Firm Size, Auditor Risk, & Audit Complexity On The External Audit Fee In Pakistan
External Audits plays a crucial role in helping companies develop a compliance as the auditor performing the audit is not a part of the company itself, therefore he can give true and fair judgements without any fear of any consequences (Fleischer and Goettsche 2012). The demand for audits are increasing at a vast scale around the globe which includes internal audits and external audits. The internal audits are a type of audits which investigate the internal business practices while the external audits focus primarily on financial records (Appelbaum, Kogan et al. 2017). The financial statements of any company would be declared credible when an auditing firm will conduct its external audit as the reliability of financial statements hold immense importance due to the fact that all business need to be good reputed in the market in order for shareholders to invest in them (Climent-Serrano, Bustos-Contell et al. 2018).
In comparison to the internal audits, the external audits are better for the internal betterment of the business because in the internal audits the person commencing the audit cannot criticize the operations in the firm due to several reasons. However an external auditors possess the ability to give opinions critically in reference to the accounting practices, and recommendations can be made to the company in terms of promoting general efficiencies and following the accounting practices in the correct manner (Simunic 1980).
The persons commencing the external audits have relatively more experience in proving critical analysis of financial records as they deal through various types of firms which are operating in different industries and the rise in the price of audits have affected the demand for audits recently but not to a very significant level as the public limited companies which are listed on the stock exchange are required to hold an audit on an annual basis. Audit firms which are big in size charge premium fees due to the fact that they ensure that they will provide client with quality services and better procedures with the help of quality team, making them better in finding errors (Waresul Karim and Moizer 1996).
Also, market tends to react in a positive manner when considering investment options because they are aware of the fact that the company has been audited by one of the best audit firms (Len nox 1999).According to the scope of this study, the existing studies related to determinants of audit fee are mostly done on the developed countries and very few importance is given to the developing countries like Pakistan and in majority of cases judgements have been made through the financial statements of enterprises and no primary data has been used from the auditing firms.
The firm size in the industry holds significance in reference to the reliability of the financial statements. Masood and Afzal conducted a study to find out both the client specific and auditor specific factors which could be held responsible for the charge of fee for audit were that the most important factor which had been affecting the audit fee was the “Firm Effect”, as the big firms mostly conduct quality audit so they charge higher fee from their clients.
Foster and Shastri examined the financial statements and reports of development stage enterprises to know the likelihood of receiving going concern modification in auditor’s opinion and what effect on audit fees and indicated that the size of the audit firm did not influence the going concern modification decision, but Big4 auditors were charging higher fees than another auditor,For the public limited companies which are listed on the stock exchange, it is a known compulsion that they have to conduct an external audit at the end of the financial year.
The size of the firm is one of the major influencers of audit fee whereas the financial performance does not play much of a significant role in determining and influencing the audit fee. Similarly, Lin and Yen study is based on public limited companies of Taiwan and their examination on what determinants play the role in audit services regarding the perspective of agency cost, need of information, and corporate governance fact that demand for audit assurance is higher in the presence of agency cost. Corporate sectors having strong capital have urge to get their interim financial statements audited. Corporate governance plays a vital part while selecting audit assurance hence making it a positive effect on deciding which audit assurance to choose. It is validated that audited information is more valuable than reviewed information.
The better the quality of audit, more the benefits companies can take related to investment decisions. (Waresul Karim and Moizer 1996) looks into determinants of audit fees in financial and non-financial companies of Bangladesh and the results showed that auditee size plays the most significant role in determining audit fees. In the world today, each commodity or service has a price to be paid for and as prices are determined by the forces of demand and supply. (Kimeli 2016) has emphasized in Kenya to give a more comprehensive feedback on the audit season which is mostly at the end of the year for majority of companies, and concluded that no relationship between reporting season, client profitability and audit fee whereas a negative relationship existed between firm size and audit fee.
Also, (Birjandi. M. F 2017) examined in Persia that the size of the company and the liquidity matters a lot when it comes to audit firms to conduct an audit through the financial elements from the Tehran Stock Exchange and it was concluded that the firm size and current ratio have a significant impact on the Audit Fee. However, (Ng, Tronnes et al. 2018) conducted a study on audit seasonality and pricing of audit services and about the correlation of audit seasonality and the corresponding audit prices.
Majority of the firms in the US in December -the end of the financial year, experience the fluctuation in audit prices largely due “off season “and on season periods so a busy audit season corresponds to a 10% premium. In the period of recession businesses usually do not have the capacity paying for the incurred expenses in comparison to the period where they were in economic stability. (Climent-Serrano, Bustos-Contell et al. 2018) examined that the number of auditing firms have been lessen after the financial crisis that occurred in 2008 resulting in transformation of business environment.
It affected the audit fee making it less and developing competition among auditors. It also comes towards the fact that reduction in audit fee is also due to fall in audit examination quality. Having poor audit quality also negatively impacts the audited firm’s prestige and profits. To check the quality and service, EBITDA was taken as an indicator and it showed that the services have remained stable regardless of decrease in audit fees and EBITDA has progressed positively minus affected reduction in fees.
Ettredge, Fuerherm examine for the effect of audit fees on quality of audit during the great recession in USA and the results showed that there was impact of recession on audit fee and audit fee pressure affected the quality of audit. There are different accounting standards for different types of companies (Berisha, Vardari et al. 2016) emphasized on the determinants of audit pricing of NGO’s in Kosovo. Audits are very important for such sort of organizations as they work for social welfare and help in developing the economy for a good cause, audit makes it reliable that the money has been spent faithfully, it was concluded that the firm size, NGO reputation (Number of projects done, high level of contribution to the society) have a positive impact on the Audit fee.
The countries possessing high economic activities are due to the multinational companies which are commencing their operations in them, as it very risky for such companies to maintain accountability, (Ji, Lu et al. 2018) examined the correlation between the internal control risk and audit fees in one the giant in the economies of the world, China. There was in fact a positive correlation between the two factors and moreover to a much larger extent it provided an inclination towards the fact that voluntary assurance can play a pivotal role in reducing the usually high audit fees.
Also, (Su and Wu 2017) conducted a study on relationship of Public disclosure and bargaining fee between the auditor and client in China and claims that public disclosure appreciably increases the negotiation power over the audit firms when it comes upon deciding upon the audit fee and public disclosure contributes towards a lower audit fee. Moreover, it has highlighted how non-disclosures lead to the exploitation of the clients and ultimately higher audit fees.
Moreover, (Ghafran and O'Sullivan 2013) gave a financial expertise on audit committee by the governance regulators and as a belief is practiced that greater the expertise, greater the effectiveness of audit committees. The analysis proved that when financial expertise is separated between accounting and non-accounting, there was positive impact recognized by non-accounting expertise, the value of expertise to audit quality rely on financial reporting challenges which firms face. (Hoffman, Sellers et al. 2018) examines client’s information technology capabilities with audit fees through a survey conducted among the InformationWeek500 (IW500) annual list of US Companies.
The results showed that companies maintaining a high level of IT capabilities tend to incur higher audit fees. The increase in client size, increases the audit pricing due to advanced IT capabilities. These discoveries stand out from earlier research by (Chen et al. 2014) that found in the quick post-Sarbanes-Oxley Act (SOX) period for the years 2004 through 2007, client IT ability decreased, and audit price increased. Hence this study discusses the advancement in IT capabilities and their impact on audit fees.
