Determinants of External Auditors’ Remuneration: Evidence from the Ugandan Insurance Sector (Published)
There is perception in Uganda that the gap between the auditors’ remuneration paid to the Big-4 (Deloitte, EY, KPMG and PwC) and that for the Small and Medium-sized Practices (SMPs) has continued to grow but little is known of what is causing the disparity. There are 100 companies in the insurance sector in Uganda yet there are 230 licenced audit firms at end of 2018 leading to an excess of supply over demand. A sample of 74 insurance players in Uganda was used for this longitudinal study based on selected data extracted from audited financial statements for the years 2014-2017. The study revealed that the client’s annual income and total assets have a statistically significant influence on the auditor’s remuneration. The auditor’s size (SMP or Big-4) also had statistically significant influence on the auditor’s remuneration – the client size influenced the choice of the auditor. The smallest insurance player had total assets of only USD 7,079 while the largest had USD 58.2million. In terms of income, the largest earned USD 34.6million per annum. Big-4 earned a premium of USD 17,235 on their remuneration per client per annum by virtue of their size and reputation. Given these three determinants, the auditor’s remuneration was USD 23,189 per client for Big-4 compared to USD 2,422 per client for the SMPs. Whereas SMPs held 66% of the number of insurance audits in Uganda, their market share of the auditor’s remuneration was 17%. This translates into a Concentration Ratio (CR4) of auditor’s remuneration of 83% held by the Big-4. The estimated size of the auditor’s remuneration in the insurance sector in Uganda is USD 822,000 per annum of which the SMP’s share is approximately USD 150,000 per annum. The implications for accountancy practice, especially SMPs in Uganda, are that the gap can only be reduced through acquisition of medium and larger insurance players who would then be able to afford higher auditor’s remuneration. Future research could include a qualitative dimension of in-depth interviews of selected insurance players to understand their criteria for audit firm choice and auditor’s remuneration budget
This study of companies listed on the stock exchanges in Tanzania, Kenya, Rwanda and Uganda has uncovered oligopolistic audit market structure. A total of 78 listed companies (74% of population) was analysed using audit fees’ data from 2013-2017. The study revealed that Big4 had a statistically positive influence on the audit fees paid by the listed companies. Non_Big4 as a bloc had a negative influence as some of the firms experienced reduction in audit fees after taking over from Big4. The Herfindahl-Hirschman Index (HHI) was 0.94 while Concentration Ratio (CR4 – clients) which measures client market concentration of the Big4 was 86% and CR4- audit fees was much higher at 96% with PwC and KPMG the top two. Only 5% of variation in audit fees could be attributed to variation in stock exchange. Audit fees increased by a compound annual growth rate of 8% but Non_Big4 remain marginalized and forced into fee discounting to retain the few clients.