sori and karbhari - 2005 - auditor appointment, rotation and independence some evidence from malaysia

AUDITOR APPOINTMENT, ROTATION AND INDEPENDENCE: SOME EVIDENCE FROM MALAYSIA Dr. Zulkarnain Muhamad Sori and Dr. Yusuf Karbhari Abstract The aim of this paper is to examine the impact to auditor independence if the mandate to appoint auditor to regulatory body and exist auditor rotation scheme. This study sampled Malaysian auditors, loan officers and senior managers of public listed companies, and questionnaire and interview surveys were used to seek the respondent’s perceptions. The majority of the respondents indicated that allocation of audit clients by a regulatory authority would threaten auditor independence. On the other hand, it is found that the majority of the loan officers and senior managers of public listed companies indicated that rotation of audit firms for a specified period of time would safeguard auditor independence, while the majority of auditors disagreed with both of these respondent groups and indicated that such an initiative would threaten independence. However, the respondents in all groups agreed that rotation of audit partners would safeguard auditor independence. This might suggest that the type of rotation is not the main concern to the loan officers and senior managers of public listed companies. The significant shift in auditors’ perceptions, from rejecting the rotation of audit firms to accepting the rotation of audit partners indicates their preference of the rotation of audit partners scheme. Keywords: Appointment, Rotation of Firms, and Rotation of Partners, Independence, Malaysia, and Conflict of Interest AUDITOR APPOINTMENT, ROTATION AND INDEPENDENCE: SOME EVIDENCE FROM MALAYSIA 1.0 Introduction Relationships between auditors and client management in the process of auditor appointments and audit tenure have raised concerns in relation to threats to auditor independence (AICPA, 1978; Beattie and Fearnley, 1998; McInnes, 1993; Mayhew and Pike, 2004; O’Connor, 2002). Although accounting theory posits that auditor is shareholders’ agent, this is not the case in practice (Abdel-Khalik, 2002; APB, 1992; Simon, 1980; Zeff, 1987) and is regarded as a ‘legal fiction’ (Mitchell et al., 1991). Audit engagement letters are practically exchanged between the client management and the auditor. Client management effectively hold the authority to hire and fire auditors, and these decisions would only be ratified by shareholders at the annual general meeting (McInnes, 1993, p. 24). On the other hand, long-term audit tenure could threaten auditor independence because it would result in complacency, lack of innovation, and less rigorous audit procedures (Mautz and Sharaf, 1961). As a result, a ‘cosy’ relationship might develop and hinder fresh examination of clients’ accounting practices that could result in undermining auditor objectivity either subconsciously or consciously. To overcome the potential problems mentioned above, a number of alternatives have been suggested in literature such as to give mandate to appoint company’s auditor to regulatory body. It may be that the role played by client management may create an incentive for the auditor to agree with the management choice of accounting policies despite their own assessments (O’Connor, 2002). Also, regulators and interested parties suggested that the profession should adopt a mandatory auditor rotation scheme, in which auditors would only be allowed to serve a particular client for a limited time, and they would be restrained from re-establishing the same engagement for a specified “cooling off” period. Perhaps, under such a scheme, auditors would not have to worry about the potential impact of upsetting the client’s management because they would know their engagement was limited to a certain number of years (Gietzman and Sen, 2002). The aim of this paper is to examine the impact to auditor independence if the mandate to appoint auditor is given to regulatory body and exist auditor rotation scheme. The threat to auditor independence could be minimised if regulatory body was to assume the roles of appointing auditors because the potential conflict of interest could be minimised. While, the supporters of mandatory rotation believe that audit quality would increase due to a ‘fresh look’ at clients’ financial statements by the new auditor (Vanstraelen, 2000). The paper is organised into five sections. The following section offers literature review on auditor appointment and auditor rotation. Section three describes the data collection and research methodology. The fourth section presents the research findings and discussions. The final section provides conclusions of the study, its implications and suggestions for future research. 1 2.0 Literature Review This section will provide analysis of previous studies on issues relating to auditor appointment and audit tenure. Issues on audit tenure to be discussed include: (1) audit firm rotation, and (2) audit partners rotation (3) the practise of rotation in selected countries. 2.1 Auditor Appointment In the process of audit engagement, auditor might face pressure to conduct their duties objectively and independently. According to Pasewark and Wilkerson (1989), “an individual has the power to influence others if he or she has control of rewards that are desired by others” (p. 14). In this context, client management may be reluctant to be advised on the best practice by auditors and more interested to know whether their accounting judgements are acceptable under the Generally Accepted Accounting Principles (GAAP) (Saul, 1996, p. 132). Beattie and Fearnley (1998) found that companies’ directors in the UK were of the opinion that auditor appointment was within their power and used this for self-interests. Abdel-Khalik (2002, pp. 97-103) provides a comprehensive illustration of the dilemma of client management appointing auditors, where the board of directors nominates auditors to be voted by shareholders at the annual general meeting, and in most such instances, the results of the vote are consistent with the recommendations made by the board of directors. Abdel-Khalik (2002) pointed out “it is rare, however, that a management-nominated auditor fails to get the blessing of those casting votes at the annual shareholders’ meeting” (p. 100). In a study of auditor-director relationships, Hussey (1999) found that although company directors are dominant in the appointment process, they are also aware of their responsibilities to shareholders. Hussey (1999) noted that auditors of public limited companies visited their clients more regularly than did auditors of private companies, and it was discovered that the auditor-director relationship is more professional and harmonious. Hussey (1999) pointed out that the ‘Familiarity Threat’ may exist, but its influence may be exaggerated when auditors provide non-audit services (i.e. due to potential conflict of interest). To overcome this dilemma, Moizer (1997) and Simon (1980) suggested that the role of appointing auditors should be given to a government body. Simon (1980) pointed out that individual audit firms should make an application to the government body regarding their intention to audit any company. This body should also responsible for determining the parameters upon which audit fees would be based, and could also charge a certain percentage of the audit fee to finance their operation. In the event of auditor switching, the client should report the reason for their intention to change the auditor, and the body could reject the application if the reasons were not valid. Moizer (1997) pointed out that “this proposal is to reduce the power of directors over the appointment of auditors” (p. 67). However, this idea was rejected by Porter et al. (2003), who believed that there would be a “possibility of auditors becoming susceptible to the political agenda of the day and of the audit profession losing its professional independence” (p. 86). Porter et al. (2003) argued that there would be consequential difficulties for the achievement of an effective audit due to different lines of accountabilities of directors and auditors, in that directors are accountable to the shareholders and auditors are accountable to the government body. 2 2.2 Auditor Rotation Long-term auditor-client relationships might significantly increase the likelihood of an unqualified opinion. Vanstraelen (2000) discovered that auditors’ reporting behaviour in the first two years is significantly different than that in the last year of engagement. Vanstraelen (2000) construed the result as an indication of the awareness of auditors about the decision to renew their engagement before they produce their last audit report. It was pointed out that to maintain the value of audits, mandatory auditor rotation should be implemented. Deis and Giroux (1992) pointed out that mandatory rotation might improved audit quality. However, Vanstraelen (2000) noted that in light of the adverse effects of mandatory auditor rotation, ‘there is a need to develop alternative measures to safeguard auditors’ independence’ such as rotation of audit partners (p. 438). In a study on loan decisions made by UK bankers, Firth (1981) discovered that auditors would behave independently even though there were close relationships with clients. Firth (1981) believed that this result indicates that partner expertise outweighed the potential bias resulting from the association with the client. Though no significant association was detected, the amount of loan given was lower for auditors that had relationships with clients than those did not. This result is consistent with Shockley (1981) and Jackson-Heard (1987), where audit tenure was not perceived as a threat to auditor independence. Another aspect of audit tenure examined by researchers is the psychological effect of long-term audit engagements. Bates et al. (1982) discovered the existence of a significant psychological effect between the rotation and non-rotation groups examined in their study, in that the non-rotation group was more generous towards its clients than the rotation group. Bates et al. (1982) noted that auditor judgements were affected by long-term auditor-client relationships. They pointed out that rotation of audit partners is a good alternative to rotation of audit firms. Similarly, a Malaysian study by Teoh and Lim (1996) showed that auditor independence is threatened when the same auditor is engaged for more than five years. They suggested rotation of audit partners as the best alternative to rotation of audit firms. From an economic perspective, mandatory firm rotation makes audits more costly due to increments in production costs and a decrease in competition in the audit market (Arrunada and Paz-Ares, 1997). The cost increment was associated with the damage of a substantial amount of specific assets and the need to rebuild in each rotation. In addition, rotation of audit firms could result in collusion among audit firms, and reduces the incentive to invest in expertise and compete for efficiency because they will ultimately be obliged to relinquish their achievements due to the rotation rule. Arrunada and Paz-Ares (1997) also showed that rotation of audit firms could damage two main determinants of quality, namely auditors’ technical competence and lesser degree of specialisation. Due to the possibility of collusion among audit firms, they claimed that mandatory rotation might harm auditor independence and lead to auditor becoming dependent on their clients. Efforts to model auditor rotation by Gietzman and Sen (2002) revealed that the desirability of audit firm rotation depends significantly on the characteristics of the audit market structure and the extent to which a particular audit client dominates an auditor’s client portfolio. They found that rotation of audit firms could have a positive 3 public policy role in certain conditions. Mandatory rotation of auditors is a desirable policy instrument in a thin audit market because auditors and client management could collude for indefinite reappointment. Therefore, the mandatory auditor rotation rule would have a positive impact in this type of audit market. On the other hand, mandatory rotation was showed to be irrelevant in developed audit markets due to additional costs incurred, where the reputation effect associated with potential loss of future business is sufficiently strong to deter implicit collusion. In a survey conducted by the US General Accounting Office (GAO) (GAO, 2003), it was found that almost all of the largest public accounting firms and Fortune 1000 publicly traded companies consider that the costs of mandatory audit firm rotation exceed the benefits. A large majority of the respondents believed that partner rotation as required by the Sarbanes-Oxley Act would adequately achieve the benefits of mandatory audit firm rotation. In addition, the interview survey undertaken with other stakeholders such as institutional investors, stock market regulators, bankers, accountants, and consumer advocacy groups showed that the participants’ perceptions were consistent with the overall views in the questionnaire survey. Mandatory audit firm rotation was perceived as an ineffective approach due to the financial costs involved and loss of the institutional knowledge of the public company’s previous auditor. It was argued that the potential benefits of audit firm rotation would be difficult to predict and quantify. In the UK, Beattie and Fearnley (1998) have shown that the process of changing audit firms involved high costs for both companies and auditors. In a review of prior studies, Fearnley and Beattie (2004) concluded that although rotation of audit firms could theoretically safeguard auditor independence, practical evaluation should lead to this approach being rejected. Consistently, Ghosh and Moon (2005) found that mandatory rotation might introduce unintended costs to capital market participants. 2.3 The Practise of Rotation in Selected Countries The rotation of audit firms and/or partners has been practiced differently around the world 1 . Italy, Brazil and Austria require their public companies to rotate audit firms within a specified period of time. However, in Singapore, only auditors of locally incorporated banking institutions are required to rotate. In Italy, listed companies have been required to change their auditor after nine years of engagement since 1975, where the auditor is subjected to three years re-appointment. In addition, a three-year cooling off period is imposed on audit firms before they can be re-elected after the maximum engagement period. Similarly, a maximum of five-year and six-year audit engagements were imposed on Brazilian (effective from May 1999) and Austrian (effective from 2004) companies respectively. The companies are required to rotate their audit firms after the maximum number of years, and audit firms have to wait (i.e. undertake a cooling off period) for three years in Brazil and one year in Austria before re-election. On the other hand, Singaporean regulators imposed a maximum of five years of engagement before the auditors of banks must be rotated (effective from March 2002). The Singapore Stock Exchange (SSE) also requires audit firms to rotate audit partners-in-charge of non-banks auditors every five years. The other industries are still allowed to continue their existing audit engagement practices. 1 This section partly benefits from the work of GAO (2003b) and ICAEW (2002) on mandatory audit firm rotation. 4 The GAO (2003) reported that the Italian securities regulator (Commissione Nazionale per le Societa e la Borsa (CONSOB)) claimed that Italy has had good experience with the mandatory audit firm rotation rule and pointed out that the rule provides the appearance of independence. However, the disadvantage is that listed companies impose fee pressure on audit firms, leading to audit fee reduction. The Brazilian regulators believed that the adoption of mandatory audit firm rotation would enhance audit supervision, and consider that the rotation of audit firms is better than the rotation of audit partners (GAO, 2003). Similarly, Austrian regulators anticipate that the rule will enhance audit quality and auditor independence. Singaporean regulators consider that the rotation of audit firms will enhance auditor independence and prevent public accounting firms from building long-term commercial relationships with the banks they audit, to protect the professionalism of audit firms from the risk of compromising their objectivity and bring a fresh perspective to the audit process (GAO, 2003). On the other hand, the UK, France, the Netherlands, Japan, Germany and Malaysia have adopted the rotation of audit partners approach. The UK, the Netherlands and Malaysia require partner rotation every five years, while the corresponding period is six years for audit partners in France and Germany, and seven years for Japan. The Coordinating Group on Audit and Accounting Issues in the UK did not support the idea of mandatory rotation of audit firms due to the possibility of negative effects on audit quality and effectiveness in the first years after rotation. The following are the weaknesses of mandatory audit firm rotation identified in literature: rotation costs would be significant, lack of knowledge of the client by incoming auditors, a lack of strong evidence of a positive effect on audit quality, collusive behaviour among large audit firms, lack of investment in new audit technology, inadequate audit firms for rotation, lack of investment in people to perform audits, lost of cumulative knowledge by outgoing auditors, and competitive implications of such a requirement (Arrunada and Paz-Ares, 1997; GAO, 2003; ICAEW, 2002). Finally, Spanish regulators withdrew the requirement of mandatory audit firm rotation in 1995. Initially, mandatory audit firm rotation had been imposed in 1989 with the aim to enhance auditors’ independence and to promote fair competition. As a result of the withdrawal, Spain’s “Company Law” and “Audit Law” were amended to allow companies to engage the same auditor on an annual basis. The drawback of the former system was that training costs to educate new audit teams had significantly increased (GAO, 2003). The Spanish “Audit Law” was amended in November 2002 to require audit engagement team members (including audit partners, managers, supervisors, and junior staff) to rotate every seven years in certain types of companies, including all listed companies, companies subject to public supervision, and companies with annual revenues over 30 million euros. 5 3.0 Methodology To achieve the research objective, this study was undertaken in two stages. The first stage involved the use of a postal questionnaire to seek a broad picture on the issues of the impact of auditor appointment by regulatory body, audit firms and partners rotation to auditor independence from three different respondent groups, namely auditors, loan officers and senior managers of public listed companies. The second stage entailed a series of interviews with senior managers of audit firms, banks and publicly listed companies aimed at obtaining more precise understanding of the issues concerning the impact of the abovementioned issues to auditor independence. Previous research on auditor appointment and auditor rotation issues has contributed to the development of the following research questions: (1) What are the perceptions of senior managers regarding the impact of auditor rotation on auditor independence, and (2) what are the perceptions of senior managers regarding the impact on auditor independence when auditors are appointed and allocated to companies by a regulatory authority? As the core research question of this study relates to auditors’, loan officers’ and corporate managements’ opinions of the impact of auditor appointment and auditor rotation to auditor independence, the most appropriate approach was to solicit their perceptions directly. The postal questionnaire is the main research tool utilised in this study, and the selection of this tool was based on the appropriateness of the technique to the research question. It is an effective tool to seek opinions, attitudes and descriptions about auditor independence issues as well as assessing cause-and-effect relationships (Ghauri and Gronhaug, 2002, p. 93). In this context, Beattie and Fearnley (1998, p. 263) pointed out that the behavioural and qualitative technique is important to clarify theories in accounting research because it is able to give “new insight on the ‘relationships approach’ of audit services, which statistical models and economic theory failed to rationalise the cause of certain events”. They further noted that the “economic-based framework can be expected to provide only a partial explanation…on the issue of interest” (p. 263). Gwilliam (1987) pointed out that the concept of auditor independence is “difficult to define in absolute terms” and its interpretation changes over time; thus, the use of questionnaires to gather the current perceptions on auditor independence held by various interest groups could be a “more pragmatic approach” (p. 92). Beattie and Fearnley (1998, p. 264) concurred with this: “the use of the questionnaire approach provides richer insights than is possible using secondary data analyses, which focuses on economic factors, since the questionnaire instrument includes both economic and behavioural factors.” The questionnaire was comprehensively tested with the intent to improve and enrich its quality, and hence to make sure that it was applicable to the current level of practices in Malaysia in order to generate a maximum response rate. Prior to actual distribution to auditors, loan officers and senior managers of public listed companies, a series of pilot studies were undertaken and the comments received were found to be useful and were incorporated into the draft questionnaire. The population selected for the current study consists of auditors, loan officers and senior managers of Malaysian public listed companies. These groups were identified based on prior literature that classified them as the key players in the audit 6 market (FCCG, 1999). Auditors were selected because they are the main subjects of the issue of interest that provide certification and/or information credibility assessment to the stakeholders (Humphrey, 1997). Furthermore, Flint (1988, p. 76) pointed that the person to whom the audit reports is addressed and the person that are subjected to audit have a direct interest in the audit outcome. Gul (1991, p. 165) argued that bank officers are relatively sophisticated financial statement users who could be expected to understand the importance of auditor independence. Finally, the manager is the agent of the principal, who conducts business on behalf of the principal and, hence, requires a monitoring mechanism (i.e. an auditor) to report on their performance (see Jensen and Meckling, 1976), and on this basis, senior managers’ perceptions of auditor independence are valuable to this study. The total questionnaires distributed and responded are reported in Table 1, where 31%, 44% and 36% of the questionnaires were returned from auditors, loan officers and senior managers of public listed companies respectively. TABLE 1 ABOUT HERE An analysis was carried out of the designation of the respondents and details of the findings are tabulated in Table 2. The majority of the respondents hold a high rank in their respective organisations: 46% of the auditors who responded are in the position of line manager, while 47% and 43% of the loan officer and corporate management groups respectively come from senior managers, the remainder being the first line of management and the chief executives of the respective organisations. This result indicates that the majority of the respondents are, for the most part, responsible for the auditing, accounting and finance function. The seniority of the respondents provides strong support for the belief that the responses will give an authoritative source of information on the issues of interest. TABLE 2 ABOUT HERE Finally, the respondents were also asked to provide their length of experience in their particular function. It can be seen in Table 3 that more than 80% of the respondents had more than 5 years’ experience in their respective functions. The length of service indicates whether the respondents are well versed with their job functions and subsequently keep informed with the changes in the accounting and auditing profession. The possibility of occurrence of non-response bias arises when some of the survey sample failed to return the questionnaire and the data may consequently turn out to be invalid 2 . Hence, in order to ensure the reliability and validity of the data, an attempt to diagnose the presence of non-response bias is essential (see Bartlett and Chandler, 1997; Mallin and Ow-Yong, 1998). Based on the technique recommended by Oppenheim (1966) and Wallace and Mellor (1988), the first 20 questionnaires were compared with the last 20 questionnaires. The Mann-Whitney test was employed as a statistical tool to investigate the differences. It was found that there was no 2 It is well recognised in the literature that responses to mail questionnaires are generally poor, and it is a common phenomenon to see return percentages as low as between 30 to 50% (Wallace and Mellor, 1988, p. 132). 7 significant difference between the 20 early and 20 late responses, implying the absence of non-response bias. Another source of bias in survey-type studies is self-selection bias (Eysenbach and Wyatt, 2002; Oppenheim, 1992; Whitehead, 1991) 3 . The bias might arise from the fact that “people are more likely to respond to a questionnaire if they see items which interest them” (Eysenbach and Wyatt, 2002) and “they may try to ‘respond’ extra- well” (Oppenheim, 1992, p.30) to the questions. Indeed, self-selection bias is a result of a pre-existing interest factor, and it is more serious than the non-representative nature of the population due to the existence of many unknown factors (Eysenbach and Wyatt, 2002; Oppenheim, 1992). It may be that the people who responded to the questionnaires have dissimilar characteristics to those who did not reply. Although no specific approach to identify self-selection bias has been documented, this study employed two techniques. First, two groups of control and experimental respondents were developed (Oppenheim, 1992). The control group consisted of respondents with more than 10 years’ experience, while the experimental group comprised of respondents with less than 10 years’ experience. Using the Mann- Whitney test, responses from both groups of respondents from all three classifications (i.e. auditors, loan officers and senior managers of public listed companies) were examined, and it was found that the distribution of responses of the two groups in all respondent classifications was not significantly different, indicating that the effect of self-selection response bias was minimal or non-existent. Second, since this study employed both questionnaire and interview survey approaches, the results of interview survey tend to confirm the questionnaire survey in all variables examined. The consistency of responses in both approaches indicates minimal or non-existent self-selection response bias. As mentioned earlier, the second stage of data collection involved the used of interview survey. The aim of the interview survey was to further elaborate the issues raised in the postal survey and to investigate the underlying reasons behind the answers given. Based on the nature of the questionnaire used in this study (i.e. closed- ended), it is important to probe what is happening and to seek new insights (Robson, 1993, p. 42) or get further explanation, which is limited in the postal questionnaire survey approach. In addition, interviewees’ own behaviour or that of others, attitudes, norms, beliefs, and values (Bryman, 2001, p. 106) on auditor independence issues could be gathered in a more comprehensive way and not limited to restrictive agreement levels, as in the questionnaire. A detailed analysis of the period of employment of the respondents participating in the interview stage is provided in Table 3. TABLE 3 ABOUT HERE Table 3 above shows the period of employment of interviewees that participate in this stage of the research. The vast majority of the interviewees had more than 5 years of experience. Only 8%, 6% and 29% of the auditors, loan officers and regulators respectively had less than 5 years of experience, and none of the senior 3 Oppenheim (1992, p.30) termed this phenomenon as ‘volunteer bias’. 8 managers of public listed companies with that length of experience participated in the study. Hence, with such a long period of experience in their respective functions, the opinions provided by interviewees can be considered authoritative, and consequently can be generalised to the whole population. 4.0 Results and Discussion This section is divided into three sub-sections, where sub-section 4.1 outlines the results of the examination of respondent’s perceptions on auditor appointment by regulatory body. Sub-section 4.2 provides results and discussion on rotation of audit firms and sub-section 4.3 reports research findings of rotation of audit partners. 4.1 Auditor Appointment It was stated in the literature review that the threat to auditor independence might arise from the management’s involvement in process of selection and appointment of an auditor by the board of directors. The respondents were asked to indicate their views on the impact on auditor independence when Malaysian regulatory authority was to allocate audit clients. It was found that the vast majority of the loan officers (98%) and senior managers of public listed companies (94%) agreed with the statement that auditor independence would be threatened if the Malaysian regulatory authority were to allocate audit clients to audit firms; however, lower level of agreement from the auditors (72%) was observed, as shown in Table 4. The respondents’ responses might reflect their concern about the effectiveness of the regulatory authority in appointing auditors. This result might be a sign of the respondents’ belief in the free market system, within which clients should determine their own auditors. The significant difference in responses might reflect the concern of a minority of auditor respondents about the potential drawback of companies’ management holding the effective power to appoint auditors. The board of directors could perhaps use their position to put some form of pressure or influence on auditor reporting strategies or in conflict situations. This finding does not support the suggestion made by Moizer (1997) and Simon (1980). As discussed in Section 2 above, auditor independence could be threatened when the client’s management appoint the auditor. Thus, it was suggested that the government, through a regulatory authority, should appoint auditors instead of this responsibility being held by management (Simon, 1980). The majority of the loan officers (76%) and senior managers of public listed companies (82%), and all of the auditors interviewed indicated that auditor independence would be threatened if the mandate to appoint auditors were given to the regulatory authority. This result confirms the questionnaire survey findings. The interviews disclosed that the current practice should be continued and shareholders shouldn’t give mandate to the board of directors to appoint auditors; instead, they should play greater role in the annual general meetings to appoint the auditor and determine the level of auditor remuneration. In fact, the Malaysian regulators should increase their efforts to educate shareholders and the general public on their rights. Investors/shareholders should exercise their rights effectively and efficiently, especially in questioning the management during the annual general meeting. Regarding the shareholder’s role, a chief internal auditor of a top public listed company remarked: 9 [...]... affairs as and when the self-regulation system has failed to monitor the profession (see Chandler, 1991) 10 4.2 Rotation of Audit Firms Following the well-documented audit failures, regulators worldwide (including those in Malaysia) are considering the possibility of adopting mandatory auditor rotation rules The respondents were asked to indicate their views on issues relating to auditor rotation and the... trustees and the auditor , Journal of Accounting and Public Policy, vol 21, pp 9 7-1 03 American Institute of Certified Public Accountants (AICPA) (1978), Commission on Auditor s Responsibility (Cohen Commission) Reports, Conclusions, and Recommendations New York, NY: AICPA Arrunada, B and Paz-Ares, C (1997), ‘Mandatory rotation of company auditors: a critical examination’, International Review of Law and. .. that rotation of audit partners would safeguard auditor independence Indeed, the loan officers and senior managers of public listed companies showed consistent views about both types of rotation, and this might suggest that the type of rotation is not the main concern to them, and perhaps that the most important issue is the existence of mechanisms to safeguard auditor independence On the other hand,... business and industry Mandatory rotation would expose inexperienced auditors to such risk Interview survey reveals that the majority of the loan officers and senior managers of public listed companies indicated that rotation of audit firms would safeguard auditor independence; however, the majority of the auditors and senior managers of regulatory bodies did not support this view The proponents of the rotation. .. Report No GAO-0 4-2 16, [WWW] [accessed 01st October 2003] 18 Ghauri, P and Gronhaug, K (2002), Research methods in business studies: A practical guide, Essex: Pearson Education Limited Ghosh, A and Moon, D (2005) , Auditor tenure and perceptions of audit quality’, The Accounting Review, vol 80, no 2, pp 58 5-6 12 Gietzmann, M B and P K Sen (2002), ‘Improving auditor independence. .. Better to have one auditor that understands us Also, the interviews revealed that the system is not fair to both parties, i.e the management and auditor On the one hand, the auditor needs to invest a huge amount of money to make sure adequate resources are available for the new audit, and on the other hand, the client needs to give more time to educate the auditor about the business and industry The... 13 1-1 37 Shockley, R A (1981), ‘Perceptions of auditors’ independence: an empirical analysis’, The Accounting Review, vol 56, no 4, pp 78 5-8 00 Simon, E B (1980), ‘Can the auditor be truly independent?’ Accountancy (UK), Vol 91, No 1042, pp 10 4-1 06 Teoh, H Y and Lim, C C (1996), ‘An empirical study of the effects of audit committees, disclosure of nonaudit fees, and other issues on audit independence: Malaysian... both of these respondent groups and indicated that such an initiative would threaten independence It is possible that auditors with long audit tenures could develop cosy relationships with their clients, which may be seen as a risk factor for auditors compromising their independence Perhaps, when rotation of audit firms is in place, auditors may exercise their independence and will not be afraid to upset... effective audit, and mandatory rotation will expose inexperienced auditors to the risks associated with non-familiarity As discussed in Section 2 above, the proponents of mandatory rotation indicated that it would improve audit quality, enhance auditor objectivity and provide a ‘fresh look’ at clients’ financial statements It may be the case that the responses from the loan officers and senior managers of... 1996) In interview survey, the majority of auditors (61%) interviewed indicated that rotation of audit firms would threaten auditor independence However, the majority of the loan officers (59%) and senior managers of public listed companies (53%) interviewed indicated that the rotation of audit firm would safeguard auditor independence The interviews disclosed that rotation of audit firms would involve . Keywords: Appointment, Rotation of Firms, and Rotation of Partners, Independence, Malaysia, and Conflict of Interest AUDITOR APPOINTMENT, ROTATION AND INDEPENDENCE: SOME EVIDENCE FROM MALAYSIA. AUDITOR APPOINTMENT, ROTATION AND INDEPENDENCE: SOME EVIDENCE FROM MALAYSIA Dr. Zulkarnain Muhamad Sori and Dr. Yusuf Karbhari Abstract The aim. the impact to auditor independence if the mandate to appoint auditor to regulatory body and exist auditor rotation scheme. This study sampled Malaysian auditors, loan officers and senior managers