Factors influencing auditor independence: Malaysian loan officers' perceptions

Abstract

Purpose -Auditor independence is fundamental to public confidence in financial reporting and the auditing profession. The study aims to provide further understanding of the factors influencing auditor independence from the perspective of commercial loan officers. Loan officers formed the sample as they are relatively sophisticated financial statement users who would understand the importance of audit report and the issues related to auditor independence. Design/methodology/approach -The study examines the perceptions of commercial loan officers in Malaysian-owned commercial banks and a total of 86 officers responded to the self-administered questionnaire.Findings -Results indicate that smaller audit firms, audit firms operating in a higher level of competitive environments, audit firms serving a given client over a longer duration, larger size of audit fees, audit firms providing managerial advisory services, and, the non-existence of an audit committee, are perceived as having a higher risk of losing independence. Audit firm size appears to be the most important factor that affects the auditor independence, followed by tenure, competition, audit committee, audit firms providing managerial advisory services and size of audit fee. Originality/value -The paper provides important insights into the factors affecting auditor independence and contributes towards better understanding on the ways to improve the confidence in financial reporting and credibility of the auditing profession.

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.…”

“…Regarding the perspectives of third parties such as bank loan officers, Abu Bakar, et al (2005) also reported a positive relationship between firm size and the level of auditor independence. Therefore, in our study on audit firm size and the likelihood that an auditor will support an audit exemption for SMEs, we hypothesis that:…”

“…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.…”