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This study aims to understand independence in internal auditing by investigating how internal auditor independence is constructed when analysed in its corporate governance context.
Abstract
Purpose
This study aims to understand independence in internal auditing by investigating how internal auditor independence is constructed when analysed in its corporate governance context.
Design/methodology/approach
A critical discourse analysis (CDA) of the corporate governance reports of Swedish large stock market listed non-financial companies, for three consecutive years, is undertaken, using a theoretical lens of organisational embeddedness and operational coupling to understand independence as a situated practice.
Findings
The study develops four archetypes of internal auditor independence – autarchic, instrumental, symbiotic and subservient – and discusses each archetype's implications for independence, related to tripartite relations with management and the audit committee, regarding who has the mandate to direct work and how the work is done. It finds that internal auditors always have a capacity to be independent. Although they are not independent in relation to agents in the subservient archetype, they are independent of those down the organisational chain of command, suggesting independence is both situational and relational.
Research limitations/implications
The analysis contributes a novel approach to the literature and develops a conception of independence using the dimensions of embeddedness and coupling. The archetypes offer an analytical framework for future studies on independence.
Practical implications
Internal auditors may understand their practice differently through the archetypes that result from this study.
Social implications
Internal auditors' power relations within corporate governance further an understanding of the pressures on internal auditors and their role.
Originality/value
This study contributes new knowledge on the situatedness of independence by showing how internal auditors are embedded and coupled helps build their independence.
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Agus Widodo Mardijuwono and Charis Subianto
The purpose of this paper is to obtain empirical evidence of the relationship of independence, professionalism and skepticism with the quality of audit produced.
Abstract
Purpose
The purpose of this paper is to obtain empirical evidence of the relationship of independence, professionalism and skepticism with the quality of audit produced.
Design/methodology/approach
This research was conducted with questionnaires distributed to all auditors working in KAP Surabaya and Sidoarjo. The population in this study was all auditors working in KAP 45 Surabaya and KAP 1 Sidoarjo. Hypothesis testing was performed by using the partial least square test with the help of SmartPLS software version 3.0.
Findings
The results from this study found that auditor independence is positively related to audit quality but is not significant. Variable auditor professionalism is positively related to audit quality and proved significant, while the skepticism variable of auditor professionalism is positively related to audit quality and is significant.
Originality/value
The results of this study indicate that auditor independence, professionalism and skepticism are positively related to audit quality.
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Keywords
Wan Zurina Nik Abdul Majid, Effiezal Aswadi Abdul Wahab, Hasnah Haron, Dian Agustia and Mohammad Nasih
The study examines the relationship between nonaudit services (NAS) and accruals quality in Malaysia. The study also considers several important characteristics of audit committee…
Abstract
Purpose
The study examines the relationship between nonaudit services (NAS) and accruals quality in Malaysia. The study also considers several important characteristics of audit committee as the determinant for accruals quality. Next, the study examines whether these characteristics mitigate the relationship between NAS and accruals quality.
Design/methodology/approach
The study employs descriptive analysis, univariate tests and multivariate regression to investigate the potential effect of NAS on acruals quality. Data for audit committee characteristics were hand collected from annual reports downloaded from Bursa Malaysia's website.
Findings
Based on 1,118 firm-year observations for the period 2009–2011, the study finds that NAS negatively impact accruals quality. This empirical result indicates that the economic bond that is created between auditors and clients restricts the auditors from performing their duty objectively. A fully independent audit committee weakens the negative relationship between NAS and auditor independence.
Research limitations/implications
The sample period represents a limitation since it only covers three years of data. This limitation is largely driven by the nature of data collection of NAS fees.
Practical implications
These results contribute to Malaysia's policy deliberation to account for the effects of NAS on auditor independence and the oversight role of an audit committee. This study contributes to theoretical perspectives on accruals quality and corporate governance in Malaysia.
Originality/value
The novelty of this research, coupled with institutional data in Malaysia, claims the originality of this research.
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Anthony Egyir Aikins, John Victor Mensah and Akwasi Kumi-Kyereme
Internal audit is an essential component of the accountability structure in Ghana's local government system. Favourable conditions are required for its operation to assist…
Abstract
Purpose
Internal audit is an essential component of the accountability structure in Ghana's local government system. Favourable conditions are required for its operation to assist management bodies to fulfil their responsibilities efficiently and effectively. Using Internal Control-Integrated Framework, this paper investigates the conditions under which internal auditing is carried out in four selected local governments in the Central Region of Ghana.
Design/methodology/approach
Based on interpretivism and qualitative approach, purposive sampling technique was used to select 14 key informants at various levels of governance for primary data by the use of key informant interview guide. The data were analysed using pattern matching and content analysis based on themes.
Findings
The findings of the study indicate that internal auditors faced unfavourable conditions including intimidation, threats and administrative interference in the course of performing their duties.
Research limitations/implications
This paper is based on qualitative data from four selected local governments in the Central Region of Ghana. Hence these findings are specific to the local governments, internal auditors and management bodies in the country to benefit from them. The implication of the findings is closely related to the efforts to realise the ultimate goal of the recent government reforms and the need for further reforms to enhance independence, objectivity, effectiveness and efficiency.
Practical implications
This study helps management of local governments in finding out conditions under which internal auditing operates. This helps to enhance favourable conditions and minimise the unfavourable conditions for the purpose of efficient and effective utilisation of resources towards improvement of service delivery of local government system to meet the needs of the people.
Social implications
The study contributes to the understanding and application of Internal Control-Integrated Framework to local government system in the Central Region. It also uses the agency theory to explain the conditions under which internal auditing is carried out in the selected local government institutions.
Originality/value
This study provides new insight into the conditions of carrying out internal auditing in local governments and raises awareness of stakeholders on the need to enhance service delivery to the people. It also introduces a novel idea of placing all internal auditors under a newly established Internal Audit Class to advance independence and objectivity.
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The purpose of this study is to explore the role of Audit and Governance Committee (AGC) for internal Shariah auditing's effectiveness in Bahrain's Islamic banks.
Abstract
Purpose
The purpose of this study is to explore the role of Audit and Governance Committee (AGC) for internal Shariah auditing's effectiveness in Bahrain's Islamic banks.
Design/methodology/approach
This paper employed two-stage approach, i.e. collecting and analysis of data. In this paper, the interviews and literature review on AGC and internal Shariah auditor were conducted as these respondents are considered vital to Islamic banks.
Findings
This paper posited that in building internal Shariah audit effectiveness' conceptual framework, the Islamic worldview theory may be employed as the theoretical foundation. Based on the theory, it was suggested that the Islamic bank's auditors and governance committees may enhance the internal Shariah auditors' effectiveness.
Practical implications
In view of the roles of AGC on internal Shariah audit effectiveness, the current exploratory research contribute to enhance the limited knowledge about AGC by describing the practices of Bahraini Islamic banks in terms of composition, roles/duties and responsibilities and operations. This study also adds to the body literature of AGC effectiveness by identifying roles, duties and responsibilities of characterizing more active AGC and suggesting that these AGC could have a positive impact on internal Shariah audit effectiveness in Bahraini Islamic banks. Overall, this paper provides important insights for Board of Director's member can refer to AGC roles, duties and responsibilities to conduct a self-diagnosis of current practice.
Originality/value
This paper uniquely seized Islamic world view for Islamic banks' AGC.
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Azam Eshagniya and Mahdi Salehi
This paper aims to examine the effect of financial restatement on changing the auditor in the following years.
Abstract
Purpose
This paper aims to examine the effect of financial restatement on changing the auditor in the following years.
Design/methodology/approach
The study uses data of 105 companies (735 company-years) listed on the Tehran Stock Exchange collected during the period 2008-2014. Logistic regression is used to test the hypotheses.
Findings
The results of hypotheses present that restatement does not cause auditor changes and that as the severity of a restatement increases, the auditor change in the following year of restatement also does not increase. Restating companies having strong governance do not go for auditor changes as compared with other companies. In addition, in companies that are restating, non-big auditor changes are not more likely than a big auditor. Also, in companies restating simultaneous with a CEO turnover, there is no possibility of auditor change. Furthermore, multinomial logistic regression showed that the adjustments resulting from the correction of errors and changes in procedures and the amount of adjustments do not cause auditor change in the following year. So, the results have shown that the restatement is not an important factor in changing auditor the next year.
Originality/value
The current study analyses the impact of financial restatement on auditor changes in a deep manner in a developing country like Iran.
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Keywords
Chinedu Francis Egbunike, Ikponmwosa Michael Igbinovia, Kenebechukwu Jane Okafor and Lucy Cecilia Mmadubuobi
The study investigated the relationship between residual audit fee and real income smoothening, proxied as real operating cash flow and production expenditure smoothing of…
Abstract
Purpose
The study investigated the relationship between residual audit fee and real income smoothening, proxied as real operating cash flow and production expenditure smoothing of non-financial firms in Nigeria.
Design/methodology/approach
The study relied on secondary data from annual financial statements of 75 firms in the non-financial sector from 2010 to 2019. The study estimated the residual audit fee using a modified model from several contexts to suit the Nigerian environment. The hypotheses were tested using the dynamic panel GMM estimation procedure.
Findings
The results showed a significant negative effect of residual audit fee on (real) operating cash flow smoothing and production expenditure smoothing of non-financial firms. The control variables showed mixed effects for the industry-related (firm size and profitability), auditor attribute (audit quality and audit report lag) and the board related (board size and board independence).
Research limitations/implications
The firms included in the analysis were selected based on data availability from MachameRatios® and the occurrence of missing values for some of the variables used in the various estimation models may bias results.
Practical implications
The study identifies the nexus between RAF and real earnings management practices of non-financial firms; and shows the implication of fee payment to the overall conduct of the audit. More so, the mixed findings from the CVs suggest that in the context of developing economies, shareholders and capital markets regulators should be watchful of residual audit fees and utilise it as a gauge for audit quality and also an indicator of opportunism and weak internal control in the firm in the future assessments.
Social implications
The implication of the study stems from its relevance to the capital market stability and the potential negative disastrous effect of corporate failure from earnings management practices.
Originality/value
The study develops a newly residual audit fee model to explore the effect of RAF on real income smoothing rather than the widely used models from prior literature; secondly, the focus on real activities manipulation may present additional evidence that applies to developing countries rather the widely used accrual measurement technique from an economic bonding perspective.
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Domenico Campa, Alberto Quagli and Paola Ramassa
This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.
Abstract
Purpose
This study reviews and discusses the accounting literature that analyzes the role of auditors and enforcers in the context of fraud.
Design/methodology/approach
This literature review includes both qualitative and quantitative studies, based on the idea that the findings from different research paradigms can shed light on the complex interactions between different financial reporting controls. The authors use a mixed-methods research synthesis and select 64 accounting journal articles to analyze the main proxies for fraud, the stages of the fraud process under investigation and the roles played by auditors and enforcers.
Findings
The study highlights heterogeneity with respect to the terms and concepts used to capture the fraud phenomenon, a fragmentation in terms of the measures used in quantitative studies and a low level of detail in the fraud analysis. The review also shows a limited number of case studies and a lack of focus on the interaction and interplay between enforcers and auditors.
Research limitations/implications
This study outlines directions for future accounting research on fraud.
Practical implications
The analysis underscores the need for the academic community, policymakers and practitioners to work together to prevent the destructive economic and social consequences of fraud in an increasingly complex and interconnected environment.
Originality/value
This study differs from previous literature reviews that focus on a single monitoring mechanism or deal with fraud in a broadly manner by discussing how the accounting literature addresses the roles and the complex interplay between enforcers and auditors in the context of accounting fraud.
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Deepak Verma, Varun Dawar and Pankaj Chaudhary
The present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India…
Abstract
Purpose
The present study's goal is to analyze the impact of audit quality (AQ) on earnings quality (EQ) using different audit attributes. The study shows empirical evidence from India, considered an emerging market.
Design/methodology/approach
The sample selected represents the 376 non-financial firms listed on the Bombay Stock Exchange (BSE). With a 20-year time frame, the authors used the absolute value of discretionary accruals (McNichols, 2002) (DA) as a proxy for EM, which is inversely related to EQ. The authors analyzed data using OLS, fixed effect (FE), 2SLS and Panel-IV estimators.
Findings
The authors found that most audit attributes positively affect EQ. In the Indian context, joint auditor (JA), auditor size (A_SIZE), auditor fee (A_FEE) and auditor tenure (A_TENURE) have a negative association with EM indicating high EQ. In contrast, auditor rotation (A_ROTATON) positively affects EM confirming low EQ.
Research limitations/implications
The present study uses Big-4 and its member firms as a proxy of auditor size (A_SIZE); instead, other bases may be taken for it, like the dominant audit firms in a particular industry in sample data, etc. The authors have started audit tenure from the base year, i.e. 2001, which may ignore the association of auditor and auditee just before 2001.
Practical implications
The study findings would enhance policymakers' willingness to prepare appropriate regulations regarding JAs and auditor rotation, which might improve financial market efficiency and reduce financial fraud among Indian corporates.
Originality/value
To the best of the authors' knowledge, this is the first study to incorporate “Joint Auditor” (JA) as a proxy for audit quality in the Indian context, which might significantly contribute to the literature.
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Fatah Behzadian and Naser Izadi Nia
In this research, using an analytical framework on factors affecting the quality of auditing services, we consider factors that affect an expectations gap in providers and users…
Abstract
In this research, using an analytical framework on factors affecting the quality of auditing services, we consider factors that affect an expectations gap in providers and users of auditing services related to factors affecting auditing quality. Effective factors studied in this regard are professional features, including the professional role of individuals in the auditing process (auditors against preparers of financial statements), professional experience of individuals, professional rating and size of auditing firms. The first statistical society consists of certified public accountants (CPAs) working in the auditing organization and audit firms in Iran, and the second statistical society consists of all investment companies that operate under the supervision of the Tehran Stock Exchange Organization. Based on the results of the research, the role of professionals in the auditing process is not effective as an independent auditor or financial statements provider, as well as the professional experience of individuals in the expectations gap from factors affecting auditing quality, while the size and qualities of the auditing firms were influenced by the expectations gap of individuals in the field of auditing regulation.