DETERMINANTS OF AUDIT FEES IN LISTED FOOD AND BEVERAGES FIRMS IN NIGERIA
ABSTRACT
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.
CHAPTER ONE
INTRODUCTION
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.
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.
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.