Quality and Audit Fees: Evidence from Pakistan

Abstract

Audit quality has been in the limelight for researchers over the last two to three decades. Researchers have endeavored to find out the factors that impact the quality of audit conducted by the auditors. The recent financial crises and financial scandals have further enhanced the importance of this topic. Although it is an empirically established fact that auditor’s performance is impeded by a number of factors that curb its independence however sudden surge in the emoluments of auditors during the last decades has actuated the researchers to study audit quality in context of compensation fee paid to the auditors. The results of studies differ as some are of the view that audit quality improves with the payment of excess fee while the rest are of the opposite view. Unluckily, Pakistan has been less explored in this regard and not even a single study has addressed the issue of audit quality in Pakistan. This study has attempted to analyze audit quality in context of abnormal or extra fee paid to auditor. Audit conducted without independence of auditor is futile and results in impairment of audit quality. Independence of auditor is usually curbed by extra fee paid to him, and auditor in fear of losing a lucrative fee does not report the misrepresentations of financial statements in his audit report. This study uses discretionary accruals as surrogate of audit quality which are computed by Cross-sectional Modified Jones Model (1995). The results are fortunately good for Pakistan and study has observed that auditors in Pakistan do not compromise on their standards and honesty when paid extra fee. In Pakistan, the quality of audit is not impaired when auditors are paid extra fee and the auditors work with diligence and exert extra effort to improve the audit quality. Therefore, the assertion that audit quality is impaired when high fee is paid to auditors does not hold well in Pakistan.

Keywords: Audit fee, Audit Quality