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Article
Publication date: 6 May 2020

Iman Harymawan

One of the strongest connections in politics in developing countries is through military links. This study aims to examine the auditor choice preference of the…

Abstract

Purpose

One of the strongest connections in politics in developing countries is through military links. This study aims to examine the auditor choice preference of the militarily-connected firms in Indonesia, an emerging country where there is a strong influence from the military on political decision-making.

Design/methodology/approach

The analysis used 3,473 firms-year observations listed on the Indonesian Stock Exchange spanning from 2003 to 2017 using regression and other statistical tests.

Findings

The results reveal that firms with a militarily-connected director are less likely to appoint one of the Big 4 auditors. Using the military reform as a natural experiment, the finding shows that militarily-connected firms did not change their auditor choice preference even after the military reform. Interestingly, I find that connected firms are associated with high earnings management. In addition, the different retirement position level and military affiliations of the connected directors generate different outcomes related to the auditor choice decision. Overall, the results indicate that militarily-connected firms were less likely to appoint one of the Big 4 auditors both before and after the military reforms. These results are robust, even after the author controlled for political connections, year fixed effects and industry fixed effects.

Research limitations/implications

Because of the limitations of the prior literature on military connections, this study is developed based on the assumption that the militarily-connected directors have identical behavior whether they serve in either public or private companies. However, this assumption could be invalid which potentially affects the interpretation of some of the results in this study.

Originality/value

This paper provides direct evidence of the auditor choice preference of firms with a military connection. The evidence builds on the existing literature on the difference in auditor choice preference between politically and militarily-connected firms.

Details

Managerial Auditing Journal, vol. 35 no. 6
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 1 March 2015

Anne-Mie Reheul, Tom Van Caneghem and Sandra Verbruggen

From 2006 onwards very large Belgian nonprofit organizations (NPOs) are legally required to appoint an external auditor. In this context we investigate whether auditor

Abstract

From 2006 onwards very large Belgian nonprofit organizations (NPOs) are legally required to appoint an external auditor. In this context we investigate whether auditor choice in favor of a sector expert, being a higher quality auditor, is associated with NPOs’ expectations regarding several auditor attributes. We find that NPOs are more likely to choose a sector expert if they attach higher importance to an auditor’s client focus and relationship with management. NPOs are less likely to choose a sector expert if they care more about the practical execution of the audit. We provide recommendations for increasing the appeal of sector expertise as valuable auditor attribute. The resulting quality increase of NPOs’ financial statements and audit reports could benefit various stakeholders.

Details

Journal of Public Budgeting, Accounting & Financial Management, vol. 27 no. 2
Type: Research Article
ISSN: 1096-3367

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Article
Publication date: 1 October 2019

Arnab Bhattacharya and Pradip Banerjee

This paper aims to examine various factors affecting the pricing of audit services and the selection of auditors in the Indian audit market. This paper also aims to…

Abstract

Purpose

This paper aims to examine various factors affecting the pricing of audit services and the selection of auditors in the Indian audit market. This paper also aims to investigate the impact of financial distress conditions on the audit pricing and auditor choice decisions of a firm, particularly in the context of a developing economy.

Design/methodology/approach

The sample comprises 22,644 firm-years for 1,366 Indian firms from 1990 to 2015. The authors adopt ordinary least squares regression technique to model audit fee, and logistic regression technique to model auditor choice as a function of various factors relating to firm attributes and auditor characteristics.

Findings

This paper finds that auditors tend to charge an audit fee premium when they are affiliated to a Big 4 auditor, have industry specialization or jointly provide auditing and non-auditing services. Additionally, firms with larger boards, higher proportion of independent board of directors and CEO–Chairman separation are more likely to choose a Big 4-affiliated auditor. The results also suggest that financially distressed firms tend to pay significantly lower audit fees and are more likely to choose non-Big 4 auditors.

Originality/value

This paper is among the few studies which investigate how financial distress impacts the audit pricing and auditor choice decisions of a firm in the context of emerging economies. The findings of this paper raises serious concerns about the credibility of the audited financial statements and corporate governance mechanisms of firms undergoing financial distress. The empirical results of this paper have strong implications for practitioners, regulators and investors.

Details

Managerial Auditing Journal, vol. 35 no. 1
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 8 May 2017

Mishari M. Alfraih

This paper aims to investigate the association between the composition of boards of directors and the choice of external auditor among companies listed on the Kuwait Stock…

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1043

Abstract

Purpose

This paper aims to investigate the association between the composition of boards of directors and the choice of external auditor among companies listed on the Kuwait Stock Exchange (KSE) in 2013.

Design/methodology/approach

Consistent with prior research, audit quality is represented by two proxies, namely, a Big 4 and Non-Big 4 audit firm. Independence, diversity, interlocks, size and role duality are used as proxies for board composition. To accommodate the dichotomous dependent variable (auditor choice), a logistic regression model is used to test the hypothesized associations between board composition and auditor choice.

Findings

After controlling for firm-specific characteristics, results show that independence, diversity and size are statistically significant and increase the likelihood that a KSE-listed company selects a high-quality (Big 4) audit firm. Role duality is also statistically significantly but decreases the likelihood of choosing a Big 4 audit firm.

Practical/implications

This research has implications for regulators, shareholders, boards and academics. The paper underlines the importance of the composition of the board in increasing the likelihood of hiring a high-quality audit firm. Regulators can draw upon these results when assessing the effectiveness of corporate governance mechanisms.

Originality/value

This paper is among the first to study the association between auditor choice and board composition using data from the frontier market of Kuwait, thus responding to the call for empirical research into the issue in less-developed markets. Overall, it sheds light on the effectiveness of board composition and provides empirical evidence that it is an important element in the choice of auditors. The findings indicate that board composition may be a mechanism that can promote demand for high audit quality.

Details

International Journal of Law and Management, vol. 59 no. 3
Type: Research Article
ISSN: 1754-243X

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Article
Publication date: 26 July 2013

AKM Waresul Karim and Tony van Zijl

The purpose of this paper is to test the relative strengths of efficiency and opportunistic considerations in making client auditor choice decisions in an emerging audit…

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1525

Abstract

Purpose

The purpose of this paper is to test the relative strengths of efficiency and opportunistic considerations in making client auditor choice decisions in an emerging audit services market. The authors examine whether the degrees of foreign and institutional shareholdings, audit complexity, industry orientation (i.e. whether the firm belongs to the banking sector), ownership concentration in the hands of domestic sponsor shareholders, state ownership, power concentration in the hands of a CEO who is also the chairperson of the board, and audit risk affect the demand for superior monitoring by Big‐4 auditors.

Design/methodology/approach

The authors carry out a multivariate analysis using binary logit regression technique. They test whether efficiency or opportunism rules auditor choice of firms in their sample. Efficiency‐based variables used in the authors' models include foreign shareholding by a multinational parent, institutional shareholding, audit complexity and whether the firm belongs to the banking sector. Opportunism‐based variables include ownership concentration in the hands of domestic sponsor shareholders other than government, government shareholding, power concentration in the hands of a CEO who holds the position of chair as well, and audit risk.

Findings

The authors find that opportunistic considerations outweigh efficiency considerations in shaping auditor choice decisions in their sample. Two out of four efficiency arguments (foreign shareholdings in the hands of a multinational parent and institutional shareholding) support efficiency as the main driver of auditor choice while one (client belonging to the banking sector) indicates otherwise. On the other hand, three out of four opportunism arguments (government shareholding, CEO‐chair duality and audit risk) document opportunistic considerations to be the main forces behind auditor choice. The influence of foreign shareholding becomes apparent only when the foreign shareholder is the controlling shareholder.

Originality/value

This paper is the first of its kind to address auditor choice in an emerging market context. No other paper looked at auditor choice using efficiency‐opportunism incentives. The paper contributes to our understanding of auditor choice dynamics in emerging markets. The finding that institutional shareholding is associated with choice of high quality auditors is encouraging. Individual small investors can use institutional investors as a shield to protect their investment through the higher quality auditing linked to the presence of institutional investors.

Details

International Journal of Accounting & Information Management, vol. 21 no. 3
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 13 September 2011

Kym Butcher, Graeme Harrison, Jill McKinnon and Philip Ross

The purpose of this paper is to examine what auditor and audit environmental attributes affect auditor appointment decisions in compulsory audit tendering, and whether the…

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4531

Abstract

Purpose

The purpose of this paper is to examine what auditor and audit environmental attributes affect auditor appointment decisions in compulsory audit tendering, and whether the attributes affecting appointment of a new auditor (rotation) are consistent with or different from those affecting reappointment of the incumbent (retention).

Design/methodology/approach

New South Wales (NSW) local council finance managers were surveyed for importance ratings of 48 attributes. An hypothesis for differential ratings between rotators and retainers was formulated. Confirmatory factor analysis, tests of mean differences and logistic regression were used.

Findings

Consistent with the sample's high retention rate, the most important attributes for all respondents related to the quality of previous experience with the incumbent. Consistent with hypothesis, attributes proxying for a quality auditor (technical competence, independence and reputation) were more important for rotators.

Research limitations/implications

The authors proxied rotation/retention by intention. Given the importance of audit quality attributes in the appointment decision and the high retention rate in compulsory audit tendering, future research could examine the relation between audit service quality attributes and retention.

Originality/value

This is the first study to examine attributes affecting auditor appointment decisions in a mandatory choice setting. NSW local councils provide a unique opportunity to do so as it is one of few jurisdictions in which compulsory audit tendering operates. Compulsory tendering may be implemented if current legislation aimed at improving audit independence and quality through mandatory partner rotation proves infeasible.

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Article
Publication date: 5 October 2012

Mikko Zerni

The purpose of this paper is examine whether agency conflicts between controlling and minority shareholders affect firms' decisions to purchase non‐audit services (NAS)…

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3812

Abstract

Purpose

The purpose of this paper is examine whether agency conflicts between controlling and minority shareholders affect firms' decisions to purchase non‐audit services (NAS). The author examines whether client firms engage separate firms for audit and non‐audit functions, especially if the expected agency costs are high.

Design/methodology/approach

The sample consists of 772 firm‐year observations from Sweden where the ownership patterns are highly concentrated. The hypotheses are tested using multivariate regression analyses.

Findings

Empirical findings reveal that higher levels of agency cost proxies are significantly negatively related to both absolute and relative non‐audit fees but, at the same time, are significantly positively related to the level of outside consulting services purchased from non‐incumbent auditors. Together, these findings support the view that client firms are protecting the appearance of their auditor's independence.

Research limitations/implications

One cannot rule out the possibility that there are some unspecified factors unrelated to auditor independence issues that affect both client firms' purchases of NAS and the level of outside consulting services purchased from non‐incumbent auditors.

Practical implications

The research findings have implications for the functioning of the audit and NAS markets. The increasing pressure on companies to improve the perception of their auditor independence by engaging separate auditors and consultants further limits the auditor choice decision.

Originality/value

This is the first paper that investigates whether agency conflicts between majority and minority shareholders affect firms' decisions to purchase NAS. This is also the first paper to examine determinants of purchases of NAS from non‐incumbent audit firms.

Details

Managerial Auditing Journal, vol. 27 no. 9
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 3 July 2017

Mishari M. Alfraih

This study examines the effects of institutional and government ownership on audit quality in Kuwait. Kuwait provides an interesting regulatory context as listed firms are…

Abstract

Purpose

This study examines the effects of institutional and government ownership on audit quality in Kuwait. Kuwait provides an interesting regulatory context as listed firms are legally required to appoint two external auditors from different auditing firms. This offers a unique opportunity to examine differentiation in demand for audit quality when there are three potential combinations of auditors: two non-Big 4, one Big 4 and one non-Big 4 and two Big 4.

Design/methodology/approach

The sample consists of all firms listed on the Kuwait Stock Exchange in 2013. Multinomial logistic regression examines the influence of ownership structure on audit quality. Analyses are controlled for the effect of company characteristics. Control variables are: firm size, complexity, growth, leverage, profitability and industry category.

Findings

The results show that institutional ownership is positively related to the number of Big 4 auditing firms that audit a company’s financial statements. This reflects the powerful and influential role institutional investors play in discouraging management from choosing lower-quality providers. In contrast, government ownership has a negative impact on audit quality. These findings are consistent with the hypothesis that audit quality is a function of, among other factors, the structure of equity ownership.

Practical implications

Given the importance of audits, knowledge of the determinants of audit quality is of particular interest to regulators, enforcement agencies and investors. The findings imply that different ownership structures have different effects on the demand for audit quality; some structures strengthen it, while others weaken it. The negative relation between government ownership and audit quality raises serious questions about the effectiveness of government in monitoring its investments.

Originality/value

This paper extends the literature by investigating the determinants of the choice of auditors in an emerging market where there is a joint audit requirement. It highlights the important role played by ownership structure in shaping demand for audit quality. A distinguishing feature in previous research is the classification of the audit quality proxy into two choices (Big 4 vs non-Big 4 auditors). However, the regulatory context in Kuwait means that there are three choices. Thus, unusually, a multinomial logistic regression is used for the analysis.

Details

Journal of Financial Reporting and Accounting, vol. 15 no. 2
Type: Research Article
ISSN: 1985-2517

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Article
Publication date: 2 November 2015

Chia-Ling Cheng, Chih-Shun Hsu and Fan-Hua Kung

The purpose of this paper is to investigate the relationship between the political connections of firms, managerial incentives and auditor choice. Data from China were…

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1306

Abstract

Purpose

The purpose of this paper is to investigate the relationship between the political connections of firms, managerial incentives and auditor choice. Data from China were used to determine whether managers in firms with political connections are more likely to hire auditors of low quality to help them cover up earnings management and opportunistic behavior.

Design/methodology/approach

Cross-sectional analysis was conducted using data covering the period from 2003 to 2009 and the Top 10 auditors were used as a proxy to represent the demand for high-quality auditors. Three proxies were used to measure the political connectedness: state-owned enterprises (SOEs), politically connected CEOs and state ownership.

Findings

This paper provides empirical evidence that firms with political connections do not demand stringency in the monitoring and information roles of auditing. Moreover, politically connected firms with high managerial incentives are likely to choose non-Top 10 auditors.

Originality/value

This paper provides a unique focus on the role of managerial incentives in the appointment of auditors. This paper tests the managerial opportunism hypothesis in another context and results of this paper help to elucidate the effects of managerial incentives on the demand of audit quality.

Details

Pacific Accounting Review, vol. 27 no. 4
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 1 August 2006

Ayoib Che Ahmad, Keith A. Houghton and Nor Zalina Mohamad Yusof

The purpose of this paper is to investigate the extent to which ethnic association (i.e. Chinese and Bumiputra ownerships) and national issues (i.e. the presence of…

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5723

Abstract

Purpose

The purpose of this paper is to investigate the extent to which ethnic association (i.e. Chinese and Bumiputra ownerships) and national issues (i.e. the presence of foreign corporations) influence the audit services market in Malaysia. Specifically, the paper aims to examine the effects of ethnicity and foreign ownership on choice of auditor.

Design/methodology/approach

Two logit models are used; the first is to test on ethnic auditor (Chinese/non‐Chinese) choice while the second is related to the choice of quality‐differentiated auditor. The data is obtained from annual reports of the population of the Bursa Malaysia listed companies for both the Main Board and the Second Board for the periods 1993‐1995.

Findings

The logit regressions confirm our prediction of ethnic networking and preferential treatment on the auditor selection process.

Research limitations/implications

The first limitation lies on the auditor choice model where the model is developed from a demand perspective, assuming that the auditors are willing to supply services to any client even though it is very unlikely in the real world. The model also assumes that the audit engagement process for foreign‐controlled companies is purely transacted in the Malaysian market. However, foreign multinational corporations might determine the selection of the auditor at the headquarter offices and the Malaysian subsidiaries might simply be directed to engage a given auditor. Another limitation relates to the results of the logit regressions as the study has documented an ethnic association between auditor and auditee rather than establishing a causal relationship.

Practical implications

An important implication of these findings relates to auditor independence. The Malaysian Institute of Accountants (MIA) has made rules prescribing the code of professional conduct and ethics of public accountants known as the MIA By‐Laws (on Professional Conduct and Ethics) but it seems to neglect the diversity of local culture in addressing independence. Whilst the auditor is divorced from financial and familial interests, the ethnic sentiments might impair auditor independence especially in an audit conflict situation.

Originality/value

The paper provides important insights into the existence of Chinese business practices in Malaysia and auditor selection process in this country.

Details

Managerial Auditing Journal, vol. 21 no. 7
Type: Research Article
ISSN: 0268-6902

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