Research Illumination No. 13
Research Spotlight 13 highlights a distinguished study by researchers at the Faculty of Commerce, Beni Suef University, examining the relationship between audit fees, audit quality, and company value. The study analyzes the crucial role of contract duration between companies and external auditors in shaping these relationships. This research is among the first to provide documented evidence from an emerging African market regarding this complex interrelationship, particularly in light of the challenges facing the Egyptian market, such as weak governance practices, the lack of clear regulations for auditor rotation, and the significant disparity in audit quality levels between local and international firms.
Given the crucial role of auditing in enhancing confidence in financial reports and protecting investors, researchers measured the impact of three key elements—audit fees, audit quality, and contract duration—on the financial reporting environment, using data from 80 non-financial Egyptian companies listed on the stock exchange between 2016 and 2020. The results revealed a direct correlation between audit fees and audit quality. Companies paying higher fees often receive more accurate and higher-quality audit services, thanks to firms employing qualified teams and possessing broader professional experience. However, the study indicated that this positive relationship weakens as the contract duration between the auditor and the company lengthens. Researchers interpreted this as a consequence of extended relationships potentially impacting the auditor's independence over time.
The results also demonstrated that higher audit quality directly leads to increased market value for the company. This is due to greater investor confidence in the accuracy of financial information, a reduced likelihood of manipulation or errors, and improved transparency in investment decisions. However, this positive impact is significantly stronger in companies with shorter-term auditor engagements, where performance tends to be more impartial and assertive. The study reveals that the audit tenure is a pivotal factor influencing all the aforementioned relationships. In short-term contracts, audit quality clearly increases with higher fees, and this improvement is reflected in higher company value. Conversely, with long-term contracts exceeding the sample average of nine years, auditor independence gradually declines, the relationship between fees and quality weakens, and the impact of audit quality on company value diminishes.
These findings reinforce calls for clear policies to rotate auditors periodically to ensure continued independence and enhance the quality of financial reporting. The study also underscores the need for the Egyptian market to implement auditor rotation every five years, strengthen oversight of audit firms, raise the level of disclosure and governance, support auditor independence, and improve their working environment. The results provide important practical guidance for decision-makers at the Financial Regulatory Authority, the Egyptian Exchange, and company audit committees, with the aim of improving the quality of financial reporting and boosting investor confidence. It is worth mentioning that this research is published in the Journal of Financial Reporting and Accounting, published by Emerald Publishing, which has an impact factor of 9.2 and is ranked in the first quarter (Q1) in the field of finance and business according to the Scopus database. The journal is also indexed in the ESCI Clarivate database.