1. THE MAIN DETERMINANTS OF AUDIT FEES: EVIDENCE FROM THE ALTERNATIVE INVESTMENT MARKET ( ) Nyerho Odje MSc, FCCA Faculty of Business Department of Accounting and Finance London South Bank University

2. Outline of the presentation
Research background
Aims and Objectives
Literature review
Theoretical and Philosophical consideration
Research Question and Hypotheses
Methodological consideration
Statistical techniques employed
Discussion of results

3. Research Background Management acts in stewardship and fiduciary roles
Liable to shareholders (with full disclosure)
Publish financial statements periodically
Communicate inside information to stakeholders
Allow informed economic decisions to be made
Information asymmetry - ownership and management
Need for external monitoring
Role of External Audit
Audit Quality
Audit Fees

4. Aims and Objectives AIM:
Gain an insight into the operation of the audit market .
Data from a sample of 30 UK AIM firms
Develop an Audit Fee model
OBJECTIVES:
Audit fee model - main determinants of audit fees in AIM firms
Determine the significance factors which affect audit fees
Impact of current economic factors on audit fees
DELIMITATIONS
Excludes small companies and charities

5. Literature review
The determinants of audit fees have been much researched
Taffler and Ramalinggam (1982)
Brinn et al.(1994) in the UK;
Simunic (1980),
Palmrose (1986) in U.S;
Francis (1984) in Australia;
Cameran(2005) in Italy
-- Kohler and Ratzinger-Sakel (2012) in Germany
Developments in agency theory (Jensen and Meckling, 1976),
Corporate Governance (Cadbury Committee, 1992)
Size, complexity, and international presence of companies
External verification through External Audit
Invoked increased interest in auditing and hence audit fees
Public opinion, policy makers and professional bodies impact on auditor public role due to:
Ethical concerns
Litigation
Competition etc

6. Literature review
High profile corporate collapses and role of external auditor:
Enron (2001)
WorldCom (2002)
Parmalat (2003)
Satyam – India (2009)
Other major reasons for increase in external verification(and Audit Fees):
Attempt by management to match performance with market expectations
International nature of modern transactions –
share purchase/disposal,
mergers/acquisitions and
cross-national ownership of property

7. Literature review Demand for external verification:
Stewardship and accountability (Common Law of Agency)
Legal requirement (Companies Act 2006)
Corporate Governance (UK Corporate Governance Code 2012)
Audit Quality : A joint determination of auditor expertise and auditor independence (DeAnglo,1981)
Audit Product : Technical Audit/Value Added/Insurance
Audit Market : Concentrated/ ‘Big4’ Premium & Oligopoly/OFT & Competition Commission
Audit Fees:
Provide objective, credible and outside opinion on financial reports
Issue of audit quality due to expertise and independence
Audit cost –Fixed /Variable (Direct (Time and Audit Expenses ) & Indirect)
Audit profit
Audit Premium (product differentiation)

8. Proxy (Independent Variable)
Prior research
Illustration of significant variables (and proxies) adopted by previous authors
Significant Variable
Proxy (Independent Variable)
Author
Year
Sign of Coef
Size
Total Assets
Simunic (Seminal research)
1980
+ve and stat sig
Total Assets and Turnover
Pong and Whittington
1994
+ and SS
Gonthier-Besacier & Schatt
2006
Risk
Pre-tax profit
Pong & Whittington (1994)
-ve and not Stat Sig
Total long term debt / by total assets.
Taylor and Simon
1999
Loss (in two consecutive years)
Abbott et al
2001
N and SS
Complexity
Trading subsidiaries/branches
Beattie et al
+ and S
Square root of no. of Consolidated Subsidiaries
Ratio of total liabilities to equity

9. Theoretical and Philosophical considerations
AGENCY THEORY:
Corporate Governance
Monitoring and Control
External verification
External Audit
Audit Fee
Limitations – Macro-economic factors ,Scope of Information Asymmetry,
Assumptions about Owner/Agency relationship

10. Research Question and Hypotheses
Main Research Question
What factors determine audit fee level?
Hypotheses:
H1: Auditee’s Size has a positive and significant relationship with audit fees (AF).
H2: Auditee’s risk has a positive and significant relationship with AF .
H3: Auditee’s complexity has a positive and significant relationship with AF.
H4: Fees for Non-Audit Services has a positive and significant relationship with AF.
H5: Auditor’s size (‘Big4’) is positively associated with AF

11. Methodological consideration
Adopted from Saunders et al (2012):
Positivist
Deductive
Survey
Experiment
Mono-method
Longitudinal
Data Collection
& Data Analysis

12. Statistical techniques employed
Quantitative Research Design:
Model Specification and Variable measurement-
Log (AUDFEE) = α + β1NAS + β2TAS + β3TOV + β4COMP +B5PROF + β6BIG4 + e
Variables:
NAS = Non-Audit Services (Fees)
TAS = Total Asset of client firm
TOV = Turnover of client firm
COMP = Client firm complexity
PROF(RISK) = Profit/Loss of client firm
BIG4 = Big4 or Non-Big4 Auditor

13. Std. Error of the Estimate
Results summary
SPSS results – Model summary: R
R Sq.
Adj R Sq
Std. Error of the Estimate
Change Statistics
Durbin-Watson
R Square Change
F Change
df1
df2
Sig. F Change
0.86
0.74
0.72
0.17
0.00
0.15 2
83.00
1.32

14. Results Quantitative Research Design:
H1: (Two Proxies for ‘Size’ variable)
Positive relationship between size (i.e. TAS) is a highly sig. determinant of AUDFEE.
higher audit fees are associated with larger size ( i.e. increase in size leads to increased agency concerns (Fama and Jensen,1983)
Positive relationship between TOV and AUDFEE but not Sig
H2:Negative relationship between PROF and AUDFEE but not
significant
H3:Positive and sig relationship between COMP and AUDFEE.
H4: Positive relationship between NAS and AUDFEE but not significant
H5: Negative relationship between BIG4 and AUDFEE but not significant

15. Conclusions Limitations Recommendations for Further Research
Firm complexity and Firm Size are still major factors in determination of Audit fees
Independent Sample Test suggests no significant difference in audit fees based on auditor size.
Limitations
Sample size
Period of study
Types of variables
Method
Assumptions relating to Agency Theory and OLS analysis.
Recommendations for Further Research
Minimisation/Elimination of above Limitations Policy contributions
Management and shareholders – Cost control including Benchmarking
Auditors – Audit Pricing on the basis of significant factors affecting audit fee.
Policy makers – e.g. Business Innovation and Skills and other relevant arms of Govt.
Professional regulators-ICAEW,ACCA,OFT, Competition Commission

16. Thank you