Determinants of Audit Fees for Listed Firms in Kenya

Abstract

The objective of the study was to find out the determinants of audit fees for firms listed in the NSE. This was informed by the fact that most research on audit fee models has been done on developed countries while little published research is available on developing countries like Kenya. The significance of certain variables changes according to each country’s characteristics and period of analysis; they recommended that models be periodically revised (Hay et al., 2006). Deductive approach, where a study begins with developing theory and hypotheses, was used in the study. After which the author chose data and tested the hypotheses. Data was collected on listed firms’ annual reports covering the period from 2008 to 2012. The period chosen was sufficient to obtain meaningful trend patterns on audit fees for listed firms. The annual reports were obtained from the respective company websites and the Capital Markets Authority. The choice of NSE firms was informed by the availability of data on listed firms due to legal requirements which require the firms to file annual reports with the Capital Markets Authority. Out of the 60 listed firms targeted by the study, 48 firms were responsive representing a response rate of 80%. It was noted that the audit market for listed firms is dominated by the Big 4 firms and most companies (72.9%) financial years end in December. It was also noted that some firms did not comply with the CMA Act on filing annual reports with the authority. Multiple regression analysis and correlation analysis were used to analyze the data in order to test the research objective. The multiple linear regression model’s coefficient of correlation (R) is 0.857 and coefficient of determination (R2) is 0.735 implying that 73.5% of the variation in audit fees can be explained by the variables in the study, while 26.5% of the audit fee variance is explained by the error term and other factors. The model is statistically significant as indicated by the F value of 63.354 and significance value of 0.000. The results of the study show that audit fees; auditor experience; auditor reputation; Big 4 status; client size; client complexity and time lag are important factors in determining audit fees for listed firms in Kenya due to the positive relationship between these variables. This was consistent with both the author’s expectations and the results of previous studies. A negative relationship was found between: audit fees; size of the audit firm and client profitability. This contradicted the author’s expectations and previous studies. The results, however, did not support any relationship between audit fees; client risk and the reporting season.