A report on fraudulent financial reporting

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This chapter review the details in literature on important key points in this research such as audit, audit firm tenure, audit firm size, and fraudulent financial reporting. Relevant findings from past researches on (i) the relationship between audit firm tenure and fraudulent financial reporting and (ii) the relationship between audit firm size and fraudulent financial reporting were also assessed.


Definition of audit is different among many scholars. Audit function is defined by Carcello and Nagy (2004) to the function that an independent, objective assurance and also consulting activity that designed to add value and improve an organization's operations. In another study, Jackson (2010) has further explained that an auditor can perform the two types of audits namely limited-scope or full-scope. It was proven in past studies that some clients opt to choose in receiving a limited scope audit in order to reduce audit costs. In fact, the impact of limited scope exemptions is decreased in audit procedures and as a result it can lead to lower in audit fees. In addition, a long list of audit procedure for investments is needed in the full-scope audit.

Quality of Audit Firm.

The audit service as proposed by Watts (1977) is required as a monitoring method due to the conflicts that may arise between managers and owners, and also for them who come from different classes of security holders. In the past studies conducted, it was showed that audited financial statements' provision is the lowest costs that occur in order to minimise the conflict of interest between managers and owners, or else known as the agency costs. The agency costs are different for different firms and also differ over time to some clients. Besides, some clients have heterogeneous demands for the audit services required as resulted from different agency cost for their firms. Moreover, Watts (1977) also argued that the quality of audit services is mentioned as the market-assessed joint probability where the auditor is able to find out any violations in the client's accounting system and report on the violations. On the other side, the specified audits may enhance the financial information's credibility as the result of the independent verification of financing reports provided by the management. Thus, auditing service may minimize the investor's information risk as proposed in the study conducted by Watts and Zimmerman (1986); Mansi et al.(2004), Dye (1993) and Johnson et al. (2002).

Many past studies (Johnson, Khurana and Reynolds 2002; Myers, Myers and Omer 2003; and Ghosh and Moon 2005) have proven that inferior quality of financial reporting has resulted from short audit firm tenure. The abovementioned past studies revealed that low level of knowledge in the earlier years of an audit in addition to the mandatory auditor rotation between audit firms for companies have led to low quality of earnings reporting. Based on the results from the past studies, the mandatory audit firm rotations potential weaknesses had been highlighted. However, it was also revealed that if the rotation requirement is targeted at auditors within an audit firm, the loss of learned knowledge will probably not take place.

Besides that, based on the past studies conducted by Mautz and Sharaf (1961); Shockley (1981) and Lyer and Rama (2004), there are lots of arguments on the issue regarding duration of clients and auditors relationship which might affect the quality of audit. There are diversions of findings where there are studies which prove that audit quality is affected as auditor tenure increases, while in another study, auditor tenure increase in line with the quality of audit.

Issues in mandatory audit firm.

In order to improve the quality of financial reporting, it shown that mandatory audit firm rotation is a solution. Carey (2006) argued that in order to improve audit quality, there is a need of policy in the mandatory rotation of audit firm for particular clients. This was also expected will be able to increase the level of intended quality for the financial statements. Past researches Cameran et al., (2005); Catanach and Walker (1999); Kim et al., (2004); Chi and Huang, (2005); Chi et al., (2005) and Carey and Simnett (2006) found that among the countries that practised the policy of mandatory rotation includes: Austria, Australia, Brazil, Greece, India, Italy, Israel, Singapore, South Korea, Taiwan and the United States of America.

Audit partner rotations as well as audit firm rotations can lead to decrease in audit quality as based on the past study. This is because, it is evidenced that audit partners' knowledge of clients' business increases with his/her tenure on the particular audit assignment. However, it was revealed that there were few differences between audit partner and audit firm rotation which may have an impact on the audit quality. Chi et al (2005) has mentioned that audit quality is improved by the audit partner rotation during the first year of the relationship while on the other parts, audit firm rotation lead to decreases audit quality.

Whilst the requirement for audit firm rotations transpire around the world, the issue of audit firms or partners rotation were not specified in detail in any Malaysian official regulatory documents; for example in the Companies Act 1965, the Securities Commission regulations, the approved auditing standards. It was found that the corporations had dismissed the ideas for mandatory rotation because of lack in official pronouncements and regulatory verdict on this issue. The findings of a study conducted by Jaffar and Alias (2002) showed that only 35 per cent of the audit firms' partners and only 32.4 per cent of the chief finance officers surveyed favored audit firm rotation every three years of engagement. Meanwhile, the Edge (2002) has revealed that the Chairman of the Malaysian Accounting Standard Board did voiced out the Board's intention to implement mandatory rotation of audit firms once in every five years. This was an action in response to the case of Enron and other scandals.

Audit Firm Tenure

In the definition of audit firm tenure, Johnson et al. (2002) has clarified that the audit firm tenure is the number of consecutive years that the audit firm has audited the client (computed by counting backward from the year the fraud began). The definition of short auditor tenure is explained by Carcello et al. (2004) by the meaning of three years or less and long auditor tenure as nine years or more. As proposed by Turner (2002); Brody and Moscove (1998); Mautz and Sharaf (1961), the aforementioned terms revealed that it was expected by inflicting mandatory limits on audit firm tenure, the quality of audit will improve as a result of reduction in client's office influence over the auditor.

Short audit firm tenure.

From the previous study conducted by Aminada and Paz-Ares (1997), the scholars has suggested that in order to replace client-specific knowledge, it will involves a technological limit whereby not much of it can be obtained shortly. Due to this, the financial reporting quality is projected to increase as the client-specific knowledge increases in the early years of an audit engagement. Meanwhile, a client-specific asset (such as knowledge) that is in line with the transactions costs may allow the incumbent auditor to earn quasi rents from maintaining existing client relationships as specified by DeAngelo (1981). It was further suggested that the financial reporting quality could be demoted in the earlier years of engagement years if the existence of quasi rents distorts the auditors' enticement towards preserving the relationship with the client.

Long audit firm tenure.

As proposed by Shockley (1981), the impact of the long term relationship between the audit firms and client is by having a "learned confidence" in the client. This learned confidence may adversely affect the audit firm's auditing quality by them employing less vigorous and less innovative audit procedures. Another author, Knapp (1991) in his past study further defined that different audit firm tenure in an experimental setting evidenced that by the experienced of the audit committee members, they perceived that auditors with five years tenure were more likely to detect errors than the auditors in the first year of an engagement or auditors with audit tenure of 20 years. Too short audit tenure often fails because of auditors' lack of client-specific knowledge, while extensive lengthy audit tenure fails because of auditor-client familiarity threat. On a part of it, Geiger and Raghunandan (2002) found that the probability of short-tenure auditors to issue going-concern opinions for clients that were subsequently declared bankruptcy are much lower as compared to the long-tenure auditors which were the preference of its study.

Audit Firm Size

In terms of the audit firm size, it was revealed that smaller audit firms have justified the proposed wealth transfers from clients and from larger audit firms, where in general the audit quality is independent of the auditor size as supported by Deangelo (1981) in his study. Moreover, it was found in the study done by previous researchers, the term of quasi-rents might serve as collateral against such opportunistic behaviour in the event where if the quality of audit delivered is lower than that has been promised, the auditor might risk losing the assured quasi rent. This finding can be proven on the theory of ceteris paribus, where the perceived audit quality is higher provided that the audit firm behave opportunistically as expected given that the less incentive it enjoys when the audit firm is large (measured by the number of current clients).

DeAngelo (1981) also argues that as the audit firm size is measured as a proxy for audit quality, every client is as important to large audit firms, and besides, larger audit firms are less likely than smaller audit firms to compromise their independence. In fact, theory supported by the research taken by Dopuch and Simunic (1980) who further proposed that larger audit firms has the pressure to provide better quality of audit services because they have greater reputations to protect. It was finally defined that audit quality is not independent of auditor firm size when incumbent auditors earn client specific quasi rents. Moreover, audit fees are not meant to be adjusted in full term to the incumbent auditors. This were justified with the view that the joint control between client and incumbent auditor denotes a sharing of the costs mentioned which proves as a successful prevention of discrimination referring to the competition from large audit firms that definitely represents a windfall gain to smaller auditors at client expense. Therefore, it can serve as an excuse to the justification of the wealth transfer results from clients to the smaller audit firms which under this scenario of voluntary contracts might become unfair and discriminate smaller firms.

Big four and non Big four.

There are many previous studies that caught on the interest of the Big four and non Big four issues. Whereby to further understand that the larger audit firms (Big four) were perceived as more skilled in sustaining an acceptable degree of independence than the smaller audit firms because they commonly deliver a range of services to a larger number of clients, hence reducing their reliance on any specific clients as mentioned by Dopuch (1984) and Wilson and supported also by the study conducted by Grimlund (1990). The past literature that has been review by Lawrence et al (2011) suggested that the Big four firms can provide a superior audit quality as their sheer size would definitely be able to support more comprehensive training programs, standardized audit methodologies, and more options for appropriate second partner reviews. In addition, Deangelo (1981) also supported by Dopuch (1984) and Wilson and Grimlund (1990) has explained that it can't be deny that larger audit firms are generally alleged as the provider of high audit quality and might take pleasure in the soaring reputation from the business environment and as such, would strive to uphold their independence to maintain their image. Further enhancing the theory would be by Chow and Rice (1982) where they had proven that the Big four audit firms are also perceived to be more independent than the non Big four counterparts in managing management's pressure whereby if there are to have any incident of disagreements, the Big four audit firms can afford to cut off the engagements as they normally have a broad base of clients. In a different environment such as in Malaysia, Teoh and Lim (1996) has found out that the hefty reliance on a few clients has been found to affect the view of independence. However, as observing the real situation, this is not consider as something new as the market for audit services for the public listed companies in Malaysia are dominated by the Big four international audit firms, which were previously known as Big six. In fact, Che-Ahmad and Derashid (1996) reported the findings from their study that the Big 6 (and their affiliates) audited 75.9 per cent of the companies listed on Bursa Malaysia, both the Main Board and Second Board as for the year 1991.

The literature based on the previous studies conducted by scholar argues that the length of tenure by the Big four audit firms is considerably longer as it would be less expected for the companies to opt for audit services by the non Big four audit firms who compete in the same industry. Moreover, it was found that besides the potential impact of audit firms type and the length of tenure, the size of the business and the types of services that is needed by the business is also taken into consideration in deciding the audit firm that would suit the companies best. In fact, it has been also argued by Watts and Zimmerman (1986) that larger auditees are demanding highly independent audit firm to reduce agency costs due to the complexity of their operations and the increase in the separation between management and ownership and also auditors' self-interest threat as found from the study by Hudaib and Cooke (2005). In a different research, Palmrose (1984) further supported that as the number of agency conflicts increases with the business, the demand for quality distinguished auditors such as the Big four audit firms might also increase as the size of the companies' increases.

In fact, based on the previous findings, Becker et al. (1998) supported on the Big four issues whereby it was given the situation that Big four clients report lower absolute discretionary accruals than the clients of the non Big four audit firms. Another similar issue as revealed based on the past findings conducted by Francis et al. (1999) who has suggested that opportunistic and aggressive reporting were hindered by the Big four audit firms because their clients have higher total accruals but lower discretionary accruals. While on the other hand, Krishnan (2003) found that there is a greater relationship between future earnings and discretionary accruals for the Big four than for the non Big four clients. Another consensus that was revealed in the past finding of research based on the study by Guay et al. (1996) is on the limitations on the successfulness of the audit process in restraining earnings management as it has only been partially effective, as discretionary accruals indicate the management's opportunism. Moreover, it was seen that some of the previous study proposed that the Big four auditors is expected to provide more assurance to the mass than the non Big four auditors. This is to support the fact found that Big four clients have more credible earnings than those of the non Big four clients. Khurana and Raman (2004) has revealed in their studies that in the United States, there is a lower ex ante cost of capital of the Big four clients as compared with the non Big four client, but unable to find similar divergence in other countries such as; Australia, Canada, or Great Britain. Another scholar, Behn et al. (2008) has included analyst forecast accuracy in his study as an audit-quality proxy, where it was argued that if one type of auditor increases the reporting reliability of earnings in comparison to the other type, then, ceteris paribus, analysts of the superior type's clients should be able to make more accurate forecasts of future earnings than those analysts of the non-superior type's clients. On the view of that, Behn et al. (2008) has concluded that it is definite that the analysts of Big four clients as having a superior forecast accuracy than analysts of non Big four clients. In the study, the analyst forecast accuracy is used by Chi et al. (2005) as one of their audit quality assessment to surrogate for an improved level of decision making by the sophisticated users of the financial statements. It was then revealed that the client characteristics should be taken into consideration in determining the variations in quality between Big four and non Big four audit firms. In fact, it was found that the dealing methods in relation to discretionary accruals, the ex ante cost-of-equity capital, and analyst forecast accuracy are not much different between the Big four and non Big four audit firms as shown by the findings on each of the study that used the matching models (large audit firms with large clients, small audit firms with small clients) or controlling for an extensive list of client and auditor variables,

Fraudulent Financial Reporting

There are many standards for auditing in the world. As for in the specific country under this study, Malaysia, the Malaysian Approved Standards on Auditing, AI 240 on "Fraud and Error" (MIA, 1997) stated that the auditor is required to assess the risk of fraud and error during the financial statements audit. The standard also demands that the auditing procedures should be designed by the auditor in order to obtain reasonable assurance that detection of any misstatements arising from fraud and error that are material to the financial statements are based on the risk assessment done earlier. It means that the responsibility has to be put on the external auditor, whereby if he/she is incapable of detecting the material misstatements, specifically the intentional misstatements, they may be exposed to litigation. Due to the matter, Kaminski (2002) has summarized that the fraudulent financial reporting given the public frustration concerning the undetected items can impose as a grievous dilemma for the external auditors due to the harm that it may cause to the firm's professional reputation.

Literatures and findings conducted by many scholar such as Mitchell, (1997); Grant, (1999) and Spathis, (2002) on the fraudulent financial reporting issue proven the fact that the fraud scenario has occurred in many countries such as in the United Kingdom (UK) and the United States (US). The seriousness of these fraudulent activities which have been reported was further supported by the findings of Tyler, (1997); Wells, (1997); Mitchell, (1997); Vanasco, (1998); and Grant, (1999). In view to this, Johnson et al (2002) has revealed in his study that a lot of revelations to one or more audit failures are in line with critical of the public accounting profession which has determined that auditors and clients' management being in a long term relationships has result in deterioration of audit quality as they are no longer acting in the public's interest. The possible solution proposed to overcome the situation is the mandatory auditor rotation, which means that the outcome will be on whether the companies will have to incur additional audit costs for probably a similar quality of audit (or lower quality of audit). On the other hand, in some countries where the rotation of audit firm is not mandatory, usually in the current regulatory regime, long audit firm tenures are not associated with a decline in the financial reporting quality. As previously mentioned, Watts (1977) measures the quality of an audit via the likelihood of an auditor to uphold professionalism and integrity in honestly testifying on any breach in the client's financial statements or accounting systems. The discovery of possible violations however depends on the audit procedures scrutinized, the audit firm's technological capabilities, the extent of audit sampling, and so forth. In fact, past study has also determined that the auditor's independence from its client can be measured from the probability that he/she would report on any distortion discovered in the accounts. To add some more, a statement proposed by Watkins et al. (2004) in his study explained that the auditor's independence and competence are both essential factors that affect the integrity and reliability of an auditor's report and, subsequently, financial reporting credibility.

Past Researches

Audit firm tenure and fraudulent financial reporting.

There are a lot of findings and conclusion reviewed by previous scholars from different point of views, whereby according to the study conducted by Carcello et al. (2004), there was only limited research on the relation between audit firm tenure and audit quality. On another study conducted by Casterella et al. (2005), conclusion was made that audit quality is lower given longer auditor tenure. The study by Casterella et al. (2005) also suggested the probability for audit failures are higher (lower) when auditor tenure is short (long). On the contrary, the findings has been denied by Chi and Huang (2005) who declared that lengthy tenure of audit partners are related to the reduction in earnings quality. According to Casterella et al. (2002), there are two aspects of auditor tenure; namely the tenure of the audit firm and the tenure of individuals engaged in the audit, particularly the engagement partner. The scholar has argued that even though these two mentioned aspects of tenure had been studied in past research, the audit firm tenure still need to be analyze further due to the limitation in identifying the engagement partner in most countries since different countries are facing different rules and requirements. Besides, the impacts of both audit firm and audit partner tenure on the quality of audit are simultaneously proven at the same time. Apart from that, Casterella et al. (2002) and Choi and Doogar (2005) mentioned that their studies found that audit quality decreases in contrast of the increment in audit firm tenure, which includes the audit firm's failure to detect fraudulent financial reporting. The argument was further supported by Davis et al. (2002) on the ability of audit firm in issuing the going concern opinions before bankruptcy. Different point of views and proofs from various studies revealed that the quality of audit is paralleled to audit firm tenure, while Johnson et al. (2002) proved that the absolute value of unexpected accruals is higher in the early years of audit firm tenure in their study.

Other findings from the past researches conducted and published by Ghosh and Moon (2005); Carcello and Nagy, (2004); Myers et al., (2003); Johnson et al.,(2002); Geiger and Raghunandan, (2002) on the effect of audit firm tenure on audit quality established that in the situation where audit tenure increases, audit quality also increases. The study by Fargher et al, (2008) evidenced that audit failures are most likely to occur in the first few years of tenure of an audit firm, while supporting several of the prior studies in the United States which have attempted to debate on audit firm tenure and financial reporting fraud. In the study conducted by Deis and Giroux (1992), the findings were contradicted from the norm whereby it found that audit quality decreases as auditor tenure increases. St Pierre and Andersen (1984) in their study mentioned that based on the auditors of new client, audit firm with tenure less than three years is inefficient in detecting fraud and thus, faced higher legal risk. The preceding statement was further supported by Knapp (1991) based on audit committee members' responses to the survey, whereby it was concluded that as audit firm gains more knowledge about the clients, the chances of detecting material misstatements increases. Geiger and Raghunandan (2002) in their study came to conclude that short-tenured audit firms are not as competent in the gathering and evaluation of evidence as compared to long-tenured audit firms. Obviously, based on the findings gathered from different type of studies conducted, it can be concluded that their results are consistent with long-tenured auditors having a more in-depth knowledge of their clients' financial status and operating systems than short-tenured auditors.

Carcello and Nagy (2004) have also concluded from their study that the occurrence of fraudulent financial reporting is higher in the first three years of an audit, and there were no proof that fraudulent financial reporting were caused by clients of lengthy audit firms tenure. On the study conducted by Myers et al. (2003), it was revealed that audit firm tenure and earnings can be used to measure quality given that the relationship between auditor and client lasted for a minimum of five years whereby it was found that the extent of discretionary and current accruals declines as the audit firm tenure increases. To further support it, Myers et al. (2003) concluded that high quality of audit is determined based on the ability of auditor to constrain managerial discretion with accounting accruals as firm tenure increases. Whereas, the study conducted by Johnson et al. (2002) revealed that accruals are much greater and less persistent for companies with short audit firm tenure compared to those with medium or long audit firm tenure. Davis et al. (2002) in contrast concluded that audit quality might decline with extended audit firm tenure through the reason that as tenure increases, companies may have greater earnings forecast errors and also flexibility in reporting.

The findings from studies conducted by Beck, Frecka and Soloman, (1988); Carcello and Nagy, (2004); Johnson, Khurana and Reynolds, (2002); Meyers, Meyers and Omer, (2003); Ghosh and Moon, (2005) had definitely supported the facts that firms with have longer audit tenure have relative advantage over firms with shorter audit tenure because they have the opportunity to develop client-specific knowledge and deeper understanding of the clients' business process and risk. This is further evidenced by the findings that fraudulent financial reporting is most probable to occur at some stage during the short period (between three years or less) of auditor and client relationship. However, the studies conducted by the abovementioned scholars has failed to deliberate on any evidence that may associate the extended length of audit firm tenure (nine years or more) with reduced financial reporting quality. Apart from that, another study by Meyers and Omer (2003) has found that the relationship between auditor and client persisted for a minimum five years when examining the association between audit firm tenure and earnings quality. This had led them to come up with the conclusion that earnings management of accounting accruals was restrained during long audit firm tenure, thus proposing for higher quality of audits. This is because audit firm tenure is adversely associated to both the absolute discretionary and current accruals. Long-tenured audit firms are more efficient as based on the point of view by Geiger and Raghunandan (2002) from the study conducted which was based on the ability to gather and evaluate evidence than short-tenured audit firms because audit firms with longer tenure have more thorough knowledge about their clients' economic standing and operating systems than those audit firms with shorter tenure.

The other study conducted by Nashwa George (2009) on "The Relationship Between Audit Firm Tenure And Probability Of Financial Statement Fraud" has proven that the length of audit firm tenure can potentially impair auditor's objectivity in respect to the assurance purpose, and subsequently lessen the quality of financial reporting. This happens in particular when audit firm tenure is short, or when audit firm tenure is long taking into consideration the degree of proximity between the auditor and the client.

The studies by Beneish (1999) and Lundelius (2003) also has proposed on the usage of five fraud indicators as direct measures for the probability of financial statement fraud. These measures were used by George (2009) in his study to investigate whether or not the fraud indicators have any relation to audit firm tenure. The output of the cross-sectional multivariate regression analysis indicated that there are significant negative relationships between most of the fraud indicators and audit firm tenure.

The results were also supported by some previous researches which were conducted by Carcello and Nagy (2004), Myers, Myers and Omer (2003); and Johnson, Khurana and Reynolds (2002) which proven that a long audit firm tenure is not necessarily related with reduced financial reporting quality. It was also mentioned that the financial reporting crisis was predominantly limited to during the initial years of audit firm relationship. Based on the review, these previous studies are very important and have contribute to the establishment of findings and theories in terms of reviewing the significance of audit firm tenure and the likelihood of fraudulent financial reporting.

Audit firm size and fraudulent financial reporting.

Research conducted by Sinason et al. (2001) on the length of audit firm tenure has come up with a conclusion that the type of audit firm would have a positive impact on audit firm tenure. It means that small audit firms have shorter engagement length as compared to the larger audit firm who have longer tenure. Another finding based on the previous studies is the difficulties faced by small audit firms in the long run in order to maintain their existing clients and at the same time to uphold a greater level of independence and objectivity due to intense competition and size mismatch. It was proposed and learned from previous cases that there should be a match between the size of the audit firm to the size of its auditee. As mentioned in the study by Hudaib and Cooke (2005), there might be instances where audit engagements would be terminated when a size mismatch happened between large auditees audited by small audit firms, and vice versa.

From the previous literatures and researches (Deangelo, 1981) it was mentioned that audit firm size remain serving as a proxy for quality of audit in the situation where client-specific quasi-rents vary between clients. This was possible because larger audit firm were believed to possess greater total collateral, but a full focus on size alone is not effective as it does not inform clients about the relationship between the quasi-rents specific to single large client and the audit firm's total quasi-rent flow. Due to this matter, it was advisable that clients are presumed to expand, besides auditor size, other featured proxies in the situation when client-specific quasi-rents differ between clients of a particular audit firm. It was also mentioned that impairment of audit firm independence is not the sole product by large audit firms. In fact, to view in the condition, the audit firms are advised to increase their investment in collateral that is not related to the client in order to increase perceived independence. The investment in collateral should be auditor-specific rather than client-specific.

Overall, past researches has proven that the quality of financial reporting has not much difference between Big four audit firms' or second tier audit firms' clients. It was also found that the tendency for Big four audit firms to issue a going concern opinion for distressed clients as much higher as relative to the second-tier audit firms. Another conclusion gathered from the finding in the study by Boone et al. (2010) is both the Big four and second-tier audit firms are similarly successful in preventing aggressive and potentially opportunistic reporting, and also are efficiently mitigating accruals-based earnings management by their audit clients. Another findings gathered by DeAngelo (1981) and Dopuch and Simunic (1980) in the usage of an assortment of audit quality proxies, there are evidence that if suggested on the non Big four audit firms, they can provide a better or similar quality of audits than the Big four auditors which were proven based on the studies done by Palmrose 1988; Becker et al. 1998; Khurana and Raman 2004 and Behn et al. 2008.

Finally, based on prior theoretical and empirical research in auditing, it was suggested that there are two primary forces of audit quality, namely litigation costs and reputation loss. As been suggested by Palmrose (1988) and Simunic and Stein (1987) specifically that the large audit firms have greater pressure to lessen the risk on litigation and reputational capital by producing highly credible financial reports. This is taken given taken into consideration the effort, time, and money spent by the audit firms on building their brand names and reputations. In support to their view, it was found that the findings are consistent with the facts as established by DeAngelo (1981) in which it was generally proven that the audit firm size is an imperative determinant of audit quality.


Literatures on the important keywords in this research were reviewed. These include audit, audit firm tenure, audit firm size, and fraudulent financial reporting. An overview was provided on the findings of relevant former researches, focusing on (i) the relationship between audit firm tenure and fraudulent financial reporting, and (ii) the relationship between audit firm size and fraudulent financial reporting.

Besides, in the audit term, the quality of audit firm and issues in mandatory audit firm rotation has been discussed with supported facts and past studies on the related issues. The issues on the length of audit firm tenure in the past studies conducted by academicians and scholars were been further discussed to provide a profound insight of the matter. As for the second variable of this study, a detailed review on the firm size is further explained, mainly on the Big four and non Big four firm. Ultimately, explanatory review was also done on the possible factors, effects and impacts of fraudulent financial reporting.

Finally, substantial amount of the previous researches conducted by the scholars on these issues were also mentioned to provide a clearer picture of this research.