THE DETERMINANT OF AUDIT FEE IN QUOTED FIRM IN THE NIGERIAN STOCK EXCHANGE

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THE DETERMINANTS OF AUDIT FEE IN QUOTED FIRM IN THE NIGERIAN STOCK EXCHANGE

CHAPTER ONE

INTRODUCTION

BACKGROUND 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 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: Audit 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: Audit 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.

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