Antecedents Which Influence The Auditors Independence Accounting Essay

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This study aims to identify the antecedents which influence the auditors' independence (AI) on clients' perception. This chapter starts with a brief background which consists of basic definitions on the topic and follows up with the motive to conduct this study. Some issues of AI involving the public listed companies as well as Small and Medium Enterprises (SMEs) were raised out to support the purpose to conduct this study. Subsequently, research questions and research objectives were identified to narrow down and ease this study.

Research Background

Professional auditors are required to express on the clients' financial statement prepared by the management as to whether they present true and fair view with compliance to the International Standard on Auditing (ISA) (Alleyne, Devonish, & Alleyne, 2006). Thus, fundamental principle of auditors is to be independent in presenting credibility and reliability of financial information for client and related users (McGrath, Siegel, Glazer, Dunfee, & Jeanicke, 2001).

According to Olagunju (2011), there is no specific meaning attribute to AI. However, some referred it as the auditor's state of mind and ability to sustain behavioral attitude in planning audit program, preparation of financial report and performance in verifying work (Bakar & Ahmad, 2009; Jaffar, Selamat, & Ismail, 2003). AI is also perceived as the cornerstone of the auditing profession which is vital in the statutory corporate reporting (Ping, Carson, & Simnett, 2006). This is because AI is the foundation for the public's trust in the attest function of financial reporting (Lindberg & Back, 2004). However, public confidence towards AI has been eroded since the Enron's case (Abdullah & Mohd. Nasir, 2004; Ping et al., 2006). Meanwhile, even when auditors act independently, certain factors might affect the perception of the public towards AI (Lindberg & Back, 2004).

Limited studies have been carried out in Malaysia on examining AI (Bakar, Abdul Rahman, & Abdul Rashid, 2005; Bakar & Ahmad, 2009). Hence, the purpose of this extended research is to explore and determine the antecedents that affect AI from SMEs perception. SMEs in Malaysia account for 99.2 percent of total establishments which form a backbone of industrial growth and economic of Malaysia (Aris, 2006). SME is determined based on the number of full-time employees or annual sales turnover (United Nations Development Programme Malaysia, 2007). Manufacturing, manufacturing-related service and agro basis with not exceeding 150 employees or 25 million annual sales turnovers is regard as SME. Services, primary agriculture and information, and communication technology with not more than 50 employees or 5 million annual sales turnover is regard as SME.

Problem Statement

AI issue has became severe and violent ponder among the users of financial statement (Abdullah, 2005). The bankruptcy of Enron and WorldCom had created awareness to be cautious with inaccurate financial reporting process and audited financial statements. Thus, AI issue has reached a high level (CernuÅŸca & Dima, 2007; Porter & Gowthorpe, 2004). Issue between conflict of interests and AI has been raised in Transmile Group Bhd. Norwani, Mohamad, and Chek (2011) stressed out that accountability of auditors is essential to produce reliable financial reports.

Warfield (2011) discovered 31 SMEs bookkeeping fraud cases in Queensland and concluded that, fraud cases in SMEs' caused the organization to close its business, leaving innocent victims, such as creditors out of pocket and employees out of a job as they do not have large economic resources to recover.

Welch and Priddy (2010) concluded that independent and curious assessment of a business will add value to SMEs as they emerge from the economic downturn. Therefore, this research will be concentrating more on SMEs' perception.

Bakar and Ahmad (2009) studied on size of audit fees, size of the audit firms, audit tenure (AT), existence of audit committee, existence of competition and NAS from Malaysian accountants' perspective. They concluded that larger size of audit firm and existence of audit committee enhances AI while the other factors devalue the AI.

Sori, Ramadili, and Karbhari (2009) did the research on the role of audit committee (AC) from Malaysian banker's perspective. They concluded the AC could considerably defend AI if members are strictly independent. Similar to Sarkar and Sarkar (2010), the research was done in India's large listed companies. The evidence showed improvement of powers, functions and the independence of the AC will reinforce AI.

Habib and Islam (2007) examined the determinants and consequences of non-audit services fees (NASF) in Bangladesh. Their subjects were the auditors from a non-litigious environment and NASF are negatively related to AI. Similar to Defond, Raghunandan, and Subramanyam (2002), their research was done in USA. They found no relationship between the NASF and AI. Moreover, Gul, Jaggi, and Krishnan (2007) mentioned AI may be compromised as a result of high NASF for smaller size of clients' firm.

Previously, most researches were done on overseas country (Defond et al., 2002; Habib & Islam, 2007; Sarkar & Sarkar, 2010). Even if it was done in Malaysia, those researches were on public listed companies (Sori & Ramadili, 2007) and individual clients, such as bankers and investors' perception (Bakar & Ahmad, 2009; Salehi, Mansoury, & Azary, 2009, Sori et al., 2009). Less AI researches were done on SMEs' perceptions. Besides, separation of ownership and management (SOM) has little empirical studies done (Bakar & Ahmad, 2009), while the AT and NASF have different views (Alleyne et al., 2006; Gul et al., 2007; Habib & Islam, 2007). Thus, it is better to retest the variable in order to get an improved perspective.

Research Questions and Objectives

This research is carried out to identify the antecedents that influence the AI, mainly focusing in Malaysian SMEs.

Table 1.01: Research Questions and Objectives

Research Question

Research Objective

General Research Question

General Research Objective

What are the antecedents which influence the auditors' independence?

To investigate the antecedents those influence the auditors' independence.

Specific Research Questions

Specific Research Objectives

Is there a significant relationship between the role of audit committee and the auditors' independence?

To determine the significant relationship between the role of audit committee and auditors' independence.

Is there a significant relationship between the audit tenure and auditors' independence?

To determine the significant relationship between the audit tenure and auditors' independence.

Is there a significant relationship between non-audit services fees and auditors' independence?

To determine the significant relationship between non-audit services fees and the auditors' independence.

Is there a significant relationship between the separation of ownership and management and the auditors' independence?

To determine the significant relationship between the separation of ownership and management and auditors' independence.

Source: Developed for the research

1.4 Significance of the Study

1.4.1 Practical Contribution

This research is designed to evaluate the independent variables (IV) which provide insights for inspiring and guiding future actions of the end users of financial statement. Specifically, it provides deeper knowledge and understanding on key components and antecedents of AI as well as increases the confidence in financial reporting of the auditing profession. Besides, it also educates the auditing firm and auditing profession by providing direction, enhancing the professional guidelines and avoiding the same situations that will undermine AI. Auditing profession may structure or strengthen their policies and framework which related to AI.

1.4.2 Theoretical Contribution

Moreover, this analysis and results will be helpful especially to the future researches and literature as it can serve as future references and enhance the research on the determinants of AI. Future researchers may also make use and address those key elements on AI as well as support maintaining the AI and audit quality. Lastly, this research model is an extended model: Evidence on the Joint Effects of Auditor Tenure and Non-audit Fees (Gul et al., 2007); Audit Committee Authority and Effectiveness: The Perceptions of Malaysia Senior Managers (Sori, Hamid, Saad, & Evans, 2007) and Ownership Rules of Audit Firms and Their Consequences for Audit Market Concentration (Oxera Consulting Ltd, 2007) which attempt to examine these antecedents to be a more holistic model.

Chapter Layout

The study consists of five chapters. Chapter one discusses the background of study, problem statement, research questions and objectives, and the significance of the study. Chapter two focuses on the literature review where the theoretical foundation and the review of prior empirical studies will be discussed further. Subsequently, the research model and the hypothesis development will also be presented. Chapter three demonstrates the research methodology with the research design, data collection methods, population and sampling procedures. Research instrument, constructs measurement, data processing and data analysis will also be explained. Lastly, chapter four presents data analysis and chapter five shows the discussion, implications and conclusion of the study.

1.6 Conclusion

This chapter will help researchers to have a rough understanding about the relationship between the IVs and dependent variable (DV). This study also contributes to the readers where the contributions were narrowed down into two perspective; practical perception and theoretical perception. The next chapter will be emphasizing on the literature review concerning the issue of AI.