Determinants of audit fees :analysis of legal systems & macro-economic determinants

This research investigates the effect of macro-economic factors on audit fees in two distinctive communal arrangements which is an addition to the limited amount of literature related to this topic. Auditee and auditor characteristics related variables have been a part of several audit fee research studies unlike the macro-economic variables which are diverse in different settings, for which we wanted to test their effect on the audit remuneration. Following the footsteps of Leuz et al. (2003), investor rights, development of financial markets, concentration of ownership, legal enforcement and level of disclosure are all tested in two cross-country settings by generating one variable called cluster defining the macro-economic characteristics. Considering La Porta et al., (1998), Taylor & Simon (1999), Francis, Khurana, & Pereira (2001), Leuz at al., (2003) Vlek (2008) and Zhan (2012), we assumed that due to the aforementioned characteristics being stronger in common law countries causes the auditors to charge a higher fee. Moreover, it is also hypothesized that auditee and auditor related characteristics maintain a positive relationship when regressed with audit fees, as done in earlier studies. This research takes 2027 firm-year observations listed on both the German and UK stock exchanges from 2010–2016 (specifically those observations for which the audit fee data was represented). The outcome after truncating and conducting a regression analysis clearly showed an influence on audit fees, supporting the previous research studies that distinct common law arrangement causes an upward effect on the audit fees. Lower investor protection laws, level of disclosure, legal enforcement, less developed financial markets and higher concentration of ownership are all associated with code law setting. In addition, an interaction term was formed between leverage and size of the firm, based on an assumption that companies having a bigger brand name, more presence and a higher performance rate around the world can easily obtain financial debt, whether equity related or from banks which does not hold true, showing a negative impact on the audit fees