ABSTRACT

This research was carried out on the topic “The Determinants of External Audit Quality within Limited Companies in the North-west and Littoral Regions of Cameroon”. The main objective of this study was to examine the determinants of external audit quality within limited companies in the North-west and Littoral Regions of Cameroon.

To achieve this objective, data was collected from 46 limited companies with the use of a structured questionnaire following a random sampling technique. The binary logistic regression enabled to highlight that audit firm size has a significant effect on external audit quality within limited companies and audit fee, auditor experience and the duration of audit mandate has an insignificant effect on external audit quality within limited companies. The provision of non-audit services and client pressure was also proven to have no significant effect on external audit quality.

From these findings, it is recommended to hire audit firms of different sizes to bring diverse perspectives and expertise to the auditing process and for limited companies to strengthen regulatory requirements and enforcement to ensure that audit firms adhere to professional standards and ethical guidelines, regardless of the audit fee involved, the auditors’ experience and the duration of audit mandate they have had with the audit firm. This will ensure that external audit quality is maintained at a high standard.

Keywords: Audit Firm Size, Audit Fee, Auditor Experience, Duration of Audit Mandate and External Audit Quality.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Audit quality retains a positive and strong relationship with the degree of confidence of various stakeholders. There are various stakeholders who are directly or indirectly related or affected by the audit quality of financial statements. One of the mechanisms that can generate quality for an audit is the auditor’s behaviour to request, observe and analyse additional evidence and to carry out additional activities to highlight certain distortions or violations of the rules (Al- Qatamin & Salleh, 2020). Various financial cases involving auditors still occur frequently. Because financial reports are the only source of information for shareholders, conducting an audit will ensure that the information in the financial statements is relevant and reliable for shareholders and other stakeholders (Ghazmahadi et al., 2020; Mariam et al., 2021). Audit quality seeks to improve audit performance results on clients’ financial statements by investigating the occurrence of material misstatements (Bachtiar et al., 2023; Harahap & Ramli, 2023; Khasanah et al., 2021; Supiati et al., 2021). Audit quality is very important for business continuity because it makes financial reports trustworthy, becomes the basis for decision making, and increases business profitability (Evia et al., 2022; Mariam et al., 2020; Ramli, 2020; Rumaidlany et al., 2022; Sylvyani & Ramli, 2023). On the other hand, audit quality can be a factor in business failure if auditors make mistakes or fail to deliver audit results (Evia et al., 2022).

There is a particular phenomenon in the audit market, called lowballing, which contributes to diminishing quality (Al-Qatamin & Salleh, 2020; Caraiani et. al., 2020; Cho et al., 2021). This phenomenon is characterized by the proposal by the audit firm to the client of a lower total cost, but with the offering of audit services of a lower quality, with clear specifications of some provisions. There are some price rates that are automatically taken as a reference for certain national markets. To reduce agency problems in companies, independent parties more often referred to as independent auditors are needed to handle this problem (Tandiontong, 2016; Imran et al., 2020; Ramli, 2020b; Rinaldi & Ramli, 2023; Utama et al., 2020). Considering that audit quality is very important for stakeholders, the presence of an auditor who is an independent party is expected to protect the interests of shareholders and creditors. Auditors have a duty to provide open and honest information regarding company performance.

Till date, there is still no universal agreement regarding the definition of audit quality (Knechel et al., 2013). To that effect, researchers have adopted several approaches to explain audit quality. Below are some definitions to auditing by some authors amongst others; Audit  quality  is  defined  as the  probability  that  an  auditor  detects  and  reports  material misstatements in the accounting system of an auditee (DeAngelo, 1981). This means that audit quality is the probability that financial statements are free from material misstatements (Palmrose, 1988). According to DeAngelo (2017), audit reports are prepared to provide useful information in making business and economic decisions. This audit report is important for the users, as they use the audited report to assess the financial condition and performance of related companies (Abbott, 2017). In order to improve the quality of information disclosed in the audited reports and safeguard the interests of shareholders, an independent examination of the financial affairs of the company becomes mandatory in the case of public quoted companies. The role is carried out by the external auditor usually appointed by the shareholders (Allied Matters Act, 2020). According to Adeyemo & Okpala (2017), many rely on the auditor’s report in the financial statement as a guide towards making financial decision.  In this circumstance, stakeholders have a high level of reliance on auditors when they make any financial decision on investment. The objective of an audit, therefore, is to plan and perform the audit to obtain appropriate audit evidence that is sufficient to support the opinion expressed in the auditor’s report.

Bedard et al. (2010) argue that a high audit quality is one issue in accordance with the audit standards and the purpose is to provide a reasonable assurance about the financial statements, respectively they are not materialised correctly, due to errors or fraud. Elshafie et al. (2014) indicate that, despite the importance of the concept of audit quality, it is not explicitly defined by the technical standards and researchers have not reached a consensus understanding of its meaning. Sailendra et al. (2019) defines the audit quality as the probability of an auditor to find the client’s accounting system inconsistent, if this is necessary to guarantee for the financial statements users, certifying that the audit commitment was carried out in a professional and independent manner. Even though the concept of audit quality has been intensely debated theoretically, its evaluation remains quite problematic. Regarding to this aspect, Caloian (2007) argues that the quality control of the services provided can be carried out in two ways, respectively at the level of professional institutes, but also at the level of the financial audit company.

To measure the audit quality involves understanding how auditors perform the “guarding” role entrusted to them by investors, audit committees, regulators and other stakeholders in financial statements.  The factors that influence these decisions, as well as their consequences on the audit quality, are a great relevance for the audit companies, regulators and for the users of the financial statements (Floyd et al., 2017). In practice we encounter different indicators used to measure the audit quality, such as: audit fees, the auditor’s mandate or the size of the audit company. Fees are important in evaluating the audit quality, in some cases the presence of larger amounts may indicate greater efforts to improve the quality, and an opposite situation is also encountered, when the high audit fees indicate a dependence on certain clients.

An alternative approach for measuring audit quality advocated by Aobdia (2015) is to consider practitioners’ assessments of what constitutes a high quality audit. Such assessments usually focus on two elements: whether an audit is performed, taking into account the audit standards and whether the evidence collected by the hiring team is sufficient to support the auditor opinion.  The deficiencies of the audit process used by the auditors and the regulatory authorities refer to: the inclination to declare the financial statements or the tendency to reach or exceed zero earning.

Inappropriate audit evidence may lead to wrong conclusions. This may affect the quality of the report (Adeyemo & Okpala, 2017).  Companies with a reputable and credible financial reporting are likely to change auditors when their audit quality is questioned to avoid being delisted in capital market. Achieving quality financial reporting depends on the role that the external audit plays in supporting the quality of financial reporting of quoted companies (Fatah & Naser, 2013). The authors Dao et al. (2019) believe that auditor liabilities will improve the audit transparency and ultimately lead to a higher audit quality, prior and empirical evidence provides mixed findings on the impact of disclosure of engagement partner identification mentioned that the introduction of the audit partner’s signature requirement resulted in an improved audit quality. On the other hand, we find that many factors of audit quality are beyond the control of auditors. There are rules imposed by legislation regarding to the auditors rotation and the provision of non-audit services, so that auditors can only respect them, regardless of what the researchers find out about the effect of these obligations.

Phenomena that link auditors to accounting scandals lead to a decline in public trust in the quality of auditors (Natalelawati, 2022; Diatmono et al., 2020; Febriani et al., 2023; Mariam & Ramli, 2020; Ramli, 2020a). Better audits are recognized for independent assurances of financial statement trust that enhance investor protection and confidence. Audit quality will improve the quality of financial reporting by increasing investor confidence (Hasan et al., 2020). Therefore, auditors need to carry out their duties professionally. An audit is qualified if it has conveyed the company’s actual state or how well the financial information describes the state of the company’s economy (Widiastuty, 2010).

The argument for choosing this topic is represented by the fact that the audit quality evaluation is a current topic both in Cameroon and also at the international level. Also, one of the most effective ways to improve the information environment is to improve audit quality, by the efficiency of the audit committee and the selection of one quality auditor. An optimal solution for the most accurate measurement of the audit quality is the approach of a wide range of possible audit quality factors and not to focus on a single quality indicator. Reporting several different indicators will obtain a large image of the quality of audit services. According to the auditors’ code of ethics, the percentage of the audit quality can be influenced by the audit mandate, respectively over a longer period, the auditor obtains a better understanding of the system, the business environment, the client’s industry and internal controls, but at the same time, it may affect its independence, as the auditor becomes familiar with the client’s activity and decision-making. The duration of the audit tenure is still a matter of debate to this day. In fact, in a short tenure, auditors do not have sufficient time to identify audit risks for new clients. Meanwhile, the long audit tenure provides sufficient understanding and time for auditors to master knowledge related to the audited company (Achlan Firdaus & Sopian, 2021). However, long tenure can also result in closeness between auditors and clients so as to reduce the independence of auditors. Research by Rahmi et al, (2019); Siregar, (2020) emphasized that tenure audits do not significantly impact audit quality. This finding is inversely proportional to the results of the study (Nurhayati & Dwi, 2015), which describes the quality of audits as having a strong influence on audit quality. The quality of audits is expected to increase if the auditor’s relationship with clients gets longer. Until now, there are still differences in the study results, so the researcher chose to re-examine this variable. The longer the audit tenure, the closer the auditor is to the company. However, this can help auditors to understand the company being audited. This study’s findings align with the research of Andriani et al. (2020), which revealed that the quality of audits is improved with tenure. The less information asymmetry between auditors and clients over a longer period, the better auditors can make better decisions. Similarly, the research findings of Nurhayati & Dwi (2015) show that tenure audits positively impact audit quality.

Until now, most of the public views that big firm accounting (big four) has more quality than small accounting firm (non-big four). However, there are several cases involving auditors from the four major accounting firms, for example the Enron case controlled by Arthur Andersen, the Satyam case controlled by PwC, or the Lehman Brothers and Toshiba cases controlled by EY (Tjun, 2019). The findings of the initial research of Astri et al., (2018), revealed that the size of the accounting firm well influences the quality of audits. This is in contrast to the findings of Palalangan et al., (2017), which revealed that the size of the accounting firm does not influence the quality of audits. Differences in the results of this variable study remain unanswered, requiring additional testing (Fajrina & Rohkhayatim, 2021). Research by Effendi & Ulhaq, (2021) shows that if the size of an accounting firm has a good impact on the quality of audits, then the quality of audits will increase as the size of accounting firms increases. The research of Astri et al., (2018) revealed that the size of the accounting firm improves the quality of audits. To provide a better audit quality than a smaller accounting firm, for example, a local or national accounting firm, a large accounting firm usually makes no concessions regarding the quality of the audit. This opinion is also driven by the research of Amrulloh & Amalia, (2020) which states that auditors who are members of the accounting firm of the Big Four have more integrity, skills and characteristics that can be linked to improving the quality of audits.

According to Indriani et al., (2020), audit fees are returns obtained by auditors for the results of audits of financial statements and cooperation carried out with certain clients or parties. The amount of this fee poses a dilemma for the auditor, on the one hand the auditor is required to be independent in carrying out his duties while on the other hand the demands from the client because the client has paid a fee for services, so the client must be satisfied with the results of the audit. Research related to audit fees has been carried out by several authors. Cahyati et al., (2021) revealed that audit fees can affect the quality of audits, audit fees can increase if the level of difficulty of the audit carried out is also high. In contrast to the research conducted by Santhi & Ratnadi, (2017), which exposes that audit fees negatively influence audit quality. The amount of audit fee received can reduce audit quality. Amrulloh & Amalia, (2020) stated that the quality of audits is better if the audit fee is also high. This research is in line with the results of research conducted by N. Andriani & Nursiam, (2018) and Prabhawanti & Widhiyani, (2018) which revealed that the greater the reward for services provided to the accounting firm allows the accounting firm to carry out more detailed procedures so that the quality of the audit obtained is also superior. Audit fees is compensation in the form of money or other forms paid to or received from clients or other parties as compensation for an engagement (Agustini and Siregar, 2020; Mulya & Ramli, 2023; Ramli, 2019; Salma & Ramli, 2023; Situmorang et al., 2023; Yunus et al., 2023). Audit fees which will improve audit quality by expanding audit procedures to uncover problems with client companies. This is in line with research by Andriani and Nursiam (2018), which found that the higher the value audit fees provided by the company, it will further improve the quality of the audit.

Another element circulated in the literature as a determinant of audit quality is the professional expertise of the auditor (see for example Guiral et al., 2015). In general, when an auditor joins an audit firm (as an associate or employee) he is examined from the point of view of knowledge and experience. Moreover, especially in public audit, the acquisition of national or international certificates or attestations is required by law to prove one’s professional expertise (Borisova & Bekhteneva, 2015). In addition, in most cases, auditors train regularly or continuously, especially if employed by an audit company with a recognized reputation (Oprea et al., 2022).

According to Adeyemo and Okpala (2017), auditor independence and ability of the auditor to comply with statutory laws have been identified as the major determinants of quality of auditors’ report. Okoro (2018), Babatolu (2018); Wale and Kabiru (2017), and Fatah and Naser (2013) showed that auditor independence, audit fees, statutory provision and auditors experience were determinants of quality of audit report.

The Cameroon business environment is perceived as not too conducive to investors; both local and foreign. The reasons for this assertion include the inability of financial reports to meet the needs of this group of users. The prevalence of fraud, excessive earnings management and other financial crimes in the country has reduced the level of confidence reposed in these financial statements; and in the ability of these statements to perform their requisite functions. In light of the cost of frauds to the business and the offender, it is important to develop strategies to prevent or detect business fraud, taking a cursory look at the risk factors associated with business, giving due attention to the motives attached with it, and establishing how to effectively manage it on a daily basis (Akinjobi & Omowumi, 2010). Hence, the auditors are looked upon as ‘messiahs’ in correcting this anomaly, and thereby directly or indirectly creating a balance in the functioning of the business environment.

The demand for external audit services originated from the agency issues which arise out of the separation of ownership and control of firms. Firms are invariably owned by disparate shareholders, but the daily operations of the firms are controlled by professional managers; who may or may not hold significant shareholdings in the firm. This means that the shareholders of the firm have a residual claim on the firm’s resources and that the managers of the firm will have to communicate their stewardship of the firm’s resources to shareholders; normally through the periodic issue of a set of financial statements (Securities and Exchange Commission, 2000). In order to ensure that the financial information published by firms are reliable for users, it is normally required that the statements are certified by an auditor; an objective and rigorous third party who performs independent examinations that give financial statements credibility with users. It has been advocated by auditing scholars that the main aim of an audit assignment is to produce a quality report. The emphasis here is on ‘quality report’, hence, it is presumed that the major role of the auditor is the production of a quality report; achieved through strict adherence to the principles of high audit quality. DeAngelo defined audit quality as the market-assessed joint probability that a given auditor will both detect material misstatements in the client’s financial statements and report the material misstatements (Chadegani, 2011). This probability depends upon the broad concept of an auditor’s professional conduct, which includes factors such as objectivity, due professionalism and conflict of interest (Mgbame et al., 2012).  In essence, auditing is used to provide the needed assurance for investors when relying on audited financial statements. More precisely, the role of auditing is to reduce information asymmetry on accounting numbers, and to minimise the residual loss resulting from managers’ opportunism in financial reporting (Adeyemi & Fagbemi, 2010).