Determinants of External Audit Quality: Evidence from Manufacturing Share Companies in Addis Ababa, Ethiopia.
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Date
2016-12
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Abstract
Audit quality is a very debatable topic in the area of auditing for the last decades following the
accounting scandals experienced in the West. One of the issues that gained momentum has been
to analyze the external audit quality and the various determinant factors those influence it.
The purpose of this study is to investigate the determinants of external audit quality proxied by
discretionary (abnormal) accrual based on audit firm specific and company related attributes
that are considered vital by regulatory and professional bodies to properly monitor the external
audit profession and to maintain trust among the various stakeholders in Ethiopian
manufacturing share companies. In light of this objective the study adopted quantitative method
of research approaches to test a series of research hypothesis. Specifically, the study used
documentary analysis of companies’ audited financial statements and personal inquiry with
audit directors/officials of audit firms and company managers. Then companies were selected
based on simple random sampling method to avoid biases and represent firms within
manufacturing share companies under consideration. Consequently, the study selected a sample
of eighteen (18) companies for the period of five years (2011-2015) with the total of 90
observations. The results of panel least square regression analysis show that certified audit
professionals’ and joint provision of audit and non-audit services have statistically significant
and positive relationship with manufacturing share companies’ external audit quality. On the
other hand, size of independent non-executive board members and duality of chief executive
officers has a negative and statistically significant relationship with large manufacturing shares’
external audit quality. However, the relationship for audit firm size, audit firm industry
specialization and audit firm tenure were found to be statistically insignificant. Therefore, this is
a clear that all large manufacturing share companies in Ethiopia should maintain board
independence and keep in mind audit firm characteristics while hiring of an audit firm for their
audit services
Keywords: external audit quality, audit-firm specific attributes, corporate governance attributes,
earning management, discretionary (abnormal) accrual.
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External audit quality, audit-firm specific attributes; corporate governance attributes; earning management; discretionary (abnormal) accrual.