Impact of perceived auditor independence on going concern audit opinions for financially distressed companies in Malaysia
With the public outcry over the corporate scandals across the world, such as Enron and WorldCom in the U.S., as well as Transmile and Silverbird in Malaysia, the notion of auditor independence has received substantial attention from the profession and regulatory bodies worldwide. These scand...
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| Main Author: | |
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| Format: | Thesis |
| Language: | English |
| Published: |
2016
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| Subjects: | |
| Online Access: | http://psasir.upm.edu.my/id/eprint/76863/1/GSM%202018%2036%20-%20IR.pdf |
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| Summary: | With the public outcry over the corporate scandals across the world, such as
Enron and WorldCom in the U.S., as well as Transmile and Silverbird in
Malaysia, the notion of auditor independence has received substantial
attention from the profession and regulatory bodies worldwide. These
scandals involving listed companies have highlighted concerns of regulators
and other interested parties relating to threats towards auditor independence.
In Malaysia, the Malaysian Code on Corporate Governance (MCCG) was
introduced in March 2000 (revised in 2017) as a result of recommendations
made by the Finance Committee on Corporate Governance (FCCG). MCCG
highlights the need to reinforce the independence of the external auditor.
However, it is noted that when organisations are in financial distress,
auditors do not provide signals of potential distress, i.e. Type II
Misclassification, which triggers independence of the auditors. Hence, there
is a need for identification of determinants of auditor independence that
leads to impairment and compromisation of perceived auditor independence
to maintain the credibility of the auditing profession. It is necessary to
develop a tool to assess auditor independence based on observable data
from published reports. It is also critical to investigate the relationship
between auditor independence and the going concern audit opinions for
financially distressed companies in Malaysia to understand how to increase
confidence and rebuild trust in audit opinions of financial statements, which
are important to ensure capital market growth.
In this study, twenty four publicly available variables were used to examine
the determinants of auditor independence in financially distressed companies. A total of 750 questionnaires were distributed among
accountants (MIA-registered practitioners) to capture auditors’ perception on
auditor independence since actual independence cannot easily be observed
or assessed. The study found that the determinants of auditor independence
for financially distressed Malaysian companies are namely, (1) Disclosure
and Financial Performance, (2) Relationship-centric, (3) Ethnicity, (4)
Assurance Focus, and (5) Transparency Focus.
Based on the findings of this study, Auditor Independence (PAI) Index was
developed and validated using Altman’s Score. Archival data of 78
financially distressed Malaysian companies (i.e. PN17 companies) in the
period between 2007 and 2012 were utilised to compute the respective PAI
value. This period was chosen to assess the perception of auditor
independence before the release of the revised MCCG 2012 which explicitly
addresses the importance of auditor independence. It was found that
relationship-centric and ethnicity determinants are statistically significant to
predict PAI value using published data. Higher PAI value reflects impaired
auditor independence. In addition, the study also revealed that auditor
independence has a negative impact on issuance of going concern opinions.
Besides contributing to the literature, this research is useful for policymakers,
financial statement users, and audit professionals to understand factors that
can impair or compromise auditor independence. |
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