The Effects of Audit Market Liberalisation and Auditor Type on Audit Opinions: The Iranian Experience

Abstract

Audit services were provided exclusively by a state entity in Iran until late 2001, when the audit market was liberalised. The liberalisation of the audit market resulted in increased competition, as more private auditors became licensed to operate and provide audit services. The present study examines the effects of audit market liberalisation and auditor type (i.e., state and private auditors) on audit opinions. It is predicted that increased competition in the audit market may reduce the relative bargaining power of auditors, which can compromise auditors' independence when issuing audit opinions. The present study also investigates whether the process of issuing audit opinions is influenced by the government, thus resulting in a lower rate of modified audit opinions issued by state auditors compared to those issued by private auditors. Importantly, this study develops an explanation based upon a bargaining power view of auditor independence in issuing audit opinions and upon the limitations of the explanation for the circumstances in which auditor and owner interests are aligned in the case of government entities. The present study analyses the data of firms listed on the Tehran Stock Exchange between 1999 and 2010. The findings, after controlling for auditor choice, reveal that modified audit opinions have decreased following the liberalisation of the audit market in Iran, and compared to private auditors, state auditors have issued fewer modified audit opinions. The findings suggest that increased competition in the audit market is more likely to decrease the relative bargaining power of auditors and that there is a significant concern regarding audit opinions when both auditee and auditor are state-controlled entities.

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“…Secondly, this study is also motivated by recent changes in professional standards related to auditor independence in Iran in a bid to increase our understanding of the similarities and differences compared to IFAC code of independence and other threats identified in the literature (Kosmala, 2007;Lee & Stone, 1995;Ramazani & Atani, 2010;Salehi & Husini, 2011). This study is also driven by the mixed, if not, conflicting results in the literature on threats to independence in Iran (MohammadRezaei, Mohd-Saleh, Jaffar, & Hassan, 2016;Salehi, 2009aSalehi, , 2009bSalehi et al, 2009a). As advanced by Salehi (2009a), there is yet no clear evidence on auditor independence in Iran.…”

Islamic Religious Atmosphere and Audit Pricing: Evidence from Iran

“…Since late 2001, the Iranian auditing market has shifted away from a focus on a government entity (i.e., IAO) and has been liberalized, leading to a decline in the IAO market share of about 73% in 1998 (Azizkhani, 2012), to the extent that in the present research sample, the IAO has a market share of about 20%, and the IACPA member institutions have a market share of about 80%. However, it seems that this liberalization has created special conditions for the Iranian auditing market, and has led to the establishment of numerous private auditing firms and an increase in supply that is incompatible with the demand for auditing services (Mohammad Rezaei et al., 2016).…”

Audit partner quality, audit opinions and restatements: evidence from Iran

“…3 From 1993 to 2001 (the year IACPA was established), IAO dominated the Iranian audit market. Unlike the audit markets of most developed countries, the Iranian audit market is competitive, even though IAO almost has a monopoly over the auditing of state and semi-state firms (MohammadRezaei et al 2016;Bagherpour et al 2014).…”

“…Although each year SEO imposes disciplinary sentences for trusted audit firms at the firm and partner levels and IACPA conducts peer reviews (firm-level reviews), the results are not made available to the public. Furthermore, due to inadequate demand for high-quality audit services and low litigation risk, reputation capital is not a very strong incentive for audit firms to provide quality services and industry expertise is not such an important topic at the firm and partner levels to serve as a driver of high-quality audit services (MohammadRezaei et al 2016).…”

“…In addition, on average, 75% of financial reports by TSE-listed firms are restated and the rate of type II audit failures (where there is no qualification but restatement still occurs) is high. Regardless of the reasons for the high rate of modified audit opinions and financial restatements (see MohammadRezaei et al 2016MohammadRezaei et al , 2018, the quality of financial reporting in Iran is low, with a high audit failure rate (Mirshekary and Saudagaran 2005).…”