Audit rotation and audit fee determination policy on audit quality with lowballing audit practice as the intervening variable

https://doi.org/10.35912/jakman.v2i1.183
Published: Dec 31, 2020

Abstract:

Purpose: This study aimed to analyze the effect of audit rotation and audit fee policy toward audit quality with lowballing audit practice as the intervening variable.

Research methodology: The research method used was path analysis with a sample of twenty manufacturing companies in Indonesia Stock Exchange during 2015-2019.

Results: The research results prove that the audit rotation and audit fee policy significantly affect the audit quality through the lowballing audit.

Limitations: The research sample used manufacturing companies listed on the IDX, so the generalization of this study's results for non-manufacturing and non-listed companies must be made carefully.

Contribution: This research can provide benefits for Audit Firms, regulators (PPPK), and professional associations (IAPI) as an evaluation of the implementation of audit rotation policies, implementation of regulations for determining audit fees following IAPI's Regulation No. 2 of 2016 concerning Determination of Financial Report Audit Service Fees, as well as evaluation of the implementation of the audit quality indicator guidelines formulated by IAPI.

Keywords: Audit rotation, Policy of determining audit fee, Lowballing audit, Negative abnormal audit fee, Audit quality

Keywords:
1. Audit rotation
2. Policy of determining audit fee
3. Lowballing audit
4. Negative abnormal audit fee
5. Audit quality
Authors:
1 . Anisa Listya
2 . Muhammad Ichsan Siregar
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How to Cite
Listya, A., & Siregar, M. I. . (2020). Audit rotation and audit fee determination policy on audit quality with lowballing audit practice as the intervening variable. Jurnal Akuntansi, Keuangan, Dan Manajemen, 2(1), 71–82. https://doi.org/10.35912/jakman.v2i1.183
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Vol. 2 No. 1 (2020): Desember
Articles
References

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    Al-Khoury, et.al. (2015). Auditor independence and mandatory auditor rotation in Jordan. International Business Research, 8(4). DOI: 10.5539/ibr.v8n4p73.

    Amake, C.C. and Okafor, Chinwuba. (2012). Auditors independence, auditors' tenure and audit firm size in Nigeria. Research Journal of Finance and Accounting, 3(10).

    Arens, A. A., R. J. Elder, dan M. S. Beasley. (2015). Auditing dan jasa assurance Edisi 15 Jilid 1: Pendekatan Terintegrasi. Erlangga.

    Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational behavior and human decision processes, 35(1), 124-140.

    Asthana, Sharad and Boone, Jeff P. (2012). Abnormal audit fee and audit quality. Auditing: A Journal of Practice & Theory, SSRN: https://ssrn.com/abstract=2029172.

    Barbadillo Ruiz, E, Carrera, N., Gómez-Aguilar, N., & Humphrey, C. (2007). Mandatory audit firm rotation in Spain: a policy that was never applied. Accounting, Auditing & Accountability Journal, 20(5), 671-701.

    Bleibtreu, Christopher dan Ulrike Stefani. (2013). The effects of mandatory auditor rotation on low balling behavior and auditor independence, http://www.wiwi.uni- konstanz.de/econdoc/working-paper- series/, Working Paper (Preliminary Version), September 2013.

    Choi, Jong-Hag, Chansog Kim, Jeong-Bon Kim, & Yoonseok Zang. (2010). Audit office size, audit quality and audit pricing. Auditing: A Journal of Practice & Theory American Accounting Association, 29(1). Doi: 10.2308/Aud.2010.29.1.73 pp.73–97.

    Choi, J. H., Kim, J. B., Liu, X., and Simunic, D. A. (2008). Audit pricing, legal liability regimes, and Big 4 premiums: Theory and cross-country evidence. Contemporary Accounting Research, 25(1), 55-99.

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    Daugherty, B. E., Dickins, D., Hatfield, R. C., & Higgs, J. L. (2012). An examination of partner perceptions of partner rotation: Direct and indirect consequences to audit quality. Auditing: A Journal of Practice & Theory, 31(1), 97-114.

    Daugherty, B. E., Dickins, D., Hatfield, R. C., & Higgs, J. L. (2013). Mandatory Audit Partner Rotation: Perceptions of Audit Quality Consequences. Current Issues in Auditing, 7(1), 30-35.

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

    DeAngelo, L.E., (1981b). Auditor independence, 'low balling', and disclosure regulation. J. Account. Econ. 3 (2), 113–127.

    Dopuch, N and King R. (1996). The effects of lowballing on audit quality: an experimental market study. Journal of Accounting, Auditing & Finance. DOI:10.1177/0148558X9601100102.

    Ettredge, Michael, Elizabeth Emeigh Fuerherm, Chan Li. (2014). Fee pressure and audit quality. Accounting, Organizations and Society, 39, 247–263.

    Fatemi, D. J. (2013). New evidence on an old question: does lowballing undermine auditors' independence or their clients' investment decisions?, American Accounting Association, 7(1).

    Fitriany, Liswan Setiawan. (2011). Pengaruh Workload dan spesialisasi auditor terhadap kualitas audit dengan kualitas komite audit sebagai variabel pemoderasi. Jurnal Akuntansi dan Keuangan Indonesia, 8(1).

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    Institut Akuntan Publik Indonesia. (2016b). Peraturan pengurus IAPI No. 2 tahun 2106.

    Institut Akuntan Publik Indonesia. (2011). Standar profesional akuntan publik. Salemba Empat.

    Institut Akuntan Publik Indonesia. (2008). Kode etik profesi akuntan Publik. Salemba Empat.

    Kwon S. D., Y.D. Lim and R. Simnett. (2014). The effect of mandatory audit firm rotation on audit quality and audit fees: empirical evidence from the Korean audit market. Auditing: A Journal of Practice & Theory, 33(4):167-196. DOI: 10.2308/ajpt-50814.

    Lee and Gu. (1998). Low balling, legal liability and auditor independence. The Accounting Review, 73(4), 533-555.

    Mautz, R.K. and H.A. Sharaf. (1961). The philosophy of auditing. Sarasota, Florida: American Accounting Association.

    Mgbame, C. O., Eragbhe, E., &Osazuwa, N. P. (2012). Audit partner tenure and audit quality: An empirical analysis. European Journal of Business and Management, 4(7), 154-162.

    Mohamed, Diana Mostafa and Hussien. (2013). Audit quality and the mandatory auditor rotation in Egypt”, education, business and society. Contemporary Middle Eastern Issues, 6(2), 116-144.

    Myers, James N, Linda A Myers, and Thomas C. Omer. (2003). Exploring the term of the auditor-client relationship and the quality of earnings: a case for mandatory auditor rotation?", The Accounting Review, 78(3), 779-799.

    Onwuchekwa, Erah, D., & Izedonmi, F. I. (2012). Mandatory audit rotation and audit independence. Survey of Southern Nigeria, 3

    Ottaway, Joanne. (2013). Improving auditor independence in Australia: is mandatory audit firm rotation the best option?

    Palmrose, Zv. (1986). Audit Fees And Auditor Size - Further Evidence. Journal of Accounting Research, 24(1), 97-110.

    Said, K., & Khasharmeh, H. (2014). Auditors' perceptions on impact of mandatory audit firm rotation on auditor independence – Evidence from Bahrain. Journal of Accounting and Taxation, 6(1), 1-18.

    Sawan, N and Alsaqqa, I (2013). Audit firm size and quality: Does audit firm size influence audit quality in the Libyan oil industry? African Journal of Business Management, 7(3), 213-226. ISSN 1990-3839.

    Sepponen, Laura. (2015). Audit pricing, lowballing and auditor changes: evidence from US Public Firms. Thesis.

    Sewon O & Kun Wang, (2012). Competition and low- balling: evidence from Texas Municipalities, Texas Southern University.

    Suharli. M dan Nurlaelah. (2008). Konsentrasi auditor dan penetapan audit fee: investigasi pada BUMN. Jurnal Akuntansi dan Auditing Indonesia, 12(2), 133 – 148.

    Taylor, Mark, H; and Simon, Daniel, T. (1999). Determinants of Audit Fees: The Importance of Litigation, Disclosure and Regulatory Burdens in Audit Engagements in 20 Countries. The International Journal of Accounting; 34(3), 375-388; ISSN: 0020-7063.

    Vroom, Victor. H. (1964). Work and motivation. San Francisco, CA: Jossey-Bass.

    Yuniarti, R. (2011). Audit firm size, audit fee and audit quality. Journal of Global Management, 2 (1), 84-97.

  1. Ahmed, Anis. (2014). Auditors' perceptions of audit firm rotation impact on audit quality in Egypt. Accounting & Taxation, 6(1), 105-120.
  2. Al-Khoury, et.al. (2015). Auditor independence and mandatory auditor rotation in Jordan. International Business Research, 8(4). DOI: 10.5539/ibr.v8n4p73.
  3. Amake, C.C. and Okafor, Chinwuba. (2012). Auditors independence, auditors' tenure and audit firm size in Nigeria. Research Journal of Finance and Accounting, 3(10).
  4. Arens, A. A., R. J. Elder, dan M. S. Beasley. (2015). Auditing dan jasa assurance Edisi 15 Jilid 1: Pendekatan Terintegrasi. Erlangga.
  5. Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational behavior and human decision processes, 35(1), 124-140.
  6. Asthana, Sharad and Boone, Jeff P. (2012). Abnormal audit fee and audit quality. Auditing: A Journal of Practice & Theory, SSRN: https://ssrn.com/abstract=2029172.
  7. Barbadillo Ruiz, E, Carrera, N., Gómez-Aguilar, N., & Humphrey, C. (2007). Mandatory audit firm rotation in Spain: a policy that was never applied. Accounting, Auditing & Accountability Journal, 20(5), 671-701.
  8. Bleibtreu, Christopher dan Ulrike Stefani. (2013). The effects of mandatory auditor rotation on low balling behavior and auditor independence, http://www.wiwi.uni- konstanz.de/econdoc/working-paper- series/, Working Paper (Preliminary Version), September 2013.
  9. Choi, Jong-Hag, Chansog Kim, Jeong-Bon Kim, & Yoonseok Zang. (2010). Audit office size, audit quality and audit pricing. Auditing: A Journal of Practice & Theory American Accounting Association, 29(1). Doi: 10.2308/Aud.2010.29.1.73 pp.73–97.
  10. Choi, J. H., Kim, J. B., Liu, X., and Simunic, D. A. (2008). Audit pricing, legal liability regimes, and Big 4 premiums: Theory and cross-country evidence. Contemporary Accounting Research, 25(1), 55-99.
  11. Craswell A.T. and Francis J.R., (1999). Pricing initial audit engagements: a test of competing theories. The Accounting Review, 74(2), 201-216. American Accounting Association.
  12. Daugherty, B., Dickins, D., & Higgs, J. (2010). Audit partner rotation: An analysis of benefits and costs: Working paper. University of Wisconsin-Milwaukee.
  13. Daugherty, B. E., Dickins, D., Hatfield, R. C., & Higgs, J. L. (2012). An examination of partner perceptions of partner rotation: Direct and indirect consequences to audit quality. Auditing: A Journal of Practice & Theory, 31(1), 97-114.
  14. Daugherty, B. E., Dickins, D., Hatfield, R. C., & Higgs, J. L. (2013). Mandatory Audit Partner Rotation: Perceptions of Audit Quality Consequences. Current Issues in Auditing, 7(1), 30-35.
  15. DeAngelo, L. E. (1981a). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.
  16. DeAngelo, L.E., (1981b). Auditor independence, 'low balling', and disclosure regulation. J. Account. Econ. 3 (2), 113–127.
  17. Dopuch, N and King R. (1996). The effects of lowballing on audit quality: an experimental market study. Journal of Accounting, Auditing & Finance. DOI:10.1177/0148558X9601100102.
  18. Ettredge, Michael, Elizabeth Emeigh Fuerherm, Chan Li. (2014). Fee pressure and audit quality. Accounting, Organizations and Society, 39, 247–263.
  19. Fatemi, D. J. (2013). New evidence on an old question: does lowballing undermine auditors' independence or their clients' investment decisions?, American Accounting Association, 7(1).
  20. Fitriany, Liswan Setiawan. (2011). Pengaruh Workload dan spesialisasi auditor terhadap kualitas audit dengan kualitas komite audit sebagai variabel pemoderasi. Jurnal Akuntansi dan Keuangan Indonesia, 8(1).
  21. Fitriany, Siregar, S. V., & Anggraita, V. (2008). Pengaruh positif dan negatif abnormal audit fee terhadap kualitas audit. Simposium Nasional Akuntansi (SNA) Medan XVIII.
  22. Fitriany, Sidharta Utama, Dwi Martani, dan Hilda Rosietta. (2015). Pengaruh tenure, rotasi dan spesialisasi Kantor Akuntan Publik (KAP) terhadap kualitas audit: perbandingan sebelum dan sesudah regulasi rotasi KAP di Indonesia. Jurnal Akuntansi dan Keuangan, 17(1), Mei 2015, hlm. 12-27. ISSN 1411-0288 print/ ISSN 2338-8137 online. DOI: 10.9744/jak.17.1.12-27.
  23. Gammal, Walid El. (2012). Determinants of Audit Fees: Evidence from Lebanon. International Business Research, 5(11). ISSN 1913-9004 E-ISSN 1913-9012 Published by Canadian Center of Science and Education.
  24. Institut Akuntan Publik Indonesia. (2016a). Panduan indikator kualitas audit pada KAP.
  25. Institut Akuntan Publik Indonesia. (2016b). Peraturan pengurus IAPI No. 2 tahun 2106.
  26. Institut Akuntan Publik Indonesia. (2011). Standar profesional akuntan publik. Salemba Empat.
  27. Institut Akuntan Publik Indonesia. (2008). Kode etik profesi akuntan Publik. Salemba Empat.
  28. Kwon S. D., Y.D. Lim and R. Simnett. (2014). The effect of mandatory audit firm rotation on audit quality and audit fees: empirical evidence from the Korean audit market. Auditing: A Journal of Practice & Theory, 33(4):167-196. DOI: 10.2308/ajpt-50814.
  29. Lee and Gu. (1998). Low balling, legal liability and auditor independence. The Accounting Review, 73(4), 533-555.
  30. Mautz, R.K. and H.A. Sharaf. (1961). The philosophy of auditing. Sarasota, Florida: American Accounting Association.
  31. Mgbame, C. O., Eragbhe, E., &Osazuwa, N. P. (2012). Audit partner tenure and audit quality: An empirical analysis. European Journal of Business and Management, 4(7), 154-162.
  32. Mohamed, Diana Mostafa and Hussien. (2013). Audit quality and the mandatory auditor rotation in Egypt”, education, business and society. Contemporary Middle Eastern Issues, 6(2), 116-144.
  33. Myers, James N, Linda A Myers, and Thomas C. Omer. (2003). Exploring the term of the auditor-client relationship and the quality of earnings: a case for mandatory auditor rotation?", The Accounting Review, 78(3), 779-799.
  34. Onwuchekwa, Erah, D., & Izedonmi, F. I. (2012). Mandatory audit rotation and audit independence. Survey of Southern Nigeria, 3
  35. Ottaway, Joanne. (2013). Improving auditor independence in Australia: is mandatory audit firm rotation the best option?
  36. Palmrose, Zv. (1986). Audit Fees And Auditor Size - Further Evidence. Journal of Accounting Research, 24(1), 97-110.
  37. Said, K., & Khasharmeh, H. (2014). Auditors' perceptions on impact of mandatory audit firm rotation on auditor independence – Evidence from Bahrain. Journal of Accounting and Taxation, 6(1), 1-18.
  38. Sawan, N and Alsaqqa, I (2013). Audit firm size and quality: Does audit firm size influence audit quality in the Libyan oil industry? African Journal of Business Management, 7(3), 213-226. ISSN 1990-3839.
  39. Sepponen, Laura. (2015). Audit pricing, lowballing and auditor changes: evidence from US Public Firms. Thesis.
  40. Sewon O & Kun Wang, (2012). Competition and low- balling: evidence from Texas Municipalities, Texas Southern University.
  41. Suharli. M dan Nurlaelah. (2008). Konsentrasi auditor dan penetapan audit fee: investigasi pada BUMN. Jurnal Akuntansi dan Auditing Indonesia, 12(2), 133 – 148.
  42. Taylor, Mark, H; and Simon, Daniel, T. (1999). Determinants of Audit Fees: The Importance of Litigation, Disclosure and Regulatory Burdens in Audit Engagements in 20 Countries. The International Journal of Accounting; 34(3), 375-388; ISSN: 0020-7063.
  43. Vroom, Victor. H. (1964). Work and motivation. San Francisco, CA: Jossey-Bass.
  44. Yuniarti, R. (2011). Audit firm size, audit fee and audit quality. Journal of Global Management, 2 (1), 84-97.