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Following recent collapses in the corporate world that have caused a ripple effect on the economies in most developed countries, the intensity with which we need to consider proper auditing practices and the focus on promoting a culture of "Good Corporate Governance" have increased significantly. Therefore various measures have been presented to safeguard stakeholders, economy and a society as a whole. However there is a large area of concern that is yet to be addressed.
The Colombo Stock Exchange experienced huge growth in the aftermath of the war and saw major listings of privately held companies. From a strategic stand point this significant growth and expansion in the capital market has led to potential foreign direct investment of listed companies. In the wake of these developments it is important that the market and listed companies be regulated and proactive action be taken to avoid any kind of unwarranted situation. This has made a striking importance on the role of external auditing and the Securities and Exchange Commission of Sri Lanka has adopted guidance on managing businesses while being fair to its stakeholders.
The external audit functions, audit fees paid by the companies are of much interest to both the legal authorities and the professional accounting bodies and as well as to the auditor and auditee as it is mandatory to have their financial statements inspected.
The external audit services and fees paid by listed companies to the designated auditors are of much interest to both companies and auditors and companies are required to have their accounts audited by external audit firms, as per the regulations of the Colombo Stock Exchange.
From the companies' perspective the fees paid to the auditors must be reasonable and should be justified to both shareholders and directors. In this view audit firms need to ensure that the service they offer is fair with the fees they charge and at the same time the level of service is satisfying to the client. It is equally important to address the concerns of companies, auditors, stakeholders and the general public precisely that the audit fee is set at an average, optimum level which will strengthen the audit assessment.
This particular study emphasises on the factors that may influence on the determination of audit fees.
The research aims to reveal the significance of external audit for the listed companies in the geographical segment of Sri Lanka and will deliver an understanding to the association between the identified factors and the determination of audit fees.
Addressing the research problem
The importance of external audit pricing has continued to be an area of uncertainty over the years. Despite the Securities and Exchange Commission, Colombo Stock Exchange have developed certain guidelines for appointing external auditors for the listed companies that come under their jurisdiction, understanding the determinants and the factors that influence external audit fees is an area, where minimal research has been done.
The turbulence of the financial landscape, tension between shareholders, directors and the management have given rise to many complications in quality of auditing and good corporate governance.
The main motivation for undertaking this study is to understand how external audit pricing is arrived at and its applicability in the Sri Lankan context. Besides the researchers' interest, only a limited effort has been done in this sphere and the researcher hopes to provide insight on audit pricing for randomly selected listed companies on the Colombo Stock Exchange.
The main objectives of the research are:
To determine the impact of firm size in determination of audit fees in the listed companies of the Colombo Stock Exchange.
To determine the impact of the significance of risk in determination of audit fees in the listed companies of the Colombo Stock Exchange.
To determine the impact of firm complexity in determination of audit fees in the listed companies of the Colombo Stock Exchange.
Contributions of the study
This research charts an unexplored area of the financial auditing landscape in the Sri Lankan context. Only a limited amount of research has been done to understand the audit fee process and its relevance for the listed companies on the Colombo Stock Exchange. Given the accelerated growth, introduction of new laws and good governance, the researcher feels that this research would help to bridge the gap in providing valuable insight into the determination of audit fees. The contribution of this research can be used to test the existing model across a wide range of listed companies across diverse industries and compositions. This will thus enable the future research to be based on the fundamentals of this thesis and to develop more accurate models based on the situational context.
Structure of the research
The thesis is structured in the following manner aimed at achieving the research objectives.
Chapter One: Introduction
The introduction sets out the context of external audit, particularly that they are seen as the bulwark against corporate mismanagement; it also sets out why the researcher sees this as an important topic. The chapter also outlines the research motives and gives a broad outline of how the research will contribute to an understanding of what factors determines the audit fees.
Chapter Two: Background to the Research
This chapter brief on the diverse business landscapes of Sri Lanka and sets the stage and reviews the financial market in Sri Lanka while discussing the audit market with special emphasis on the Big 4 audit firms. The demand and supply of companies and the general audit practices used by companies are discussed later. The background to the research further explains the regulations on external audits while highlighting both professional and legislative guidelines. Some estimation of the external audit fees, secondly, its composition and services offered will also be discussed.
Chapter Three: Literature Review
An introduction and development to auditing from a global perspective, prior researches conducted in the South Asian and Sri Lankan context, the identification of factors affecting the level of audit fees and designing of the audit fee model would be discussed, thus providing an overall review of both historic and contemporary literature.
Chapter Four: Theoretical Framework
Deals with the theoretical framework and aims at discussing the general theories aligned with the research problem. In particular this chapter emphasises the Agency theory, Stewardship theory and the Stakeholder theory.
Chapter Five: Research Methodology and Hypotheses
This chapter illustrates the research philosophy which represents the research design, process, types and the approach. The development of the hypotheses is then discussed along with the appropriate empirical model including the defined independent variables (i.e size, complexity and risk). The analytical procedure will be then explained.
Chapter Six: Findings
This chapter outlines the results of this study; including the results of the assumption checks, multivariate analysis. This analysis also explains the relationship between each independent variable and its impact upon the determination of audit fees.
Chapter Seven: Research Conclusions & Recommendations
This chapter summarises the research results and provides research recommendations. It also goes on to explain the limitations of the research and goes on to explain the avenues for further research.