Audit Firm Tenure and Auditor Reporting Quality: Evidence in Malaysia

Rohami Shafie,Md Hairi Md Hussain,Wan Nordin Wan Hussin,Mohd ‘Atef Md Yusof

doi:10.5539/ibr.v2n2p99

Abstract

The main purpose of the study is to examine the relationship between audit firm tenure and auditor reporting quality in Malaysia. This study employs well-established going concern model of logistic regression. Our findings show that audit firm tenure is positively significant relationship with auditor reporting quality. Future research should consider other importance variables that may affect the auditor reporting quality such as non-audit services, and audit partner tenure. However, in sum, this study is in line with the recent decision by the regulators not to regulate a mandatory audit firm rotation in Malaysia. This study provides a very importance implication and as a cornerstone to the regulators and policy makers in a developing country as the issue continues to be strong interest among them in improving the auditor independence.

Highlights

Even in such a mandatory auditor rotation regime, there is insufficient evidence to suggest that audit quality is improved by this means
In view of the importance of the issue in question, the Malaysian Institute of Accountants (MIA) and the Malaysia Institute of Certified Public Accountants (MICPA), who are the accounting governing bodies in Malaysia, agreed to establish an MIA/MACPA joint Taskforce on Auditor Independence in May 2002. Both institutes agreed that the overall disadvantages of mandatory rotation of audit firms, including exorbitant costs, disruption and loss of accumulative knowledge, and a restriction on the freedom of companies to choose their own auditors, outweigh the benefits that may be derived from such rotation of audit firms. (Malaysian Institute of Accountants, 2002)
We found no market wide evidence to support that argument in Malaysia but instead we found that longer audit tenure has positive significant association with auditor’s reporting decision

Summary

Introduction

Even in such a mandatory auditor rotation regime, there is insufficient evidence to suggest that audit quality is improved by this means. In view of the importance of the issue in question, the Malaysian Institute of Accountants (MIA) and the Malaysia Institute of Certified Public Accountants (MICPA), who are the accounting governing bodies in Malaysia, agreed to establish an MIA/MACPA joint Taskforce on Auditor Independence in May 2002 Both institutes agreed that the overall disadvantages of mandatory rotation of audit firms, including exorbitant costs, disruption and loss of accumulative knowledge, and a restriction on the freedom of companies to choose their own auditors, outweigh the benefits that may be derived from such rotation of audit firms. The audit partner rotating after such period should not resume the role of audit engagement partner for the audit client until two years have elapsed Prior to this pronouncement, in 1999, the MIA under its former president, Datuk Hanifah Noordin, called for a mandatory rotation of external auditors in every three or five years. Among significant changes between IAG 23 and ISA 570 include provision to assess going concern assumption in every audit engagement and additional prescription to guide practitioners in detecting going concern problem

Objectives

Results

Conclusion