Factors Affecting Quality Of External Auditing The Case Of Ethiopian Commercial Banks

Subjecting financial statements to external verification and assurance is a mechanism throughrnwhich managers can add credibility to the reports, enhance and improve the quality of financialrninformation, while increasing the reliance placed upon them (Jensen & Meckling, 1976; Watts &rnZimmerman, 1986).Since DeAngelo’s study (1981) on audit quality, there is little evidence aboutrnaudit quality in the financial market. In Ethiopia, studies on audit quality began only in thern2000s, although without a specific focus on banks. The purpose of this study was to identify thernquality determinants of audit work in Ethiopian banking institutions. Using the practice ofrnearnings management as a proxy for audit quality - more specifically, the discretionary accrualsrnrelated to the process of the constitution of the Loan Loss Provision (LLP) - tests were performedrnbased on the annual information of commercial banks from 2005 to 2014. Empirical associationrntests of the audit quality proxy with the variables representing incentives for the performance ofrnauditors have confirmed two of the seven research hypotheses, revealing that audit quality hasrnthe following relationships: positive with the bank size and negative with audit fee paid by thernbank. Of the hypotheses tested, five were not confirmed empirically.rnKeywords: Audit quality, Earning Management, Loan Loss Provision

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