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THE RELATIONSHIP BETWEEN INTERNALAUDITING AND EXTERNALAUDIT FEES:
EVIDENCE FROM KUWAIT
SBE, Vol.20, No.1, 2017
ISSN 1818-1228
©Copyright 2017/College of Business and Economics,
Qatar University
Studies in this line of audit research have
typically been interested in examining whether
external audit fees are influenced by the
contribution of IA to the external audit work.
Empirical results offered by these studies are
mixed. In particular, prior research examining
the IA-fees relationship has reported a negative
relationship, a positive relationship, and no
significant relationship between external audit
fees and IA. For example, Felix
et al
. (2001)
provide evidence suggesting that audit fees
are reduced as a result of IA involvement in
external audit. Goodwin-Stewart and Kent
(2006), on the other hand, report evidence of
a positive relation between external audit fees
and internal audit contribution. On the other
hand, both Stein
et al
. (1994) and Carey
et al
.
(2000) could not find a significant relationship
between audit fees and IA.
The current study aims at extending this line of
audit research by examining this important yet
rarely examined research issue in the context of
the Kuwait audit market. Much of the existing
empirical evidence about this relationship stem
from developed countries’ markets, with very
limited research examining this issue in the
context of less developed countries. Research
based on data from these markets may not be
applicable to other parts of the world where
the market structure, firms’ ownership, and
the regulatory environment are quite different.
The current study aims at filling this gap in the
international audit literature by examining the
relationship between external audit fees and
IA contribution using data from the Kuwaiti
audit market. Such examination seems to be
warranted as it could help knowing whether
empirical findings documented and conclusions
drawn from prior developed markets-based
studies about the IA-fees relationship prove to
be relevant to a developing country’s market,
like the Kuwaiti market.
While similar in some aspects, the audit market
in Kuwait is distinct from audit markets of
developed markets in a number of different
ways. First, unlike in most developed countries
where the degree of regulation and official audit
guidance is thorough and well-structured, rules
and regulations governing the audit profession
inKuwait are still immature and underprovided.
Audit pricing in Kuwait, therefore, is expected
to be different from that in other markets as
audit fees are expected to be influenced by the
market’s regulatory settings (Kim
et al
. 2012).
Second, unlike in developed countries where
prior related studies were conducted, there
are no regulations requiring firms to disclose
audit fees paid to their external audit firms.
This makes the pricing of audit services in
the Kuwaiti market less transparent than audit
pricing in these markets where audit fees are
publically known. Third, unlike in Western
and well-developed audit markets, where
the business environment is highly litigious,
the potential for economic or reputational
losses audit firms may incur as a result of
audit failures is quite remote in a developing
market, like the Kuwaiti market (Habib and
Islam, 2007). Finally, unlike in developed
markets where audit firms operate in a highly
competitive environment, competition is quite
insignificant in the Kuwaiti audit market. Prior
research (e.g. Boone
et al
. 2012; Francis
et al
.
2013) suggests that external auditors’ behavior
is influenced by the level of competition in
the marketplace. Hence, the reduced level of
competition audit firms face in developing
markets compared to that in developed markets
may result in fewer incentives for audit firms
to reduce their audit costs via seeking IA
contribution in their external audit work. These
differences between the Kuwaiti audit market
and other markets where prior related studies
were carried out raise the need for further