An empirical analysis of the external audit fee in the “new” South Africa: The basic model

Abstract

This paper studies the audit services market in Post Apartheid South Africa. The similarity of audit fee determinants between South Africa and other countries is analysed and the extent to which the large audit fee premium documented in other countries is also examined. This paper examines audit fee structure in South Africa for 1,605 companies listed on the JSE Securities Exchange (South Africa) for the 2000 – 2004 fiscal years. By analysing the data measuring a number of variables representing auditee size, risk, complexity, agency theory and size of audit firm, a model is developed for the determinants of audit fees. The study strongly confirms that most of the previous international research findings are also applicable to the South African market, and that audit fees are significantly associated with auditee size, risk, complexity of a business, agency theory and the size of the audit firm. The findings of this research study can be used as a benchmark for audit fee negotiation by highlighting the determinants of audit fees. The findings of this study differ from a previous study carried out by Simon (1995), where the determinants of audit fees were examined for the 1991 fiscal year. Simon (1995) found that the large audit firm fee premium documented in other countries did not exist in South Africa. This study found that this large audit fee premium does exist in Post Apartheid South Africa.

Key Words:

• Audit fees
• Big 4 fee premium
• The “New” South Africa
• Market for audit services