audit fees during initial engagement in malaysia
TRANSCRIPT
Audit fees during initialengagement in Malaysia
Effiezal Aswadi bn Abdul WahabSchool of Accounting, Curtin Business School, Curtin University of Technology,
Bentley, Australia, and
Mazlina Mat ZainFaculty of Management, Multimedia University, Selangor, Malaysia
Abstract
Purpose – The purpose of this study is to investigate whether fees discounting exists in Malaysiaand whether such a practice impairs auditor independence.
Design/methodology/approach – The paper employs a panel least regression of 3,003 firm-yearobservations of firms listed on Bursa Malaysia for the period between 1996 and 2006. The papercollects the audit fees, auditor’s identity and other firms’ characteristics data from Compustat Global,Stock Performance Guide Handbook and annual reports. The annual reports are obtained from theBursa Malaysia’s web site and Mergent Online database. The paper removes initial public offering(IPO) firms, firms involved with PriceWaterhouse and Coopers and Lybrand merger and firms forcedto switch auditor during the Arthur Andersen implosion in 2002.
Findings – The analysis shows that price cutting occurs on initial audit engagements evenwhen auditfees are publicly disclosed. Further tests suggest that the auditor recovers the “sunk cost” investedduring the initial engagement only during the fourth year of their audit engagement. Further, the paperfinds price recovery is not significantly different from normal audit fees charged for the continuingaudit engagement during the first three year period of engagement, as the audit firms will only recoverthe cost on the fourth year of engagement. Overall, this finding has an important implication forregulators, as it suggests that price recovery due to “lowballing” does not impair auditor independence.
Research limitations/implications – Due to data unavailability, this study does not considerother unique factors that determine audit fees in Malaysia. Among them are political connections,institutional investors and ethnicity.
Originality/value – This is the first study that examines audit pricing during an initial engagementin Malaysia.
Keywords Audit fees, Initial engagement, Emerging markets, Switching, Disclosure, Independence,Malaysia
Paper type Research paper
1. IntroductionThe issue of audit pricing during an initial engagement has received significantattention from various parties, including regulators, especially with the common
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0268-6902.htm
JEL classification – G34, G38, M41, M42The authors are internally grateful to Ferdinand Gul, David Hay and Shamharir Abidin for
their useful comments. The authors would like to say thank you to FEP UPM Seminar, AsianAcademy of Management Conference and USM Management Seminar Series participants forvaluable comments. The authors are in debt to Tajul Ariffin Masron for explanation on economictheory. Effiezal would like to acknowledge the incentive grant from USM. All errors are theauthors’ own.
Data availability. Data are publicly available from sources identified in the paper.
Managerial Auditing JournalVol. 28 No. 8, 2013
pp. 735-754q Emerald Group Publishing Limited
0268-6902DOI 10.1108/MAJ-Sep-2012-0752
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practice of pricing initial audits significantly below cost termed as “lowballing”[1].This is because fees discounting during the initial audits may have some implicationsfor “auditor independence” as the fee discounts offered during the initial auditengagement must be recovered by the audit firm from future audit fees. Likewise, asargued by Geiger and Raghunandan (2002), the practice of lowballing could lead to anindependence issue, since the auditor who is concerned about the future returns on aninvestment would presumably be more likely to compromise with a client in order tomaintain the auditor-client relationship. It also leads to the contention that the auditfirm has an interest in the financial success of the client (Chan et al., 2006). In particular,the “lowballing” practice can also create an incentive on the part of the incumbentauditors to deliver favourable audit opinions with the motive of retaining their existingclients (Ghosh and Lustgarten, 2006). More worrying, if the additional costs associatedwith an initial audit are not billed to the client, it is likely that the auditor will reducethe scope of work, which could then lead to a lower quality audit especially during theinitial year (Hirsch, 2002). Furthermore, Sankaraguruswamy and Whisenant (2005)also argued that the practice of fee discounting during initial engagement could pose athreat to auditor independence, as it creates an economic bond between auditors andclients, thus undermining the monitoring role of auditors.
There are two major conflicting theoretical arguments regarding pricing behaviourby auditors. On one hand, DeAngelo (1981) argues that the lowballing practice (initialengagement discounts arise from transaction costs, i.e. client switching costs andauditor start-up costs) provides incumbent auditors a cost advantage over competitors,allowing incumbents to set future audit fees above their sunk costs and thereby earnquasi rents. This suggests that lowballing does not impair independence, as thediscounted audit fees are a “sunk cost” or reflect a competitive response to theexpectation of earning quasi-rents during subsequent years.
On the other hand, Dye (1991) posits that initial discounts on fees only occur insettings where fees are not publicly disclosed. According to Dye’s (1991) alternativeargument, the client has more bargaining power and thus can use this to keep the fee atthe level of the incumbent auditor’s costs. Unlike, DeAngelo (1981) who assumes thatauditors low-ball with the expectation to capture the entire cost savings on subsequentaudits, Dye (1991) suggests that the client could capture the entire costs savings bygetting the auditor to reduce the fee to the level of the audit cost. Dye (1991) also arguesthat the clients are more likely to have a stronger incentive to use bargaining powerwhen quasi rents earned by auditors impair investors’ confidence in the client’sfinancial statement. This is because when investors already recognise that there arequasi rents, it also can give the impression about the auditor’s stake in the continuedexistence of the client. Thus, investors are likely to perceive the client’s financialstatement to be less reliable. This scenario could only occur if quasi rents are publiclydisclosed; otherwise, a client is in a strong bargaining position and might still allow theauditor to earn positive quasi rents for a more favourable audit report (Ghosh andLustgarten, 2006). In contrast, Kanodia and Mukherji (1994) argue that regardless ofwhether the cost of information (audit fees) is disclosed or not, only the auditor knowsthe actual cost of the audit engagement.
These theoretical arguments have been tested extensively across multiple marketsand the results are inconclusive (Gregory and Collier, 1996; Ghosh and Lustgarten,2006). However, recent evidence (Sankaraguruswamy andWhisenant, 2005; Ghosh and
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Lustgarten, 2006), especially in the USA, suggests that fee discounting still existsdespite the disclosure of audit fees. In addition, a more recent study by Huang et al.(2009) suggest that the Big 4 has become more conservative in the post Sarbanes OxleyAct (SOX) period as Big 4 clients are charged an initial-year audit fee premium lessafter SOX than in the pre-SOX period, and that the Big 4 are much less likely to serveas a successor following the auditor change. This evidence provides empirical supportfor previous studies such as DeAngelo (1981) and Kanodia and Mukherji (1994).Likewise, evidence in the UK based on Peel (2009)’s work, also demonstrates the samefee discounting scenario.
Based on the above competing arguments, we test whether auditors discount theirfees during initial audits engagements (lowballing) and we also aim to examinewhether lowballing could pose a threat to auditor independence. In this study, we focusour analysis only on the initial engagement of Big “n” firms, due to the homogenousnature of successor and predecessor audit firms of which lateral alignments offer themost reliable sample evidence to test the competing theory of audit pricing (Pong andWhittington, 1994). The restriction to Big “n” continuing and initial audit clients alsooffers econometric advantages based on similar structural relations on the estimatedcoefficients of continuing and new clients. Furthermore, the sample of Big “n”continuing and same-tiered initial audits is more likely to represent the audit pricingdynamics of interest according to Dye (1991) and DeAngelo (1981).
Our study contributes to the extant literature in several ways. First, the Malaysiancapital market provides a good opportunity to test the competing theories (DeAngelo,1981; Dye, 1991), as Malaysia provides the environment whereby audit fees arepublicly disclosed. In comparison to the USA that only required public companies todisclose audit fees in 2001, the disclosure of audit fees in Malaysia was alreadymandatory since 1965 by the Malaysian’s Companies Act and all Malaysian listedfirms are required to disclose their audit fees to fulfil the listing requirements. This isan interesting exploration as corporate annual reports for publicly held-companies arepublicly available and audit fees are required to be disclosed in Malaysia.
However, the country’s cultural background, political and socio-economic structuresare unlike those in much of the former British Empire. In particular, the Malaysianeconomy offers a clearly identifiable capital segment divided along ethnic lines, and theethnicity privileges are constitutionally secured by a certain ethnic group. For example,the political administration is controlled by ethnic Malays (referred to as Bumiputras),while the private sector has been heavily influenced by ethnic Chinese. Although thereare other ethnic groups (such as Indians), the distinction between the two main groups(i.e. the Chinese and Bumiputras) dominates much of the socio-economic and politicalpolicy-making. Furthermore, Grays’s (1988) societal values research classifiedMalaysia as more conservative than the USA, Australia and the UK However, muchof the present empirical evidence is based in countries such as the USA, the UK andAustralia (Peel, 2009; Huang et al., 2009; Craswell and Francis, 1999). As such, anexamination of this issue is important in the context of the Malaysian environment, asthe results from prior studies especially from developed countries cannot begeneralised.
Second, our results provide an incremental contribution and support to Huang et al.(2009) especially from the emerging capital market environment. Although we did notundertake an additional test similar to Huang et al. (2009), our data set comprised of
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555 firms over a span of 11 years (1996-2006) with a total final sample of 3,003firm-year observations. This allows us to capture the period of the pre and postMalaysian Code on Corporate Governance (MCCG), since the MCCG was firstintroduced in 2000. The price recovery test suggests that Big “n” recovers the “sunkcosts” only during the fourth year of the audit engagement, i.e. in year 2000 (the periodwhereby the MCCG was introduced in Malaysia) and the audit fees charged during thistime are not significantly different from those charged to the continuing audit client.This finding allows us to make an assumption similar to Huang et al. (2009) that auditfirms have become more conservative in the post regulation period.
We employ panel data for this study, which allows us to control for cross-sectionaland time series effects simultaneously. Finally, this paper also addresses some of theeconometric issues being raised in the literature. Although, there are a reasonablenumber of studies examining audit fees (auditor switching issues) in most of thestudies, a dummy variable for actual auditor choice (switching) is used in the audit feesregressions. Nevertheless, actual auditor choice (switching) is likely to be endogenousin these regressions (Copley et al., 1995; Chaney et al., 2004). We thus adopt theeconometric model developed by Hamilton et al. (2008) to address the issue of potentialbias due to self-selection.
We posit that audit fees are discounted during the initial audit engagement(lowballing) with the expectation of charging higher fees in the subsequent period. Ourresult suggests that firms do experience discounted fees during the initial auditengagement. Contrary to the Dye (1991) argument, our result shows that price cuttingoccurs on an initial audit engagement even when audit fees are publicly disclosed.Price recovery test suggests that the auditor recovers the “sunk cost” invested duringthe initial engagement during the fourth year of their audit engagement, which isconsistent with DeAngelo (1981), Sankaraguruswamy and Whisenant (2005), Ghoshand Lustgarten (2006) and Peel (2009). Nonetheless, price recovery is not significantlydifferent from normal audit fees charged for continuing audit engagement. Thisfinding suggests that price recovery due to “lowballing” does not impair auditorindependence.
The next section of this paper provides background information on the market forauditing services in Malaysia. Section 3 presents the previous empirical literature andproposes the hypothesis for the study. Subsequently, Section 4 delineates the researchmethod and describes the data. Univariate and multivariate analyses and anexamination of the issue of price recovery are presented in Section 5. Section 6concludes the study.
2. Auditing in MalaysiaThe regulation of Malaysian company affairs is derived from the British system,especially with respect to the provision of financial information. The annual reports forpublic listed firms are publicly available and those firms are required to disclose theamount of their audit fees[2]. Section 169 (4) of the Companies Act of 1965 requiresevery company incorporated under the Act to provide audited financial statementsannually[3]. Similarly, the Securities Commission (SC) of Malaysia mandates that allfirms listed on the Bursa Malaysia be audited and publish their annual reports everyyear. Moreover, both regulators emphasise the need for auditors to be independent andhave the power to inspect records and obtain information as necessary to conduct an
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audit. Auditors also have the right to attend and speak at the annual general meetingsof the firms with which they work (Ali et al., 2006).
In Malaysia, high dependence on a few clients has been found to affect perceptionsregarding auditor independence (Teoh and Lim, 1996). This is not surprising since theBig N auditors control nearly 65 percent of the audit market in Malaysia. Originally,the Big 8 in Malaysia included Coopers & Lybrand, Arthur Andersen, PriceWaterhouse, Ernst & Whinney, Arthur Young, Deloitte Haskins & Sells, DeloitteTouche Ross and KPMG. Following the mergers of Arthur Young with Ernst& Whinney and Deloitte Haskin & Sells with Deloitte Touche Ross in 1989, the Big 8auditing firms became the Big 6. An additional merger, this time between PriceWaterhouse and Coopers & Lybrand in 1998, reduced the group to five firms. Then,finally, the collapse of Arthur Andersen in 2002 brought together only four globalauditing firms: Ernst & Young, PriceWaterhouseCoopers, KPMG and Delloite. InMalaysia, anecdotal evidence indicates that most of Arthur Andersen’s business andstaff moved to Ernst & Young[4].
3. Hypotheses development3.1 Audit fees during initial engagementThe main factor affecting audit services is agency costs, as the appointment of anauditor aims to reduce the information asymmetry between the principals(shareholders/owners) and the agents (managers). As such, it is reasonable to expectthat a switch to a new auditor will be based on the same notion: that is to realign therelationship between managers and auditors (Williams, 1988).
DeAngelo (1981) and Chan (1999) argue that audit fee premiums resulting from anauditor change arise ultimately because of start-up costs for auditors and switchingcost for clients[5]. DeAngelo (1981) argues that the incumbent auditor has morebargaining power than the client does and that this situation therefore allows auditorsto offer fee discounts during an initial audit engagement with the anticipation ofearnings quasi-rents on subsequent audits. The anticipation is based upon the notionthat discounted fees during initial audits are a consequence of the anticipation of futurerents; the auditor has an incentive to retain the client for this purpose (DeAngelo,1981)[6]. Furthermore, Kanodia and Mukherji (1994) state that client-specificinformational advantages associated with incumbency provide incentives fordiscounting the initial audit engagement. They argue that even audit fees areobservable, audit costs are known only to incumbent auditors, and therefore, the publicdisclosure of audit fees will not reduce incentives for initial audit discounting.
On the other hand, considering the demand for audit services, Dye (1991) suggeststhat the practice of fee discounting only persists when quasi-rents are not publiclydisclosed. He argues that this alternative outcome should only be anticipated whenclients have very strong incentives to use their bargaining power to prevent incumbentauditors from earning quasi-rents. Dye (1991) also claims that the client has morebargaining power than the auditor and uses this power to keep fees at the level of theincumbent auditor’s costs. Dye’s theoretical model does predict a discount during theinitial audit engagement, but this discount occurs only when audit fees are not publiclydisclosed. Therefore, cost savings are connected with both the demand and the supplyargument regarding audit services[7]. Prior studies in this area revealed mixed results:for instance, early studies by Simunic (1980), Francis (1984) and Palmrose (1986) do not
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detect price discounts. In contrast, Francis and Simon (1987) find evidence offee-cutting activity during initial audit engagements. Likewise, a later study by Simonand Francis (1988) involving 440 firms, of which almost half changed auditors from1979 to 1984, also finds that the fees charged for the initial engagement are 24 percentbelow normal fees. Similarly, Ettredge and Greenberg’s (1990) study indicates thataudited firms receive an average 25 percent reduction in fees after switching.Furthermore, Sankaraguruswamy andWhisenant (2005), Ghosh and Lustgarten (2006)and Peel (2009) find systematically lower fees or discounts during an initialengagement. Overall, most of the studies conducted in the environment whereby auditfees are made publicly available have derived consistent results. Based on the aboveargument and these prior studies, we posit the following hypothesis (stated in alternateform):
H1. Audit clients are likely to be charged with lower audit fees during the initialaudit engagement.
4. Research methods4.1 Sample selectionThe panel data set consists of 555 firms for the 11 years from 1996 to 2006 (6,105observations). Each auditor’s identity was based on annual reports made availablefrom the Bursa Malaysia’s web site. Audit fee data were collected from two sources:Compustat Global and annual reports. The remaining data were collected fromCompustat Global, the Stock Performance Guide Handbook and annual reports. Of6,105 observations, 1,906 were eliminated due to missing information. Furthermore,following prior studies, we excluded financial and trust firms because prior researchshows that the determinants of audit fees are unique for such firms (138 observations)(Simunic, 1980; Firth and Lau, 2004). Furthermore, financial institutions in Malaysiaare subject to additional regulations as determined by the Central Bank of Malaysia(Rahmat and Iskandar, 2004).
We exclude firms involved in initial public offerings (IPO) (550 observations) andthose that switched auditors due to mergers between auditors and former ArthurAndersen clients (230 observations)[8]. We exclude these observations as these firms’motives during the initial engagement are different (as observed in numerousstudies)[9]. We also exclude firms that record negative equity (278 observations). Ourfinal full sample contains 3,003 firm-year observations for 555 firms. This study usesseemingly unrelated regression (SUR) to address the issue of heterocedasticity andcontemporaneous correlations for each cross-section (Table I).
4.2 Audit fee model and self-selection biasRecent studies using audit pricing models have questioned whether companiesself-select their auditors, as this could introduce self-selection bias into the audit feeregression estimations and affect the audit fee premium estimates used (fee premiumsestimates are often used as the basis for making inferences about market competition)(Hamilton et al., 2008). A number of studies argue that auditor choice is likely to beendogenous and that treating it as an exogenous variable may affect the findings(Ireland and Lennox, 2002; Chaney et al., 2004; Hamilton et al., 2008). To overcome thisissue, we used a two-step treatment effects model (Wooldridge, 2002; Greene, 2003) todetermine whether “selectivity bias” is an issue in this study. Our first step in
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addressing the treatment effects model (i.e. the selection model) involves using probitregression to determine the likelihood of selecting a Big “n” auditor and to calculate theinverse mills ratio (IMR) to be included in the audit fee model. We develop an auditorchoice model similar to that of Hamilton et al. (2008) by including a subset of variablesfrom the audit fee model and prior year opinion (OPINION(21)). The self-selectionequation is as follows:
INITIALit ¼ a0INTERCEPTit þ a1LNASSETSit þ a2DISC_OPit þ a3RECVTAit
þ a4INVTAit þ a5LIQUIDit þ a6ROAit þ a7LOSSit þ a8DEBTit
þ a9YEit þ a10OPINION ð21Þit þ INDUSTRY DUMMIESþ PERIOD DUMMIES þ eit
The underlying audit fee model employed in this study captures the primary feedeterminants as derived from prior audit fee research. Our dependent variable is thenatural log transformation of audit fees (LAF), as in most audit fees studies (Gul,2006)[10]. The audit fee model is as follows:
LAFit ¼ b0INTERCEPTit þ b1INITIALit þ b2LNASSETSit þ b3DISC_OPit
þ b4RECVTAit þ b5INVTAit þ b6LIQUIDit þ b7ROAit þ b8LOSSit
þ b9DEBTit þ b10BIG_Nit þ b11YEit þ b12OPINIONit þ b13IMRþ INDUSTRY DUMMIES þ PERIOD DUMMIES þ vit
For the sake of simplicity, we categorise the control variables similar to Hay et al.(2006) namely client attributes, auditor attributes and engagement attributes. Theclient attributes consist of size, complexity, inherent risk, profitability, leverage andindustry. We use the natural logarithm of total assets (LNASSETS) as a proxy for sizeand a dummy variable that takes the value of 1 if the firm reports either discontinuedoperations or extraordinary items (DISC_OP) as our proxy for complexity. Receivables(RECVTA) and inventory (INVTA), scaled by total assets, act as our proxy for inherentrisk. Return on assets (ROA) and LOSS, a dummy variable that takes a value of 1 if thefirm records a loss in the previous year, are our profitability variables. Liquidity iscontrolled for by including the working capital ratio, represented by the ratio of current
Observations Observations
Total observations from Compustat and annualreports
6,105
555 firms for 11 yearsMissing observations (1,906)LessIPO firms 550Mergers and acquisition 138Arthur andersen 92Finance companies 138Negative equity companies 278Total (1,196)Total observations 3,003
Table I.Sample selection
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assets to current liabilities (LIQUID). We use total debt scaled by total assets (DEBT)as our leverage proxy.
We include two variables as the engagement attributes: a dummy variable thattakes a value of 1 for firms reporting from 31 December to 31 March (YE) and anindicator variable for audit opinion (OPINION).
As the data span for a lengthy period, we make adjustments for movements in pricelevels. In particular, we adjust (deflate) fees and total assets for movements in theMalaysian Consumer Price Index (CPI). All other variables are either ratios or indicatorvariables and do not require price-level adjustments. The figures for CPI were obtainedfrom the World Development Indicators database. In addition, we include yeardummies (although they are not reported) to control for any unobserved effects duringthe sample period and various industry classifications to control for the industryeffect[11, 12].
4.2.1 Experimental variable. Consistent with other recent studies(Sankaraguruswamy and Whisenant, 2005; Ghosh and Lustgarten, 2006; Peel, 2009),we have devised the following indicator variable, INITIAL, which takes a value of 1 ifthe company experiences a change in auditor (Table II).
4.3 Sample descriptionPanel A of Table III represents the final distribution across the years included. Thelargest sample obtained for the period is 379 (12.621 percent) for 2005, whereas thesmallest sample is 144 (4.795 percent) for 1996[13].
Panel B of Table III tabulates the auditors’ distribution for the sample firms. Ernst& Young held nearly 24 percent of the audit market share during the sample period,followed closely by KPMG at 17.68 percent.
Table IV presents the descriptive statistics. The mean (median) audit fee level,deflated by the consumer price index (CPI), is RM 508,500 (88,710), and the range
No. Variables Sign Definition
1 LAF Natural logarithm of audit fees2 INIITIAL þ An indicator variable, 1 if a firm switches auditors3 LNASSETS þ Natural logarithm of total assets4 DISC_OP þ An indicator variable, 1 if a firm reports
discontinued operations or extraordinary items5 RECVTA þ Account receivables scaled by total assets6 INVTA þ Inventory scaled by total assets7 LIQUID þ Current assets to current liabilities8 ROA 2 Net profit before tax over total assets9 LOSS þ An indicator variable, 1 if the firm incurred a loss in
the last year10 DEBT þ Total debt to total assets11 YE þ An indicator variable, 1 for firms whose year ends
between 31 December and 31 March12 OPINION þ An indicator variable, 1 for qualified opinions13 IMR ? Inverse mills ratio
Notes: All data were collected from Compustat Global and annual reports; annual reports aredownloaded from the Bursa Malaysia’s web site and the Mergent Online database
Table II.Operational definitionsof variables
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extends between RM 2.946 and 61.99 million, as reported in Panel A of Table IV. Only10 percent of the sample experiences an auditor change during the test period. Panel Cof Table IV exhibits the client attribute variables. Total assets, deflated by CPI(ASSETS), average RM 1.188 billion and range between RM 2.935 million and 76.07billion. The mean (median) for RECVTA is 0.211 (0.183), whereas the mean (median)for INVTA is 0.114 (0.087). The average for LIQUID is 2.240, and on average, the firmsin the sample recorded ROA of 0.039; 19.2 percent recorded a loss in the previousperiod. The average (median) for DEBT is 0.461 (0.458). As reported in Panel E ofTable III, 61.6 percent of the sample firms end their financial statements on 31December each year (YE). Only 7.5 percent received a qualified opinion (OPINION).
5. Findings5.1 Univariate analysisThe correlations between the variables, determined using both the Pearson andSpearman-rank tests, are presented in Table V. As expected, the correlations betweenINITIAL and LAF are negative and significant for both Pearson (20.083, p , 0.001)and Spearman-rank (20.086, p , 0.001), which supports our primary notion thatinitial engagement will result in discounts for audit clients. In addition, at theunivariate level for Spearman-rank correlations, we document a positive andsignificant correlation between LAF and LNASSETS, ROA, OPINION, DEBTand DISC_OP. Further we find negative and significant results between LAF andRECVTA, INVTA, LOSS, YE and LIQUID. We find similar results for Pearsoncorrelations with the exception of ROA and YE.
Observations Percentage
Panel A: yearly distributionsYear1996 144 4.7951997 206 6.8601998 307 10.2231999 251 8.3582000 298 9.9232002 270 8.9912003 276 9.1912004 362 12.0552005 379 12.6212006 224 7.459
3,003 100.000Panel B: auditor distribution
Big nDeloitte 145 4.829Arthur Andersen 326 10.856Ernst & Young 1,114 37.096KPMG 815 27.140PriceWaterhouseCoopers 422 14.053PriceWaterhouse 114 3.796Coopers and Lybrand 67 2.231Observations 3,003 100.000
Table III.Sample description for
sample firms (1996-2006)
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Table VI presents a univariate analysis of the differences between the means (medians)for switching and non-switching firms during the sample period. We documentsignificant differences between the mean levels of AF and LAF for switching andnon-switching firms, as switching firms record significantly lower audit fees. Inaddition, significant differences emerge between the mean figures for RECVTA,INVTA, LIQUID and DISC_OP for switching and non-switching firms. Significantdifferences between the median figures are only recorded for ASSETS and ROA. x 2
show significant differences for LOSS and DISC_OP.
5.2 Audit fees during initial engagementTable VII presents the least squares results for this study. Column 1 of Table VIIpresents the probit or selection model in which the inverse mills ratio (IMR) isgenerated. The McFadden R 2 of this model is only 3.5 percent. Column 2 of Table VIIintroduces the basic audit fee model recommended by Hay et al. (2006), which excludesthe IMR variable generated earlier. In contrast, column 3 presents the audit fee modelwith IMR for the purpose of comparison. The coefficient of the IMR is insignificant;this suggests that there is no self-selection bias among clients or auditors[14].
Column 3 of Table VII presents the main regression results, with INITIAL as theexperimental variable, which includes the IMR variable generated earlier from the
Mean Median Maximum Minimum SD
AF (’000) 508.5 88.71 619,900 2.946 11,430LAF 11.601 11.393 20.245 7.988 1.126INITIAL a 0.100 0.000 1.000 0.000 0.299ASSETS (’000) 1,188,000 246,500 76,070,000 2,935 3,634,000LNASSETS 19.553 19.323 25.055 14.892 1.483RECVTA 0.211 0.183 0.999 0.000 0.152INVTA 0.114 0.087 0.987 20.007 0.115ROA 0.039 0.047 2.034 21.587 0.131LOSS a 0.192 0.000 1.000 0.000 0.394DEBT 0.461 0.458 0.995 0.016 0.217LIQUID 2.240 1.535 35.283 0.073 2.704DISC_OP a 0.065 0.000 1.000 0.000 0.246OPINION a 0.075 0.000 1.000 0.000 0.263YE a 0.616 1.000 1.000 0.000 0.486IMILLS 1.797 1.790 2.774 1.015 0.223
Notes: n ¼ 3,003; adichotomous variables: AF is the total audit fees while LAF is the logarithmictransformation of AF; INITIAL is an indicator variable that takes the value of 1 if the initial audit is aresult from a change in auditor; LATERAL takes the value of 1 if the initial audit involves a switchfrom one auditor to another within the same class or zero otherwise; ASSETS represents total assets,and LNASSETS is the logarithmic transformation of ASSETS; DISC_OP is an indicator variable, witha value of 1 for firms reporting discontinued operations or extraordinary items; RECVTA and INVTAare total receivables and inventory scaled by total assets, respectively; LIQUID represents currentassets divided by current liabilities, and ROA represents return on assets; LOSS takes a value of 1 ifthe company records a loss in the previous year; DEBT is total debt scaled by total assets; BIG_Ntakes a value of 1 if the auditing firm is a Big N firm; YE takes a value of 1 if the year end for thecompany is 31 December, and OPINION takes a value of 1 if the audit opinion is qualified; IMR isinverse mills ratio
Table IV.Descriptive statistics forsample firms (1996-2006)
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LA
FIN
ITIA
LL
NA
SS
ET
SR
EC
VT
AIN
VT
AR
OA
LO
SS
OP
INIO
NY
ED
EB
TL
IQU
IDD
ISC
_O
PIM
R
LA
F1.000
20.0
83
**
*0.7
30
**
*2
0.0
65
**
*2
0.0
52
**
*0.0
07
20.0
50
**
*0.1
08
**
*2
0.0
01
0.2
64
**
*2
0.1
44
**
*0.1
09
**
*0.3
58
**
*
INIT
IAL
20.086***
1.0
00
20.0
63
**
*2
0.0
15
20.0
38
**
20.0
09
0.0
83
**
*0.0
11
0.0
31
*2
0.0
14
0.0
02
20.0
24
20.1
38
**
*
LN
AS
SE
TS
0.733***
20.066***
1.0
00
20.3
19
**
*2
0.2
20
**
*0.1
06
**
*2
0.1
55
**
*0.0
88
**
*0.0
09
0.1
83
**
*2
0.1
14
**
*0.1
22
**
*0.4
64
**
*
RE
CV
TA
20.075***
20.014
20.304***
1.0
00
0.2
75
**
*2
0.0
33
*2
0.0
03
20.0
51
**
*2
0.0
01
0.2
09
**
*0.0
80
**
*2
0.0
21
0.1
03
**
*
INV
TA
20.072***
20.023
20.205***
0.092***
1.0
00
20.0
13
20.0
03
20.0
43
**
20.0
17
0.1
22
**
*0.0
54
**
*2
0.0
36
**
0.1
23
**
*
RO
A0.040**
20.032*
0.116***
20.021
0.009
1.0
00
20.4
32
**
*2
0.1
65
**
*2
0.0
01
20.4
02
**
*0.4
21
**
*0.0
39
**
0.2
00
**
*
LO
SS
20.053***
0.083***
20.155***
20.001
0.003
20.321***
1.0
00
0.1
24
**
*2
0.0
06
0.2
55
**
*2
0.2
75
**
*2
0.0
50
**
*2
0.4
83
**
*
OP
INIO
N0.101***
0.011
0.095***
20.042***
20.041***
20.121***
0.124***
1.0
00
20.0
04
0.1
75
**
*2
0.1
70
**
*0.0
28
20.1
42
**
*
YE
20.038**
0.031*
20.024
0.010
0.021
0.019
20.006
20.004
1.0
00
20.0
08
0.0
16
20.0
39
20.2
37
**
*
DE
BT
0.264***
20.014
0.202***
0.190***
0.114***
20.300***
0.272***
0.192***
20.002
1.0
00
20.6
55
**
*0.0
51
**
*0.1
67
**
*
LIQ
UID
20.158***
0.019
20.120***
20.070***
20.057***
0.154***
20.111***
20.076***
20.012
20.506***
1.0
00
20.0
42
**
*0.0
19
DIS
C_O
P0.105***
20.024
0.123***
20.020
20.029
0.037
20.050***
0.028
20.039**
0.045***
20.012
1.0
00
0.1
61
**
*
IMR
0.354***
20.147***
0.463***
0.100***
0.127***
0.170***
20.479***
20.156***
20.226***
0.141***
20.136***
0.232***
1.0
00
Notes:Significantat:* 10,
** 5
and
*** 1
percentlevels;
n¼
3,003;Pearson
(italicised)andSpearm
an-rankcorrelationsarereportedin
thistable;L
AFisthelogarithmictransformationof
theauditfees;I
NIT
IALisan
indicator
variablethat
takes
avalueof
1iftheinitialauditresulted
from
changingauditors;
AS
SE
TSistotalassets,and
LN
AS
SE
TSisthelogarithmictransformationof
AS
SE
TS;D
ISC
_O
Pisan
indicator
variablewithavalueof
1forfirm
sreportingdiscontinued
operationsor
extraordinaryitem
s;R
EC
VT
Aand
INV
TAaretotalreceivablesandinventory
scaled
bytotalassets,respectively;L
IQU
IDiscurrentassetsdivided
bycurrentliabilities;
RO
Aisreturn
onassets;L
OS
Stakes
thevalueof1ifthecompanyrecordsaloss
inthepreviousyear;
DE
BTistotaldebtscaled
bytotalassets;Y
Etakes
avalueof
1iftheyearendforthecompanyis31
Decem
ber,and
OP
INIO
Ntakes
avalueof
1iftheauditopinionisqualified;IM
Risinverse
millsratio
Table V.Correlation matrix
(1996-2006)
Audit fees
745
selection model. We find that all of the client attributes are significantly associatedwith audit fees, with the exception of ROA, DISC_OP and OPINION. In addition, theadjusted R 2 for the basic model is 62.6 percent. These results are comparable to thosepresented in other Malaysian studies of audit fees (Salleh et al., 2006; Gul, 2006; AbdulWahab et al., 2009).
Consistent with our prediction in H1, we find the coefficient of INITIAL to benegatively and significantly (20.097, t ¼ 22.191, p , 0.05) related to audit fees. Ourfindings are consistent with those of DeAngelo (1981) and Kanodia and Mukherji(1994), who argue that fee discounting during an initial audit engagement will still takeplace, regardless of whether the cost of the audit is made public because the bargainingpower resides with the auditor. Our findings are also consistent with those ofHuang et al. (2009), Peel (2009), Ghosh and Lustgarten (2006), Sankaraguruswamy andWhisenant (2005) and Craswell and Francis (1999), who tested audit pricing during aninitial engagement in the environment where fees are publicly disclosed.
5.3 Price recoveryDeAngelo (1981) argues that the phenomenon of fee-cutting stems from intensivecompetition among auditors, which is similar to “special introductory offers” madewhen suppliers expect that customers will make repeated purchases (Ghosh andLustgarten, 2006). As the auditor can expect to recover the sunk cost associated withthe initial audit during subsequent audits, the initial fee discount can be seen as not
Initial ¼ 1 n ¼ 299 Initial ¼ 0 n ¼ 2,704 t-test Mann-WhitneyMean Median Mean Median ( p-value) ( p-value)
AF (’000) 193.0 69.11 543.4 90.18 0.000 0.000LAF 11.311 11.143 11.633 11.410 0.000 0.000ASSETS (’000) 868,900 180,300 1,223,000 254,100 0.103 0.067LNASSETS 19.259 19.010 19.585 19.353 0.044 0.055RECVTA 0.205 0.172 0.212 0.184 0.011 0.007INVTA 0.106 0.071 0.115 0.089 0.003 0.002ROA 0.026 0.045 0.040 0.047 0.023 0.025LOSS 0.291 0.000 0.181 0.000 (0.000)DEBT 0.452 0.447 0.462 0.459 0.733 0.496LIQUID 2.393 1.493 2.223 1.542 0.050 0.061DISC_OP 0.047 0.000 0.067 0.000 (0.000)OPINION 0.084 0.000 0.074 0.000 (0.971)YE 0.662 1.000 0.611 1.000 (0.162)IMR 1.699 1.728 1.808 1.800 0.000 0.000
Notes: n ¼ 3,003; AF is the total audit fees while LAF is the logarithmic transformation of AF;INITIAL is an indicator variable that takes the value of 1 if the initial audit is a results from a changein auditor; ASSETS represents total assets, and LNASSETS is the logarithmic transformation ofASSETS; DISC_OP is an indicator variable, with a value of 1 for firms reporting discontinuedoperations or extraordinary items; RECVTA and INVTA are total receivables and inventory scaled bytotal assets, respectively; LIQUID represents current assets divided by current liabilities, and ROArepresents return on assets; LOSS takes a value of 1 if the company records a loss in the previous year;DEBT is total debt scaled by total assets; YE takes a value of 1 if the year end for the company is 31December, and OPINION takes a value of 1 if the audit opinion is qualified; IMR is inverse mills ratio;the p-values are in italic, and the x 2 results are in parentheses
Table VI.Univariate analysis ofdifferences in audit fees,client, auditor andengagement attributesbetween initial andcontinuous engagementfirms in Malaysia(1996-2006)
MAJ28,8
746
impairing auditor independence but instead as providing continuous discounts overtime and thus helping to retain clients.
We extend our empirical examination by considering whether auditors lowballduring the first audit year. To test this idea, we must test for subsequent price recovery.
Variable Probit Without IMR With IMR
INTERCEPT 20.053 0.714 0.7782 0.090 1.823 * 1.883 *
INITIAL 20.095 20.0972 2.164 * 2 2.191 *
LNASSETS 20.073 0.571 0.5762 2.791 * * 31.649 * * * 26.991 * * *
RECVTA 20.188 1.006 1.0192 0.791 6.982 * * * 6.934 * * *
INVTA 20.306 0.457 0.4822 0.966 2.428 * * 2.447 * *
ROA 0.021 20.053 20.0550.085 2 0.446 2 0.464
LOSS 0.261 0.135 0.1163.115 * * * 3.317 * * * 2.008 * * *
DEBT 20.058 0.290 0.2922 0.294 2.408 * * 2.430 * *
LIQUID 0.005 20.014 20.0150.389 2 1.903 * 2 1.935 *
DISC_OP 0.004 0.098 0.0980.026 1.548 1.548
OPINION 0.083 0.0701.357 1.210
OPINION(21) 0.3793.385 * * *
YE 0.114 20.106 20.1141.691 * 2 2.400 * * 2 2.398 * *
IMR 20.0852 0.455
McFadden R 2 0.035 – –Adjusted R 2 – 0.627 0.627LR/F-statistic 67.492 * * * 169.440 * * * 163.937 * * *
Obs with dep ¼ 0 2,704Obs with dep ¼ 1 299
Notes: Significant at: *10, * *5 and * * *1 percent levels; n ¼ 3,003; AF is the total audit fees whileLAF is the logarithmic transformation of AF; INITIAL is an indicator variable that takes the value of 1if the initial audit is a result from a change in auditor; LATERAL takes the value of 1 if the initial auditinvolves a switch from one auditor to another within the same class or zero otherwise; ASSETSrepresents total assets, and LNASSETS is the logarithmic transformation of ASSETS; DISC_OP is anindicator variable, with a value of 1 for firms reporting discontinued operations or extraordinary items;RECVTA and INVTA are total receivables and inventory scaled by total assets, respectively; LIQUIDrepresents current assets divided by current liabilities, and ROA represents return on assets; LOSStakes a value of 1 if the company records a loss in the previous year; DEBT is total debt scaled by totalassets; BIG_N takes a value of 1 if the auditing firm is a Big N firm; YE takes a value of 1 if the yearend for the company is 31 December, and OPINION takes a value of 1 if the audit opinion is qualified;the t-statistics are italicised
Table VII.Panel least squares forpricing of initial audit
engagement (1996-2006)
Audit fees
747
We note that Pong and Whittington (1994, p. 1078) suggest that “although negativecoefficients on the change of auditor are definitely indicative of lowballing, it is notnecessarily the case that zero or positive coefficients indicate the absence of lowballing”.If we can make plausible assumption that there are positive costs to setting up a newaudit, then a fee which recovers the costs of incoming auditor will be higher. Thus, anexamination of price recovery is very much warranted.
We run a test similar to that by Turpen (1990), creating three dummy variables toreflect subsequent year(s) after the initial engagement. The first dummy variable takesa value of 1 if the firm employs the same auditor during the initial engagement for atleast the next three years (INITIAL_1_to_3). The second dummy variable takes avalue of 1 if the firm employs the same auditor for at least four to six years(INITIAL_4_to_6), and the third variable takes a value of 1 if the firm employs thesame auditor for at least seven to ten years (INITIAL_7_to_10). To carefully examinelowballing or price recovery, we remove the minimal firms that change auditors withinthis from the sample.
Column 2, of Table VIII documents price recovery with the 11 years grouped intothree periods. We find that on average, the auditor will recover the “sunk cost” investedduring the initial engagement within the next three years of the engagement as shownby the positive and significant relationship between INITIAL_1_to_3 (0.073, t ¼ 1.857,p , 0.10) and audit fees. We extend the analysis by creating dummy variables toinvestigate whether there is any difference between the first three years of audits afterthe initial engagement and later audits. The dummy variables are INITIAL_1,INITIAL_2 and INITIAL_3, which represent the first year, second year and third yearafter the initial engagement, respectively. Our evidence, presented in Table VIII inColumn 2, suggests a positive and significant relationship (0.090, t ¼ 1.694, p , 0.10)between the fourth year (INTIAL_3) of engagement and audit fees. In fact, our findingssuggest that the audit fees are not significantly different from normal fees forcontinuing engagement for the first three years of engagement. Thus, our findingssuggest that price recovery due to lowballing does not impair auditor independence.
6. ConclusionThis study examines the pricing for audit services during an initial engagement inMalaysia from 1996 to 2006. The sample includes 555 non-financial firms (3,003firm-year observations) listed in the Bursa Malaysia during the sample period. Thisstudy predicts a negative relationship between audit fees and initial auditengagements. Our results, based on a large sample including 555 firms and 3,003observations from the period 1996 to 2006 (an 11-year period), show a negativerelationship between initial audit engagements and audit fees.
As Malaysia’s capital market regulations require the full disclosure of audit fees,our findings are consistent with Kanodia and Mukherji (1994)’s argument that actualaudit fees are known only to the auditor and not to the client. Our findings areconsistent with those of Peel (2009), Huang et al. (2009), Sankaraguruswamy andWhisenant (2005), Ghosh and Lustgarten (2006) and Craswell and Francis (1999).These studies tested audit fee pricing during initial engagements when informationwas publicly disclosed.
Like Turpen (1990), we extended our analysis by examining price recovery. We viewthis test as an essential determinant of lowballing by auditors. In addition, the test
MAJ28,8
748
Variable Coefficient Coefficient
INTERCEPT 1.108 1.1122.588 * * 2.600 * *
INITIAL 20.117 20.1142 2.543 * * 2 2.470 * *
LNASSETS 0.564 0.56425.775 * * * 25.865 * * *
RECVTA 0.940 0.9406.168 * * * 6.168 * * *
INVTA 0.441 0.4432.205 * * 2.212 * *
DISC_OP 0.109 0.1091.683 * 1.691 *
LIQUID 20.014 20.0142 1.730 * 2 1.730 *
ROA 20.026 20.02520.216 20.201
LOSS 0.142 0.1412.326 * * 2.313 * *
DEBT 0.301 0.3022.452 * * 2.458 * *
YE 20.128 20.1282 2.683 * * 2 2.674 * *
OPINION 0.065 0.0661.073 1.086
INITIAL_1_TO_3 0.0731.857 *
INITIAL_1 0.0601.300
INITIAL_2 0.0731.207
INITIAL_3 0.0901.694 *
INITIAL_4_TO_6 0.0030.066
INITIAL_7_TO_10 20.02820.361
IMR 20.093 20.0942 0.478 2 0.483
Period fixed (dummy variables) Yes YesAdjusted R 2 0.619 0.619F-statistic 131.397 * * * 131.400 * * *
Notes: Significant at: *10, * *5 and * * *1 percent levels; n ¼ 3,003; LAF is logarithmic transformationof audit fees; INITIAL is an indicator variable that takes the value of 1 if the initial audit is resultedfrom a change of an auditor; LNASSETS is logarithmic transformation of total assets; DISC_OP isdiscontinued an indicator variable, 1 for firms reporting discontinued operations or extraordinaryitems; RECVTA and INVTA are total receivables and inventory scaled by total assets, respectively;LIQUID is current assets divided by current liabilities; ROA is return on assets while LOSS takes thevalue of 1 if the company records a loss in the previous year; DEBT is total debt scaled total assets; YEtakes the value of 1 if the year end of the company is 31 December and OPINION takes the value of 1 ifthe audit opinion is qualified; INITIAL_1_to_3,INITIAL_4_to_6 and INITIAL_7_to_10 are periodsof one to three, four to six and seven to ten years after the initial engagement, respectively; INITIAL_1,INITIAL_2 and INITIAL_3 which represent the first year, second year and third year after the initialengagement, respectively; t-statistics are italicised
Table VIII.Panel least squares for
price recovery(1996-2006)
Audit fees
749
provides partial evidence of auditor independence in Malaysia. We find a positive trendbetween the number of years (three years) after the initial engagement and a positiveand significant relationship between the fourth year of engagement and audit fees. Ourfindings suggest that the practice of “lowballing” does occur in the Malaysian auditmarket. However, we find no evidence to indicate that this practice could impairauditor independence. Although we have not directly tested the initial audit pricing inthe pre and post FCCG (2000), consistent with Huang et al. (2009), the test of pricerecovery suggests that the Big “n” only recover their investment during the fourth yearof audit engagement and more interestingly, the audit fees are not significantlydifferent from normal fees charged for the continuing engagement. This has furtherimplications, as it could further highlight to the regulators that the introduction of thecorporate reforms and initiatives in Malaysia have somehow improved the overallcorporate governance practices.
In addition, our results provide interesting evidence from an emerging capitalmarket country. In particular, Malaysia has a very unique background in terms of amultiracial society, the existence of family ties, political connections and differentcultural backgrounds. For instance, Gray’s (1988) societal values research hasclassified Malaysia as more “conservative” in practice than in the USA and UK, and soit is likely that, although lowballing exists in the Malaysian environment, auditors aremore conservative in nature to ensure that it would not affect their independence.
We derived a similar conclusion with Huang et al. (2009) that the Big n are morelikely to be conservative during the post regulations period. This should be of interestto the regulators and various parties, as it could suggest that the corporate governancereforms in Malaysia, (the introduction of MCCG in 2000) have positive implications forauditing practice.
This study is not without limitations. First, it does not capture whether switchesresulted from the dismissal or resignation of auditors, as highlighted by Griffin and Lont(2008), which is important as the motive for any fees discounts would be different. Suchinformation may enhance our understanding of the relationship between auditorswitching and audit pricing. In addition, due to data availability issues, this study did notcontrol for some of the Malaysian institutional factors documented in other studies, suchas political connections (Gul, 2006), institutional investors (Abdul Wahab et al., 2009),ethnicity (Yatim et al., 2006; Salleh et al., 2006), or corporate governance (Yatim et al.,2006). Another point to consider in future research is the inclusion of non-audit fees in theassessment of audit pricing during an initial engagement and auditor independence.Furthermore, we do not consider small or mid-tier auditors in the analysis. We foreseethat this is a gap for future research into Malaysian auditing practice.
Notes
1. Regulators’ concerns that auditors need to recover fee discounts in future period that mayrestrict auditors’ judgments and threaten independence (SEC, 1988).
2. See Favere-Marchesi (2001) for a thorough review of audit requirements in Malaysia.
3. The Companies Act of 1965 was mainly developed from the Victoria Companies Act of 1961and the British Companies Act of 1948.
4. Auditor switching in this study is defined as a change in the audit firm specified in theclient’s annual report anytime between 1996 and 2006. In Malaysia, information regardingaudit fees is publicly available pursuant to requirements of the Companies Act 1965.
MAJ28,8
750
5. DeAngelo (1981) cites Arens and Loebbecke (1976, p. 100) to provide three reasons for higherstartup costs: (1) it is necessary to verify the details of the firms’ permanent (balance sheet)accounts; (2) it is necessary to verify the beginning balances listed on the balance sheet forthe initial engagement; and (3) the auditor is less familiar with the client’s operations.Switching costs are the costs that clients incur when they change from one auditor toanother. Examples include the cost of obtaining and evaluating bids by potential auditorsand the costs associated with informing the new auditors about the nature of the firm’soperations and financial reporting system.
6. DeAngelo (1981) states that quasi-rent consists of future fees less avoidable costs, includingthe opportunity cost of auditing the next best alternative client. Fee discounts by competingauditors are necessary to secure these benefits.
7. Monopoly power arises when there is only one seller who has already acquired thatknowledge. Monopoly power also arises when there is only one buyer for the specialisedknowledge that the auditor has accumulated from the initial audit.
8. In 1998, PriceWaterhouse merged with Coopers and Lybrand to formPriceWaterhouseCoopers. In 2001, Arthur Andersen was found guilty in the ENRONdebacle, although the verdict was overturned later in 2005.
9. Chi (2004), Asthana et al. (2004) and Ho and Wang (2006) document fee premiums due to theAndersen saga. In addition, Willenborg (1999) and Beatty (1993) discuss the economicdeterminants of auditor fees during IPOs. McMeeking et al. (2007) and Rahmat and Iskandar(2004) find evidence of audit fee premiums during merger activities.
10. We use audit fees because we are interested in capturing the extent of auditor investigations.It is reasonable to assume that more audit investigations will require more audit hoursand/or the use of more specialised audit staff, resulting in higher audit fees (O’Sullivan,2000). Furthermore, the use of audit fees to proxy for audit quality is appropriate because theaudit quality of a firm is unobservable (O’Sullivan, 2000). The motivation for investing more(less) audit effort and charging higher (lower) fees could come from either the auditor or theauditee.
11. The results for the year/period dummies can be requested from the corresponding author.
12. The industries dummies are manufacturing, consumer, wholesale, health, mining andconstruction.
13. Removing the lowest number of observations does not alter the main results.
14. We would like to highlight the argument presented by Francis and Lennox (2008) that thesignificance or insignificance of the IMR variable does not provide compelling evidence ofthe presence or absence of self-selection. Multicollinearity or minor changes to the modelmight be at play.
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Further reading
Abdul Nasser, A.T., Abdul Wahid, E., Syed Mustapha Nazri, S.N.F. and Hudaib, M. (2006),“Auditor-client relationship: the case of audit tenure and auditor switching in Malaysia”,Managerial Auditing Journal, Vol. 21 No. 7, p. 724.
Butterworth, S. and Houghton, K.A. (1995), “Auditor switching: the pricing of audit services”,Journal of Business Finance & Accounting, Vol. 22 No. 3, pp. 323-344.
Che Ahmad, A., Shafie, R. and Mohamad Yusof, N.Z. (2006), “The provision of non-audit services,audit fees and auditor independence”, Asian Academy of Management Journal ofAccounting and Finance, Vol. 2 No. 1, pp. 21-40.
Chow, C.W. and Rice, S.J. (1982), “Qualified audit opinions and auditor switching”, AccountingReview, Vol. 57 No. 2, p. 326.
Collier, P. and Gregory, A. (1999), “Audit committee activity and agency costs”, Journal ofAccounting & Public Policy, Vol. 18 Nos 4/5, pp. 311-332.
Francis, J.R. and Wilson, E.R. (1988), “Auditor changes: a joint test of theory relating to agencycosts and auditor differentiation”, Accounting Review, Vol. 63 No. 4, p. 663.
Gul, F.A. (1999), “Audit prices, product differentiation and economic equilibrium”, Auditing: AJournal of Practice & Theory, Vol. 18 No. 1, pp. 90-100.
Krishnan, J. (1994), “Auditor switching and conservatism”, Accounting Review, Vol. 69 No. 1,pp. 200-215.
Pong, C.M. and Burnett, S. (2006), “The implications of merger for market share, audit pricingand non-audit fee income”, Managerial Auditing Journal, Vol. 21 No. 1, pp. 7-22.
Singh, H. (2002), “Arthur Andersen merges with Ernst & Young”, Business Times, 19 June.
Stock Performance Guide Malaysia (2003), DynaquestSdn. Bhd, Penang, July edition.
About the authorsEffiezal Aswadi bn Abdul Wahab is currently a Lecturer at School of Accounting, CurtinBusiness School, Curtin University, Australia. He has published in Journal of ContemporaryAccounting and Economics, Accounting Research Journal, Managerial Auditing and Advances inFinancial Economics. Effiezal Aswadi bn Abdul Wahab is the corresponding author and can becontacted at: [email protected]
Mazlina Mat Zain currently is an Associate Professor at Faculty of Management, MultimediaUniversity. She has published in International Journal of Accounting, International Journal ofAuditing, Corporate Governance: An International Review and Managerial Auditing Journal.
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