Exploring how the Audit industry operates


Audit is a process of evaluation performed to a person, organization, system, process, company or product. In accounting term, audit refers to an act to ascertain the validity and reliability of the information given, and to provide an assessment of the company's internal control system. The primary aim of the audit today is the verification of financial statements (Ojo, 2006), that is to express an opinion on the 'subject' audited, based on the work done on using nonstatistical methods for sample planning, selection and evaluation (Thomas et al, 2002) as to provide reasonable assurance that the statements are free from material error.

Traditionally, audit is mainly carried out to assess a company's financial information and to provide a reasonable assurance on the company's internal control system. This service is called financial audit and it is a mandatory for every registered company to perform financial audit annually under the Company Act 1965 (CCH Company Law Editors, 2008). Auditors act as a third party to provide independent verification and credibility to the financial statement (Ojo, 2006). An auditor whom performed financial audit is called a General External Auditor. However, the word 'audit' is not confined to financial audit only. As the audit industry evolved, non-traditional areas are developed, such as audit on the company's information system, company's management performance and environmental concerns (Arrunada, 1999). As a result, there are now new audit professionals who specialize in security audits, information systems audits and also the environmental audits.

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Charted accounting firms (or also terms as audit firms in our context), which range from one to two person offices to international firms employing thousands of professional members, are generally the primary providers of audit services (Fisher, 2001) it is observed that the audit industry is dominated by an oligopoly of the four largest international companies, which also commonly refers as the Big Four in the market (Beattie et al, 2003). The members of Big Four are Ernst & Young, KPMG, Deloitte and PwC (PricewaterhouseCoopers) (Francis and Yu, 2009), and they have branches and offices that located all over the world. In the United Kingdom, the Big Four dominates the audit of the Financial Times Stock Exchange (FTSE) companies and reportedly held 90% of the market measured by audit fees in year 2002 (Beattie et al, 2003).


1 http://www.ey.com/GL/en/Newsroom/News-releases/Ernst-and-Young-reports-fiscal-year-2010-global-revenues-of-USD-21-3-billion

2 KPMG International Annual Report 2010: Cutting through complexity

3 Deloitte Global Annual Review 2010: Building relationships. Creating value.

4 http://www.pwc.com/gx/en/annual-review/people-2010.jhtml

In the Malaysia setting, the audit industry is dominated by the Big Four and additional two large-scale audit firms, namely BDO and Crowe Horwath (Oh, 2011). These firms collectively audited 73% of the public interest entities (PIEs) in Malaysia, while their listed clients accounted for 93% of the total market capitalisation of the companies on Bursa Malaysia (Oh, 2011). PIEs include listed companies, banking and financial institutions (including Islamic banks and development financial institutions), insurance companies and takaful operators, and holders of Capital Market Services Licences (such as securities and futures trading firms, and fund management companies).

Audit, being one of the service industry is naturally labor intensive (Hsieh et al, 2009). In other words, the key success factor of an audit firm relies on its manpower which measured by the level of staffs' competency. Henceforth, the attitude and behavior of employees are paramount as it represents a company's image. The importance of human resource is also highlighted in the Audit Oversight Board (AOB) report that recently released on 31st March 2011 at Kuala Lumpur, which reported that human resource was an important factor in ensuring high quality audit, and so it is crucial to ensure appropriate workload of partners and other members of the audit team, as well as attracting new talent through a conducive work environment (Oh, 2011).

To maintain the staffs' competitiveness, audit firms frequent conduct technical training and also workshop targeted to improve the employees' soft skill. Hiltebeitel et al (2000) noted that large accounting firms normally incur a substantial amount in recruitment and traning costs. Large audit firms also provide a better remuneration package as compared to other small-scale audit firms, such as higher salary, provision for tuition fees and provision for professional membership fees, to name a few. Despite the lucratic package offered by the large audit firms, the staff turnover rate remains high (Hsieh et al, 2009). Therefore, it is a nightmare for an auditor to leave an audit firm especially for the Big Four, due to the unrecoverable training cost (William, 1993) and negative influence on the entire business operation (Hsieh et al, 2009) in terms of efficiency losses (Law, 2005). Thus, it is essentially important to recognize the factors that lead to the auditors' turnover in order to preserve the company's long-term growth. In relation to this, this study is designed to examine the relationship of role stress, job satisfaction and organizational commitment towards turnover intentions amongst auditors in Sabah.

1.1 Problem Statement

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The profession of public accounting has traditionally documented having exceptionally high turnover rates (Nelson and Sutton, 1990; Robertson et al, 1990; Connor et al, 1999). It is reported that the turnover intentions are the highest among staff with two to four year experience (Bullen and Martin, 1987). As cited by William (1991) from Grossman (1967) study, most national accounting firms retain less than 25 percent of their employees for four years; Capin (1969) elaborated that the retention rate was 85% after one year, and decline to 38% after five years and only 18% after ten years (cited by Wiliam, 1993).

High employees' turnover rate has become a serious problem among the big players in the audit industry as it translates into unrecoverable substantial professional training expenses (Hiltebeitel et al, 2000), undesirable higher costs and efficiency loss (Law, 2005) that might results in poor audit quality (Hill et al, 1994; Sanusi and Iskandar, 2007) which affects the public confidence with the accounting profession. The impact of a staff leaving a large audit firm is observed to be greater as compared to the small-scale audit firm due to the two reasons. Firstly, large audit firm especially the Big Four spends heavily on employees' trainings (Hiltebeitel et al, 2000) as compared to the small-scale audit firms. Secondly, big corporate is normally audited by large audit firms due to their expertise and availability of resources. Henceforth, the departure of an auditor from a large audit firm would translate into efficiency loss due to insufficient manpower and might affect the audit quality (Hill et al, 1994), that ultimately bring down the company's image.

From the past research, high turnover rate in the audit firms is commonly relates to a number of factors such as job stress (Law, 2010; Hasin and Omar, 2007), low job satisfaction (Udo et al, 1997; Hasin and Omar, 2007; Hsieh et al, 2009) and leadership style (Hsieh et al, 2009). Most of the accounting literature that focuses on turnover intentions were studied in countries like the United States (Reed at al, 1994; Viator, 2001; Law, 2005; Tiamiyu, 2009), Hong Kong (Liu et al, 2001; Law, 2010), and Taiwan (Hsieh et al, 2009), to name a few. Despite substantial contribution of pervious research on turnover intentions amongst auditors, few extant studies have attempted to examine the relationship of role stress and job satisfaction on turnover intentions, with organizational commitment as mediator, especially in the Malaysia context. The present study attempts to develop and empirically examine the relationship of role stress, job satisfaction and organizational commitment towards turnover intentions amongst auditors in Sabah. The next section presents the research questions and objectives.

1.2 Research Questions

This study attempts to address the following research questions:

What is the relationship between role stress on the turnover intentions amongst the auditors in Sabah?

What is the relationship between job satisfaction on the turnover intentions amongst the auditors in Sabah?

Does organizational commitment mediate the relationships between role stress and job satisfaction on turnover intentions amongst the auditors in Sabah?

1.3 Research Objectives

In an attempt to solve the problem as highlighted above, the research objectives are further defined as below:-

To determine the relationship between role stress on the turnover intentions amongst auditors in Sabah.

To determine the relationship between job satisfaction on the turnover intentions amongst auditors in Sabah.

To examine the moderating effect of organizational commitment on the relationships between role stress and job satisfaction on the turnover intentions amongst the auditors in Sabah.

1.4 Scope of Study

The scope of this study is being limited to the external auditors work in Sabah, Malaysia. Specifically, the samples are draw from external auditors who currently employed by four large audit firms in Sabah, namely Ernst & Yong, KPMG Peat Marwicks, Deloitte Kassim Chan and Crowe Howarth. All level of auditors is included: the associate (junior staff), senior auditor, audit manager, senior audit manager and audit partner; except for the interns and trainees as their leaving is guaranteed upon the completion of the training course. Audit firms are mainly located at the big cites or developed towns. Kota Kinabalu city, Sandakan town and Tawau town are identified as the places that have the majority number of auditors due to their big population and centralized business base. This study will focus on auditors work in Kota Kinabalu city, Sandakan town and Tawau town as the representative of the population.

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Turnover can be categorized as voluntary or involuntary leaving. This study will focus on the voluntary turnover intentions only. The early research work carried out by Bullen and Flamholtz (1987) found that there were three general categories of determinants for voluntary turnover, which are (1) External determinants such as the state of economy and employment perceptions; (2) Organizational commitments such as job autonomy and responsibility, role clarity and job satisfaction; and (3) Individual determinants such as age, tenure, gender and personality. These three factors can be translated into (1) external environment, (2) organizational and (3) individual factors. Within this area, the factors related to the organizational will be examined under this scope of study due to its importance and contribution to the study of organizational behavior. Focusing on the organizational factors, researchers noted that role stress forms part of the job stress among the accounting professionals (Smith, 1990) and suggested that role stress is negatively related with turnover intentions (Fisher, 2001; Viator, 2001). Another significant organizational factor that considered an effective predictor of turnover intention is job satisfaction (Dole and Schroeder, 2001; Hasin and Omar, 2007; Muliawan et al, 2009; Hsieh et al, 2009). Studies also found that organization commitment has a pervasive effect on intention to leave in the public accounting sector (Stallwoth, 2003; Ketchand and Strawser, 1998). This study is thus undertaken to examine the relationship between role stress and job satisfaction on turnover intentions amongst auditors in Sabah, and further investigate the moderating effect of organizational commitment between the variables.

Significance of Study

The empirical literature on studying turnover intention in Western countries is well established. However, little research had been focus at different geographical area, for example: in Kota Kinabalu. The study of auditors' turnover intentions in Malaysia is limited in scope, which is mainly concentrated on job stress and job performance. Past research on accounting literatures on turnover intentions carried out in the United States, Taiwan and Hong Kong focus on variables such as job stress, job satisfaction and personality trait, but less was found using organizational commitment as mediator. Organizational commitment has consistently been viewed as an important determinant to employee retention among engineers (Chang, 2006) and information system auditors (Muliawan et al, 2009). Research has shown that employees with high commitment level tend to be emotionally attached to the organization and they will feel an obligation to serve the company well. Therefore, it appears to be a gap in understanding how the role stress and job satisfaction can relates to turnover intention, and having organizational commitment as mediator. Research on relating the role stress, job satisfaction and organizational commitment on turnover intentions is thus needed. The research findings would help to bridge the gap in literatures study in the audit industry. It is also contribute to the existing knowledge to the service industry.

By conducting this study, the research findings are useful for the employers especially in the large audit firms to improve their employees' retention scheme. The Audit Oversight Board (AOB) executive chairman Nik Mohd Hasyudeen Yusoff stressed the importance of human resource to ensure high quality audit (Oh, 2011). Thus, it is important for the management to be aware of how to retain the existing workforce and enhance the employees' commitment level at the same time. Therefore, this study would provides an insight for the management to understand the relationship of role stress, job satisfaction, organizational commitment on turnover intention in order to develop high committed employees within the organization.

1.6 Operational Definitions of Key Variables In This Study

1.6.1 Turnover Intentions

1.6.2 Role Stress Role Ambiguity Role Conflict

1.6.3 Job Satisfaction

1.6.4 Organizational Commitment

1.7 Organization of the Report

The report is organized into five chapters, which is Introduction, Literature Review, Research Methodology, Analysis of Findings, and Discussion and Conclusion respectively.