Audit quality is considered as an essential factor affecting the reliability of financial information. The aim of this study is to assess the effects of auditfirm characteristics, including audit reputation, audit fees and auditfirmsize, on audit quality. A sample of 192 companies listed on Hanoi and Ho Chi Minh Stock Exchange for the period of 2006-2014 was selected. Multiple regression was used to analyze the data. The findings show that Big 4 auditors in Vietnam provide high audit quality than non-Big 4 auditors. Interestingly, in Vietnam context, except for the audit firms in the Big 4 group, the findings suggest that smaller audit firms provide better audit quality. Additionally, the results reveal that the more audit fees the auditors receive, the lower audit quality they provide. The critical role of audit quality has attracted significantly scholarly attention, however, prior studies have mainly focused on firms in developed countries. Little is known about audit quality in an emerging economy context such as Vietnam. This study adds to the limited number of studies on audit quality of listed companies in emerging economies.
audit committee (i.e. size, composition, frequency of meeting and financial expertise. They found that the distressed banks have a significant negative relation with the meeting frequency of the audit committee. They added that meeting frequency plays an important role to ensure audit committee effectiveness and the audit committee with frequent meetings is able to help audit committee members to ensure the integrity of financial reporting, to provide better monitoring and to review effectively the operations. Fulop (2013) analyzed the correlations between the audit committee and profitability. He used 25 companies listed on Berlin Stock Exchange to test these relationships he found that the role of the audit committee is crucial. Similarly Zare et al (2013) examined the relationship between auditfirmsize and profitability. They used 97 companies’ annual reports to test the study hypotheses; they found a negative and significant relation between auditfirmsize institution and companies profitability. Moreover, Arshad et al (2011) found a there is positive effect of an audit committee on firm’s profitability ratio and on firm’s performance.
Larger audit firms are often considered to be more able to resist pressures from management (i.e. higher auditor’s independence). This is proven by almost all of the empirical studies that attempted to find the relationship between auditfirmsize and auditor’s independence, whereby they found that there is a positive relationship between them (Alleyne et al., 2006; Abu-Bakar et al., 2005). In fact, it has been argued that certain characteristics inherent in small audit practices may increase the danger of impairment of independence, for example, the tendency toward a more personalized mode of service and close relationship with the client (Robert & Darryl, 2009)). However, one should not conclude that large firms are immune to pressures from their clients.
Soo and Trompeter, (2003) and Carcello and Nagy (2004). Auditfirmsize was also found to be negative though statistically insignificant. This means a large auditfirm is more likely to produce lesser quality audit. This is liken to produce lesser quality audit. This is likened to the ‘too big to fail” syndrome of Nigeria banks which saw the demise of large banks such as Intercontinental, Oceanic, to mention a few. The case of Arthur Anderson is still fresh in our memory; therefore, the negative relationship between the size of the auditfirm and audit quality is not unexpected. This finding disagreed with the findings of previous studies (e.g. Teoh & Wong, 1993, Francis & Krishman, 1999, Reynolds & Francis, 2000). The variable of audit independence was positive but not statistically significant. This means the independence of the auditor is likely to increase audit quality. This position is consistent with Alim, Trisni and Lilik (2007), Windson, Warring and Rasmussen (2009).
Australian context especially as most of the prior research in this area has been conducted in the United States (for example: Chandra, 1989; Lee & Morse, 1990; Schroeder & Gibson, 1992; Epstein & Pava, 1994) and more recently in the United Kingdom (Ward, 1998). Notably these studies have generally been descriptive in nature and motivated by the innovative qualities depicted by early adopters. In all jurisdictions it is the company that chooses whether or not to issue a summarised annual report and therefore the study of the characteristics of adopting firms helps to identify companies more likely to utilise the summarised reporting format. Evidence from the U.S. and U.K. suggests that shareholder dispersion, the size of a firm, industry membership (Ward, 1998), listing status, auditfirmsize and profitability (Chandra, 1989; Lee and Morse, 1990) are characteristics that differentiate companies that voluntarily issue summarised annual reports.
Table 1 provides the summary statistics of the dependent and independent variables in order to effectively appreciate the nature of the results. It provides a basic insight into the nature of the data upon which analysis is done. The summary statistics include measures of central tendency, such as mean, measures of dispersion (the spread of the distribution) such as the standard deviation, minimum and maximum of both the dependent variable and explanatory variables. From Table 1, discretionary accruals show a mean of 0.6287985, a standard deviation of .036685which is an indication that the firms may not differ on the extent of their earnings management. The mean of auditfirmsize is .6875 and a standard deviation of .4684174.
Likewise, there are much research evidences suggesting that AAERs firms engage in earning management. While, there are few research evidences that focus on the AAER’s independence auditor’s role and characteristics, even after big accounting scandals. Most companies and managers lack the accounting knowledge and resource to create a suitable financial statement. In fact, many companies rely on the auditor to make the financial statement and take advice from the auditor before make any accounting decision. Therefore, auditors indirectly affect the financial statement prior to doing their real job. In this circumstance, companies have a high level of reliance on auditors when they make an accounting decision or make a financial statement. A high level of reliance on the auditor implies that the auditor highly affects the quality of the financial statements. More specifically, due to the high reliance of the auditor, depending on the auditor’s characteristics such as auditor’s independence, auditor’s efforts, and auditfirmsize, the quality of its client’s financial statement can be changed. According to previous studies, auditfirmsize and auditor effort affect the audit quality by decreasing discretionary accruals (DeAngelo, 1981; Simunic & Stain, 1986). Thus, if the audit quality is affected by the auditor’s characteristic depending on the auditor’s characteristic, its client also has a difference incidence rate subject to AAERs.
Model 2(a) presents the results regarding nexus between the level of CG compliance and disclosure with COC. The value of adjusted R 2 is 32.54 which reveals that 32.54% variation in COC is explained by these explanatory variables, while remaining 67.46% is explained by other factors. Moreover, the value of F-stats (31.49512) reveals the fitness of the model as it is above 20. The findings reveal that CGI has a significant negative relationship with COC which means the COC decreases with increase in the level of CG compliance and disclosure. Although the literature is limited in examining the nexus between CG and COC, this finding of significant negative association is supported by prior studies (Bozec & Bozec, 2011; Chen et al., 2009; Shah & Butt, 2009). The findings reveal an insignificant positive association of director, institutional and government ownership with COC among PSX listed firms. It means that director, institutional and government ownerships are not able to explain variation in COC. Agency theory supports these findings and documents more agency problems (Demsetz & Lehn, 1985) due to high level of director ownership and government ownership. In contrast, the block ownership has a significant negative association with COC. It means the COC decreases with increase in block ownership among PSX listed firms. Bozec et al. (2014) and Pham et al. (2012) also found similar results in their studies. There is a negative association between auditfirmsize and COC among PSX listed firms. It means that those firms bear less COC whose accounts are audited by big audit firms. Jensen and Meckling (1976) documented that external auditors can play a pivotal role in mitigating agency conflicts and improving CG compliance. In a similar vein, audit firms can help in the reduction of information asymmetry which ultimately reduces COC (Beatty, 1989; DeAngelo, 1981). Additionally, those firms have fewer problems of CG compliance and dis- closure that are audited by big audit firms which increases the investors’ confidence and reduces COC. The findings reveal a negative association of board size and gender diversity with COC. It means firms with large board size may bear less COC as compared to firms with smaller boards in Pakistan. These findings are supported by literature (Bozec & Bozec, 2011; Shah & Butt, 2009). Moreover, findings reveal that firms with a higher level of female board members have a lower COC than those with less or no female board members. These findings are also supported by existing literature (see Nielsen & Huse, 2010). The study finds a negative relationship of all four control variables, i.e. firmsize, growth, ROE and leverage with COC. These findings are in line with previous studies (Bozec et al., 2010; Pham et al., 2012).
The impact of auditfirmsize on audit fees was examined by several audit fee studies, with purpose to find out whether audit fees paid to “Big” audit companies are significantly higher than fees paid to “non-Big” companies. Another reason for studying the auditfirmsize comes from the assumption that the firm’s size indicates the audit quality. Chia et al. (2007), show the evidence that the big firms conduct a high quality audit than the others and that’s why these firms charge high fee. The audit quality depends from the independence of auditor and an independent auditor is better able to perform his duties than the dependent auditor. The study of Sun et al. (2011), indicates that the audit quality differentiation of big firms is due to deep pocket hypothesis i.e. in case of high litigation firm Big firms are more likely to be sued and therefore perform a high quality audit. In the UK (Chan et al., 1993) found that audit fees charged by “Big” audit firms to be higher than fees charged by “non-Big” audit firms.
Larger firms that offer auditing services adopting more elaborate audit pro- cedures, it is only logical that the quality of audit work is going to be enhanced. Also, as perceived by Kilgore , auditfirmsize is a common surrogate for creating audit quality. Otherwise, as upheld by DeAngelo , when firmsize is large, concern about not losing client companies means that the firm in question will make sure that audit quality is sustained. This view is also shared by Hussein & Hanefah . They found that large audit firms find themselves in a situation where due attention must be given to professional competence, high auditor’s qualification, and highly selective recruitment of talented as well as knowledgea- ble supporting staff.
Thus, a high quality audit sends a signal to the market that the financial statements are more credible than those audited by lower quality auditors. The market perceives auditfirmsize and specialist auditors to be of a higher quality than others and rewards (punishes) companies with larger improvements (or falls) in share prices accordingly (Teoh and Wong, 2015; Krishnan & Yang, 2015; Menon and Williams, 2015). It has been shown that the market‟s perception of the quality of the company‟s auditor influences that company‟s share price. As such, directors and management may want to signal to the shareholders that their interest is being well monitored. Therefore, signalling should, theoretically, affect the demand for audit quality over and beyond the monitoring function alone. The positive Signal of transparency and credibility it sends to the market and the assurance it provides to stakeholders about the quality of earnings performance disclosures suggests a positive association between EPS, MPS and audit quality.
Audit quality differs in meanings by as found by researchers and institutions as given below. Audit quality is about offering an appropriate professional view supported by material evidence and objective judgments. To ensure audit quality, auditors must provide a quality service to shareholders if they provide audit reports that are independent, reliable and supported by sufficient audit evidence. Similarly, a quality audit entails appropriate and complete reporting by the auditors which enables the Audit Committee and Board properly to discharge their responsibilities (FRC, 2006). In like manner, according to Clinch, Stokes, and Zhu (2010), audit quality is a component of the quality of accounting information disclosed, as higher disclosure quality leads to lower information asymmetry between traders. According to Adeyemi, Okpala, and Dabor (2012), the International Audit and Assurance Standard Board (IAASB), defined an audit as an independent examination of, and expression of opinion on the financial statements of a firm by an appointed auditor in line with the terms of appointment and in compliance with the relevant statutory and performance requirements. The audit report is the end product of every audit assignment that the auditor issues to the members of a client company expressing his opinion on the truth and fairness view regarding an enterprise’s financial statements. However, for the purpose of this study, audit quality is defined as an audit exercise that encompasses the relevance and reliability of the following variables, which are the auditfirmsize, audit timeliness, audit tenure, and audit fees.
There is unanimity that provides non-audit services to yield higher profit rates than audit fees due. When Levitt speaks about non-audit services, he says: “lucrative consulting con- tracts”. Some audit fees are too low because auditors have to lower their audit fees to obtain lucrative consulting contracts (SEC 2001). The VIII Directive (2006; art. 25) says: “State Members shall ensure that adequate rules are used to provide that fees for statutory audit: are not influenced or determined by the provision of additional services to the audited entity”. For this, it is necessary to have technical rules about audit fees ap- proved by the professional associations. On the other hand, when a company informs about audit fees must differentiate between audit fees and non audit service fees.
confidential agent, derives his broad function in society from the need for expert and independent examination as well as the need for an expert and independent judgement supported by the examinations. Thus, accountants and auditors are expected to know and realize that the public continues to expect a low rate of audit failures. This requires that the auditors must plan and perform their audit in a manner that will minimize the risk of undetected material misstatements. The accountant is under a duty to conduct his work in a manner that does not betray the confidence which he commands (Limperg Institute, 1985). The importance of the theory of inspired confidence isthat the duties and responsibilities of the auditors are a derivation from the confidence that are bestowed by the public on the success of the audit process and the assurance which the opinion of the accountant conveys. Since this confidence determines the existence of the process, a betrayal of the confidence logically means a termination of the process or function. Carmichael (2004) in discussing the social significance of the audit stated that when the confidence that society has in the effectiveness of the audit process and the audit report is misplaced, the value relevance of that audit is destroyed. Therefore, auditors are expected to maintain reasonable quality assurance especially given that an audit failure is effectively a career-ending event. Audit provides assurance to the owners and management of companies and to investors and stakeholders, and along with financial reporting, corporate governance and regulations, supports confidence in the capital markets.
Firm performance is critical to the economic well-being of the shareholders and other interested stakeholders. However, the integrity of financial reporting is not reliable without sound oversight function of the Audit Committee and the macroeconomic system may be exposed to a major risk. For instance, Flamholtz, Das and Tsui (1985) appraised the concept of performance and its measurement from traditional perspective, where they regarded the term as an element of the planning and control cycle that captures performance data, enables control feedback, influences work behaviour. In the words of Simons (1990), the concept of performance centers around monitoring of organization’s objectives and the implementation of strategy to achieve the set objectives. Generally, performance measurement plays an important role in the development of strategic plans and evaluating the achievement of organizational objectives and serves as a pointer to organization’s growth (Simons, 1990: Ittner and Larcker ,1998). Therefore, Khan, Shah, and Atta (2009) with respect to the company’s present and future performance opined that performance can be seen from many perspectives, such as profit before tax, profit after tax, growth in earnings per share, or market share of a firm. According to them, investors are keen on dividend and growth in market price of shares, which attracts investors toward investment in shares that will further raise the demand in the stock market and will lead to increasing stock prices and performance of the stock market. However, Sonnentag and Michael (2001) posited that when conceptualizing performance, one has to differentiate between an action (that is behavioural) and an outcome of the action which ultimately results in performance. According to them, the behavioural aspect of the action refers to the consequence or result of the individual behavior. The outcome aspect described behaviours which may result in outcomes such as increased output, growth in sales figures and so on. Based on this, financial performance is defined as a subjective measure of how well a firm can utilize its assets generate revenues from its primary business activities. The term also depicts the overall financial health of the firm over a given period of time.
and firms with insu ffi cient balance sheet information, we are left with 10,671 firms and 48,703 firm-year observations. In the cleaned dataset, a total of 633 firms experienced a default event, defined by the Basel II Accord as more than 90 days delinquency. Moreover, 54 of the 633 de- faulting firms experience a second default, in the sense that they became delinquent a second time during the sample period. Other default studies have treated a firm that re-emerges from default as a new firm. In accordance with the Basel II Accord’s definition of a default event as a period of delinquency, we choose to disregard multiple default events, so that only the initial default counts. Figure 1 shows the patterns by which firms enter and potentially leave our final sample. The right panel shows the number of firms that enter the sample at each year along with an indication of the number of entries eventually corresponding to defaults and non-defaults. Despite discussions with the financial institution providing the data, the low number of firms entering the sample in 2005 remains a conundrum. It appears, however, that the firms that eventually default do not seem to di ff er systematically from the non-defaulting firms based on when they enter the sample. The right panel shows the number of firms at risk of defaulting, i.e. firms in the “risk set,” at each quarter, along with the quarterly number of defaults. The risk set is seen to contain at least 2,000 firms at each quarter, and the 2008-09 financial crisis is readily visible from the sharp rise in the number of defaults.
ILK = -2,08 + 2,75INDP + 1,66KOAU, 1,66INST – 0,14SIZE + 0,84LVRG (2) The presence of the Board of Commissioners that at least 30% of the total overall Board of Commissioners allegedly have not been able to so some balance in the decision-making process in an attempt to provide protection of the rights of the stakeholders especially the minority’s shareholders. A low percentage of the independent Commissioners feared would be less able to provide oversight of a very independent of actions taken by management of the company. In addition, the indepedent commissioners also serves as audit committee and remuneration committee. So independent commissioners do not focus to perform their tasks and functions to the maximum. The presence of the independent commissioners are still lacking in balance with the number of the board of commisoners who are not yet able to boost confidence to the users of the financial statements that the information presented in the financial statements have been high integrity and can be accounted for.
The results in the table show that all of the questionsin (1-33) in all groups prove are considered as important factors influencing pricing of audit services in Bahraini listed companies with the average means ranging from 3.43 to 4.5 and standards deviations ranging from 0.47434 to 0.63851. Since the standards deviations for all items are less than half of the means, this indicates that there is no dispersion among respondents‟views about the questions of the hypothesis. By using the measurement scale, any factor with a mean of 3.50 or more is acceptable, and since all the factors got means above 3.50 except for group 5 where the average mean is 3.43 because of question 25 that is stated in negative way, then the respondents do not agree with it, and thus, the mean for this specific question is very low, and hence all the seven hypotheses are are accepted.
The following auditor’s attributes determinants on audit fee are controlled: audit staff number, audit tenure period, non-audit fee and industry specializa- tion. The number of audit staff working on the audit engagement is employed to control for one of the major determinants of audit fee and audit effort. Carson et al . (2014) argue that the observed increase of audit fees in Australian from 2000-2011 might be driven by higher audit effort that is driven by the global fi- nancial crisis and more stringent regulations . Following Kim and Fukukawa (2013), the unique dataset of Japanese firms disclosure information is employed and natural log of number of CPAs, junior accountants and other staffs em- ployed in the audit engagement (excluding engagement partners) is calculated ( TEAM variable) . Auditors are expected to experience a learning effect when provide audit service to the same clients for a number of years that reduces cumulative average audit costs . The audit learning effect is captured in the audit fee model by measuring the number of years an auditee has hired its current auditor ( TENR variable). The non-audit fee ( NAF variable) is measured by the natural log of total non-audit fee paid by the client to its current year auditor.
In China, study on auditor location and audit pricing is still in an initial stage, and only few researches focus on it; however, literatures abroad concentrate more on the auditor location and audit quality, for example, Knechel et al. (2007)  examined the correla- tion between auditor location and audit quality on the basis of business information, and found that location was important for audit firms to collect audit company’ infor- mation, in addition to gathering information by manager, and proving large informa- tion which will lead to higher audit quality. De Fond et al. (2011)  found “non-big four” away from the SEC Regional more likely to give continuous audit opinions when they faced financial distress company, and indicated the location affected audit opinion. Choi et al. (2012)  found audit quality may be much higher if they were audited by native audit firms, however, non-native audit firms perform oppositely. Chen et al (2010) , Chhaochaharia et al. (2012)  and Durendez Gomez (2012)  ex- amined the geographical characteristics between audit firms and companies; they also believe location is an important factor for in determining price