International Journal of Islamic and Middle Eastern Finance and Management

Factors influencing external audit fees of companies listed on Dubai Financial Market
Kamal Naser Yousef M. Hassan
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Kamal Naser Yousef M. Hassan , (2016),"Factors influencing external audit fees of companies listed on Dubai Financial
Market", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 9 Iss 3 pp. -
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 FACTORS INFLUENCING EXTERNAL AUDIT FEES OF COMPANIES
LISTED ON DUBAI FINANCIAL MARKET

1. INTRODUCTION

Recent governance failures and scandals have highlighted the critical role of external
auditing in promoting good corporate governance. Agency theory suggests that
separation between ownership and control creates a conflict between managers who
may engage in activities for their personal interests and stakeholders who do not have
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close monitoring of managers' decisions. To control and observe management

decisions, shareholders tend to pay monitoring costs which may include, amongst
others, the costs of preparing and auditing accounting statements and reports. External
audit might, therefore, be seen as a corporate governance mechanism that improves the
quality of corporate reporting (Beasley and Salterio, 2001) and reduces the information
asymmetry and agency conflict between managers and stakeholders (Beatty 1989;
Willenborg, 1999). However, the usefulness of an external audit in enhancing the
credibility of financial statements depends on the quality of audit services being
provided. The audit quality is measured in the literature by the total amount of audit
fees paid by a company to external auditors in exchange for performing their audits
(Hallak & Silva, 2012). In this context, De Angelo (1981) argued that, among other
factors, audit fee is correlated with audit quality. The reason for this is that shareholders
are willing to pay high audit fees to obtain high quality audit (Choi et al., 2010). This
study is motivated by increasingly interest in the audit market. Gerakos & Syverson
(2013) argued that audit market receives considerable attention from policymaker for at
least three reasons. First, audit market plays an important and unique role in preserving
transparency and improving the functioning of capital markets (Watts and
Zimmerman,1983; Ball, 2001; Black, 2001). Second, a substantial portion of demand in
the market is mandated as publicly traded companies are forced to purchase audit
services, and there are no services from outside the industry that can legally serve as
substitutes. Third, the market's supply side is highly concentrated; the majority of audit
engagements and audit fees involve just four audit firms. As such, this study attempts to
observe the quality of audit services by investigating factors affecting the level of audit
fees paid by Dubai Financial Market (DFM) listed companies to their auditors.
1
 Many studies have been undertaken to examine factors expected to influence external
audit fees. A considerable part of these studies has been carried out in developed
countries (e.g., Taylor and Baker, 1981; Francis and Stokes, 1986; Chan et al., 1993;
Anderson and Zeghal, 1994; Craswell and Francis, 1999; Ezzamel et al., 2002; Neimi,
2006; Simon and Taylor, 2002; Gonthier and Schatt, 2007; Wang et al., 2009). Few
studies, however, addressed the same issue in emerging economies (Joshi and Al-
Bastaki, 2000; Naser and Nuseibeh, 2008; Hassan and Naser, 2013; Kikhia, 2014;
Ulhaq and Leghari, 2015). Hence, more research still needed in the context of emerging
economies since corporate governance is still at its infancy stage in many of these
countries. In this regards, United Arab Emirates have recently requested all companies
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listed on the national stock exchanges to issue governance report with effect from April
2010. Thus, the main objective of this study is to empirically investigate the underlying
determinants, with some emphasis on corporate governance that may influence external
audit fees in a sample of non-financial companies listed on DFM. Such a study is
important for several reasons. First, it helps in expanding limited existing literature
about the determinants of audit fees in the Arab and Middle East countries generally
and in the UAE context particularly. Second, no prior attempt had been made to
investigate determinants of audit fees paid by Emirati firms listed on DFM because the
disclosure of audit fees services provided by external auditors only became effective
after 30 April 2010. Third, Dubai hosts all international big audit firms together with
regional and local audit firms. Hence, a large number of audit firms are competing to
audit a limited number of companies listed on DFM. The imbalance between the supply
and demand for audit firms is expected to impact audit fees and their determinants.
Fourth, the findings of the study may be generalized to other Arab countries
particularly neighboring Gulf Cooperation Council (GCC) states who have similar
socio-cultural environment.

The rest of this paper is organized as follows. A review of the relevant prior literature
concerning determinants of audit fees together with the main hypotheses of the study are
presented in Section 2. While research methodology is presented in the third section, the
results are discussed in the fourth section. The conclusion is provided in the last
section.

2. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT

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 A considerable body of literature has investigated the influence corporate governance and
corporate attributes on external audit fees. The most commonly relevant variables
employed by most of previous studies are reviewed below.

2.1 Corporate Size

Corporate size was one of the main attributes employed by most prior researchers to
determine what determines external audit fees. Evidences from these studies found that
large companies tend to pay higher external audit fees than small ones (Anderson and
Zeghal, 1994; Mike et al, 1997; Ashbaugh et al., 2003; Whisenant et al., 2003;
Naser and Nuseibeh, 2008; Ellis and Booker, 2011; Hassan and Naser, 2013; Ulhaq and
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Leghari, 2015). Many reasons have been advanced to explain this finding. First, large
companies are subject to high agency costs resulting from potential conflicts between
management and the stakeholders (Inchausti, 1997). They are also more vulnerable than
small companies due to public visibility. To reduce these agency and political costs,
large firms tend to disclose more financial and non-financial information (Cormier and
Magnan, 2003; Othman, et al., 2009). Furthermore, large companies are expected to
embark on transactions that are more in number and value than those undertaken by
small companies. Moreover, large companies would have the resources to recruit
prestigious external auditors (Palmrose, 1986; Carson et al., 2004; Vermeer et al.,
2009). Consequently, external auditors require more audit effort and time to audit large
firms and thereby high audit fees. In the literature, different proxies were used to
measure corporate size. The most common measures were total assets (Owusu-
Ansah,1998; Tower et al., 1999; Naser et al, 2002; Haniffa and Cooke, 2005; Barako et
al., 2006, Othman et al., 2009; Khan, 2010; Miah and Sharmeen, 2015; Siregar and
Bachtiar, 2010), total sales (Wallace et al., 1994; Naser et al., 2002; Prencipe, 2004;
Rouf, 2011) and market capitalization (Naser et al., 2006; Ghazali, 2007; Chatterjee and
Mir, 2008). Based on findings of prior research, It is, therefore, hypothesized that:

Hypothesis 1: External audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with company’s size.

2.2 Profitability

Most of the previous literature revealed that companies reporting high profits are more
likely to pay more audit fees (Joshi and Al-Bastaki, 2000; Sandra and Patrick, 1996).

3
 Since the firm profitability indicates the efficiency of company's management in
allocating available resources, management of highly profitable firms tend to disclose
more information to highlight their performance and reduce agency costs (Watts and
Zimmerman, 1986) and to strengthen their position and justify their compensation
(Inchausti, 1997). Companies disclosing more information about their activities increase
auditor’s risk and this might subsequently lead to intensive audit testing of these
companies’ revenues and expenses and thus increase audit fees. (Joshi and Al Bastaki,
2000). Further, external auditor is expected to subject various accounts of profitable
firms to intensive testing in order to verify performance figures that will be used as a
base in the firm’s compensation system (Zulkarnain and Shamsher, 2008). Previous
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researchers have used different profitability measures such as net profit margin (Aburime,
2009; Amba and Almukharreq, 2013) return on assets (ROA) (Alanazi et al., 2011;
Tamimi and Charif, 2011) and return on equity (ROE) (Tamimi and Charif, 2011). It is,
therefore, hypothesized that:

Hypothesis 2: External audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with company’s profitability.

2.3 Corporate Risk

Corporate leverage refers to the use of borrowed funds to acquire assets in order to
increase their shareholders’ return. According to agency theory, highly leveraged firms
are expected to disclose more information to meet the needs of their creditors (Jensen
and Meckling, 1976). Generally speaking, capital structure of highly geared firms will
be unstable due to high levels of corporate risk as measured by the leverage ratio.
Highly geared firms would be at risk of insolvency or bankruptcy if they fail to settle
their short-term obligations resulting from interest accrued on loans. Therefore, external
audit firms will usually require more time and effort to audit the accounts of highly
geared firms to avoid any potential litigation against them in the future. The more the
time and effort required to complete the auditing process, the higher are the external
audit fees. Thus, external audit fees are usually positively related to the clients’ risk
(Francis and Simon, 1987; Craswell and Francis, 1999). Most of previous research
reported evidence that firm leverage level is significantly and positively associated with
corporate risk (Simunic, 1980; Francis and Stokes, 1986; Joshi and Bastaki, 2000;
Gonthier-Besacier and Schatt, 2007). Nevertheless, few studies showed insignificant
4
 association between the two variables (Vermeer et al., 2009; Ellis and Booker, 2011).
Several measures have been employed in previous studies to symbolize corporate risk
(leverage). Yet, a significant number of these studies used total debt to total assets to
proxy corporate risk (Audousset-Coulier, 2015; Bukair and Abdul Rahman, 2015). It is,
therefore, hypothesized that:

Hypothesis 3: External audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with company’s risk.

2.4 Complexity
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Complexity has been found by some prior research as one of the dominant determinants
of audit fees. A significant body of prior research noticed significant and positive
relationship between client complexity and external audit fees (Simunic, 1980; Brinn et
al, 1994; Cameran, 2005; Joshi and Bastaki, 2000, Clatworthy and Peel, 2006;
Thinggaard and Kiertzner, 2008; Vermeer et al., 2009; Ellis and Booker, 2011;
Verbruggen et al., 2011). It is reasonable to expect that external auditors need more
time, audit work and greater expertise to audit complex clients than less complex ones.
This would result in high external audit fees (Sandra and Patrick, 1996; Hoitash et.al,
2007; Hackenbrack and Knechel, 1997). Furthermore, external auditors are exposed to
more professional liability claims when auditing complex clients than less complex
ones (Clatworthy and Peel, 2006). A variety of ways have been used in the literature to
measure corporate complexity. Some researchers used the number of products, client
geographic distribution, the proportion of foreign assets and the number of business
segments as indicators of client complexity. However, the number of subsidiaries and
the number of foreign subsidiaries are the most frequently used measures of complexity
(Hay et.al, 2006; Hay, 2013; Audousset-Coulier, 2015). In line with some previous
studies, it is hypothesized that:

Hypothesis 4: External audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with company’s complexity.

2.5 Industry Type

Industry type is expected to be another factor that determines external audit fees. Some
companies operating in a certain industry type require higher levels and more time and
5
 efforts of external auditing services than other companies. This would result in higher
audit fees in comparison with companies operating in other industries (Firth, 1985;
Anderson and Zeghal, 1994). For instance, audit fees paid by Canadian transportation,
communication, or utilities firms are found to be lower than that paid by firms in other
sectors (Anderson and Zeghal, 1994). Gonthier-Besacier and Schatt (2007) found that
French high technology firms paid higher audit fees than that paid by firms belong to
other sectors. In this context, previous studies found that manufacturing firms tend to
disclose more voluntary information than other non-manufacturing firms (Camfferman
and Cooke, 2002; Naser and Nuseibeh, 2008). The financial statements prepared by
manufacturing firms are usually more complex than financial statements prepared firms
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in other sectors as the production process gives rise to many costs that do not exist in
other industries. Such firms are likely to demand higher levels of external audit quality
to face the higher agency costs associated with more complex transactions and financial
statements. Furthermore, as manufacturing companies are more environmentally
sensitive because of regulation and due to their eco-friendly corporate policies (Klassen
and Whybark 1999), they are more likely to be subjected to more social and public
pressure than other firms. Thus, they would provide more information about social and
environmental activities and responsibilities to avoid such pressure and regulations
(Hackston and Milne, 1996; Tagesson, et al, 2009). Hence, manufacturing firms are
more willing to hire a high-quality external auditor to give signal that their financial
statements are credible which may in turn results in high external audit fees.
Accordingly, it seems reasonable to expect that audit fees might be influenced by
industry type. It is, therefore, hypothesized that:

Hypothesis 5: External audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with company’s industry type.

2.6 Status of the Audit Firm

Most researchers agreed that the size of the external audit firm and its brand are
important indicators of audit quality (Lennox, 1999). They have also supported the
view that large audit firms provide higher quality external audit compared to small
ones. In this regard, Hay et al., (2006) argued that higher audit fees are expected when
an auditor is recognized to be of superior quality to other firms. Previous studies used
big international audit firms to represent large audit firm while local and regional firms
6
 are viewed as being small (DeAngelo, 1981; Haniffa and Cooke, 2002; Glaum and
Street, 2003). Large international audit firms are expected to produce high quality
external audit service because of the reputation rationale or / and the insurance
rationale (Becker, DeFond, Jiambalvo, and Subramanyam, 1998; Jin et al., 2013).
Under the reputation rationale, big audit firms have strong reputation incentives to
perform better external audit because they have more to lose if they supply low quality
audits (DeAngelo, 1981). Under the insurance rationale, however, large and strong
audit firms, in terms of financial resources, have great incentives to deliver high quality
services to minimize or avoid litigation risk that may result from audit failures (Dye,
1993). On the other hand, large companies attempt to avoid high political pressure and
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reduce monitoring costs by improving the quality of their reporting and hiring big
international audit firms. Consistent with the above studies, it is hypothesized that:

Hypothesis 6: External Audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with the audit firm status hired by the company.

2.7 External Audit Report Lag

External audit report lag is a period of time between the end of the accounting year and
the external audit report date. The audit lag is positively related to audit complexity as
well as risk litigation. This would impact external audit fees (Ghosh and Pawlewicz,
2009). When the firm faces financial difficulties or engages in an illegal act during the
year, the amount of evidence that the external auditor must obtain increases, which in
turn leads to an increase in audit fees since more audit work is required. In addition, the
likelihood of material errors occurring is greater in more complex firms and therefore
the amount of audit work that must be performed is greater (Bamber et al. 1993),
resulting in high audit fees. Some previous studies have shown that audit lag is one of
the determinants of audit fees (Chan et al., 1993; Ezzamel et al., 1996; Hassan and
Naser, 2013). It is, therefore, hypothesized that:

Hypothesis 7: External audit fees paid by Emirati nonfinancial companies listed on

DFM are associated with audit report lag.

2.8 Audit Committee Independence

7
 The findings of most of prior studies that have examined the influence of audit
committee characteristic such as independence, expertise and experience on external
audit fees supported the notion that an effective audit committee requires a higher
quality audit which results in high audit fees (Abbott et al., 2003; Vafeas and
Waegelein, 2007). A counter argument, however, is that auditor’s risk assessment and
the needed auditing tests would be reduced when auditing a client with an effective
audit committee, (Collier and Gregory, 1996; Goddard and Masters, 2000; Abbott et
al., 2003) which it turn reduces audit fees.

In the UAE, Ministerial Resolution No (518) of 2009 concerning Governance Rules

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requires the board of directors of any listed company to form an audit committee consisting
of non-executive board members, provided that majority of the committee's members shall be
independent members. It is therefore, hypothesized:

Hypothesis 8: Audit fees paid by Emirati nonfinancial companies listed on DFM are
associated with the proportion of the independent audit committee
members.

3. DATA COLLECTION AND METHODOLOGY

At the end of 2011, the total number of Emirati companies listed on Dubai Financial
Market (DFM) reached 45 companies; 22 of which were operating in the financial
sector. The current study will cover non-financial companies. Financial companies were
excluded from this study because they conduct special nature activities and they are
subject to more regulation. Consequently, they have different external audit fees
structure (Basioudis and Fifi, 2004; Cameran, 2005; Simunic, 1980). Initially all the 23
Emirati non-financial listed companies were included in the sample. One company did
not have a complete record of data related to variables employed in this study and it
was excluded. Thus, the final sample included in the study consists of 22 Emirati non-
financial companies listed on Dubai Financial Market (DFM) at the end of 2011. Data
utilized in this study have been extracted from 2011 annual reports and corporate
governance reports of the sampled companies.

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 To identify the impact of selected variables on audit fees of the sampled companies, the
following regression model with an ordinary least squares (OLS) technique was
estimated:

ADFEES = ƒ (SIZE, PROF, RISK, COM, INDS, AUST, ARL, INDCOM)

Where:

ADFEES = Audit fees measured by the natural logarithm of the auditor’s fees.
(+) SIZE = Corporate size measured by the natural logarithm of the
company’s total assets.
(+) PROF = Profitability measured by net income / sales
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(+) RISK = Risk measured by total liabilities/ total assets

(+) COMP = Corporate complexity measured by the number of subsidiaries
(±) INDS = Industry; 1 Industrial and real estate, 2 Services, 2 Consumer
staples.
(+) AUST = Status of the audit firm; (0) score is given to a local audit firm and
(1) score is given to a local firm affiliated to a big international
firm.
(+) ARL = The lag between the audit report and the end of the accounting
year
(-) ADCOM = The proportion of independent members on the audit committee

4. FINDINGS

4.1. Descriptive Statistics

Tables 1 and 2 provide descriptive statistics of the dependent and independent variables
used in this study. While descriptive statistics about continuous variables are presented in
Table 1, descriptive statistics about discontinuous variables are given in Table 2. Audit
fees (ADFEES) range from a minimum of AED 50,000 (≈USA $13,700) to a maximum
of AED 1,200,000, with mean value of AED 375,198. The audit fees (in logarithms) range
from AED 10.82 to AED 14 with a mean of AED 12.53. The mean value for corporate
size of the Emirati non-financial companies listed on DFM, measured by the natural
logarithm of the company’s total assets, is AED 21.53. Over the whole sample,
profitability ranged from -2.96 to 0.35, with a mean of - 0.09. The mean of the leverage
ratio, represented by total liabilities to total assets, of the sampled companies is 0.38. This
indicates that about 38% of total assets of average firm has been financed by debt and
about 62% has been financed by equity. For the degree of complexity of the surveyed
9
 companies, as measured by the number of subsidiaries, the table reveals that each
company in the sample had on average about 6 subsidiaries. However, while some firms
do not have any subsidiary, other firms appeared to have 22 subsidiaries. Table 1 also
shows that the proportion of audit committee being independent ranges from 50% to
100% with a mean of 80%. Corporate governance rules in the UAE require that the
majority of the audit committee (at least two out of three directors) be independent
directors. As for the audit report lag variable, the table shows that external auditors take in
average 64 days to conduct their work and issue their report.

[Table 1 about here]

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Table 2 reveals that the vast majority of non-financial companies listed on DFM (91%) are
audited by one of the big four international audit firms. Only 9% of the sampled
companies are audited by small and local audit firms and offices. This implies that the
auditing practice in the UAE is concentrated and dominated by the Big Four international
auditing firms. For the industry variable (IND), there were 7 manufacturing and real estate
companies, 10 services companies and 5 consumer staples companies.

[Table 2 about here]

4.2. Correlation

Multicollinearity can be a serious problem in the regression analysis. The assessment of

the relative importance of two independent variables in determining the dependent
variable will be difficult when these independent variables are highly correlated. To detect
potential high pair-wise correlations, Pearson correlation matrix has been constructed and
presented in table 3. It can be observed from the matrix that the highest significant
correlation between any two independent variables is 0.539 between COMP and RISK
and the correlation between COMP and SIZE 0.496. Since all correlation coefficients
between independent variables are less than 0.8, multicollinearity is not a serious concern
in the interpretation of the regression findings (Bryman and Cramer, 2005). Further, the
severity of the multicollinearity between all the explanatory variables simultaneously was
tested in this study by using Variance Inflation Factor (VIF) diagnostic procedure. VIF for
all variables was calculated and reported in table 4. As all VIF for all explanatory

10
 variables are well below the multicollinearity critical value of 10. Thus, multicollinearity
is not a serious problem in the interpretation of the regression results (Neter et al., 1983).

[Table 3 about here]

4.3. Regression Analysis

A backward multivariate regression test is employed to test the above developed

regression model. The results of the regression are presented in Table 4. The table
shows that the F-value of the first model is 4.533. This value indicates that the model is
statistically significant. An R2 of 0. 574 implies that the independent variables used in
the model explain 57.4% of the variance in audit fees among Emirati nonfinancial
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companies listed on Dubai Financial Market. Table 4 also reported a positive and
significant association between audit fees and each of corporate size and the proportion
of independent members on the audit committee. A negative and significant association
was also detected between the audit fees and client complexity,
[Table 4 about here]

All models presented in table 4 shows that the company size variable (SIZE) is the key
factor in explaining variations in external audit fees paid by Emirati nonfinancial
companies listed on DFM. This finding is consistent with the result of most of previous
research that pointed to client size as the most significant explanatory variable in
determining audit fees (Whisenant, et al., 2003; Ashbaugh, et al., 2003; Joshi and Al-
Bastaki, 2000; Naser and Nuseibeh, 2008; Kikhia, 2014). This result is expected
because large size companies are involved in more transactions with high values than
small ones. They also have enough financial resources to recruit prestigious international
audit firms. They are more visible and subject to the public eyes. Hence, they tend to
disclose more information than small companies. Consequently, more audit services and
time are required to audit them and this will be reflected in external audit fees.

A positive and marginally significant association was also observed between the audit
committee independence and audit fees in model l included in Ta le 4. The level of
significance, however, appeared to be strongly significant in the last models. This
finding is in line with some previous studies (Abbott et al., 2003; Vafeas and
Waegelein, 2007). However, the result is inconsistent with some prior literature that

11
 reported significant and negative association between the two variables (Collier and
Gregory, 1996; Goddard and Masters, 2000). The positive association observed
between audit committee independence and audit fees is justified on grounds that
independent audit committee members may require a higher level of assurance as well
as support the external auditor to conduct more testing which leads to an increase in
audit fees (Abbott et al., 2003). According to agency theory, corporate management has an
incentive to signal to the market that it has effective internal corporate governance and attempt
to reduce agency costs and increase the value of the company by appointing a high profile
external auditor that conducts detailed audit to assure stakeholders. Consequently, external
audit fees will be high.
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A significant but negative relationship detected between client complexity measured by

number of subsidiaries and external audit fees in the sample of Emirati nonfinancial
companies listed on DFM in all six models presented in table 4. This finding is
inconsistent with the findings reported by similar studies as external audit fees appeared to
be positively and significantly related with corporate complexity (Firth, 1985; Simon et
al., 1992; Iyer and Iyer, 1993; Pong and Wittington, 1994; Johnson et al., 1995; Collier
and Gregory, 1996; Sandra and Patrick, 1996; Mike et al., 1997; Langendijk; Joshi and
Al-Bastaki, 1997). This finding can be explained on the grounds complex companies are
more likely to recruit a well-qualified team since the nature and the number of transactions
conducted by complex companies require recruiting qualified and experienced
accountants. In addition, complicated companies are expected to install advanced
accounting system. They are also expected to adopt sound accounting and internal control
system that facilitates external auditor reliance on it. Thus, reducing external audit work.
Furthermore, auditors when serving client firms with complex accounting requirements
are able to benefit from economies of scale in the auditor’s costs (Naser and Nuseibeh,
2008). Accordingly, more complex firms are expected to pay less external audit fees.

Although, consistent with expectation, audit fees have been found positively associated
with both client profitability and risk, the positive association reported was insignificant.
This finding lends partial support to agency theory. The theory implies that profitable and/
or leveraged firms are expected to disclose more information. This requires external auditors
to use more time and efforts to accomplish their work. Companies with large profits tend
to disclose more information to justify such large profits and to reduce their political costs
12
 (Watts and Zimmerman, 1986). Similarly, the highly leveraged firms disclose more
information to satisfy their long term creditors’ needs (Wallace et al., 1994) and to reduce
their high agency costs (Inchausti, 1997). More information disclosure might require much
more audit work from external auditors and this will be reflected in their fees.

Like profitability and risk variables, status of audit firm variable is positively but
insignificantly related to audit fees. This result disagrees with some prior research
suggested significant association between audit firm status and audit fees paid by clients
(Pong and Whittington, 1994; Johnson et al., 995; Gregory and Collier, 1996; Craswell
and Francis, 1999). This result might be explained by the concentration of the external
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audit firms. Most of the firms (91%) covered in this study are audited by one of the big
international auditing firms. The imbalance between the supply and demand of the
external audit services (many external audit firms and few companies listed on DFM) in
the UAE market is expected to push external audit fees down.

Contrary to expectations, the regression results showed that the industry type has negative
but insignificant impact on the external audit fees. This implies that manufacturing
companies pay lower fees than those in other sectors. A possible explanation for this
result might be that the size of the manufacturing companies operating in an emerging
economy like the UAE is either small or medium. These companies have limited number
of transactions with relatively low or medium size. Hence, they tend to disclose less
information than companies operating in other sectors. Therefore, Emirati manufacturing
companies are expected to pay relatively low audit fees than other sectors. Moreover, the
limited number of companies listed on the exchange and the relatively large supply of
audit services in the AUE assist in pushing external audit fees down.

Contrary to some prior research (Haskins and Williams, 1988; Chan et al., 1993; Che
Ahmad and Derashid, 1996; Ezzamel et al., 1996; Craswell and Francis, 1999), a negative
but insignificant association was reported between the audit report lag and audit fees paid
by Emirati nonfinancial companies listed on DFM. This result, however, agrees with
Naser and Nuseibeh (2008) who reported a significant association between audit report lag
and the audit fees among Jordanian companies. The relatively small number of companies
listed on DFM enables audit firms to predict with accuracy when to embark on serious

13
 auditing activities (Naser and Nuseibeh, 2008). A delay in the external audit report is
usually associated with the time when the related company completes its accounts.
Companies might delay submitting their accounts to the external auditor to ensure
minimum audit. This would be reflected in external audit fees.

5. CONCLUSION

This study is set out to explore the relationship between external audit fees and a set of
company characteristics, including corporate governance, in a sample of Emirati non-
financial companies listed on (DFM). The 2011 annual reports and governance reports
for all non-financial companies, except one, listed on DFM were used to explore the
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relationship. The results of the OLS regression analysis revealed that external audit fees
are positively and significantly associated with corporate size and the independence of
the audit committee. Negative and significant relationship is, however, detected
between external audit fees and the client complexity measured by number of
subsidiaries. Corporate size is expected to impact external audit fees since large
companies embark on more and sizable transactions more than small companies. They are
also subject to external pressure and monitored by public eyes more than smaller
companies. They also have the required resources to hire a prestigious external audit firm.
For all these reasons, corporate size appeared to be the most significant variable impacting
external audit fees by the Emirati non-financial companies listed on DFM and covered in
this current study. The positive association between external audit fees and the
independence of the audit committee is explained by agency theory. Corporate
management with an independent audit committee may chose a prestigious external audit
firm to perform detailed and through external audit in order to signal to stakeholders that it
works to their best interest. As a consequence, this will be reflected in external audit fees.

The negative and significant relationship between external audit fees and the complexity
of the audited company is explained on the grounds that most of the size of the Emirati
companies listed on DFM is either small or medium. In addition, these companies are
expected to recruit very qualified staff and to install very advanced accounting information
system. This ensures the quality of the prepared financial statements and may require
minimum external audit. Hence, they pay less audit fees.

14
 Table 1: Descriptive statistics about continuous variables employed in the study

Variable Mean Median Standard Minimum Maximum

Deviation

12.5 12.38 0.82 10.82 14.00

Audit Fees (ADFEES) 3

21.5 22.06 1.86 17.84 24.82

Total assets in logarithms (SIZ) 3

Net income / Net sales (PROF) -0.09 0.07 0.67 -2.96 0.35

Total liabilities/ Total assets (RISK) 0.38 0.37 0.20 0.00 0.77

Number of subsidiaries (COMP) 5.50 1.50 7.17 0.00 22.00

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64.1 62.00 20.63 15.00 90.00

Audit Report Lag (ARL) in days 8

The proportion of independent 0.80 0.71 0.18 0.50 1.00

members on the audit committee
(ADCOM)

Table 2: Descriptive statistics about discontinuous variables employed in the study

Variable Frequency Percentage Accumulated

percentage

Audit Firm Status International 20 91 91

(SAF) Otherwise 2 9 100

Industry (IND) Industrial 7 31.8 31.8

Service 10 45.5 77.3

Consumers staples 5 22.7 100

15
 Table 3: Correlation among all variables used in the study

Variable ADFEES SIZ PROF RISK COMP IND SFA ARL AUDCOM
ADFEES 1

SIZ .704** 1

PROF -.040 -.010 1

RISK .168 .330 -.055 1

COMP .083 .496* -.017 .539** 1

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IND .211 .311 .198 .275 .091 1

SFA .358 .327 -.141 .103 .248 -.123 1

ARL -.285 -.144 .213 .018 -.077 .013 .066 1

AUDCOM .550** .353 -.223 -.101 .088 .008 .228 -.377 1

Table 4: Results of the backward regression analysis

Model Variables R2 =. 736 Adj. R2 = .574 F = 4.533
Beta T Sig. VIF
(Constant) 4.951 2.907 .012
SIZ .298 3.499 .004 1.839
1 PROF .116 .619 .547 1.166
RISK .845 1.132 .278 1.629
COMP -.051 -2.335 .036 1.766
IND -.022 -.077 .940 1.320
SAF .500 1.111 .287 1.283
ARL -.006 -.911 .379 1.247
ADCOM 1.328 1.714 .110 1.475

Variables R2 =. 736 Adj. R2 = .604 F = 5.576

Beta T Sig. VIF
(Constant) 4.989 3.173 .007
SIZ .296 3.809 .002 1.647
2 PROF .113 .639 .533 1.122
RISK .830 1.195 .252 1.519
COMP -.050 -2.445 .028 1.714
SAF .507 1.197 .251 1.225
ARL -.006 -.948 .359 1.246
ADCOM 1.326 1.778 .097 1.475

16
 Variables R2 =. 728 Adj. R2 = .62 F = 6.702
Beta T Sig. VIF
(Constant) 4.917 3.199 .006
SIZ .302 4.005 .001 1.619
3 RISK .776 1.149 .269 1.496
COMP -.050 -2.471 .026 1.711
SAF .466 1.136 .274 1.197
ARL -.005 -.869 .399 1.210
ADCOM 1.246 1.728 .104 1.433
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Variables R2 =. 715 Adj. R2 = .625 F = 8.014

Beta T Sig. VIF
(Constant) 4.428 3.120 .007
SIZ .304 4.058 .001 1.618
4 RISK .771 1.149 .267 1.496
COMP -.049 -2.436 .027 1.703
SAF .400 1.000 .332 1.156
ADCOM 1.477 2.222 .041 1.237

Variables R2 =. 715 Adj. R2 = .625 F = 9.767

Beta T Sig. VIF
(Constant) 4.420 3.114 .006
SIZ .317 4.317 .000 1.563
5 RISK .750 1.119 .279 1.495
COMP -.046 -2.332 .032 1.678
ADCOM 1.563 2.371 .030 1.217

Variables R2 =. 674 Adj. R2 = .620 F = 12.432

Beta T Sig. VIF
(Constant) 4.495 3.148 .006
SIZ .331 4.528 .000 1.522
6 COMP -.036 -2.034 .057 1.342
ADCOM 1.398 2.161 .044 1.156

17
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 Ulhaq, A., & Leghari, M. (2015). Determinants of audit fee in Pakistan. Research
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the Islamic Banks vs Conventional Banks- Evidence from GCC”, International Journal of
Financial Research, vol. 4(3), p.83-93.

26