The Demand for External Audit Quality: The Contribution of Agency Theory in the Context of Cameroon

Michael Forzeh Fossung,Samuel Tanjeh Mukah,Motika Eubert Nsai,Kueda Wamba Berthelo

doi:10.5430/afr.v11n1p13

Michael Forzeh Fossung, Samuel Tanjeh Mukah + Show 2 more

Open Access

https://doi.org/10.5430/afr.v11n1p13

Copy DOI

Abstract

This study examines the effect of agency theory on the demand for external audit quality in Cameroon. Specifically, it looks at the impact of shareholder/manager agency cost, shareholders/creditors agency cost, and majority/minority shareholders agency cost on external audit quality demand in Cameroon. The focus is on a sample of 171 companies drawn from the regions of Littoral, Centre and North-West using questionnaires. We assess the explanatory power of agency theory on the demand for a better quality of audit in the Cameroonian context by modelling external audit quality as a function of agency costs. The logistic regression analysis allows us to study the nature of any possible interaction. The analysis shows that while an increase in shareholder/creditor agency cost and an increase in shareholder/manager agency cost negatively affect the demand for audit quality, the majority/minority agency cost and the size of the audited client positively and significantly affect the demand for audit quality.

Highlights

Under the base of the agency theory of Jensen & Meckling (1976), the managers and shareholders relationship is such a conflictive relation
These studies provided evidence that external audit quality improves the quality of financial reporting, information asymmetry, lower the cost of capital equity (Houqe et al, 2017) and, above all, reduce agency costs (Watts and Zimmerman, 1986; Corten et al, 2017)
Wong (2001) shows that agency costs in firms, where capital is concentrated in the hands of a small number of shareholders, result from conflicts of interest between majority shareholders and minority shareholders

Summary

Introduction

Under the base of the agency theory of Jensen & Meckling (1976), the managers and shareholders relationship is such a conflictive relation. Previous have extensively examined the demand for audit quality at different degrees of agency problems and the cost of equity capital (Lai & Liu, 2018). These studies provided evidence that external audit quality improves the quality of financial reporting, information asymmetry, lower the cost of capital equity (Houqe et al, 2017) and, above all, reduce agency costs (Watts and Zimmerman, 1986; Corten et al, 2017). Based on the paper of Growth and Employment Strategy of 2009, the Cameroonian companies' bankruptcy rate is greater than 32% (Fossung and Margang, 2019)

Objectives

Methods

Findings

Discussion

Conclusion