Tendency to Choose Big Audit Firms: Case of Indonesia

Abstract

This paper investigates the tendency of companies to choose a big audit firm as their external auditor under the condition of their income smoothing tendency and risk tolerance to business and financial risks. Using 2,240 company-year observations listed on the Indonesian Stock Exchange, it generally reveals that companies with lower tendency to smooth earnings and companies with intolerable risk tend to choose big audit firms. These results are also consistent after controlling the asset size of companies (clients). In addition, companies would tend to show indifferent preference when the opportunistic and non-opportunistic income smoothing tendencies are in the same proportion. This paper also implies that audit firms tend to accept audit offers from clients with intolerable risk but with greater asset size to compensate higher risk. The situation where big audit firms accept clients with intolerable risk level indicates that non-big audit firms are not capable of doing so and audit firms in Indonesia operate in weak litigation environment.

The Effect of Audit Opinions on TOBIN S Q and Stock Value by Panel Data Analysis

“…Below are the studies investigating the impact of an auditor's opinion on market value as a variable of audit quality. Ardiana (2014) investigated the impact of audit quality on firm value of firms that were continuously traded on the Indonesian Stock Exchange between 2007 and 2013. Data from 2,240 companies were used and a multiple linear regression analysis was performed.…”

“…The model to be used according to the purpose determined in the research is expressed as follows. 2 This model was created from panel data models in the literature (Martinez 2001, Ardiana 2014, Cengiz et al 2017, Önder and İrkörücü 2018, Kesen ve Salur 2020, Karcıoğlu, 2021.…”