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 (Chersa
n 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 STATEMENT OF RESEARCH HYPOTHESES
In
order to establish the factors serving as the determinants of audit fees, the
following null hypotheses are specified as:
a.
Ho: Auditee size does not affect audit fees
among listed firms in the construction sub-sector of the Nigeria Stock Exchange.
b.
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.
c.
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.