Action research methodology

The reason why a firmselects an auditor can be multifaceted and isprobable to be

differentfrom one firm to another and the various benefits accrued to acquisition of an

audit. Most works done in the pastconclude that some of the keyfactors that determine

auditors‘ choice are the size of auditor and its reputation. In Finland, Knecheel, Niemi

and Sudgren (2008) investigatethe factors that determine auditor choice in a small

company market. In a sample of 2015 mostly small and mid –size Finnish firms, the

authors employ three logistical regression models to ascertain thediverse auditor

selection decisions. The result of their study shows that amongst the smallest firms the

choice to engagethe services of chartered accountant auditor tells the level of complexity in the firmproxied by size and degree of manpower. Their results alsoshowsthat the choice between a first tier and second tier firm is connected to the level of debt financing and concern about revealing proprietary information to competitors and finally in the upper end of the market. The decision to hire a large international firm relates to equity financing and competition in the industry.

Jiang (2010) studies how debt, as an opposingvariable to equity and corporate governance of banks affect the choice of auditor by Japanese listed companies.

Employinginformation from Japanese listed companies in the Tokyo Stock Exchange over the period of seven years (2002 – 2008), the author used discretional accruals as a measure of audit quality. The results of his findings indicate the companies who choose the same auditors as their main banks have higher audit quality than companies who choose different auditors from their main banks.

In Belgium, Reheul, Caneghem and Verbruggen (2011) examine auditor preference in Belgiannon-profit organizations from a behavioural viewpoint. The research population comprises Belgian non-profit organization that had their financial statements monitored by an external auditor during the period 2006 – 2008. The data to conduct this study was collected from three sources; a national survey addressed to 1000 Belgian non-profit organizations, the non-profit organizations‘ financial statements and archival research. Their resultshows that there is a segment of auditors specialized in the non – profit sector and that this segment is well known to the non-profit organization and the second finding is that non-non-profit granting high value to an auditor‘s client orientation eventually choose an auditor with a higher level of sector specialization.

Houge and Zjil (2011) examine the connection between country level government

quality and firms‘ preferencefor auditors. Using a cross sectional sample of 142, 193

firm year observations from 46 countries over the period of (1998 – 2007), the authors

regress the Big Four indicator variable on government and a number of control

variables. The researcher find that firms domiciled in strong government countries are

more likely to hire a Big Four auditor. They also find that the positive effect of home

country government quality value on the likelihood of choosing a ‗Big Four‘ auditor is augmented by the IFRS adoption decision in these countries.

Zijl, Dunstan and Karim (2012) examine whether firms‘ auditor choice reflects the strength of board ethics. Based on a sample of 132,853 firm year observations from forty-six countries around the globe during the period between 1999-2007 and controlling for a number of firm-and country-level factors, the authors find that firms in countries where ―high board ethical values‖ prevail are more likely to hire a Big 4 auditor. They also find that the positive effect of home country board ethical values on the likelihood of hiring a high-quality auditor is reinforced by the extent of the firm‘s board size. These results establish an indirect link between board ethics and financial reporting quality through the firms‘ choice of auditor.

In Jordan, At – Bawals (2012), identifies the factors which affect the choice of the external auditor in Jordanian Banks from the perspective of the external auditors in Jordan. The researcher used survey design. The findings of the study are: there are causes related to the banks of Jordan to lead to change the external auditor and there are reasons related to the audit office to change the external auditor.

Extant literature on auditing confirm that companies choose external auditors based on auditors‘ characteristics such as audit fees, audit opinion, size of audit firm, locality reputation and industry specialization. The client companies also select external auditor based on their own situation such as agency costs and client company‘s own demands. The economy, political and legal institutions are regional factors and they also impact on the selection (Wang, 2013).

In US, Li (2013), examines the impact of auditor choice on debt pricing for listed companies by using the samples of listed companies in U.S. In his study, Big Four audit firms are constructed to be ―high – quality‖ auditors and consequently they provide a higher perceived and actual audit quality. After controlling for other determinants of debt pricing, the results do not significantly support hypothesis that

―the interest rate on debt capital for listed companies is negatively related to the choice

of high – quality, audit firm (Big 4 Firms).

In China, Wang (2013) examines the evidence on the choice of external audit firms by Chinese listed companies. Nearly half of the listed companies are state – owned in China. Moreover, China experienced the third merger wave of audit firms during 2005 – 2008. The author collected data on auditor choice, audit opinion and audit fees of China‘s listed companies from 2008 to 2012. The study reveals that central state owned enterprises and local state owned enterprises have the tendency to hire small local auditors (Small auditors within the same region).

In Turkey, Karaibrahim (2013), investigates the association between corporate

governance and auditor choice by using a sample of 805 firm – year observations from

Istanbul Stock Exchange between the years 2005 – 2009. The study uses data from non

– financial firms listed in the Istanbul Stock Exchange. Firms in the financial sector

were excluded from the sample. The study uses an empirical model based on

multinomial logit and panel regression analysis of ‗Big – four‘ and audit firm industry

specialization. His findings show that firms‘ auditor choice in terms of ‗Big Four‘ and

audit industry specialization is affected by the firm level corporate governance

mechanisms of firms particularly board of directors‘ composition and ownership

structure.