ABNORMAL AUDIT FEE AND ATTRIBUTE OF AUDITORS IN NIGERIA BANKING SECTOR (A CASE STUDY OF SELECTED BANKS IN EDO STATE)

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The turbulent effects of the global financial crisis have highlighted the critical importance of credible high quality financial reporting (Farouk & Hassan, 2014). Also, in Nigeria, a series of well-publicized cases of accounting improprieties, such as is reported in relation to banks in Nigeria, has captured the attention of investors and regulators alike (Adeyemi & Fagbemi, 2010). Achieving quality financial reporting depends on the role that the external audit plays in supporting the quality of financial reporting of quoted companies (Farouk & Hassan, 2014). Auditing which is an independent examination and expression of opinion on the financial statement of an enterprise or organization by an appointed auditor in pursuance of that appointment and in compliance with any relevant statutory obligation aims at providing solution to the inevitable problem of credibility in report and accounts (Okoli, 2012). Evolution of auditing can be linked to the expansion of business enterprises in 1200 (Boeijink, 2011). Service of auditor became essential resolve the divergence of interests of owners, managers and other classes of investors (DeAngelo, 2015). Engagement of an auditor is mean to offer a high level of pragmatic guarantee that finance records are not drastically misstated. This reassurance diminishes the hazard of stakeholders making erroneous decision (Franken, 2011). This guarantee that every firm is prepared to part with money to purchase this service presents added advantages such as low cost of capital. Quasi rent paid by the auditor known as audit fee. Audit fee can divided into parts, that is, the normal and abnormal audit fee. Some author are of the opinion that audit fee serves a gauge for measuring audit efforts and risk of cost ligation risk (Choi, Kim & Zang, 2012).This implies that when auditors exert more audit effort they charge clients more. Other scholars argued that excessive high audit fee is not a reflection of audit effort but rather an attempted bribe audit to give auditor free hand to perpetrate opportunistic behaviour there soothing engagement to its advantage. . Abnormal could be either positive or negative. Excessive high audit fee is seen as positive abnormal while extremely low audit fee is a negative abnormal audit fee. Audousset-Coulier, Cazavan-Jeny and Song (2010) auditor sell their independence on the altar of audit fee. Anecdotal evidence shows that auditor sometimes gives in to pressure from management and issue an unqualified opinion in return for quasi rent. Kinney and Libby (2013) opine that when there is strong economic bonding of auditor to auditee quality audit is lowered. The fees paid to auditors (whether high or low) have the propensity to of beclouding the auditor sense of reasoning (Franken, 2011). International Federation of Accountant (2010) instituted a standard for negotiating audit services. It further state whatever fees is deemed appropriate, and that there may be threat in terms of compliance with fundamental ethical principles when different fees level are charged. However, the law requires that financial statement of companies to validate by an independent auditor. Nonetheless, is suffices to point that the law did not expressly state amount auditee should pay services rendered. Some studies have argued that whenever auditor receives abnormally high or low fees from client, audit quality might be compromised (Xie, Cai & Ye, 2010).When an auditor charges abnormally low fee, this is not unethical provided the audit is carried out at a corresponding quality level but when the fees is high it is unethical because it allows client to engage in more questionable accounting practice. Abnormally high audit fees can make auditor to be financially dependent on their clients and create economic bonding of the auditor to their clients. DeAngelo (2015) argued that audit quality could be impaired when significant economic bonding exists between auditor and clients. This is so because, for clients with higher audit fees, the benefits to the auditor from retaining these profitable clients may out weight the cost associated with allowing substandard reporting Hope, Kang, Thomas and Yoo (2009) noted that when auditor remuneration is excessively high, investors may perceive the auditor to be economically bonded to the client, leading to a lack of independence, which could impair audit quality. Alternatively when auditors receive lower audit fees now in anticipation of high fees in future, the auditor may be vulnerable to client pressure for allowing opportunistic earnings management (Stanley, 2007). Most of the studies done on abnormal audit fees are in developed countries and of these studies there seem to be inconsistent and inconclusive findings. Therefore this study seeks to investigate the impact and association between abnormal audit fees and audit quality using data from developing nation (Nigeria). One aspect of professionalism that should be possessed by auditors is the ability to conduct audit works in accordance with auditing standards. This aspect, along with other professionalism aspects, determines audit fees for the work performed by auditors (Fachriyah, 2011). In carrying out their auditing duties, auditors should be guided by auditing standards that have been established by the Indonesian Institute of Accountants (IAPI), the common standards, standards of field work and reporting standards (IAPI, 2007). Common standards are a reflection of personal qualities that should be possessed by auditors. It is required that auditors have technical trainings and adequate expertise in performing audit procedures. It should be done by people who are competent and independent (Arens, 2012). Auditing should be done based on the auditing standards established by the Indonesian Institute of Certified Public Accountants (IAPI).Furthermore, auditors are required to have sufficient competence, so that they are able to carry out auditing processes in accordance with the established procedures. After conducting auditing processes, auditors will receive fees or remuneration from clients for their professional services. Pramudji (2009) argues that the development in the field of audit services is in line with the change of paradigm, which will support the prevention of fraud and is able to control risks.

1.2 STATEMENT OF THE PROBLEM

The literature has tried to establish the link between abnormal audit fee and attribute of auditors such as independence, experience, competent and auditor accountability. No doubt auditor independence, experience, and the awareness that the auditor would be held accountable would motivate the auditor to gather appropriate and sufficient audit evidence, which in turn would lead to audit quality. Many companies suffered corporate collapse due to poor audit quality. The poor audit quality was due to lack of appropriate and sufficient audit evidence. Enron’s auditors, Arthur Andersen failed to gather sufficient audit evidence about the use of the ‘special purpose entities’ (SPEs) and their accounting treatment (Mallin, 2010). Could the poor audit quality work of Arthur Andersen have been due to lack of auditor independence, experience and accountability? Specifically, the research problem to be addressed in this study is: To what extent is auditing quality affected by auditor independence, experience, competency and accountability in Nigerian banks?

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine abnormal audit fee and attribute of auditors in Nigerian banking sector leverage 2014-2018. Other general objectives of the study are:

1. To examine if auditors independence, competency has any effect on the quality of audit report issued by an audit firm
2. To examine the impact of abnormal audit fee on audit quality in Nigerian banking sector.
3. To examine the impact of abnormal audit fee on attributes of auditors in Nigerian banking sector.
4. To examine the factors influencing normal audit fee in Nigerian Banks.
5. To examine the relationship between abnormal audit fee and the leverage of the Nigerian Banking Sector.
6. To provide recommendations on how to perform the role of auditors in the banking sector.

1.4 RESEARCH QUESTIONS

1. Does auditors independence, competency has any effect on the quality of audit report issued by an audit firm?
2. What is the impact of abnormal audit fee on audit quality in Nigerian banking sector?
3. What is the impact of abnormal audit fee on attribute of auditors in Nigerian banking sector?
4. What are the factors influencing normal audit fee in Nigerian Banks?
5. What is the relationship between abnormal audit fee and the leverage of the Nigerian Banking Sector?
6. What are the recommendations on how to perform the role of auditors in the banking sector?

1.5 RESEARCH HYPOTHESES

Hypothesis 1

H0: Abnormal audit fee does not influence the attribute of auditors in the Nigerian Banking Sector leverage.

H1: Abnormal audit fee significantly influences the attribute of auditors in the Nigerian Banking Sector leverage.

Hypothesis 2                     

H0: There is no relationship between abnormal audit fee and the leverage of the Nigerian Banking Sector

H1: There is a significant relationship between abnormal audit fee and the leverage of the Nigerian Banking Sector

1.6 SIGNIFICANCE OF THE STUDY

This research would be of interest to the management, accountants and auditors of Nigerian banking Sector. This topic is significant for business management, shareholder and the overall financial community because of the best use of assets comes from external auditing from its responsibilities especially after financial crisis all over the world that makes internal auditing significant in monitoring and evaluation of management performance. This study keeps track of developments and trends in the field of auditing, whether in the field of professional standards or practices and modern methods and tries to apply this Development in Nigeria. The study would serve as reference materials to other researchers who may want to carry out more research on this or related topic. The study would broaden the researcher knowledge on the subject

1.7    SCOPE OF THE STUDY 

The study is based on abnormal audit fee and attribute of auditors in Nigerian banking sector leverage 2014-2018, a case study of selected banks in Edo state.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 DEFINITION OF TERMS

Audit Fees: Audit fee is the economic remuneration for auditors who provide audit services, which are an agency fee according to certain standards. The audit fee includes the total cost of audit through the overall audit work, the risk compensation and the profit demand. During the actual audit work, the audit fee influences not only audit quality, but also the development of accounting firms and audit industry.

Abnormal Audit Fees: Abnormal audit fees are defined as the difference between the audit fee paid and the normal or expected audit fee (Knechel et al. 2013).

Auditor: A person who officially examines the business and financial records of a company or organization.

External Auditor: External auditor as a chartered accountant who is a public officer and is professionally qualified. Section 357 of CAMD 1990 talk on our auditor is appointed and he can also be appointed according to section 86 of the 2011 constitution of the federal republic of Nigeria.