Factors Affecting Quality of External Auditing: The Case of Ethiopian Commercial Banks
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Date
2016-05
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Addis Ababa University
Abstract
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
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Keywords
Audit quality, Earning management, Loan loss Provision