International Journal of Accounting Research

Perceived auditor independence and audit quality

Varun Yogesh Ramdin^* Department of Economics, Faculty of Social Sciences, Anton de Kom University of Suriname, Leysweg 86, Tammenga, Suriname
^*Correspondence: Varun Yogesh Ramdin, Department of Economics, Faculty of Social Sciences, Anton de Kom University of Suriname, Leysweg 86, Tammenga, Suriname, Email:

Received: 19-Nov-2021 Published: 10-Dec-2021

Introduction

De Angelo (1981) defines the audit profession is such a profession where the auditor provides different services, such as audit and non-audit services to a client., where audit service of this profession means that a company’s financial statements are examined by an independent and objective individual [1]. The goal of this examination is to provide the users with reasonable assurance that the financial statements are audited in accordance with the accounting standards and are audited by an independent auditor. In other words, the auditor gives a statement that the financial statements are free from material statements [2]. The expectation by the society regarding the quality of the audit is high because the society or the user of the audited financial statements use this assurance for proper decision making. Cases such as Enron and WorldCom are examples whereas the business failure is directly related to the audit failure and the accounting infringement created by management was supported by the auditor [3].

As mentioned earlier the quality of the audit is a major factor for users of financial statement. De Angelo [1] defines the audit quality as the ability of the auditor to discover and to report existing accounting shortcoming in the client’s accounting system [1]. According to Rahima and Angoes [3] the ability of the auditor to detect a material misstatement depends on the auditor’s competence (knowledge) and the ability to report this misstatement depends on the auditor’s independence. The auditing standards and the Ethics code of Public Accountant Profession states that the public accountant should maintain its independency under every circumstance. The Code of Ethics states that the auditor should possess the ability to be objective, and to maintain their integrity. The important aspect within the concepts of objectivity and integrity is that the auditor should always be independent in mind and appearance, which means that when the auditor is performing his duties, he should be neutral to avoid conflict of interest [2].

The audit quality and the ability of the auditor to detect and to report a certain misstatement are very much related to each other. However, there are few factors such as audit tenure and audit rotation that can have certain influence on the independence of the auditor which can affect the audit quality [2-5]. According to the research of Chen et al. [4] the audit tenure is defined as the time the auditor has taken to examine the financial statement of the company or the time that the auditor spends on evaluating the client. Furthermore, this research concluded that if the auditor takes more time to conduct the audit, the audit quality will decline. The result is not supported by the work of Rahmina and Angoes [3], where in the market of Indonesia, the investigation of the relationship between the audit tenure and the audit quality states that the audit tenure has a positive influence on the audit quality.

According to Siregar et al. [5] there are opponents and proponents of audit rotation, where the proponent’s states that the rotation of the audit firm increase the independency of the auditor which results in a greater audit quality. If there is a change in the audit firm/ auditor this will result in a fresh look at the financial statements of the client from the new auditors, which might increase the ability that the auditor will be able to detect misstatements. On the other hand, the opponents of auditor/ firm rotation states that if there is a rotation this will increase the audit failure risk. According to Myers et al. [6], the argument for this statement is that the new auditor/audit firm will rely heavily on the management estimates, but if there is no rotation the reliance on management estimates will be reduced, which will result in a more effective audit. In addition to this, Lu et al., [7,8] argues that an extension of the auditor- client relationship increases the audit quality, because the poor knowledge of the new auditor about the client will work obstructive in the effectiveness of the audit.

According to the study of Yuniatri [9] there is a positive correlation between the audit fees and the audit quality, which means that when the audit fees are higher this will result in a higher quality of the audit. This result challenged the work where the opinion states that audit fees and audit quality are negatively correlated, which means that audit fees can influence the auditor independence in appearance, because the high fee can put the auditors is such a position that they will not take any action against their clients [10]. This will result in a decline of the audit quality, while a small fee will provide the auditor to perform all the audit procedures to maintain a certain audit quality.

Problem Definition

With a population of approximately 590 thousand, Suriname is the former Dutch colony, that is located at the north coast of South America [11]. Suriname is geographically seen as one of the smallest countries on the continent of South America, however the Caribbean region states that Suriname is part of the Caribbean region, more specifically the Guiana Plateau [12].

In the year 2017 Suriname passed the first law regarding the financial reporting and of the financial statements. According to this Act, companies should prepare their annual report in accordance with the International Financial Reporting Standards (IFRS) or the International Financial Reporting Standards for Small and Medium Entities (IFRS SME) [13].

The Suriname Chartered Accountant Institute (SCAI) is the body established by law with the aim to develop the audit profession in accordance with international standards and regulation. The SCAI is in a process of establishing good relationship with the Netherlands Institute of Chartered Accountants (NBA) and is also an active member of the Institute of Chartered Accountants of the Caribbean (ICAC). In addition to the relationship with the NBA and the membership of ICAC, the SCAI is preparing the become a member of the International Federation of Accountants (IFAC) [14]. According to the law of Suriname the SCAI’s objective is not only to promote the audit profession but also to increase the integrity of the audit profession in Suriname. By monitoring all the registered CPA’s (Certified Public Accountants) or RA’s (Register Accountants) this institute is also responsible for setting standard and rules for a proper functioning of the audit profession in Suriname [14]. According to the rules of the SCAI one of the main purposes of this institute is the developed rules and guidance to increase the auditor independence and the audit quality in Suriname. However, the SCAI has not yet developed any rules or regulation about mandatory audit rotation at partner or firm level, audit tenure and audit quality which leaves a grey area for auditors and audit firms to perform their duties according to the law [14].

Research in the field of audit and more specifically research where the relationship between audit characteristics and audit quality is tested is conducted in a very few less developed countries in region as Asia and South/ Latin America [15]. In this work the focus is on the relationship between audit fees and audit quality in the markets of South/Latin America Based on this it can be concluded that there has been inadequate to no research in the field of audit in countries like Suriname these which refers to research that has been conducted in the Caribbean Alleyne et al. [16]. A summary shows that in the time period of 2002 some research was conducted by Alleyne et al. [16], where one characteristic of the auditor, the independence of the auditor was tested in an environment like Barbados. The reason why this research was important can be found in the different arguments regarding the independence of the auditor, where most of the arguments stated that the independence of the auditor can be influenced by human behavior. The research regarding the auditor’s independence expanded over the years in Barbados where the relation between the perceived auditor’s independence and aspects of corporate governance, audit regulations were the center of research in Barbados [17].

Based on the research that has been done in the field of auditor’s independence and audit quality and the gap that exists in the audit profession in Suriname it is interesting to conduct this research. Therefore, the aim of this study aims to determine to what extent the auditor’s independence affects the audit quality in Suriname. There are several reasons why this study should be conducted in undeveloped countries such as Suriname. Firstly, the study will have a major contribution understanding the audit profession in small undeveloped country, apparently because no previous studies were conducted in the audit field more specifically regarding the auditor’s independence in Suriname. Secondly, this study can help institutional bodies such as the Suriname Chartered Accountant Institute (SCAI), to structure the audit profession with regards to the auditor’s independence and the audit quality. And thirdly, this study will contribute to the academic educational system and other stakeholders with the information provided in this study. And last the study will contribute to the existing research which is done in countries where there are similarities with Suriname, such as Barbados and other less developed countries in other regions.

Previous studies and hypothesis Development

Corporate collapses such as Enron and WorldCom have found their origin in audit failures, where the poor audit quality was directly associated with a lack of auditor independence, where the auditors failed to detect and to report material misstatements in the financial statements [5].

Based on the different research it can be said that the audit quality refers to the ability of the auditor to discover and report shortcomings of the audit clients accounting and reporting system (de Angelo 1981) [1]. The most important part is that this ability is only possible when the auditor possesses the technical abilities and is independent [3]. The level of the audit quality depends on the first part on the ability of the auditor to detect the misstatement. This is directly related to the auditor’s knowledge (competence). The second part of the audit quality depends on the ability of the auditor to report the misstatement, which is directly related to the level of the independence of the auditor [3]. Based on this it can be said that the auditor’s independence is an important aspect for safeguarding the audit quality, because the auditing standards and the Ethics code of Public Accountant Profession clearly state that the auditor should maintain his independency, which means that the auditor should always be neutral [2].

Audit Tenure

According to research as the work of Haron et al. [18], audit tenure is seen as the period of the engagement time that exists between the audit firm and the same audit client. As motioned by the work of Chen et al. [4] it is shown that there is a negative relation between the audit tenure and the audit quality, and in such a manner that the audit quality decreases as the audit tenure goes longer. In contrast to this the study of, Rahmina and Angoes [3] shows evidence that supports a positive relation between audit tenure and audit quality, where the audit quality increases as the length of the audit tenure increases. The study of Alleyne [16] is one study that is conducted in a country that is more likely to be compared to Suriname, where is concluded that the audit tenure is negatively associated with audit quality. Studies like NDUBUISI and EZECHUKWU [19,20] which are conducted in developing countries have shown that audit tenure and audit quality are positively related, which means that the length of the audit and client relationship is increasing the quality of the audit. Looking at these statements made by different research in different countries it can be concluded that the audit tenure is directly related with the aspects of the auditor’s independence. Based on the information above the second hypothesis is developed: H1: There is a significant influence of audit tenure on audit quality

Audit Firm Rotation

Audit firm rotation indicates that the audit firm must be rotated after a certain of period despite the ability of the auditee to stay with the same audit firms [21]. Those in favor of the audit firm rotation argue that a long-term relation with the client will decrease the audit quality, because the focus of the auditor will be shifted towards incentives of the clients instead of focusing on the detection and the reporting of material misstatements [22]. Furthermore, [23-25] argues that periodic rotation of audit firms increases the objectivity, the independency of the auditor to conduct the audit, because there is no economic incentive between the audit firm and the client, which could have affected the auditor’s independency. Those who are not in favor of the audit firm rotation argue that the rotation will decrease the audit quality because the newly rotated auditor does not have enough client specific information, and this will affect the ability of the auditor to detect and report the misstatements [7,8]. Based on the information above the second hypothesis is developed:

H2: There is a significant influence of audit firm rotation on audit quality

Audit Report Lag

As mentioned in several studies above there is a link between the audit tenure and the audit quality. Different studies such as Lee et al. [26], Habib and Bhuiyan. [27], Dao and Pham [28] have shown that there is a link between the audit tenure and the audit report lag (ARL) in such a way that the audit report lag is longer in the early years of the audit which indicates that the audit report lag is longer when the audit tenure is shorter. Furthermore, the work of Ahmed and Che-Ahmad [29], shows that the ARL influences the audit quality, because when the audit report lag is longer it can influence the users of information because they will doubt the ability of the auditor to assess the financial statements. Based on the information above the second hypothesis is developed:

H3: There is a significant influence of ARL on audit quality

Data and sample selection and research Design

The sample in this study will contain all the companies from the private sector who produces an audited financial report for the period of 2014-2019. In this study all the companies refer to companies listed on the Surinamese Stock Exchange (SSE) as well as those who are not listed on the SSE.

The data for this study will contain the information regarding the audit opinion, audit report lag, audit rotation and audit tenure. The data for all the variables be extracted by downloading each audit report from the website of the company.

Audit quality

As derived from the hypothesis, the theoretical concept in this study is the audit quality. Researchers as De Fond and Zhang [30] stated that audit quality refers to the ability of the auditor to detect and report material misstatements. According to the SCAI there is no clear definition of audit quality in the law [14]. Therefore, this research is based on the measurement for audit quality which will be adapted from other research in the field of audit where there are similarities with Suriname where the given audit opinion is taken as measurement for audit quality [15]. The main reason why the measurement for this variable is reliable as this is also based on the study of Gul et al. [31] and the study of Goodwin and Wu [32], where it is stated that auditor’s opinion can be seen as a form of audit quality which is an extension of the measurement of audit quality, where the given opinion (unqualified gets the value of 1, otherwise is 0) Based on this reliability of the given measurements the type of opinion will be used as a proxy to measure the audit quality and gets the value of 1 if the company gets an unqualified opinion, otherwise the value will be 0 for all the other types of opinion.

Audit Tenure

As mentioned earlier Haron et al. [18], defines audit tenure as the period of the engagement time that exists between the audit firm and the same audit client. According to the SCAI there is no definition, measurement, or rule for the audit tenure in Suriname [14]. Based on this information the measurement for audit tenure in this study is the same that is used in the study of Siregar et al. [5], which is the length of time the Public Accounting Firm has been the auditor of a company (number of years).

Audit Firm Rotation

As mentioned earlier audit firm rotation indicates that the audit firm must be rotated after a certain of period despite the ability of the auditee to stay with the same audit firms [21]. The current regulatory body in Suriname states that there is no rule or definition regarding the audit firm rotation Suriname, [14]). This also indicates that there is no such thing as mandatory audit rotation in Suriname, which gives companies the ability to stay with the same auditor. Based on this information the measurement for the audit firm rotation will be same measurement that is used in the study of Siregar et al. [5] which is a dummy variable, where it gets a value of 1 if there is audit firm rotation and 0 otherwise.

Audit Report Lag

According to the study of Lee et al. [26] the Audit report lag (ARL) is the duration of the audit of the financial statements. This indicates that the ARL can be defined as the period between the end of the company's fiscal year and the date on the independent auditor's report. The SCAI nor the law had defined the above. There is no definition, measurement, or rule of ARL in Suriname [14]. As a result of this given information the measurement for ARL in this research will be the same as used by Lee et al. [26] and Habib and Bhuiyan [27], which is number of calendar days from fiscal yearend to date of the auditor’s report.

Based on the information above, the following research model will be used to test the relation:

Ao= B0+B1*AuT+B2*AFR+B3*ARL+E

Where:

Ao= Type of Audit Opinion; dummy variable where; unqualified opinion=1, otherwise=0

AuT= Audit Tenure, the period the company has the same audit firm

AFR= Audit Firm Rotation, dummy variable, value of 1 if there is a rotation otherwise 0

ARL= Audit Report Lag, measured by the number of the calendar days from the fiscal year end to the date of the audit report

E= Error term

Results of the Study

Table 1 shows the descriptive statistics. Based on these statistics the following findings can be concluded that the most companies (approximately 90%) in the sample received an unqualified opinion. This statement is based on the mean value of 0.92 that approaches the value of 1. Most of the companies in the sample have an audit tenure with audit firms of 3 year. Furthermore, it can be concluded that the companies in the sample are not making use of audit firm rotation, as the mean value for audit firm rotation approaches the value of 0.05. From this table it can be concluded that the companies in the sample take approximately 154 days to complete the audit, as it is indicated in the mean value of 154 for the audit report lag.

Table 1: Descriptive Statistics.

The model is expressed as: AO= B0+B1*AUT+B2*AFR+B3*ARL+E. The F- statistic for the model is: 1.084, R2:0.032, and the adjusted R2:0.002

Table 2 presents the coefficients for the model where the audit quality, which is measured by the opinion of the auditor as the dependent variable. All the independent variables show a relationship or an effect on the dependent variable, but this effect is not significant at a level of 0.10. As measured by the adjusted R2 for the model (0.002) this indicates that a lot of variation in the audit quality is left unexplained by the independent variables.

As mentioned earlier, the results show that the independent variables effect the dependent variable in a negative way, however based on the significance levels, this is not significant. The results for the first hypotheses which is presented in Table 2 concludes that audit tenure effects the audit quality (-0.153). This effect is tested with a significance level of 5% and 10% (p=0.05 and p=0.10). Based on the significance levels it can be concluded that this effect is not significant and does not support the first hypothesis.

Table 2: Coefficients.

The value for the effect between auditor firm rotation and audit quality is -0.146, this value indicates the auditor firm rotation affects the audit quality negatively. However, the statistical test produced evidence that this effect is not significant (p=0.05, p=0.10). This significance level of 0.166 is greater that the p value which means that this evidence does not support the second hypothesis.

The third value of -0.003 shows that the audit report lag effects the audit quality negatively. This negative effect is tested with a significance value of 0.975 which is greater than the p value of 0.05 and 0.10 shows that the evidence is not significant and does not support the third hypothesis.

Conclusion

The aim of this study is to determine to what extent the auditor’s independence affects the audit quality in Suriname. In response to this, the study examined some factors suggested by the existing literature as predictors of the relationship with audit quality. The factors included are related to the actual audit firm tenure, audit firm rotation and the length of the audit.

The main conclusion for this study is that the auditor’s independence affects the audit quality in Suriname, but this effect is not significant, which means that the factors (audit firm tenure, audit firm rotation, audit report lag) does not decide the audit quality in Suriname.

Based on the results of the study it can be concluded that the tenure that the audit firm holds with the audited is not significant on the audit quality in Suriname. The statistical evidence in the study shows that there is a certain effect on audit quality that is caused by the audit tenure, however this effect is statistical not significant and therefore does not support the hypothesis, which means that there is very small amount of evidence which can conclude that the length of the tenure decides the audit opinion in Suriname. The second reasoning for the conclusion of this study is presented by the evidence for the second hypothesis. This evidence shows that the audit firm rotation also affects the audit quality. However, the evidence produced by the test shows that this is not significant and does not support the second hypothesis, which indicates that there is also a small amount of evidence that predict that the audit quality is decided by the rotation of the audit firm.

The third reason for this conclusion can be found in the results of the last hypothesis, where it is stated that the audit report lag affects the audit quality. However, the significance level of this effect shows that this is not significant and does not support the last hypothesis, which indicates that there is also a small amount of evidence that predict that the length of the audit decides the audit quality in Suriname.

Overall, it can be concluded that the auditor’s independence does affect the audit quality in Suriname, however this effect is not statistically significant which implies that this relationship is not a strong relation.

Recommendations

Based on the conclusion of this research it can be recommended that this study can be expanded by testing to conclude whether there are other factors of auditor’s independence that could affect the audit quality in Suriname.

This research can also be expanded by looking at other determinants of the audit profession is Suriname. In this setting it can interest to look at factors like audit fee, or audit partner rotation. In this setting it can be interesting to look whether these factors show any relationship with audit quality in Suriname.

Furthermore, this research can be used as surrogate to conduct further research in order to define and to set standards for certain audit characteristics in Suriname, such as, audit quality, auditor’s independence, audit firm rotations and audit tenure.

REFERENCES

1. DeAngelo LE. Auditor size and audit quality. J Account Econ.1981; 3(3): 183-199.
2. Arens AA, Elder RJ, Beasley MS. Auditing and Assurance Services: An Integrated Approach 14th Edition (14th ed.). Pearson Education, Inc. 2021.
3. Rahmina LY, Agoes S. Influence of Auditor Independence, Audit Tenure, and Audit Fee on Audit Quality of Members of Capital Market Accountant Forum in Indonesia. Procedia - Social and Behavioral Sciences.2014; 164: 324-331.
4. Chen H, Chen JZ, Lobo GJ, Wang Y. Effects of Audit Quality on Earnings Management and Cost of Equity Capital: Evidence from China. Contemporary Accounting Research. 2011; 28(3): 892-925.
5. Siregar SV, Amarullah F, Wibowo A, Anggraita V. Audit Tenure, Auditor Rotation, and Audit Quality: The Case of Indonesia. Asian J Bus Account.2012; 5(1): 55-74.
6. Myers JN, Myers LA, Omer TC. Exploring the Term of the Auditor-Client Relationship and the Quality of Earnings: A Case for Mandatory Auditor Rotation? Account Rev. 2003; 78(3): 779-799.
7. Lu T, Sivaramakrishnan K. Mandatory audit firm rotation: Fresh look versus poor knowledge. J Account Public Policy. 2009a; 28(2): 71-91.
8. Lu, T., & Sivaramakrishnan, K. (). Mandatory audit firm rotation: Fresh look versus poor knowledge. J Account Public Policy. 2009b;28(2): 71-91.
9. Yuniarti R. Audit Firm Size, Audit Fee And Audit Quality. J Global Manag.2011; 2(1): 84-97.
10. Choi JH, Kim JB, Zang Y. Do Abnormally High Audit Fees Impair Audit Quality? Auditing. J Serv Theory Pract. 2010; 29(2): 115-140.
11. ABS. (2021, February). Demographic Data 2017 – 2019 (356/2021-01). Algemeen Bureau voor de Statistiek
12. Taglioni F, Cruse R. Is Surinam a Carribean Island like the others? Caribbean Atlas. Published. 2013.
13. De Nationale Assemblée (DNA). WET van 24 september 2017, houdende regels inzake de jaarrekening en wijziging van het Wetboek van Koophandel en Wet Coöperatieve Verenigingen (Wet op de Jaarrekening) (No. 84). STAATSBLAD VAN DE REPUBLIEK SURINAME. 2017, October.
14. De Nationale Assemblée (DNA). WET van 18 oktober 2018, houdende regels inzake het accountantsberoep en instelling van het Instituut voor Chartered Accountants in Suriname (Wet Suriname Chartered Accountants Institute) (No. 92). Staatsblad Van De Republiek Suriname. 2018, June.
15. Moraes AJ, Martinez AL. Audit Fees and Audit Quality in Brazil. Controladoria e Contabilidade. 2015; 21: 1-15.
16. Alleyne P. Independence of Auditors: In the Deep End? A Barbadian Analysis. Journal of Eastern Caribbean Studies. 2002; 27(2): 55-79.
17. Alleyne PA, Devonish D, Alleyne P. Perceptions of auditor independence in Barbados. Manag Audit J. 2006; 21(6): 621-635.
18. Haron H, Hartadi B, Ansari M, Ismail I. Factors Influencing Auditors’ Going Concern Opinion. Asian Acad Manag J. 2009; 14(1), 1-19.
19. NDUBUISI AN, EZECHUKWU BO. Determinants of Audit Quality: Evidence from Deposit Money Banks Listed on Nigeria Stock Exchange. Int j acad res account, Finance and Management Sciences. 2017a; 7(2): 117-130.
20. NDUBUISI AN, EZECHUKWU BO. (). Determinants of Audit Quality: Evidence from Deposit Money Banks Listed on Nigeria Stock Exchange. Int j acad res account, Finance and Management Sciences. 2017b; 7(2): 117-130.
21. Onwuchekwa JC, Erah DO, Izedonmi F. Mandatory Audit Rotation And Audit Quality: Survey Of Southern Nigeria. Res j finance account. 2012; 3(8), 70–77.
22. Chen CY, Lin CJ, Lin YC. Audit Partner Tenure, Audit Firm Tenure, and Discretionary Accruals: Does Long Auditor Tenure Impair Earnings Quality? Contemporary Accounting Research, 2008; 25(2): 415-445.
23. Chi W, Huang H, Liao Y, Xie H. Mandatory Audit Partner Rotation, Audit Quality, and Market Perception: Evidence from Taiwan. Contemporary Accounting Research, 2009; 26(2): 359-391.
24. Firth M, Rui OM, Wu X. How Do Various Forms of Auditor Rotation Affect Audit Quality? Evidence from China. Int J Account. 2012; 47(1): 109-138.
25. Azizkhani M, Daghani R, Shailer G. Audit Firm Tenure and Audit Quality in a Constrained Market. Int J Account. 2018; 53(3): 167-182.
26. Lee HY, Mande V, Son M. Do Lengthy Auditor Tenure and the Provision of Non-Audit Services by the External Auditor Reduce Audit Report Lags? Int J Account. 2009; 13(2): 87-104.
27. Habib A,  Bhuiyan MBU. Audit firm industry specialization and the audit report lag. J Int Account Audit Tax,  2011; 20(1): 32-44.
28. Dao M, Pham T. Audit tenure, auditor specialization and audit report lag. Manag Audit J. 2014; 29(6): 490-512.
29. Ahmed MI, Che-Ahmad A. Effects of Corporate Governance Characteristics on Audit Report Lags. Int J Econ Financial Issues. 2016; 6(7): 11-13.
30. DeFond ML, Zhang J. A Review of Archival Auditing Research. SSRN Electronic Journal. Published. 2014;134pages.
31. Gul FA, Ma SM, Lai K. Busy Auditors, Partner-Client Tenure, and Audit Quality: Evidence from an Emerging Market. J Int Account Res. 2017; 16(1): 83-105.
32. Goodwin J, Wu D. What is the Relationship Between Audit Partner Busyness and Audit Quality? Contemporary Accounting Research. 2015; 33(1): 341-377.