ABSTRACT
The topic of audit fee determination and what
factors influence the height of audit fees havebeenwidelydiscussedinquantitativeresearch.However,theresultsofthepreviousstudiesshowthat
the different factors are not always consistent. On top of this, the measures
used inquantitative research are
often proxies of the real constructs used in practice. Therefore, thisstudy examines how audit fees are
determined in practice and what considerations the auditoractuallytakesinto account.This isdonebyusing thecasestudymethod atan audit firm in Nigeria.Theresultsofthisstudyindicatethattherearethreemainphasesinwhichauditfees are being determined and these are: the construction of the
technical budget, negotiationswith
the client about the commercial budget and finally the additional work phase
during theaudit process. Each of
these phases has its own considerations that come along with it. Theresultsofthisstudyprovideinputforfurtherdiscussionsintoauditfeedeterminationbylookingatconsiderations
that auditors makein practice
CHAPTER ONE
INTRODUCTION
1.0BACKGROUND TO THE STUDY
The market for audit
services has been recognize to be segmented into varying sub-markets or
sub-sectors of an economy. Empirical researchers have shown that the
concentration has been as the private sector market than in the public sector.
Prices paid to the external auditors for audit services differ significantly
from that of the public sector. The basis of determining these fees the
statutory auditors receive from client organization has continued to attract
the attention of researcher especially in developing countries such as Nigeria.
The empirical findings obtained this far as regard the determinants of audit
fees in developed economies have been mixed while the use of some variables
have yielded positive correlations, others have rather remained inconclusive(Cobbin,2002).
Basically, the essence of studying the determinants of audit fees is to enhance
or maximize shareholders wealth. This is because audit fees paid by firms to
external auditors for auditing the annual financial statements, no doubt constitute
a major expenditure; certainly such expenditure does not increase the value of
shareholders directly from empirical findings.
The day to day running of
the affairs of a business entity no doubt is very much based on true
relationship between the resource owners (shareholders) and managements.
The owners put their trust on the management with a view to increasing wealth
and preserving the continuity of the business. The true reflection of the
affairs of the organization is always made known through the audited financial
report. Usually, the nature of the work to be performed by an external
auditor will determine the audit fees charge the client firm. The understanding
of audit fee determination is pertinent to suppliers and customers of the audit
services industry (Che–Ahmad &Houghton, 1996). Similarly, the pricing
of these fees is very vital to market regulators. Prior studies have
shown audit services might not be priced competitively due to high
concentration of the number of accounting firms (Che-Ahmad & Houghton,
1996). Most of the studies conducted on audit fees determinants have
majorly been in developed countries of the world (Simon, Teo & Trompeter,
1992).
Studies regarding the audit
market and its actors (auditors and auditees) have been performed for more than
30 years (Chersan and Mihai, 2012). 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 fee level is mostly
contradictory (Cobbin, 2002).
Similarly, the empirical
evidence on audit fees determinants have been focused on developed economies
with mixed results given some numbers of variables but without adequate
researches in developing countries such as Nigeria. It is against this
back drop this study examined the determinants of audit fees behavior among
quoted firms in the construction sub-sector of the Nigeria Stock Exchange.
1.2 STATEMENT
OF THE RESEARCH PROBLEM
Number variables have been employed in advanced countries of the world to
ascertain how they determine audit fees. The results obtained in these
studies have been mixed and very contradictory (Cobbin, 2002). In the
light of the ongoing researches, the following research questions for this
study are:
1.
What is the relationship between audit fees
and auditee’s size among quoted firms in the construction sub-sector of
the Nigeria Stock Exchange?
2.
What is the relationship between audit fees
and auditee complexity among quoted firms in the construction sub-sector
of the Nigeria Stock Exchange?
3.
What is the relationship between audit
fees and auditee risk among quoted firms in the construction sub-sector of the
Nigeria Stock Exchange?
4.
What is the relationship audit fees and
auditee profitability among listed firms in the construction sub-sector of the
Nigeria Stock Exchange?
1.3 OBJECTIVES
OF THE STUDY
The objective of this study
from the view point of the student researcher is basically segmented into
general and specific objectives. The general objective is on the
determinants of audit fees among quoted firms in Nigeria. However, the
specific objectives of the study are put forward as follows:
1.
To examine the relationship between audit
fees and auditee’s size among quoted firms in the construction sub-sector of
the Nigeria Stock Exchange.
2.
To ascertain the relationship between audit
fees and auditee complexity among quoted firms in the construction
sub-sector of the Nigeria Stock Exchange.
3.
To find out the relationship between
audit fees and auditee risk among quoted firms in the construction sub-sector
of the Nigeria Stock Exchange.
4.
To examine the relationship audit fees and
auditee profitability among listed firms in the construction sub-sector of the
Nigeria Stock Exchange.
1.4 RESEARCH
HYPOTHESES
In order to establish the
factors serving as the determinants of audit fees, the following null
hypotheses are specified as:
Ho:
Auditee size does not affect audit fees among listed firms in the construction
sub-sector of the Nigeria Stock Exchange.
Ho:
There is no relationship between audit fees behavior and auditee’s complexity
among listed firms in the construction sub-sector of the Nigeria Stock
Exchange.
Ho:
Auditee risk does not affect audit fees among listed firms in the construction
sub-sector of the Nigeria Stock Exchange..
1.5 SCOPE
OF THE STUDY
This study examines the
determinant of audit fee behavior in the construction sub-sector of the Nigeria
Stock Exchange. Thus, the study is delimited to the construction sub-sector in
the Nigeria Stock exchange. The period 2005-2012 of all the firms listed
in the Nigeria Stock Exchange (NSE).
1.6 SIGNIFICANCE
OF THE STUDY
This study has theoretical
and practical implications. This study definitely will extend theory by providing
further insights on the factors that determine audit fees among quoted firms in
the construction subsector of the Nigeria Stock Exchange. It will also
provide whether it indeed differ according to the factors determined to
influence audit fees. The auditing profession no doubt will find the
outcome of this study useful in terms of knowing how to give criteria that
serve the basis of pricing audit fees among quoted firms in Nigeria.
1.7 LIMITATIONS
OF THE STUDY
There is no study or
research undertaken in any field that has no limitations. Thus, in this
study, the limitations of the study include in adequate research materials
dealing extensively on the subject matter and secondly there is the problem of
generalizing the outcome of the study to financial institutions in Nigeria.
1.8
Definition of Terms
Audit
Fee: Audit
fee is the economic remuneration for auditors who provide audit services, which
are an agency fee according to certain standards.
Firm: A
firm is an organization which sells or produces something or which provides a
service which people pay for.
Quoted
Firm: A company whose shares can be bought or sold on the
Stock Exchange.
Nigerian
Stock Exchange: The Nigerian Stock Exchange was founded
in 1960 as the Lagos Stock Exchange, on September 15, 1960, the stock exchange
council was inaugurated. Operations began officially on August 25, 1961 with 19
securities listed for trading but informal operations had commenced earlier in
June, 1961.