DETERMINANTS OF AUDITORS’ REMUNERATION IN NIGERIA: EVIDENCE FROM QUOTED FIRMS ON THE NIGERIAN STOCK EXCHANGE

External users of financial statements have to rely on the trust reposed on the independent auditor’s expressed in an opinion on financial statements to make investment decisions and hence the importance of independent auditors in financial reporting. Nevertheless, this trust might be broken unethically and thus raises the questions of what determines independent auditors’ remuneration in Nigeria. Our sample consists of twenty two firms drawn across the sectors classification of firms on the Nigerian Stock Exchange. Our model drawn from past studies included variables such as size of the firm, the characteristics of the auditor, profit, ratio of inventory plus accounts receivable divided by total assets to evaluate the determinants of auditors’ remuneration in Nigeria. Our multiple regressions result opposes the findings of past studies that size is a major determinant of auditors’ fees. However, our findings also reveals that auditor type (BIG4) ie the characteristics of the auditor; the level of profitability; and firm liquidity are the determinants of auditors’ remuneration in Nigeria. 1.0. INTRODUCTION Public companies are managed by people who are not owners of the business. The full separation between ownership and management and the development of stock market make a need for owners‟ and investors to supervise business results reflected in financial statements reported by company management. The company management has the responsibility to report business results to the owners and other users of the financial statement. They therefore decide the information presented in company‟s financial statements. Thus, external users of the financial statements have to rely on the auditor‟s opinion delivered on the financial statements. The importance of auditors, especially in this era of globalization, makes a steadier and larger market for auditing services (Hayes, et al, 2005). Since the ownership is separated from management, the running of firms is therefore based on trust relationship. Nevertheless, this trust might be broken as management might act in their own best interests instead of that of the owners who have deployed their capital in the business. This phenomenon is known as agency problem. This raised the issue for an external party to keep management in check and to ensure that procedures and policies are in place to protect the interest of the owners and probable investors. Thus, regulators of publicly owned businesses in various countries make provisions for external auditing of public businesses. In Nigeria, section 357 of company and Allied Matter Act (CAMA) provides „that at each annual general meeting every company shall appoint an auditor or auditors to audit the financial statements of the company and to hold office from the conclusion of that, until the conclusion of the next, annual general meetings. Section 360 of the act imposes a lot of responsibilities on the auditors. An auditor can only carry out these responsibilities if he is independent. He must ensure that he is free from any influence which will militate against the discharge of his duties unethically. He must be in a position to give honest and unbiased opinion at all times (Nwabueze, 2000). Traditionally, one major element that impairs audit independence is audit fees. It may benegative abnormal audit fees or positive abnormal audit fees, i.e under or over pricing audit services. Proceedings of 2nd International Conference on Social Sciences Economics and Finance Held on 27 th 28 th Aug 2016, in Montreal, Canada, ISBN: 9788193137369 73 The remuneration of the auditor may be fixed at the time of appointment or left to be decided at the completion of the audit. This is because it is not easy to determine the complexity of an audit at the initial stage. According to Nwabueze (2000) where the fee is to be decided upon completion of the audit, it is advisable for the auditor at the time of appointment to state some basis of remuneration. The question therefore is, what company characteristicsare considered to determine the basis of the auditor(s) remuneration? What are the determinants of audit fees in Nigeria? Several studies on the determinant of audit fees have been carried out in developed countries while there have been little of such work in the developing countries. This study therefore, empirically evaluates the company characteristics that serve as the determinants of audit fees for firms quoted on the Nigerian stock exchange. The rest of the paper is organized as follows: given the introduction, section two reviews literature as related to the study while section three outlines the methodological framework. Section four presents the empirical findings while the paper is concluded in section five. 2.0. LITERATURE REVIEW Audit fees are the amount a company pays an external auditor in exchange for performing an audit. It is the price charged for the audit services by audit firms. The International Standards on Auditing defines Audit fees as “the amount that remunerates the financial auditor‟s activity, the certification of financial statements. These fees,according to the code of Ethics for professional accountants, should be calculated in an objective way and the auditor‟s independence should not be influenced by them. A number of researches have been carried out on the determinants of audit fee. Most of the research findings show that the size and the complexity of the company are the major determinants of audit fees. Simunic (1980) developed a basic model for this. He constructed an economic model of audit fees, that includes five main explanatory factors which are (a) size of the auditee, (b) complexity of the audit, (c) auditing problems associated with certain financial statement components especially inventories and receivables, (d) industry of the auditee and (e) whether the auditee is a public or a closely held company. His empirical tests using regression model confirmed that the size of audit fee could be explained by the identified factors. Ole and Mogens (2010) analysed whether the application of international financial Reporting Standards (IFRS) has increased Danish Companies‟ cost of auditing. A sample of financial reports from large Danish Companies from 2002-2008 was used. They found out that audit fees have not increased significantly for companies using IFRS rules. However when combining IFRS with company size and complexity, large and complex companies using IFRS pay a heavy audit fee premium compared to small and less complex companies that also use IFRS. Rubin (1988) and Tinggard and Kiertzner (2008) used Simunic model to analyse the determinants of audit fee. Rubin result is similar to that of Simunic while Tingggard and Kiertzner (1988) result indicate that joint audits where both auditors have significant stakes in the audit reduce audit fees compared to audits where one auditor is dominant. Kamal and Rana (2007) investigated the structure of audit fees in Jordan. They ran a cross-sectional linear Ordinary Least Square (OLS)regression of the audit fees on corporate size, the status of the audit firm, the degree of corporate complexity, profitability risk, corporate accounting year end and the lag between the audit report and the end of the accounting year. The results of the analysis revealed that corporate size, status of the audit firm, industry type, degree of corporate complexity and risk are the main determinants of audit fess. However, variables like corporate profitability, corporate accounting year end and time lag between year end and the audit report date appeared to be insignificant determinants of audit fees. Nathalie and Alain (2000) in their study “ the determinants of audit fee in French quoted companies “ found out that audit fees depend on firm size, firm risk, and the presence of two of the big four firms. Emiliano, Kenneth and Martin (2011) in their study, found out that size, risk and fees for nonaudit services are the main determinant of audit-fee in the UK charity sector. According to them, contrary to research in the private sector, the organizational complexity of the charity did not seem to have significant influence on audit fees. Proceedings of 2nd International Conference on Social Sciences Economics and Finance Held on 27 th 28 th Aug 2016, in Montreal, Canada, ISBN: 9788193137369 74 Joshi, and Bastaki (2000) examined audit fee structure in Bahrain for 38 companies. By analyzing the data concerning a number of variables representing size, risk, complexity, timing of audit, and profitability, a model was developed of the determinants of audit fees. The study strongly confirms that most of the previous research findings are also applicable to the Bahrian market and that audit fees are significantly associated with the size, risk,profitability and complexity of the Client Operation. Contrary to Emiliano et al (2011) Beattie, Goodacre, Pratt and Stevenson (2000) in their study to determine audit fee voluntary sector, confirmed the previous private sector company studies and concludes that size, organizational complexity and audit firm location are the major determinants. Ramzy (1988) investigated the factor affecting the level of audit fees paid to companies auditors. He classified all the factors thought to be affecting the level of audit fees into three groups – size, complexity and others. The relative importance of these factors was determined empirically and statistically. The empirical study was undertaken by mailing two sets of questionnaires to samples of 100 companies and 100 audit firms. These questionnaires were used to assess the degree to which the factors previously identified were important determinants of the audit fees. Multiple regressions was also used to assess the magnitude of the association between size and complexity factors and audit fees. The results of both the empirical study, and the statistical analysis revealed that the company size (in terms o