Review Journal "AUDIT COMMITTEE SUPPORT AND AUDITOR INDEPENDENCE"

Tittle	AUDIT COMMITTEE SUPPORT AND AUDITOR INDEPENDENCE
Author	Zulkarnain Bin Muhamad Sori, PhD, Shamsher Mohamad, PhD and Ms Siti Shaharatulfazzah Mohd Saad
Year	2000

1. Introduction

Financial statement users rely on this information only after the external auditor, who is independent, confirms the reliability of this information. Firms employ reputable auditors to assure outside investors the credibility of financial disclosures and hence mitigate the agency problems. The rest of this paper is organized as follows: section 2 reviews theoretical framework and relevant prior studies while section 3 describes the methodology and section 4 reports on the result and conclusion.

2. Literature Review

2.1. Theory and Framework

The potential incentives include agency conflicts in the companies or signaling quality by adding credibility to the financial statements. Auditing can reduce agency risks created by conflict of interests between managers and shareholders small and large shareholders (Fan and Wong, 2005); and shareholders and debt holders.

2.2. Prior Researches

Some prior studies examine the association of one factor with auditor switch. Takiyah and Ghazali (1993) verified the association between qualified audit opinion and auditor switch but they do not find significant relationship between qualified report and auditor switch.

3. Hypothesis Development

Auditor switch decision involves change of incumbent auditor resulting in the choice of quality differentiated audit firms to realign the characteristics of the audit firm, with the growing need of clients under changing circumstances. Firms switch auditors more frequently after receiving qualified opinion and subsequently do not receive any unqualified opinion.

3.1. Change in Management

According to past studies, management influences auditor choice decision and have a motivation of switching auditor in order to pursue their own self interests (Williams, 1988). It is argued that change in management should be positively related to auditor switch. So the first hypothesis is:

H1: There is a positive relationship between change in management and auditor switch.

3.2. Qualified Audit Opinion

One very common reason cited for auditor switching is the qualification of auditor opinions. Prior research found that clients receiving an unclean audit report were likely to switch auditors.

H2: There is a positive relationship between qualified audit opinion and auditor switch.

3.2. Qualified Audit Opinion

One very common reason cited for auditor switching is the qualification of auditor opinions. Prior research found that clients receiving an unclean audit report were likely to switch auditors. It is expected this variable positively related to switching of auditors.

H2: There is a positive relationship between qualified audit opinion and auditor switch.

3.3. Client Size

Client size is another important explanatory variable because of the auditors' self-interest threat. Several studies have found that smaller companies are more likely to receive qualified audit opinions than larger auditees and subsequently change auditor (Gul et al., 1992; Krishnan et al., 1996). Following this argument, the third hypothesis is:

H3: There is a negative relationship between client size and auditor switch.

3.4. Audit Quality

Selecting an audit firm that suits the company’s or managers’ needs may be a function of many factors but audit quality is known to be an important determinant of auditor choice in developed markets. Auditing large clients requires more resources, which are usually provided by large audit firms. Large audit firms are generally perceived as the provider of high audit quality and enjoy a high reputation in the business environment.

3.5. Financial Distress

The financial position of client has important implications on decisions in retaining the audit firm. In addition, financially stressed clients are more likely to replace their audit firms compared to their healthier counterparts due to the reason that these types of companies need to hire a higher quality of auditor compared to the previous one.

H5: There is a positive relationship between financial distress and auditor switch.

3.6. Audit Fees

When managers are not comfortable with audit fees they try to switch auditors in an effort to find a better offer. Accordingly, positive relationship between auditor switch and change in audit fees is expected. Thus the last hypothesis is:

H6: There is a positive relationship between change in audit fees and auditor switch

4. Research Methodology

4.1. Sampling

The sample firms are limited in this period because of availability of data in this period. The samples are compiled according industry and size. The relevant data had been collected from the annual general meeting, companies’ financial statements and notes. The dependent variable is auditor switch and independent variables are change in managements, audit quality, qualified audit opinion, client size, change in auditor fees and financial distress.

4.2. Logistic Regression Model

Since the dependent variable (auditor switch) is a binary variable, the stepwise logistic regression technique is used to confirm the relationship between auditor switch and independent variables.

5. Conclusion

auditor switch and six independent variables (log of assets, change in management, client size, audit quality, qualified audit opinion and financial distress) as determinants of auditor switch in Tehran Stock Exchange are examined. Previous studies had different result and in some research audit fee and change in management were found as important factors of auditor switch. Furthermore, consistent with most previous studies, this study showed that there is no significant relationship between receiving qualified audit opinion and auditor switch. Thus, this result suggests that opinion shopping should not be of concern in TSE.