclude that auditor tenure has significant positive impact on the audit fees during the period under review; suggesting that tenure in the listed food and beverages companies during the period under review determines the fees paid to auditors. This finding is inconsistent with the view of auditor mandatory rotation, and also inconsistent with the findings of Cobin, (2002); who document evidence that, there is a deterioration of audit quality as audit tenure increases, and, the possibility of auditors acquiescing more in later years of the engagement and management using this to meet earnings forecasts. In contrast, the finding is in line with those of Fields, Donald and Williams (2004), and those of Hassas and Alavi (2004); Pong and Whittinghton(1994); Takukava, (2011); who found no evidence of impaired audit quality when auditor tenure is longer.
The study however conclude that client firm size has significant positive impact on the audit fees during the period under review; implying that size of the auditee firm significantly determined fees paid to auditors. This finding support the view of Waresulkarim and Moizer (1996) who show that audit delay is positive for firms with interim overstatements and declining earnings, and that the audit delay increases with the size of the overstatement of interim earnings.
Finally, the study conclude that complexity has positive but insignificant impact on the audit fees in the sampled food and beverages firms during the period. This may be as a result of the effect of firm size, which is also a proxy of complexity. This supports the findings of Waresulkarim and Moizer (1996) Hassan and Nasor (2013), Lonelacorina, Loan Bogdan, Mchai and Marilena (2012), Shammari, Yaquot and Hussaini (2008).
Based on the findings and conclusions from this research, the study recommends that;
- The regulators of the food and beverages firms in Nigeria should improve the guidelines for employing the services of external auditors and their remuneration, and consider the size of the firm, auditor size and firm performance among the factors in the determination of auditors’ fees.
- The study recommends that auditors should be adequately remunerated relative to the complexity of a firm and its growing capacity; this could give them sufficient resources to conduct a thorough audit capable of uncovering material misstatements and errors in the financial statements, hence higher quality reports.
- External auditors of listed food and beverages firms should avoid non audit services that are likely to increase total audit fees and decreases the auditors’ independence. iv.Large firms should also be allowed by law to pay more audit fees in order to have a thorough audit with wider coverage. This could make it possible for auditors to uncover both intentional and unintentional errors and misstatements; and hence a true and fair financial statements.
- The regulators and other stakeholders should allow a sufficient time for the audit exercise as this appears to be significant in improving financial reporting quality.
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