Examining the Effect of Audit Quality and Audit Fees on the Financial Performance of Ghanaian Banks
Abstract
This study aims to examine examining the effect of audit quality and audit fees on the financial performance of Ghanaian banks. In specific terms, the study investigates the relationship between audit fee, audit tenure, client size, leverage ratio and audit quality. Ordinary Least Square Model estimation technique was employed to analyze the relationship between the explanatory variables and the dependent variable. Secondary data derived from the published annual reports of the selected banks for a six year period (2016-2022) was used for the study. Findings from the study show that audit fee, audit tenure, client size and leverage ratio exhibit a joint significant relationship with audit quality given coefficient of determination (R2) being 0.6006 and a combined p-value of 0.001 and Fcalc=7.14. This implies that the predictive power of the independent variables as used to explain changes in audit quality is about 60%. Audit fee in particular shows a significant positive impact on audit quality with a t and p-values of (4.04 and 0.001) respectively as well as a high positive correlation coefficient of 0.7513 with audit quality. The study recommends that Government through the various professional bodies should develop robust policies that will help improve audit quality in Ghana
Chapter one
Introduction
Background of the study
The banking sector is a vital component of any nation’s economy, playing a significant role in the financial intermediation process (Ado et al., 2020; Kyere & Ausloos, 2021). In Ghana, as in many other countries, the banking sector is central to economic development, offering financial services, facilitating trade and investment, and promoting economic growth (Ogbodo & Akabuogu, 2018). The stability and performance of Ghanaian banks are of paramount importance to ensure economic prosperity and financial inclusion for the citizens of the country (Monametsi & Agasha, 2020).
One of the key mechanisms for ensuring the reliability and integrity of financial institutions, such as banks, is the audit process (Esplin et al., 2018; Khan et al., 2021). Audit quality, in particular, plays a crucial role in enhancing confidence in financial reporting and the decision-making process of various stakeholders, including investors, regulators, and the public (Temple & Ofurum, 2016; Knechel, 2016). High-quality audits contribute to the trust and reliability associated with financial institutions, ensuring that they adhere to stringent standards and regulations.
However, the effectiveness of audits can be influenced by various factors, including audit fees, which are payments made to audit firms for their services (Soyemi, 2022; Matoke & Omwenga, 2016). Audit fees serve as compensation to audit firms for their professional services in verifying and attesting to the financial statements of banks. The payment of audit fees can have an impact on the dynamics of the audit process and, ultimately, on the quality of the audit.
This research proposal aims to examine the effect of audit quality and audit fees on the financial performance of Ghanaian banks. Understanding the relationship between these two factors and the financial performance of banks is essential for promoting transparency and stability in the financial sector (Amahalu & Obi, 2020; Caldeira, 2019).
The banking sector in Ghana, as in many developing economies, faces unique challenges, including the need to maintain financial stability and achieve sustainable growth (Aledwan et al., 2015; Ezejiofor & Erhirhie, 2018). These challenges are closely tied to the performance of Ghanaian banks and their ability to fulfil their role in the economic development of the country.
Audit quality, as discussed in the literature, is a critical component of the oversight and control mechanisms that help ensure the reliability and integrity of financial institutions, including banks (Rahman et al., 2020; Tyokoso et al., 2017). The audit process is designed to assure the accuracy and fairness of financial statements, and it is an essential tool for enhancing confidence in the financial reporting of banks. High-quality audits are characterized by thorough examination, adherence to professional standards, and a focus on identifying and addressing financial irregularities and misstatements (Ado et al., 2020; Phan et al., 2020).
In the context of Ghanaian banks, the quality of audits plays a crucial role in the oversight and accountability of these financial institutions. Banks are required to publish audited financial statements to provide transparency and information to stakeholders, including investors, regulatory authorities, and the public. High-quality audits not only ensure that these financial statements are free from material misstatements but also help in detecting and addressing any weaknesses in the financial reporting process (Iliemena & Okolocha, 2019; Gaynor et al., 2016).
Audit fees are an important aspect of the audit process, representing the financial compensation paid by banks to audit firms for their services (Soyemi, 2020; Wijaya, 2020). These fees are typically negotiated between the banks and the audit firms and may vary based on the scope and complexity of the audit engagement. While the payment of audit fees is necessary to incentivize audit firms to perform their duties effectively, the level of these fees can influence the audit process and potentially impact audit quality (Al-ahdal & Hashim, 2021; Monametsi & Agasha, 2020).
The relationship between audit fees and audit quality is a critical area of investigation, as it has implications for the reliability of financial audits and, consequently, the financial performance of banks (Soyemi, 2022; Ezejiofor & Erhirhie, 2018). Audit firms may face pressure to maintain profitability and meet client expectations while delivering high-quality audits. This balance between financial incentives and the rigour of the audit process can be complex and may impact the ultimate quality of the audit (Ezejiofor & Erhirhie, 2018; Baldavoo & Nomlala, 2019).
This research proposal aims to contribute to the existing body of knowledge by examining the relationship between audit quality and audit fees in the context of Ghanaian banks. Specifically, the study seeks to determine whether there is a significant relationship between audit quality and the financial performance of these banks. It will investigate whether high-quality audits positively affect financial performance and whether the fees paid to audit firms have a significant impact on this relationship.
Statement of Problem
The Ghanaian banking sector, like many others globally, faces a multifaceted challenge that necessitates rigorous investigation. The problem at the heart of this research is the need to ascertain whether a significant relationship exists between audit quality, audit fees, and the financial performance of Ghanaian banks.
While the banking sector is crucial to economic development and financial stability (Ado et al., 2020), it has experienced turbulence in recent years, marked by financial irregularities and the failure of some banks. These challenges have underscored the importance of robust regulatory mechanisms and effective oversight, particularly in the context of financial institutions. The audit process is one of the cornerstones of these mechanisms, intended to enhance financial transparency and reliability (Temple & Ofurum, 2016). The quality of these audits is paramount for ensuring the trust and confidence of stakeholders, including investors and regulatory authorities (Knechel, 2016).
However, the effectiveness of audits is not solely determined by their quality; it is also influenced by audit fees (Ezejiofor & Erhirhie, 2018). The payment of audit fees is a crucial factor, as it can potentially exert pressure on audit firms to balance their financial interests with the rigorousness of the audit process (Esplin et al., 2018). This delicate equilibrium can impact the overall audit quality and, consequently, the financial performance of banks.
The problem, therefore, is whether the level of audit quality achieved in Ghanaian banks significantly influences their financial performance and whether audit fees play a substantial role in mediating this relationship. It is imperative to address this problem given the imperative need for financial stability and reliability in the Ghanaian banking sector. By understanding the intricate dynamics between audit quality, audit fees, and financial performance, policymakers, regulatory bodies, audit firms, and banks can make informed decisions to enhance transparency and bolster the sector’s integrity.
Objectives of the Study
This research seeks to achieve the following specific objectives:
- To assess the relationship between audit quality and the financial performance of Ghanaian banks.
- To examine the impact of audit fees on the financial performance of Ghanaian banks.
- To determine whether audit quality mediates the relationship between audit fees and the financial performance of Ghanaian banks.
Research Questions
In line with the objectives of this study, the following research questions are formulated:
- What is the relationship between audit quality and the financial performance of Ghanaian banks?
- How do audit fees affect the financial performance of Ghanaian banks?]
- Does audit quality mediate the relationship between audit fees and the financial performance of Ghanaian banks?
Research Hypotheses
To answer the research questions and achieve the study’s objectives, the following hypotheses are proposed:
Null Hypotheses(H0):
- There is no significant positive relationship between audit quality and the financial performance of Ghanaian banks.
- Audit fees have no significant impact on the financial performance of Ghanaian banks.
- Audit quality does not significantly mediate the relationship between audit fees and the financial performance of Ghanaian banks.
Alternative Hypotheses(H1):
- There is a significant positive relationship between audit quality and the financial performance of Ghanaian banks.
- Audit fees have a significant impact on the financial performance of Ghanaian banks.
- Audit quality significantly mediates the relationship between audit fees and the financial performance of Ghanaian banks.
Significance of the Study
This research holds significant importance for various stakeholders in the Ghanaian banking sector, including policymakers, regulatory bodies, audit firms, banks, investors, and the general public. The findings of this study will provide insights into the relationship between audit quality, audit fees, and the financial performance of banks, which can inform decision-making and policy formulation. Specifically:
Policymakers within the Ghanaian banking sector can utilize the research findings to develop more effective regulatory frameworks and mechanisms that foster stability, transparency, and trust within the sector. This insight can contribute to the formulation of policies that enhance the overall health and integrity of the banking industry.
Regulatory authorities overseeing banking operations and financial reporting will benefit from a deeper understanding of how audit quality and audit fees impact financial performance. This knowledge can help in refining audit-related regulations and standards, ultimately contributing to a more robust and accountable banking environment.
Audit firms providing services to banks in Ghana can gain a better understanding of the intricate relationship between audit quality and fees. This understanding can empower them to tailor their audit processes and fee structures to better serve their clients while maintaining the integrity and effectiveness of their audits.
For banking institutions, the research findings can inform strategic decision-making regarding their auditing processes. Banks can use this knowledge to assess and optimize their audit quality, which can, in turn, impact their financial performance and reputation.
Investors, as key stakeholders in the banking sector, will gain insights into the reliability of financial reports and associated risks. This knowledge can guide their investment decisions, enhance their confidence in the banking sector, and influence portfolio diversification.
The general public in Ghana, relying on the banking sector for financial services and trustworthiness, can expect a more stable and transparent banking environment as a result of the study’s contributions. This, in turn, can foster economic growth and financial inclusion, benefiting the citizens at large.
In essence, this research goes beyond academic inquiry, as its findings have the potential to reshape the Ghanaian banking landscape, fortifying its foundations and enhancing its contributions to the nation’s economic prosperity.
Scope of the Study
The scope of this study is limited to the Ghanaian banking sector. It will focus on commercial and universal banks operating in Ghana. The study covers a period of five years, from 2018 to 2022, to analyze recent data and trends. The data sources for this research will include financial statements, audit reports, and relevant documents from the selected banks.
Operational Definition of Terms
To ensure clarity and understanding, the following terms are operationally defined within the context of this study:
Audit Quality: Refers to the effectiveness and reliability of the audit process, including the extent to which it detects financial irregularities and enhances the accuracy and transparency of financial reporting.
Audit Fees: The monetary compensation paid by a bank to an audit firm for the provision of auditing and related services.
Financial Performance: Encompasses various financial metrics and indicators, such as profitability, liquidity, solvency, and efficiency, which collectively assess the overall financial health and stability of a bank.
Policymakers and Regulatory Bodies: Government institutions, such as the Bank of Ghana and the Securities and Exchange Commission, are responsible for setting and enforcing regulations and policies in the banking sector.
Audit Firms: Professional firms that provide audit and assurance services to banks and other organizations.
Investors: Individuals, institutions, or entities that allocate capital to banks with the expectation of generating returns on their investments.
General Public: The population at large, including customers, depositors, and other stakeholders, who have an interest in the stability and transparency of the banking sector.
Financial Statements: Official documents prepared by banks that summarize their financial activities, including income statements, balance sheets, and cash flow statements.
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