An Evaluation of the Relationship Between Audit Fees and Audit Quality: A Case Study of Nigerian Banks
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Background of the Study
Audit fees and audit quality are critical components of the auditing process, influencing stakeholder trust and the reliability of financial statements. Audit fees represent the monetary compensation paid by an organization to an audit firm for auditing services, while audit quality refers to the ability of the audit to detect and report material misstatements or irregularities in financial statements (IAASB, 2023). The relationship between these variables has been a subject of extensive debate, particularly in the banking sector, where financial accuracy and compliance are paramount.
In Nigeria, the banking sector plays a vital role in economic stability and development, necessitating high audit quality to ensure transparency and regulatory compliance. However, there are concerns that low audit fees may lead to compromised audit quality due to resource constraints, reduced audit effort, and limited application of professional skepticism (ICAN, 2024). Conversely, excessively high audit fees may result in undue client influence, affecting auditor independence.
This study evaluates the relationship between audit fees and audit quality in Nigerian banks, exploring the implications for regulatory oversight, stakeholder trust, and the broader financial sector.
Statement of the Problem
The Nigerian banking sector has experienced numerous financial scandals attributed to weak corporate governance and poor audit quality. Audit fees are often cited as a contributing factor, with arguments that insufficient fees limit the auditor’s ability to allocate adequate resources for thorough audits. On the other hand, high audit fees may create a perception of compromised auditor independence, further eroding stakeholder confidence.
While existing literature highlights the importance of audit fees in determining audit quality, there is limited empirical evidence specific to the Nigerian banking sector. This study seeks to bridge this gap by analyzing the relationship between audit fees and audit quality in Nigerian banks, providing insights for policymakers, audit firms, and banking institutions.
Objectives of the Study
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To assess the relationship between audit fees and audit quality in Nigerian banks.
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To identify the factors influencing audit fees in the Nigerian banking sector.
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To evaluate the implications of audit fees on auditor independence and stakeholder trust.
Research Questions
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What is the relationship between audit fees and audit quality in Nigerian banks?
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What factors influence the determination of audit fees in the Nigerian banking sector?
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How do audit fees impact auditor independence and stakeholder trust?
Research Hypotheses
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H₁: There is a significant relationship between audit fees and audit quality in Nigerian banks.
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H₂: Factors such as client size and complexity significantly influence audit fees in the Nigerian banking sector.
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H₃: High audit fees negatively affect auditor independence in Nigerian banks.
Scope and Limitations of the Study
The study focuses on Nigerian banks, analyzing audit fees and their impact on audit quality over the period 2023–2025. Limitations include potential reluctance of audit firms to disclose fee structures and the dynamic regulatory environment, which may influence findings.
Definitions of Terms
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Audit Fees: The compensation paid to an audit firm for providing audit services.
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Audit Quality: The ability of an audit to detect and report material misstatements in financial statements.
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Nigerian Banks: Financial institutions licensed by the Central Bank of Nigeria to provide banking services.
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