DETERMINANTS OF AUDIT FEES IN NIGERIA: AN EMPIRICAL ANALYSIS

CHAPTER ONE

INTRODUCTION
1.1 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 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 Nigeria?
2.         What is the relationship between audit fees and auditee complexity among quoted firms in Nigeria?
3.         What is the relationship between audit fees and auditee risk among quoted firms in Nigeria?
4.         What is the relationship audit fees and auditee profitability among listed firms in Nigeria?

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:
To examine the relationship between audit fees and auditee’s  size among quoted firms in Nigeria.
To ascertain the relationship between audit fees and auditee complexity among quoted firms in Nigeria.
To find out the relationship between  audit fees and auditee risk among quoted firms in Nigeria.
To examine the relationship audit fees and auditee profitability among listed firms in Nigeria.

1.4       STATEMENT OF 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 Nigeria.
Ho:  There is no relationship between audit fees behavior and auditee’s complexity among listed firms in Nigeria.
Ho:  Auditee risk does not affect audit fees among listed firms in Nigeria.

1.5       SCOPE OF THE STUDY
This study examines the determinant of audit fee behavior in Nigeria. Thus, the study is delimited to the banking industry in Nigeria.  The period 2008-2012 of all the banks 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 banks in Nigeria.  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 non financial institutions in Nigeria.