Recently, hearer rotary motion has obtained wider ‘publicity ‘ . The prostrations of high profile companies, such as Enron, WorldCom and Tyco International, lead to a closer public examination on the credibleness of fiscal studies. These prostrations have been attributed to the hapless audit quality. In bend, the independency of hearers and the demands set to obtain high degree of audit independency have besides been closely monitored. One of the demands is audit spouse rotary motion.
The ideal of audit spouse rotary motion policy is that audit quality would better with the periodic rotary motion of the audit battle spouse, usually from 5 to 7 old ages. Before the 1960s, compulsory hearer rotary motion did non derive much public credence ( Hoyle, 1978 ) . A series of events, after 1960s, marked better acknowledgment of compulsory auditor rotary motion among regulators, hearers and academicians. In 1961, Mautz and Sharaf suggested that long period of audit-client relationship badly deteriorates the independency and the objectiveness of hearers. Therefore, a compulsory hearer rotary motion government would heighten the audit quality. The Metcalf study, in 1976, recommended compulsory hearer rotary motion to increase competition among accounting houses and to keep auditor independency ( Hoyle, 1978 ) . In 2002, Sarbanes-Oxley Act ( SOX ) amended the old policy of a 7-year rotary motion ( Hoyle, 1978 ) , to the rotary motion of lead audit spouse ( or organizing audit spouse ) and reexamining spouse for every 5 old ages[ 1 ]. Malaysia, on the other manus, has mandated the audit spouse rotary motion policy somewhat later than the United States. The Malaysia Institute of Accountants ( MIA ) adopted the International Standards on Quality Control ( ISQC ) 1 on July 2006. Section 27 of ISQC 1 requires the lead battle spouse to revolve at least every seven old ages for listed companies. All these events have directed to the inquiry on the demand of compulsory audit spouse rotary motion, and its consequence on audit quality.
Aim
This paper seeks to carry on a cross-sectional survey, to research the consequence of audit spouse rotary motion on audit quality in Malayan financially-distressed companies. Auditor rotary motion will be assessed through the scrutiny of audit spouse term of office, while the hearer ‘s leaning to publish going-concern modified sentiment will be used as the placeholder for audit quality.
Motivation
There are several motives for this survey. Carey and Simnett ( 2006 ) mentioned that the analysis on the length of audit spouse term of office on audit quality, is best performed ‘in an environment and at a clip where the policy is non compulsory and the audit spouse can be identified ” . Malaysia suits the environment and clip, as Malaysia did non mandate the policy until 2006 and the audit spouse can be identified in the hearer study. Therefore, a survey on audit spouse term of office in Malaysia will be performed. Besides, this survey will analyze whether the determination to mandate audit spouse rotary motion in Malaysia is favorable. It is hoped that this survey would better the audit quality in Malaysia and in bend, beef up the credibleness of the fiscal studies.
Contribution to the Literature
This paper will lend to the bing literature in a few ways. First, most of the surveies carried out on audit spouse term of office were based on informations obtained from the developed states ( Taiwan and Australia ) . There are limited empirical grounds from the developing states ( including Malaysia ) , which examines the consequence of hearer rotary motion on the quality of hearer ‘s study. Second, there are no surveies on audit spouse rotary motion in Malaysia. There is merely one related Malayan survey, investigated utilizing archival informations ( Shafie, Hussin, Yusof, & A ; Hussain, 2009 ) and two other questionnaire-based surveies[ 2 ]. They examined the relationship between audit house rotary motion and audit quality. However, audit spouse rotary motion and audit house rotary motion is different as both are non absolutely correlated ( Chi & A ; Huang, 2005 ) . Last, there is a deficiency of consensus in the literature on the consequence of the length of audit spouse term of office on audit quality, because different findings were derived from old surveies. Therefore, this survey would lend to the current literature.
Structure of the Paper
This paper is structured as follows. Section 2 outlines the audit spouse term of office policy in a few selected states and in Malaysia. Section 3 develops the theory in audit quality and in audit spouse term of office. The hypothesis will be constructed in Section 4. Section 5 presents the research methods while Section 6 summarises the paper and discusses about the restrictions.
Audit Partner Tenure Policy
Audit Partner Tenure Policy in Selected Countries
The audit spouse term of office policy is, basically, different internationally. The policy of audit spouse rotary motion was foremost enacted in the United States. The American Institute of Certified Public Accountants ( AICPA ) mandated audit spouse rotary motion for every seven old ages in the seventiess. Section 203 of SOX farther refined the demand by shortening the spouse rotary motion to every five old ages, in effort to reenforce the public assurance.
In the United Kingdom, audit spouse was obliged to revolve every seven old ages for listed companies since 1992, after the Cadbury Committee ( Committee on the Financial Aspects of Corporate Governance ) found in favor of the policy ( Carey & A ; Simnett, 2006 ) . In January 2003, a reappraisal on the audit and accounting ordinances performed by the Department of Trade and Industry and the U.K. Treasury, recommended a rotary motion period of every five old ages. In add-on, the rotary motion of every seven old ages is required for other cardinal audit spouses ( Carey & A ; Simnett, 2006 ) .
In 2001, the International Federation of Accountants ( IFAC ) ‘s Code of Ethics stated that the lead battle spouse should be rotated after a pre-defined period, usually no more than seven old ages. The spouse should non restart the function of lead engagement spouse until two old ages have elapsed. More than 80 states use the Code of Ethics issued by IFAC ( Carey & A ; Simnett, 2006 ) .
As for Australia, the earliest mention to spouse rotary motion arose in 1994, when the Australian Society of Certified Practicing Accountants and the Institute of Chartered Accountants in Australia reported on the issue ( Carey & A ; Simnett, 2006 ) . However, the suggestion on the audit spouse rotary motion of every seven old ages was non adopted. In 1996, the Australian Commonwealth Government working party recommended spouse rotary motion of every seven old ages. However, it was non adopted once more ( Carey & A ; Simnett, 2006 ) . In 2001, Australia revised their profession ‘s criterion on independency in line with the IFAC Code of Ethics ( Carey & A ; Simnett, 2006 ; Fargher, Lee, & A ; Mande, 2008 ) . Auditor rotary motion policy was foremost established in May 2002 ( Fargher, et al. , 2008 ) , through the Professional Statement F1 Professional Independence, by the Institute of Chartered Accountants in Australia ( ICAA ) . It requires the audit spouse of listed companies to revolve at least every five old ages by 2004 ( Carey & A ; Simnett, 2006 ; Fargher, et al. , 2008 ) . Similarly, in Taiwan, the Taiwan Stock Exchange Corporation ( TWSE ) and GreTai Securities Market ( GTSM ) mandated regulations that basically require five-year hearer spouse rotary motion in 2003 ( Chi, Huang, Liao, & A ; Xie, 2009 ) .
Audit Partner Tenure Policy in Malaysia
Malaysia is a underdeveloped state, which relies on foreign direct investing to fund for growing and development. The credibleness of fiscal studies is indispensable, to guarantee that foreign investors are confident about the securities market in Malaysia ( Teoh & A ; Lim, 1996 ) . This demonstrates the importance of the audit quality in fiscal studies.
Nasser, Wahid, Nazri and Hudaib ( 2006 ) mentioned in their paper that the issue of auditor term of office was non clearly addressed in any of the Malaysian functionary paperss, before 2006. In March 1999, MIA, which was led by Datuk Hanifah Noordin announced the purpose to suggest a three- or five-year audit spouse rotary motion for public listed companies ( Shafie, et al. , 2009 ) . Nonetheless, no formal policy was enacted. Following a series of dirts in the U.S. , the Malaysia Securities Commission ( SC ) and the Bursa Malaysia[ 3 ]became more concerned with the hearer rotary motion issue. With that, MIA and Malaysia Institute of Certified Public Accountants[ 4 ]( MICPA ) have established an MIA/MACPA Joint Taskforce on Auditor Independence in Malaysia to analyze the hearer independent issue ( Shafie, et al. , 2009 ) . Once once more, the proposal of compulsory audit spouse rotary motion was recommended by MIA for a period of non more than five old ages. The audit spouse should non restart the function of lead engagement spouse until two old ages have elapsed. In July 2006, MIA adopted ISQC 1, mandating the rotary motion of audit spouse for at least every seven old ages.
Theory Development
Auditor ‘s Independence and Audit Quality
Auditor plays a critical function in cut downing the bureau costs incurred among the direction and the stockholders, in order to increase the value of the house ( Jensen & A ; Meckling, 1976 ) . Harmonizing to Watts and Zimmerman ( 1983 ) , hearer will cut down the bureau costs merely if hearers are perceived to be independent. The MIA ‘s By-Laws on Professional Ethics, Conduct and Practice[ 5 ]( 2007 ) stated that independency requires independency of head and independency in visual aspect. Therefore, hearer should avoid menaces to independence and follow the attacks set out in the By-Laws to cover with specific circumstance. With that, the audit procedure can break heighten the audit quality.
The care of good audit quality improves the credibleness of fiscal studies. A higher quality audit minimises the uncertainness associated with the fiscal studies prepared by directors. Users of fiscal studies would besides hold more confident in the fiscal studies. One of the constituents of audit quality is the likeliness of hearer to describe the abnormalities detected, which relies on the independency of hearer ( DeAngelo, 1981 ) . For illustration, an hearer, who is impaired, might make up one’s mind non to publish going-concern modified audit study, when the audit client exerts force per unit area on the hearer ( Geiger & A ; Raghunandan, 2002 ) . Failure to describe going-concern sentiment leads to hapless audit quality, and therefore, audit failure ( Francis, 2004 ) . Therefore, hearer ‘s independency is extremely regarded when the hearer tries to obtain good audit quality.
Audit Partner Tenure and the Perceived Audit Quality
By and large, the public perceives audit spouse rotary motion positively. From the audit commission point-of-view, Knapp ( 1991 ) found that audit quality is positively-correlated with hearer ‘s term of office, if the hearer ‘s term of office is less than 5 old ages. However, if the hearer ‘s term of office is more than 5 old ages, the position changes into negative. Once once more, the General Accounting Office[ 6 ]( GAO ) ‘s survey reconfirms the earlier public perceptual experience. The survey was carried out on the public accounting houses and Fortune 1000 ‘s publically traded companies. Most respondents of its study, which studied on compulsory steadfast rotary motion and its consequence on audit quality, believe that audit spouse rotary motion will be sufficient plenty to accomplish the intended benefits of compulsory hearer rotary motion. Likewise, a study done in Malaysia by Sori and Karbhari ( 2006 ) , farther supports the perceptual experience that the public favours the rotary motion of audit spouses. However, the focal point of this paper is non on the perceived audit quality. This paper tries to analyze the existent quality in the auditing procedure.
Potential Benefits of Restricting the Length of Audit Partner Tenure on Audit Quality
Advocates of audit spouse rotary motion support the gesture to put a bound on audit spouse term of office, as it is considered as one of the stairss to increase audit quality. First, hearers might be more independent and nonsubjective, if they are required to revolve after a period of clip ( Carey & A ; Simnett, 2006 ) . Second, hearers might be better in observing fraud and abnormalities in fiscal studies.
One of the menaces to auditor ‘s independency is familiarity menaces ( Hoyle, 1978 ; Lee & A ; Roder, 2007 ; McLaren, 1958 ; Winters, 1976 ) . Long association between hearers and audit clients impairs the objectiveness of hearer as the hearer becomes less doubting and more sympathetic to the clients ‘ involvements ( Accountants, 2009 ) . After working for drawn-out period with the same client, hearer tends to set excessively much trust into the client ( Arrunada & A ; Paz-Ares, 1997 ) . Furthermore, the control valid in the client ‘s audit plan is presumed to be the same as the old old ages ( Hoyle, 1978 ) . Auditor will besides expect consequences, alternatively of paying attending to the inside informations of the audit processs ( Arrunada & A ; Paz-Ares, 1997 ) . Unwittingly, hearer might be influenced by client ‘s involvement. As shown by Shockley ( 1981 ) , auditor tends to be more self-satisfied, becomes less advanced, prepares less strict audit processs and develops assurance in client after covering with the same client for an drawn-out period.
Besides, Shafie et Al. ( 2009 ) mentioned that prolong auditor-client relationship can sabotage hearer ‘s independency, as hearer feels committed to the client. Hearer might besides conspire with the client, as he/she become more intimate with the clients ( McLaren, 1958 ; Winters, 1976 ) . Furthermore, hearer might be worried about losing client, if he/she does non hold with the client ‘s penchants ( Hemraj, 2002 ) . Consequently, impaired hearer might easy follow client ‘s involvement. Dopuch, King and Schwartz ( 2001 ) found that the compulsory spouse rotary motion decreases the hearer ‘s willingness to publish a colored audit study. Therefore, the rotary motion of audit spouse is good, in effort to avoid these issues and to heighten hearer ‘s independency.
Furthermore, rotary motion of audit spouse brings “ fresh eyes ” to do audit opinion ( Arrunada & A ; Paz-Ares, 1997 ; Fargher, et al. , 2008 ; McLaren, 1958 ) . Auditor rotary motion integrates agnosticism into hearers ‘ plants, as hearers are less likely to observe fraud and abnormalities after working for excessively long. Hearers might besides go less challenged and might utilize less advanced audit processs ( Deis & A ; Giroux, 1992 ) . A new spouse will judge based from different angles and he/she might be able to observe mistakes and abnormalities that were overlooked by the old hearer ( Arrunada & A ; Paz-Ares, 1997 ; Carey & A ; Simnett, 2006 ; McLaren, 1958 ) . Furthermore, subjective country which necessitates professional opinion can be reviewed through rotary motion of hearers ( Catanach & A ; Walker, 1999 ) . With that, the mistakes can be minimised.
Following these statements, advocates support the bound set on audit spouse term of office. Not merely does the periodic rotary motion conveying approximately improved hearer independency, it heightens the ability of hearer to observe fraud and abnormalities in the fiscal studies.
Potential Costss of Restricting the Length of Audit Partner Tenure on Audit Quality
In contrast to the benefits mentioned in the old subdivision, critics oppose to the compulsory rotary motion of hearers due to a figure of grounds. One of the grounds being a company is compelled to alter the hearer, albeit improved audit quality ( Hoyle, 1978 ) . Other than that, compulsory rotary motion might besides sabotage audit quality ( Arrunada & A ; Paz-Ares, 1997 ; Hoyle, 1978 ; Johnson, Khurana, & A ; Reynolds, 2002 ; Lee & A ; Roder, 2007 ; Myers, Myers, & A ; Omer, 2003 ) .
Audit quality reduces as the new hearer does non hold the cognition of client, concern and environment. There is a learning curve for hearer to obtain the cognition needed in scrutinizing a peculiar company ( Pierre & A ; Anderson, 1984 ) . The rotary motion of audit spouse impedes the larning curve as cognition and experience from different clients might non be perfect replacements ( Arrunada & A ; Paz-Ares, 1997 ; Chi & A ; Huang, 2005 ) . Auditor would necessitate to familiarize him/herself with the audit procedure to enable better apprehension and to better hearers ‘ ability to place hazards ( Chi & A ; Huang, 2005 ; Pierre & A ; Anderson, 1984 ) . A new hearer might hold a higher possibility of overlooking certain mistakes and abnormalities.
Pierre and Anderson ( 1984 ) found that the new hearers would hold a higher inclination to perpetrate mistakes and consequence in higher judicial proceeding hazard, as compared to auditor with three-year experience. In add-on, Carcello and Neal ( 2000 ) found that the happening of deceitful fiscal coverage is higher in the first three old ages of an audit. They did non happen grounds of greater deceitful activity by client after drawn-out audit term of office. Besides, Petty and Cuganesan ( 1996 ) presented that hearer rotary motion will sabotage hearer ‘s inducement to put in a specific industry because hearer would necessitate to abandon the industry sporadically. Hence, there would be lesser hearer who has the forte in a specific industry, farther weakening the quality of audit. Due to these disadvantages, critics reject the thought of restricting audit spouse term of office.
The Relation between Audit Partner Tenure and Audit Quality
There are a immense sum of literature on the relationship between audit house rotary motion and audit quality ( Geiger & A ; Raghunandan, 2002 ; Jackson, Moldrich, & A ; Roebuck, 2008 ; Jenkins & A ; Velury ; Johnson, et al. , 2002 ; Myers, et al. , 2003 ; Vanstraelen, 2000 ) . However, the surveies on the length of audit spouse term of office and audit quality are limited. To day of the month, there are merely six surveies, taking grounds from Australia and Taiwan ( Carey & A ; Simnett, 2006 ; Chen, Lin, & A ; Lin, 2008 ; Chi & A ; Huang, 2005 ; Chi, et al. , 2009 ; Fargher, et al. , 2008 ; Hamilton, Ruddock, Stokes, & A ; Taylor, 2005 ) . The consequences of these surveies have been inconsistent.
Two surveies have discovered about the diminishing audit quality with longer spouse term of office. Hamilton, Ruddock, Stokes and Taylor ( 2005 ) supported compulsory audit spouse rotary motion as the unexpected accumulations ( used as the audit quality placeholder ) is lower with spouse alterations. Similarly, Carey and Simnett ( 2006 ) found that audit quality decreased for long audit spouse term of office. Using three placeholders for audit quality, Carey and Simnett reported that merely two steps, which are the leaning to publish a going-concern audit sentiment by hearer ; and the merely beaten ( or merely missed ) cardinal net incomes benchmarks, are consistent with the bead in audit quality. The usage of unnatural working capital accumulations did non take to important consequence. However, their survey by and large supports the instance for compulsory spouse rotary motion.
In add-on, two other surveies came out with the decision that audit quality additions in the initial twelvemonth of battle and lessenings after a period of clip. Chi and Huang ( 2005 ) found that net incomes quality additions at the beginning, but decreases as spouse term of office exceeds 5 old ages, when they examine the consequence of spouse term of office on net incomes quality. Systematically, Fargher, Lee and Mande ( 2008 ) indicated that new audit spouse coming from the same house as the surpassing audit spouse would better audit quality in the first few old ages. However, when audit spouse term of office becomes drawn-out ( more than 6 old ages ) , directors ‘ accounting discretion besides increases, thereby diminishing the audit quality. Therefore, longer association is good in the scrutinizing procedure to bring forth higher audit quality. However, when the length of audit spouse term of office becomes inordinate, the audit quality will deteriorate. These surveies indicate that audit spouse term of office should be limited after a period of clip.
In contrast, the staying two surveies reject the thought of restricting the audit spouse term of office. Chen, Lin and Lin ( 2008 ) found that net incomes quality addition with the addition on spouse term of office. Similarly, the most recent survey done by Chi, Huang, Liao and Xie ( 2009 ) on hearer rotary motion found that there is no support for the belief that compulsory audit spouse rotary motion enhances audit quality. In fact, Chi et Al. used sample that straight investigate the consequence of compulsory audit spouse rotary motion on gaining quality ( audit quality ) . The writers used informations after the spouse rotary motion policy was mandated, instead than voluntary informations. These two surveies lead to the contention on the demand of audit spouse rotary motion.
Conceptual Framework & A ; Hypothesis Development
Question Statement
There are reversible findings on the relationship between the audit spouse term of office and the audit quality. As old surveies lack of consensus on the issue of audit spouse term of office, the undermentioned inquiry arises:
Is there any association between the length of audit spouse term of office and audit quality?
Conventional Diagram of the Conceptual Framework
Audit Quality
( Dependent Variable )
Audit Partner Tenure
( Independent Variable )
Conceptual Model
Despite the beliing findings from Chen et Al. ( 2008 ) and Chi et Al. ( 2009 ) , this survey suggests that the length of audit spouse term of office is negatively associated with the audit quality. The ground is, both Chen et Al. ( 2008 ) and Chi et Al. ( 2009 ) used accrual-based placeholder in their research. Accrual-based placeholder was found to be noisy ( Chi, et al. , 2009 ) . Prior survey done by Carey and Simnett ( 2006 ) besides depicts the fact that accrual-based consequences can be contradictory. Therefore, Chen et Al. ( 2008 ) and Chi et Al. ( 2009 ) ‘s surveies might be biased.
In contrast, the hearer ‘s chance to publish going-concern modified sentiment will be used as the placeholder for audit quality in this survey, consistent with Carey and Simnett ( 2006 ) , Hopwood, McKeown and Mutchler ( 1994 ) and DeFond, Raghunandan and Subramanyam ( 2002 ) . DeFond et Al. ( 2002 ) mentioned in their paper that the audit study has of import function to inform about the going-concern job of audit client. Therefore, hearer must be able to be free from damage and defy the client force per unit area to publish a clean sentiment. In other words, there is a positive correlativity between the hearer ‘s leaning to publish traveling concern sentiment, with the degree of independency and the audit quality. Furthermore, harmonizing to Sinason, Jones and Shelton ( 2001 ) , auditor term of office is longer for clients who received unqualified sentiments. All these suggest that the usage of going-concern sentiment as the placeholder for audit quality is feasible.
In the early period of scrutinizing procedure, literature suggests that hearer has a higher failure hazard to observe material misstatements ( Chi & A ; Huang, 2005 ; Fargher, et al. , 2008 ; Geiger & A ; Raghunandan, 2002 ) . After the familiarization period, hearer would hold the cognition and accomplishment to option high degree of audit quality ( Chi & A ; Huang, 2005 ; Pierre & A ; Anderson, 1984 ) . Carey and Simnett ( 2006 ) viewed these old ages as between three to seven old ages. The hearer is expected to keep their independency within this period ( Carey & A ; Simnett, 2006 ) . After this period, it was expected that the audit quality will deteriorate ( Carey & A ; Simnett, 2006 ) . Even though the length of the audit spouse term of office period is non fixed, recent policy depicts a period of either five or seven old ages. Based on that, this hypothesis is derived ( in the alternate signifier ) :
Hour angle: There is a negative association between the length of audit spouse term of office and audit quality, ceteris paribus.
Research method
Sample and Data
The sample will dwell of all 1238 Malaysian listed companies found in the OSIRIS database in 2005. The twelvemonth of 2005 is selected as it is the most recent twelvemonth after International Standard on Auditing ( ISA ) 570[ 7 ]came into force and the twelvemonth before ISQC 1 was adopted to restrict the engagement spouse term of office. With that, the informations will non include spouse alteration due to rotation demand and it will mensurate the going-concern sentiment. The information needed to mensurate the audit spouse term of office and the audit quality, can be obtained from the one-year studies located in OSIRIS, including the name of the audit spouse and the audit house.
The sample will be confined to financially-distressed companies and non-banking and insurance industry. Previous research workers found that it is of import to command for the fiscal wellness of client when seeking to analyze the hearer ‘s coverage behavior ( Hopwood, et al. , 1994 ) . Furthermore, the going-concern modified sentiment is more outstanding among financially-distressed companies ( DeFond, et al. , 2002 ) as non-distressed companies does non usually publish going-concern audit sentiment for non-distress company that fails all of a sudden ( Geiger & A ; Raghunandan, 2002 ) . Therefore, financially-distressed companies are chosen. To command for financially-distressed companies, the sample will merely include companies which report negative net incomes and/or runing hard currency flows for the current financial twelvemonth ( Carey & A ; Simnett, 2006 ) . Other than that, the banking and insurance industry would besides be omitted as they have uncomparable entire plus base and fiscal construction ( Carey & A ; Simnett, 2006 ) .
Model of Audit Opinion
A logistic arrested development will be carried out, to analyze the relationship between the length of audit spouse term of office, and the hearer ‘s leaning to publish going-concern modified sentiment. The theoretical account, consistent with the attack of Carey and Simnett ( 2006 ) , is as below:
Dependent Variable
OPINION = index variable equal to 1 if the hearer issue going-concern modified sentiment, else 0
Experimental Variable
TENURE & gt ; 7 = index variable equal to 1 if client engages the same audit spouse for more than seven old ages, else 0
Control Variables
PBANK = chance of bankruptcy calculated from Carcello, Hermanson and Huss ‘s ( 1995 ) theoretical account
SIZE = natural logarithm of entire assets of client at year-end
AGE = natural logarithm of the figure of old ages since public listing
LEV = entire liabilities divided by entire assets at year-end
CLEV = alteration in LEV during the twelvemonth
RETURN = market-adjusted return over the twelvemonth
LLOSS = index variable equal to 1 if client reported a loss for cherished twelvemonth, else 0
INVEST = short- and long-run investing securities ( measured as current assets less debitors and stock list ) divided by entire assets at year-end
AFIRM = index variable set to 1 if audited by Big Four house, else 0
FEERATIO = ratio of non-audit fees to entire fees paid to incumbent hearer
CFO = runing hard currency flow divided by entire assets
TENURE2 = index variable equal to 1 if audit spouse is engagement spouse on a clean company for two old ages or less, else 0
Variables treatment
The dependent variable of TENURE & gt ; 7 is chosen because the ISQC 1 adopted in Malaysia stated that the spouse term of office should non be longer than seven old ages. The pick of control variable is based on the theoretical account used by Carey and Simnett ( 2006 ) . However, the variable used to command for the excavation companies is omitted in this theoretical account, as it is non a major industry in Malaysia.
The control variables in the theoretical account are informed by old literature ( Carcello, et al. , 1995 ; Chen & A ; Church, 1992 ; DeFond, et al. , 2002 ; Dopuch, Holthausen, & A ; Leftwich, 1987 ; Geiger & A ; Raghunandan, 2002 ; Mutchler, Hopwood, & A ; McKeown, 1997 ) and assistance in the anticipation of a going-concern sentiment. Prior research suggests that fiscal hurt, default on loan and large audit house ( PBANK, LEV, CLEV, LLOSS and AFIRM ) are positively associated with the leaning to publish a going-concern sentiment. Higher PBANK[ 8 ]value indicates higher chance of bankruptcy. LEV measures hazard connected with higher degrees of debt, while CLEV captures motions in purchase that might take to unsustainable degree of debt. LLOSS indicates companies with relentless losingss. AFIRM captures the differences in the Big Four audit houses and not Big Four houses as large audit houses were found to be more nonsubjective with bigger client base.
In contrast, SIZE, AGE, RETURN, INVEST, FEERATIO, CFO and TENURE2 are negatively associated with the likeliness to publish going-concern sentiment. Large audit clients ( SIZE ) have greater negociating power and are less likely to have going-concern audit study from hearers. The “ younger ” companies ( AGE ) are more prone to meet fiscal hurt. RETURN measures the market-based hazard and company ‘s public presentation and it is predicted to be negatively associated with going-concern sentiment. INVEST captures the ability to raise hard currency quickly in the event of fiscal troubles. FEERATIO is associated with lessened audit quality. CFO is related with a higher likeliness of fiscal hurt as the PBANK mark does non include the hard currency flows step. TENURE2 is set as the control because there is an initial period for hearer to familiarize with the audit procedure.
Summary and Limitation
Drumhead
The populace is concerned about the audit spouse term of office policy, after recent prostrations of high profile companies. Therefore, this survey aims to look into the impact of the length of audit spouse term of office on the audit quality for financially-distressed companies in Malaysia. Prior surveies have contradictory findings on the relationship between audit spouse term of office and audit quality. This survey is traveling to prove the hypothesis which proposes that the length of audit spouse term of office is negatively associated with the audit quality. The hypothesis is based on the belief that hearer would be impaired, after long association with client. This survey tests the hypothesis utilizing Carey and Simnett ‘s ( 2006 ) logistic arrested development theoretical account, with the leaning to publish going-concern modified sentiment as the placeholder for audit quality.
Restriction
There are a few restrictions in this survey. First, the determination of this survey may merely be applicable for Malaysia. Second, the sample of this survey merely includes publicly-listed and financially-distressed companies. This limits the generalization of the determination to other private entities and other non hurt companies ( external cogency issue ) . Third, the sample of financially-distressed companies is expected to be little, thereby raising the external cogency issue. Last, non all financially-distressed companies, which receive going-concern sentiment, will neglect later. Therefore, the usage of going-concern sentiment might take to Type I error ( rejecting a void hypothesis when it is really true ) .
