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.