Client Internal Factors to The Change of Upgrade, Downgrade, and Same Grade of Public Accounting Firm (An Empirical Study on The Banking Sector Companies Listed in The Indonesia Stock Exchange for The Year of 2014-2018)

Abstract

This study aimed at determining the effect of client internal factors, such as; firm size, financial distress and management changes to switching of a public accounting firm (PAF). The population of this study was the company of the banking sector listed in the Indonesia Stock Exchange from 2014 to 2018. The sampling technique used in this study was purposive sampling method which generated a sample of 195 companies. The multinomial logistic regression test was performed because there were three categories of the dependent variable. The results of the analysis revealed that financial distress did not affect the change of PAF upgrade, downgrade, and the same grade. Firm size did not affect the change of PAF upgrade, downgrade and the same grade and management changes did not affect the change of PAF upgrade, downgrade, and the same grade.

Determinants of Accounting Firm Switching to Upgrade, Samegrade, and Downgrade

“…Thus, companies tend to use accounting firms that have a smaller size (downgrade) or similar size (samegrade) as the previous accounting firm (Hermawan & Fitriany, 2013). These results do not support previous findings (Setiawati et al, 2020) that management (directors) turnover did not affect downgrade and samegrade switching types in the banking sector. Thus, these results support the Agency Theory that management turnover aims to align the interests of the principal and agent in the preparation of the company's financial statements.…”

“…Starting from this condition, the company focuses more on efforts to recover its financial position. This evidence supports previous research from Setiawati et al (2020) that financial distress does not affect switching auditors for downgrade, samegrade, or upgrade types.…”

“…Previous studies has identified the financial factors, such as financial distress (Manto & Wanda, 2018;Setiawati et al, 2020), profitability (Diana, 2018Hermawan & Fitriany, 2013;Setiami & Solikhah, 2017), company growth (Diana, 2018Zikra & Syofyan, 2019). Other studies verify non-financial factors such as corporate governance (Aprilia & Effendi, 2019;Setiawati et al, 2020). Indeed, previous findings have inconsistent results.…”