Impact of Audit Firm Characteristics on Audit Quality: A Study of Business Sustainability Strategy
DOI:
https://doi.org/10.7187/GJATSI022022-11Keywords:
Audit Firm Age, Audit Quality, Non-Audit Services, Audit Firm SizeAbstract
The aim of this paper is to investigate the impact of audit characteristics such as, audit firm size, audit fees, non-audit fees and audit firm age on Audit Quality (AQ) of the Malaysian Listed Companies. The research design of this study is quantitative analysis based on the secondary data and the unit of analysis is the organizational level. This study employs a cross‐sectional regression analysis of 201 firms listed on Bursa Malaysia. Smart-PLS were used to estimate the relationships proposed in the hypothesis. Overall, the finding shows that, audit fee, non-audit fee and audit firm size does have a positive significant with AQ. Unexpectedly, the audit firm age has a negative effect on AQ. This research contributes to audit literature by growing the academic ‘s knowledge. Further, the study fill-up the gap in literature by provides empirical evidence on the seldom-used audit firm age as one of the audit firm characteristics. This study could be benefits policymakers, especially the Malaysia Institute of Accountants (MIA) to come up with more policies that can enhance the AQ. Moreover, this study also could help the shareholder and management as a guide on which audit characteristics that they need to focus on a better understanding of financial reporting quality.
References
ACFE. (2018). Report to The Nations: 2018 Global Study on Occupational Fraud and Abuse. Retrieved from USA: https://s3-us-west-2.amazonaws.com/acfepublic/2018-report-to-the-nations.pdf
Agoglia, C. P., Hatfield, R. C., & Lambert, T. A. (2015). Audit team time reporting: An agency theory perspective. Accounting, Organizations and Society, 44, 1-14.
Arfiyadi, A., & Anisykurlillah, I. (2016). The Detection of Fraudulent Financial Statement with Fraud Diamond Analysis. Accounting Analysis Journal, 5(3), 173-181.
Bell, T. B., Causholli, M., & Knechel, W. R. (2015). Audit firm tenure, non‐audit services, and internal assessments of audit quality. Journal of Accounting Research, 53(3), 461-509.
Bhasin, M. L. (2016). Fraudulent Financial Reporting Practices: Case Study of Satyam Computer Limited. The Journal of Economics, Marketing and Management, 4(3), 12-24.
Bursa. (2013). Corporate governance guide (2nd ed.). Retrieved from http://www. bursamalaysia.com/misc/system/assets/7257/CG_Guide2.pdf. from Bursa Malaysia http://www.bursamalaysia.com/misc/system/assets/7257/CG_Guide2.pdf
Bursa. (2019). Retrieved from http://www.bursamalaysia.com/market/listed-companies/list-of-companies/main-market/
Che, L., Hope, O.-K., & Langli, J. C. (2018). How Big-4 Firms Improve Audit Quality. Available at SSRN 2828224.
Choi, J.-H., Kim, C., Kim, J.-B., & Zang, Y. (2010). Audit office size, audit quality, and audit pricing. Auditing: A Journal of Practice & Theory, 29(1), 73-97.
Christ, M. H., Masli, A., Sharp, N. Y., & Wood, D. A. (2015). Rotational internal audit programs and financial reporting quality: Do compensating controls help? Accounting, Organizations and Society, 44, 37-59.
Climent-Serrano, S., Bustos-Contell, E., Labatut-Serer, G., & Rey-Martí, A. (2018). Low-cost trends in audit fees and their impact on service quality. Journal of Business Research, 89, 345-350.
Corbella, S., Florio, C., Gotti, G., & Mastrolia, S. A. (2015). Audit firm rotation, audit fees and audit quality: The experience of Italian public companies. Journal of International Accounting, Auditing and Taxation, 25, 46-66.
Dahmash, F. N. (2015). Size effect on company profitability: Evidence from Jordan. International Journal of Business and Management, 10(2), 58.
Dang, C., Li, Z. F., & Yang, C. (2018). Measuring firm size in empirical corporate finance. Journal of Banking & Finance, 86, 159-176.
DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of accounting and economics, 3(3), 183-199.
DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of accounting and economics, 58(2-3), 275-326.
Francis, J. R. (2004). What do we know about audit quality? The British accounting review, 36(4), 345-368.
Francis, J. R. (2011). A framework for understanding and researching audit quality. Auditing: A Journal of Practice & Theory, 30(2), 125-152.
Fredriksson, A., Kiran, A., & Niemi, L. (2018). Reputation Capital of Directorships and Audit Quality.
Ganesan, Y., Narayanan, R., Haron, H., & Pitchay, A. A. (2019). Does Audit Fees and Non-Audit Fees Matters in Audit Quality? KnE Social Sciences, 3(22), 1074-1083. doi:10.18502/kss.v3i22.5112
Gaynor, L. M., Kelton, A. S., Mercer, M., & Yohn, T. L. (2016). Understanding the relation between financial reporting quality and audit quality. Auditing: A Journal of Practice & Theory, 35(4), 1-22.
Ghafran, C., & O’Sullivan, N. (2017). The impact of audit committee expertise on audit quality: Evidence from UK audit fees. The British accounting review, 49(6), 578-593.
Gottschalk, P., & Gunnesdal, L. (2018). White-Collar Crime Detection. In White-Collar Crime in the Shadow Economy (pp. 111-134): Springer.
Hair Jr, J. F., Hult, G. T. M., Ringle, C., & Sarstedt, M. (2016). A primer on partial least squares structural equation modeling (PLS-SEM): Sage publications.
Hamid, F. Z. A., Shafie, R., Othman, Z., Hussin, W. N. W., & Fadzil, F. H. (2013). Cooking the books: The case of Malaysian listed companies. International Journal of Business and Social Science, 4(13).
Hoitash, R., Markelevich, A., & Barragato, C. A. (2007). Auditor fees and audit quality. Managerial Auditing Journal, 22(8), 761.
Hrazdil, K., Simunic, D. A., & Suwanyangyuan, N. (2018). Are the Big 4 Firms Homogeneous?: Further Evidence From Audit Pricing. Further Evidence From Audit Pricing (October 15, 2018).
Huang, T.-C., Chang, H., & Chiou, J.-R. (2015). Audit market concentration, audit fees, and audit quality: Evidence from China. Auditing: A Journal of Practice & Theory, 35(2), 121-145.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. doi:https://doi.org/10.1016/0304-405X(76)90026-X
Jiang, J. X., Wang, I. Y., & Wang, K. P. (2018). Big N auditors and audit quality: New evidence from quasi-experiments. The Accounting Review.
Justice, D. o. (2017). U.S. Seeks to Recover Approximately $540 Million Obtained From Corruption Involving Malaysian Sovereign Wealth Fund. Retrieved from https://www.justice.gov/opa/pr/us-seeks-recover-approximately-540-million-obtainedcorruption-involving-malaysian-sovereign
Kaawaase, T. K., Assad, M. J., Kitindi, E. G., & Nkundabanyanga, S. K. (2016). Audit quality differences amongst audit firms in a developing economy: The case of Uganda. Journal of Accounting in Emerging Economies, 6(3), 269-290.
Kaklar, H. M., Kangarlouei, S. J., & Motavassel, M. (2012). Audit quality and financial reporting quality: case of Tehran Stock Exchange (TSE). Innovative Journal of Business and Management, 1(03).
Kwon, S. Y., Lim, Y., & Simnett, R. (2014). The effect of mandatory audit firm rotation on audit quality and audit fees: Empirical evidence from the Korean audit market. Auditing: A Journal of Practice & Theory, 33(4), 167-196.
Lawrence, A., Minutti-Meza, M., & Zhang, P. (2011). Can Big 4 versus Non-Big 4 Differences in Audit-Quality Proxies Be Attributed to Client Characteristics? The Accounting Review, 86(1), 259-286. doi:10.2308/accr.00000009
Lennox, C. S. (1999). Non-audit fees, disclosure and audit quality. European Accounting Review, 8(2), 239-252.
Loderer, C. F., & Waelchli, U. (2010). Firm age and performance. Available at SSRN 1342248.
Mahama, M. (2015). Detecting corporate fraud and financial distress using the Atman and Beneish models. International Journal of Economics, Commerce and Management, 3(1), 1-18.
Martínez‐Ferrero, J., Garcia‐Sanchez, I. M., & Cuadrado‐Ballesteros, B. (2015). Effect of financial reporting quality on sustainability information disclosure. Corporate Social Responsibility and Environmental Management, 22(1), 45-64.
MohammadRezaei, F., Mohd-Saleh, N., & Ahmed, K. (2018). Audit firm ranking, audit quality and audit fees: Examining conflicting price discrimination views. The International Journal of Accounting, 53(4), 295-313.
Nation. (2018, 27 Jun 2018). Auditors: No 1MDB accounts are true and fair. The Star Online. Retrieved from https://www.thestar.com.my/news/nation/2018/06/27/auditors-no-1mdb-accounts-are-true-and-fair/
Nazmi, S., & Rahim, M. H. A. (2016). The reporting on the 1Malaysia Development Berhad (1MDB) crisis and implication on efficacy of economic and financial news reporting in Malaysia. Advances in Social Sciences Research Journal, 3(10).
Palmorse, Z. (1988). An analysis of auditor litigation and audit service quality. The Accounting Review, 63(1), 55-73.
Palmrose, Z.-V. (1986). Audit fees and auditor size: Further evidence. Journal of Accounting Research, 97-110.
Rezaei, F., & Shabani, S. (2014). The effect of audit firm size and age on the quality of audit work. European Online Journal of Natural and Social Sciences; Vol 3, No 1 (2014). Retrieved from http://european-science.com/eojnss/article/view/317
SCM. (2017). Former Directors Jailed Six months for Misleading Financial Disclosure to SC [Press release]. Retrieved from http://www.sc.com.my//post_archive/former-directors-jailed-six-months-for-misleading-financial-disclosure-to-sc/
See, J. K. P., Pitchay, A. A., Ganesan, Y., Haron, H., & Hendayani, R. (2020). The Effect of Audit Committee Characteristics on Audit Quality: The Moderating Role of Internal Audit Function. Journal of Governance and Integrity, 3(2), 44-56.
Simunic, D. A., & Stein, M. T. (1987). Product differentiation in auditing: Auditor choice in the market for unseasoned new issues: Canadian Certified General.
SSM. (2018). Complying to Financial Reporting Requirements [Press release]. Retrieved from http://www.ssm.com.my/Pages/Publication/Bulletin/Borneo%20Post%20Article%20(002).pdf
Sukumaran, T. (2019, 30/Jan/2019). Malaysia fines auditor Deloitte US$535,000 for 1MDB breaches. South China Morning Post. Retrieved from https://www.scmp.com/news/asia/ southeast-asia/article/2184302/malaysia-fines-audit-firm-deloitte-serious-breacheslinked
Svanberg, J., & Öhman, P. (2015). Auditors’ identification with their clients: Effects on audit quality. The British accounting review, 47(4), 395-408. doi:https://doi.org/10.1016/j.bar. 2014.08.003
Svanström, T. (2013). Non-audit Services and Audit Quality: Evidence from Private Firms. European Accounting Review, 22(2), 337-366. doi:10.1080/09638180.2012.706398
Svanström, T. (2016). Time pressure, training activities and dysfunctional auditor behaviour: evidence from small audit firms. International Journal of Auditing, 20(1), 42-51.
Tepalagul, N., & Lin, L. (2015). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing & Finance, 30(1), 101-121.
Timothy, B., Doogar, R., & Solomon, I. (2008). Audit Labor Usage and Fees under Business Risk Auditing. Journal of Accounting Research, 46(4), 729-760. doi:10.1111/j.1475-679X.2008.00291.x
Wang, Q., Wong, T.-J., & Xia, L. (2008). State ownership, the institutional environment, and auditor choice: Evidence from China. Journal of accounting and economics, 46(1), 112-134.
Yatim, P., Kent, P., & Clarkson, P. (2006). Governance structures, ethnicity, and audit fees of Malaysian listed firms. Managerial Auditing Journal, 21(7), 757-782.
Yurisandi, T., & Puspitasari, E. (2015). Financial Reporting Quality-Before and After IFRS Adoption Using NiCE Qualitative Characteristics Measurement. Procedia-Social and Behavioral Sciences, 211, 644-652.
Zarinah, A. (2007). Future Direction of the Legal and Regulatory Framework for Malaysia’s Capital Market. Retrieved from http://www.sc.com.my/post_archive/keynote-address-by-ybhg-dato-zarinah-anwar-chairman-securitiescommission-at-the-miba-regional-capital-market-conference/
GJAT provides immediate open access to its content on the principle that making research freely available to the public supports a greater global exchange of knowledge.
