Factors Affecting Quality of External Auditing: The Case of Ethiopian Commercial Banks

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Addis Ababa University


Subjecting financial statements to external verification and assurance is a mechanism through which managers can add credibility to the reports, enhance and improve the quality of financial information, while increasing the reliance placed upon them (Jensen & Meckling, 1976; Watts & Zimmerman, 1986).Since DeAngelo’s study (1981) on audit quality, there is little evidence about audit quality in the financial market. In Ethiopia, studies on audit quality began only in the 2000s, although without a specific focus on banks. The purpose of this study was to identify the quality determinants of audit work in Ethiopian banking institutions. Using the practice of earnings management as a proxy for audit quality - more specifically, the discretionary accruals related to the process of the constitution of the Loan Loss Provision (LLP) - tests were performed based on the annual information of commercial banks from 2005 to 2014. Empirical association tests of the audit quality proxy with the variables representing incentives for the performance of auditors have confirmed two of the seven research hypotheses, revealing that audit quality has the following relationships: positive with the bank size and negative with audit fee paid by the bank. Of the hypotheses tested, five were not confirmed empirically. Keywords: Audit quality, Earning Management, Loan Loss Provision



Audit quality, Earning management, Loan loss Provision