Audit Fee Determinants and Audit Quality in Ethiopian Commercial Banks

Abstract

The audit profession has been highly scrutinized among researchers and regulators following the fall of giant companies in the west. One of the issues that gained momentum has been to analyze the audit fee structure and the various auditor-client relationships. This study investigates the determinants of audit fees and the ex-ante audit quality based on variables unique to the banking firms and considered important by regulators in Ethiopian commercial banks. The study also examined whether auditors value factors considered important by the regulatory bank, which result in better alignment of interests of auditors and regulators. The study used panel data for eight commercial banks from the year 2004-2012. The panel fixed effect regression result revealed bank size, liquidity, efficiency, loan growth, capital adequacy and auditor size are significant determinants of audit fees in Ethiopian commercial banks. However, among the factors considered important by the regulatory bank, credit risk is found to be insignificant. With regard to audit quality, the study did not find significant relationship between the extent of earning management and abnormal audit fees, indicating that auditors do not seem to compromise audit quality to secure abnormally higher audit fees. The researcher recommends auditors to further align audit fee valuation with the interests of regulatory bank, particularly in respect of credit risk.

Keywords: audit fees, regulatory risks, audit quality, earning management, Loan Loss Provision.