Auditor Independence: Malaysian Accountant's Perception

Abstract

Independence is the primary justification of the existence, and thus the hallmark of the auditing profession. It is recognized as the primary attribute to be maintained by auditors in all circumstances. This study attempts to explore the determinants of auditor independence as perceived by Malaysian accountants using a self-administered mail survey. It was evidenced from the survey that size of audit fees is the most important factor, followed by competition, size of audit firm, tenure, provision of management advisory service and finally audit committee. More specifically, the study indicates that (1) larger size of audit fees, (2) audit firms operating in a higher level of competitive environments, (3) smaller audit firms, (4) audit firms serving a given client over a longer duration, (5) audit firms providing MAS, and, (6) the non-existence of an audit committee, are perceived as having a higher risk of losing independence. This study provides a basis for the profession to establish policies relating to auditor independence. Also, it may assist policy makers and other relevant international accounting agencies in their attempt towards the international harmonization of auditing standards. The major contribution of this paper is that it supplies recent evidence on factors influencing auditor independence from the viewpoint of Malaysian accountants.

Overview of Surrogates to Measure Audit Quality

“…As summarized by Schneider et al (2006), prior studies reached mixed results but most generally the results indicate that NAS can negatively affect auditor independence perception. This view has been reinforced recently by spectacular corporate collapses and apparent audit failures associated with them.This is in line with the suggestions in prior literature advocating the use of the elements of independence (e.g., Abu Bakar et al, 2005;Chen et al, 2005;and Abu Bakar & Ahmad, 2009). …”

“…8, No. 17;2013 too consider tenure of audit firms as an element of independence external auditing (Act SOX, 2002;George, 2004;Abu Bakar et al, 2005;Jackson et al, 2008;Abu Bakar & Ahmad, 2009). …”

Audit Exemption for Small and Medium Enterprises: Perceptions of Malaysian Auditors

“…Previous research suggests a positive association between audit firm size with auditor independence (Abu Bakar, Abdul Rahman, & Abdul Rashid, 2005;Abu Bakar & Ahmad, 2009;DeAngelo, 1981;Gul, 1989;Shockley, 1981). It has been found that larger audit firms has higher auditor's independence as they are often considered to be more able to resist pressures from management compared to small audit firms.…”

“…However, as pointed out by (Goldman & Barlev, 1975), one should not conclude that large CPA firms are immune to pressures from their clients. The court cases which challenge the assumption that CPA firms acted independently indicate that a large CPA firm is no guarantee of its ability to resist pressures from clients, as the case with Arthur Andersen and Enron (Abu Bakar & Ahmad, 2009 (2009), mentioned that 91.4% of Malaysian audit firms fall into the category of small firms with one to two partners, while medium size audit firms with three to eight partners constitute 7.5% of the population of audit firms and the remaining figure of 1.1% are of the large size audit firms with more than nine partners. Salleh, et al (2008a) used three factors that are being used in the SMEs definitions to categorize the firm size.…”

“…Indirectly, this implies that providing NAS might impair auditor independence. In Malaysia, Abu Bakar and Ahmad (2009) and Abu Bakar, et al (2005) found that accountants and bank loan officers agree that NAS have a significant effect on auditor independence. In addition, Hariri (2009) found that NAS fees have a positive relationship with the impairment of auditor independence.…”