Determinants of Audit Fees: Evidence from the Companies Listed in Bahrain

Abstract

This paper examines the audit fee structure in Bahrain for 38 companies listed on the Bahrain Stock Exchange (BSE). Data was collected from the BSE Directory and also from the listed companies. The study also provides data on the audit firms operating and listed with clients in Bahrain. Five variables, namely total assets (size), risk, complexity, timing of audit, and profitability were examined in relation to audit fees. A regression 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 Bahrain market, and that audit fees are significantly associated with the size, risk, profitability and complexity of the client operations. The model shows that 60 percent of the variation in audit fees is explained by the variation of these four factors. The importance of the non-audit services, and stability of audit fees, extent of market concentration, and audit services in the non-listed sector, are some subjects recommended for future research. This paper expands upon previous research into the market for audit services by providing a study of the market for audit services in Many studies have been conducted on the market for audit services in Anglo-Saxon countries, but, to-date, none of them have focused on the Middle Eastern countries. This paper examines the audit fee structure in Bahrain for 38 companies listed on the Bahrain Stock Exchange (BSE). By analyzing the data concerning a number of variables representing size, risk, complexity, timing of audit, and profitability, a model is developed of the determinants of audit fees. The study strongly confirms that most of the previous research findings are also applicable to the Bahrain market, and that audit fees are significantly associated with the size, risk, profitability and complexity of the client operations. The study also suggests that other important issues be considered, such as non-audit services, the extent of market concentration, and audit services in the unregulated market.

Determinants of Audit Fees: Evidence from an Emerging Economy

“…Auditors need to make more efforts with a client with poor financial condition to avoid lawsuits against audit firms in the future, and thus, auditors will charge higher audit fees. Previous literature on the determinants of audit fees reported significant association with corporate risk (Simunic, 1980;Francis & Stokes, 1986;Joshi & Bastaki, 2000;Gonthier-Besacier & Schatt, 2007). However, several studies reported insignificant relationship between the two variables (Vermeer et al, 2009;Ellis and Booker, 2011).…”

“…Companies with several subsidiaries are considered to be more complex than companies with few or without subsidiaries. A significant proportion of previous studies observed positive relationship between corporate complexity and audit fees (Simunic, 1980;Brinn et al, 1994;Cameran, 2005;Joshi & Bastaki, 2000;Clatworthy & Peel, 2006;Thinggaard & Kiertzner, 2008;Vermeer et al, 2009;Ellis & Booker, 2011;Verbruggen et al, 2011). The main reasons advanced in the literature to explain such a relationship is that greater number of subordinate financial statements require more audit time and greater expertise to ensure the accuracy of the consolidated financial statements (Sandra & Patrick, 1996).…”

“…Previous research pointed to possible association between audit fees and corporate profitability (Joshi & Al-Bastaki, 2000;Sandra & Patrick, 1996). Companies reported high levels of profit would disclose more information to highlight their achievements and reduce agency costs (Watts & Zimmerman, 1986).…”

“…Disclosing more information will be used by management of a profitable company to signal information about their performance to strengthen their position and justify their compensation (Inchausti, 1997). These companies will be subject to rigorous audit testing to their revenues and expenses (Joshi & Al-Bastaki, 2000). Hence, profitable companies would pay high audit fees.…”

“…The majority of these studies covered developed countries (e.g., Taylor & Baker, 1981;Francis, 1984;Francis & Stokes, 1986;Haskins & Williams, 1988;Chan et al, 1993;Anderson & Zeghal, 1994;Ezzamelet et al, 1996;Iyer & Iyer, 1996;Craswell & Francis, 1999;Ezzamel et al, 2002;Neimi, 2006;Simon & Taylor, 2002;Gonthier & Schatt, 2007;Wang et al, 2009). Yet, limited number of studies covered Arab and Middle Eastern countries (Joshi & Al-Bastaki, 2000;Kutoband Al-Khater, 2004;Naser & Nuseibeh, 2008). Hence, more research efforts are still needed in Arab and Middle Eastern countries.…”