The Mediation Effect of Audit Quality on the Relationship Between Auditor-Client Contracting Features and the Reliability of Financial Reports in Yemen

International Journal of Business Society, Vol. 3, Issue 4
Afif A. AlmasaniDr. S.M. Ferdous AzamSohail AhmedSiti Khalidah Binti MD Yusoff
Audit QualityAudit FeesAudit Firm RotationReliability of Financial Reports
PDFRegular IssueDOI: 10.30566/ijo-bs/2019.109
3Volume
4Issue

Abstract

The main purpose of this research is to investigate the direct and indirect association between the independent variables auditor-client contracting features (audit firm rotation and audit fees), the mediating variable which is an audit quality and dependent variable is the reliability of financial reports. The main data of this study is collected by survey method. The convenient sampling method is used to collect data. In addition, the respondents of this research are 285 of Yemeni Certified Public Accountants. For the purpose of analyzing, Structural Equation Modeling SEM has been employed through Smart PLS software and SPSS has been used to obtain the descriptive data. The findings of this research revealed that the relationship between the fees of audit and audit firm rotation with audit quality is positively significant. Meanwhile, indicated a positive significant association with the reliability of financial reports. Furthermore, the results disclose a positive significant relationship between the audit quality and the reliability of financial reports. Finally, the results have also confirmed that the audit quality has positively mediated relationship between the fees of audit firm, audit firm rotation; and the reliability of financial reports. The main contribution is a depth examination of the reliability of financial reports and providing an understanding of the role played by audit fees, auditor rotation on audit quality in Yemen.

References

[1]

AbuBakar, N. B., & Ahmad, M. (2009). Auditor Independence: Malaysian Accountant's Perception. International Journal of Business and Management, 4(12), 129.

[2]

AICPA. (2001). Statement on Auditing Standards No. 94, The Effect of Information Technology on the Auditor’s Consideration of Internal Control in a Financial Statement Audit. New York, USA: American Institute of Certified Public Accountants.

[3]

Al-Ajmi, J., & Saudagaran, S. (2011). Perceptions of auditors and financial-statement users regarding auditor independence in Bahrain. Managerial Auditing Journal, 26(2), 130-160.

[4]

Al-Eissa, A. I. (2009). Non-audit services and auditor independence: The case of Saudi Arabia. Victoria University.

[5]

Al-Khadash, H. A., Nassar, M., & Sweidan, D. (2011). Rotation of Auditors in Jordan: The perspectives of Small and Large Audit Firms. Applied Finance, 499.

[6]

Al-Khaddash, H., Al Nawas, R., & Ramadan, A. (2013). Factors affecting the quality of auditing: The case of Jordanian commercial banks. International Journal of Business and Social Science, 4(11).

[7]

Almasani, Afif A. (2019). The Mediation Effect of Audit Quality on the Relationship between Auditor-Client Contracting Features and the reliability of Financial Reports in Yemen. International Journal of Business Society, 3(10), 58-69. doi:10.30566/ijo-bs/2019.109

[8]

Almalhuf, A. A. (2009). Perceptions of Libyan external auditor independence. Liverpool John Moores University.

[9]

Alrshah, A. M. (2014). Corporate governance, auditor quality and the reliability of audited financial statements in Libyan banking sector.

[10]

Alrshah, A. M. (2015). An Empirical Analysis of Audited Financial Statements Reliability: Mediating Role of Auditor Quality. International Journal of Finance and Accounting, 4(3), 172-179.

[11]

Alrshah, A. M., Fadzil, F. H., & Alrshah, M. M. (2016). Corporate Governance as Enabler of Audited Financial Statements Reliability: Mediating Role of Audit Team Attributes. Paper presented at the Proceeding 3rd International Conference on Global Social Entrepreneurship, Legoland, Johor.

[12]

Aruñada, B. (2004). Audit failure and the crisis of auditing. European Business Organization Law Review (EBOR), 5(4), 635-643.

[13]

Bamshmous, A. A. O. (2003). Auditing International Standards and application possibilities in the Republic of Yemen. (Ph.D Thesis), University Almostansria, Iraq.

[14]

Basioudis, I. G., Papakonstantinou, E., & Geiger, M. A. (2008). Audit fees, non‐audit fees and auditor going‐concern reporting decisions in the United Kingdom. Abacus, 44(3), 284-309.

[15]

Bernstein, L. (1992). A financial analyst’s guide to accounting quality. Business Credit, 94(2), 1.

[16]

Brody, R. G., & Moscove, S. A. (1998). Mandatory auditor rotation. National Public Accountant, 43, 32-36.

[17]

Byrne, B. M. (2001). Structural equation modeling with AMOS, EQS, and LISREL: Comparative approaches to testing for the factorial validity of a measuring instrument. International journal of testing, 1(1), 55-86.

[18]

Cameran, M., Prencipe, A., & Trombetta, M. (2016). Mandatory audit firm rotation and audit quality. European Accounting Review, 25(1), 35-58.

[19]

CBY, C. B. o. Y. (2005). Report on Yemeni National Commercial Bank. Sanaa: Central Bank of Yemen.

[20]

Cheung, E., Evans, E., & Wright, S. (2010). An historical review of quality in financial reporting in Australia. Pacific Accounting Review, 22(2), 147-169.

[21]

Chin, W. W. (1998). The partial least squares approach to structural equation modeling. Modern methods for business research, 295(2), 295-336.

[22]

Chin (2010). How to write up and report PLS analyses Handbook of partial least squares (pp.655-690): Springer.

[23]

Chung, H., & Kallapur, S. (2003). Client importance, nonaudit services, and abnormal accruals. The Accounting Review, 78(4), 931-955.

[24]

Cronbach, L.J. (1951). Coefficient Alpha and the Internal Structure of Tests. Psychometrika, 16(September), 297-334.

[25]

Crowther, D., & Lancaster, G. (2009). Research Methods: A Concise Introduction to Research in Management and Business Consultancy. Butterworth-Heinemann.

[26]

Daniels, B. W., & Booker, Q. (2011). The effects of audit firm rotation on perceived auditor independence and audit quality. Research in Accounting Regulation, 23(1), 78-82.

[27]

Davis, L. R., Soo, B. S., & Trompeter, G. M. (2009). Auditor tenure and the ability to meet or beat earnings forecasts. Contemporary Accounting Research, 26(2), 517-548.

[28]

DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.

[29]

DeFond, M., & Zhang, J. (2014). A review of archival auditing research. Journal of Accounting and Economics, 58(2), 275-326.

[30]

Desira, J., & Baldacchino, P. J. (2005). Jurors' and self-perceptions of the statutory auditors in Malta. Managerial Auditing Journal, 20(7), 691-706.

[31]

Dopuch, N., King, R. R., & Schwartz, R. (2003). Independence in appearance and in fact: An experimental investigation. Contemporary Accounting Research, 20(1), 79-114.

[32]

Ettredge, M., Fuertherm, E. E., & Li, C. (2014). Fee pressure and audit quality. Accounting, Organizations and Society, 39(4), 247-263.

[33]

Faraj, S., & Akbar, S. (2008). Reliability of the Audited Financial Statements the Case of Libya. Paper presented at the British Accounting Association Annual Conference.

[34]

Flaming, L. J. (2002). The effect of non-audit services on investor judgments about auditor independence, auditor knowledge, audit quality and investment.

[35]

Fornell, C., & Larcker, D. F. (1981). Evaluating structural equation models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39-50.

[36]

Francis, J. R., Maydew, E. L., & Sparks, H. C. (1999). The role of Big 6 auditors in the credible reporting of accruals. Auditing: A Journal of Practice & Theory, 18(2), 17-34.

[37]

GAJEVSZKY, A. (2015). Assessing Financial Reporting Quality: Evidence from Romania. Audit Financiar, 13(121).

[38]

Gates, S. K., Jordan Lowe, D., & Recker, P. M. (2006). Restoring public confidence in capital markets through auditor rotation. Managerial Auditing Journal, 22(1), 5-17.

[39]

Gaur, A. S., & Gaur, S. S. (2006). Statistical methods for practice and research: A guide to data analysis using SPSS. Sage.

[40]

Gavious, I. (2007). Alternative perspectives to deal with auditors’ agency problem. Critical Perspectives on Accounting, 18(4), 451-467.

[41]

Geiger, M. A., & Raghunandan, K. (2002). Auditor tenure and audit reporting failures. Auditing: A Journal of Practice & Theory, 21(1), 67-78.

[42]

Geiger, M. A., Lowe, D. J., & Pany, K. J. (2002). Audit fees, nonaudit fees, and auditor reporting on stressed companies. Auditing: A Journal of Practice & Theory, 22(2), 53-69.

[43]

Geiger, M. A., Lowe, D. J., & Pany, K. J. (2002). Appearances are important: Outsourced Internal Audit Services and the Perception of Auditor Independence. The CPA Journal, 20.

[44]

Götz, O., Liehr-Gobbers, K., & Krafft, M. (2010). Evaluation of structural equation models using the partial least squares (PLS) approach. Handbook of Partial Least Squares, 691-711.

[45]

Hair, J. F., Ringle, C. M., & Sarstedt, M. (2013). Partial least squares structural equation modeling: Rigorous applications, better results and higher acceptance. Long Range Planning, 46(1-2), 1-12.

[46]

Hair, Black, Babin, Anderson & Tatham. (2006). Multivariate data analysis (Vol. 6). Upper Saddle River, NJ: Pearson Prentice Hall.

[47]

Hashim, H. A. (2012). The influence of culture on financial reporting quality in Malaysia. Asian Social Science, 8(13), 192.

[48]

Henseler, J., Christian, M., Ringle, C., & Sinkovics, R. (2009). The use of partial least squares path modeling in international marketing. New Challenges to International Marketing Advances in International Marketing, 20, 277-319.

[49]

Herath, S. K., & Albarqi, N. (2017). Financial Reporting Quality: A Literature Review. International Journal of Business Management and Commerce.

[50]

Hoitash, R., Markelevich, A., & Barragato, C. A. (2007). Auditor fees and audit quality. Managerial Auditing Journal, 22(8), 761-786.

[51]

Hołda, A., & Staszel, A. (2015). Reliability of Financial Statements versus Creative Accounting. Knowledge Economy Society, pp. 193.

[52]

Holland, K., & Lane, J. (2012). Perceived auditor independence and audit firm fees. Accounting and Business Research, 42(2), 115-141.

[53]

Hope, O.-K., & Langli, J. C. (2010). Auditor independence in a private firm and low litigation risk setting. The Accounting Review, 85(2), 573-605.

[54]

Hosseinniakani, S., Inácio, C. H., & Mota, R. (2014). A Review on Audit Quality Factors. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(2), 243-254.

[55]

Hribar, P., Kravet, T., & Wilson, R. (2014). A new measure of accounting quality. Review of Accounting Studies, 19(1), 506-538.

[56]

IASB, I. A. S. B. (2006). Preliminary views on an improved conceptual framework for financial reporting: the objective of financial reporting and qualitative characteristics of decision-useful financial reporting information: comments to be received by 3 November 2006. United Kingdom: International Accounting Standards Board.

[57]

Idawati, W. (2014). Effect of Audit Rotation, Audit Fee and Auditor Competence to Motivation Auditor and Implications on Audit Quality (Study in Registered Public Accountant Firms at Bank Indonesia).

[58]

Ilechukwu, F. U. (2017). Effect of Audit Fee on Audit Quality of Listed Firms in Nigeria. International Journal of Trend in Research and Development, 4(5).

[59]

Ismail, I., Haron, H., Nasir Ibrahim, D., & Mohd Isa, S. (2006). Service quality, client satisfaction and loyalty towards audit firms: Perceptions of Malaysian public listed companies. Managerial Auditing Journal, 21(7), 738-756.

[60]

Jackson, A. B., Moldrich, M., & Roebuck, P. (2008). Mandatory audit firm rotation and audit quality. Managerial Auditing Journal, 23(5), 420-437.

[61]

Jana, S., & Schmidt, M. (2017). Model-based fair values for financial instruments: relevance or reliability? Conjoint measurement-based evidence.

[62]

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.

[63]

Johnson, V. E., Khurana, I. K., & Reynolds, J. K. (2002). Audit‑firm tenure and the quality of financial reports. Contemporary Accounting Research, 19(4), 637-660.

[64]

Kamariah, N. (2007). Preliminary to advance quantitative methods and SEM Amos Model. UUM, Sintok.

[65]

Khasharmeh, H., & Said, K. (2014). Effects of Mandatory Audit Firm Rotation Upon Quality of Audit: The Perception of Audit Firms-Evidence From Bahrain. Journal of Modern Accounting and Auditing, 10(4).

[66]

Kinney Jr, W. R., Palmrose, Z. V., & Scholz, S. (2004). Auditor independence, non-audit services, and restatements: Was the US government right? Journal of Accounting Research, 42(3), 561-588.

[67]

Krambia-Kapardis, M., & Zopiatis, A. (2010). Investigating incidents of fraud in small economies: the case for Cyprus. Journal of Financial Crime, 17(2), 195-209.

[68]

Krejcie, R. V., & Morgan, D. W. (1970). Determining sample size for research activities. Educational and Psychological Measurement, 30(3), 607-610.

[69]

Kuntari, Y., Chariri, A., & Nurdhiana, N. (2017). The Effect of Auditor Ethics, Auditor Experience, Audit Fees and Auditor Motivation on Audit Quality. Sriwijaya International Journal of Dynamic Economics and Business, 1(2), 203-218.

[70]

Lee, H.-L., & Lee, H. (2013). Do Big 4 audit firms improve the value relevance of earnings and equity? Managerial Auditing Journal, 28(7), 628-646.

[71]

Manry, D. L., Mock, T. J., & Turner, J. L. (2008). Does increased audit partner tenure reduce audit quality? Journal of Accounting, Auditing & Finance, 23(4), 553-572.

[72]

Mat Daud, Z. (2007). The study of the audit expectations gap in the public sector of Malaysia.

[73]

Moghram, M. A. (2007). Legal and Institutional structure for Fighting Corruption in the Republic of Yemen. Sana'a University, Yemen.

[74]

Mohamed, D. M., & Habib, M. H. (2013). Auditor independence, audit quality and the mandatory auditor rotation in Egypt. Education. Business and Society: Contemporary Middle Eastern Issues, 6(2), 116-144.

[75]

Mohamed, D. M. (2010). The Impact of the Auditor Rotation on the Audit Quality: A Field Study from Egypt. http://ssrn.com/abstract=1676224

[76]

Monroe, G., & Tan, E. (1997). The relationship between audit firm size and audit quality: An empirical investigation of Australian audits. Perspectives on Contemporary Auditing, 1, 35-47.

[77]

Moore, D. A., Tetlock, P. E., Tanlu, L., & Bazerman, M. H. (2006). Conflicts of interest and the case of auditor independence: Moral seduction and strategic issue cycling. Academy of Management Review, 31(1), 10-29.

[78]

Onaolapo, A., Ajulo, O., & Onifade, H. (2017). Effect of Audit Fees on Audit Quality: Evidence from Cement Manufacturing Companies in Nigeria. European Journal of Accounting, Auditing and Finance Research, 5(1), 6-17.

[79]

Onwuchekwa, J. C., Erah, D., & Izedonmi, F. (2012). Mandatory audit rotation and audit quality: Survey of Southern Nigeria. Research Journal of Finance and Accounting, 3(8), 70-77.

[80]

Organization Transparency International. (2017). Report on Corruption. Retrieved from https://www.transparency.org/news/feature/corruption_perceptions_index_2017

[81]

O'Sullivan, N., & Diacon, S. R. (2002). The impact of ownership, governance and non-audit services on audit fees: Evidence from the insurance industry. International Journal of Auditing, 6(1), 93-107.

[82]

Pallant. (2007). SPSS survival manual, 3rd. Edition. McGrath Hill.

[83]

Preacher, K. J., & Hayes, A. F. (2004). SPSS and SAS procedures for estimating indirect effects in simple mediation models. Behavior Research Methods, Instruments, & Computers, 36(4), 717-731.

[84]

Preacher, K. J., & Hayes, A. F. (2008). Asymptotic and resampling strategies for assessing and comparing indirect effects in multiple mediator models. Behavior Research Methods, 40(3), 879-891.

[85]

Rahmina, L. Y., & Agoes, S. (2014). 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, 164, 324-331.

[86]

Rija, M. (2018). Auditing Quality: Some Empirical Studies. Eurasian Business Perspectives, 3-20.

[87]

Rong, Q. (2017). Mandatory Audit Firm Rotation and Audit Partner Rotation. Honors Theses and Capstones, University of New Hampshire.

[88]

Ruiz-Barbadillo, E., Gómez-Aguilar, N., & Biedma-López, E. (2006). Long-term audit engagements and opinion shopping: Spanish evidence. Accounting Forum.

[89]

Salleh, K., & Jasmani, H. (2014). Audit rotation and audit report: empirical evidence from Malaysian PLCs over the period of ten years. Procedia -Social and Behavioral Sciences, 145, 40-50.

[90]

Sarstedt, M., Ringle, C. M., & Hair, J. F. (2017). Partial least squares structural equation modeling. Handbook of market research, 1-40.

[91]

Sawan, N. (2010). An investigation into the perception of oil companies and audit firms on factors affecting service quality of auditing. Liverpool John Moores University.

[92]

Seidman, B. (2003). Comment Letter on the SEC's Proposed Rules on Auditor Independence. (File No. S7-49-02). New York: BDO Seidman.

[93]

Sekaran U, Bougie R. (2016). Research methods for business: A skill building approach. John Wiley & Sons; 2016 Jun 27.

[94]

Simunic, D. A. (1980). The pricing of audit services: Theory and evidence. Journal of Accounting Research, 161-190.

Article Information

Article Details
Volume & IssueVol. 3, Iss. 4
Publication DateOct 20, 2019
Authors
Afif A. Almasani
Dr. S.M. Ferdous Azam
Sohail Ahmed
Siti Khalidah Binti MD Yusoff
DOI
10.30566/ijo-bs/2019.109
PDF Download
The Mediation Effect of Audit Quality on the Relationship Between Auditor-Client Contracting Features and the Reliability of Financial Reports in Yemen | International Journal of Business Society