goodwin and seow - 2002 -the influence of cg mechanisms on the quality of financial reporting and auditing in singapore

Accounting and Finance 42 (2002) 195–223 © AAANZ, 2002. Published by Blackwell Publishing. Blackwell Publishing, LtdOxford, UKACFIAccounting and Finance0810-5391© The Accounting Association of Australia and New Zeland, 2002423November 2002016???ORIGINAL ARTICLEGraphicraft Limited, Hong Kong The influence of corporate governance mechanisms on the quality of financial reporting and auditing: Perceptions of auditors and directors in Singapore Jenny Goodwin a , Jean Lin Seow b a The University of Queensland Business School, Queensland 4072, Australia b Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore, 639798 Abstract This study uses two hypothetical cases to examine the perceptions of auditors and directors in Singapore about corporate governance practices relating to the quality of financial reporting and auditing. In the first case, the strength of the audit committee, the existence of an internal audit function and the strength of a corporate code of conduct were manipulated. All three variables were perceived to have some influence on financial reporting and audit quality. However, some interesting differences were found between the perceptions of auditors and directors. Auditors place more weight on the internal audit function, possibly due to their familiarity with the role that internal audit can play in reducing audit risk and enhancing controls. Directors have more confidence in board enforcement of a strong code of conduct, possibly reflecting the view that this encourages staff to adhere to higher ethical standards. In the second case, audit partner rotation, outsourcing of internal audit services and whether the audit firm audited all companies within a group were manipulated. Auditors believed that their ability to resist management pressure was enhanced when they audited all companies within the group. No significant differences were found for the other variables, suggesting that neither group believes that these practices impair audit independence. Key words: Corporate governance; Financial reporting quality; Audit quality; Audit independence JEL classification: M40; G34 The authors acknowledge the helpful comments of two anonymous reviewers, Margaret Abernethy, Allen Craswell, Terry O’Keefe, Donald Stokes, and participants at the One-Day Symposium on Accountability and Performance in the New Millenium, Brisbane, Australia, February 2000, the 23 rd Annual Congress of the European Accounting Association, Munich, Germany, March 2000 and the British Accounting Association Annual Conference 2000, Ex- eter, England, April 2000. 196 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 © AAANZ, 2002 1. Introduction There has been considerable debate in recent times concerning the need for strong corporate governance (McConomy and Bujaki, 2000), with countries around the world drawing up guidelines and codes of practice to strengthen governance (Cadbury, 1997). The underlying reason for this emphasis lies in concerns over the integrity of securities markets (Millstein, 1999). Sound governance by boards of directors is recognised to influence the quality of financial reporting, which in turn has an important impact on investor confidence (Levitt, (1998 and 2000a). Strong governance should reduce the adverse effects of earnings management as well as reduce the likelihood of misstatements arising from fraud or errors (Beasley, 1996; Dechow et al., 1996; McMullan, 1996). Traditionally, the external auditor has also played an important role in improving the credibility of financial information (Mautz and Sharaf, 1961; Wallace, 1980). A high quality audit is generally regarded as one where the auditor both discovers misstatements (discovery) and is willing to report those misstatements (independence) (DeAngelo, 1981a and 1981b; O’Keefe and Westort, 1992). However, considerable criticism has been directed at the audit profession for failing in both of these aspects (Knutson, 1994; Rabinowitz, 1996). The profession has been proactive in attempting to improve audit quality by issuing standards focused on discovery and independence. For example, in the United States (US), greater responsibility for the discovery of fraud has been placed on the auditor by the issue of SAS no. 82. Independence has received the attention not only of the profession but also regulators and stock exchanges around the world. Levitt’s (1998 and 2000a) criticisms of the failure of the auditing profession in the US to curb excessive earnings management, together with the Security and Exchange Commission’s attempts to regulate audit independence have been well publicised. As a result, there has been a concerted effort to devise ways of enhancing independence (SEC, 2000; Independence Standards Board, 2000). The profession has also responded to criticisms on audit quality by emphasis- ing that, by its nature, the inherent limitations of an audit make it impossible to eliminate the risk of audit failure (Ricchiute, 1998; IFAC, 1994a). Furthermore, it is stressed that it is primarily the responsibility of the client to both prevent and detect the occurrence of fraud, errors or other irregularities in the financial statements (IFAC, 1994b). This responsibility can be met by putting into place a strong system of corporate governance (Bishop et al., 2000; Rabinowitz, 1996). In recognition of this, regulators and professional bodies have imposed requirements or made recommendations concerning board structure, audit committees and internal controls (Blue Ribbon Committee, 1999; Committee on Corporate Governance, 2001). The effect of sound governance practices on the quality of financial reporting has recently received attention from researchers, particularly in the US (McMullen, Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 197 © AAANZ, 2002 1996; Beasley, 1996; Beasley et al., 2000; Abbott et al., 2000). The main focus of these studies has been the relation between audit committees and fraudulent financial reporting, with results generally supporting a negative relation between an active audit committee and the likelihood of a company being cited for fraudulent reporting. While these results provide evidence from a strong and sophisticated capital market environment, very little research has been conducted in countries where capital markets are less developed and where governance mechanisms are still evolving. However, sound corporate governance practices are equally, if not more, important in countries that are attempting to gain credibility among global investors. This is particularly so in South East Asia as the region attempts to regain investor confidence following the financial crisis of the late 1990s. This paper addresses the scarcity of research in this environment by explor- ing governance issues relating to the quality of financial reporting and auditing in Singapore. In spite of its size, Singapore plays an important role in setting standards of corporate governance in the South East Asia/Oceania region. Not only was it one of the first countries to legislate that all listed companies must have an audit committee, but as part of a government-led drive to become the dominant regional financial centre, there has been considerable emphasis on the need for sound governance (SES, 1996b; Ng, 1997; Goodwin and Seow, 1998 and 2000). This study thus enables investigation into the perceived incremental effectiveness of some of the governance mechanisms proposed by various global regimes within a regulatory framework that mandates a base level of corporate governance. In this study, we examine the perceptions of external auditors and directors concerning the impact of certain governance mechanisms on the prevention and detection of control weaknesses, financial statement errors and fraud. While this provides only an indirect measure of the effectiveness of these mechanisms, the findings reflect the considerable experience of these two groups. In any corporate governance regime, auditors and directors should have considerable influence over the accountability of management and the integrity of financial reporting. Directors are in a position to set the ‘tone from the top’ with regard to strong governance in their companies. External auditors, through their interactions with audit committees and client management, are able to influence their client’s strength of internal controls and integrity of financial reporting. Thus, identifying the perceptions of these two key constituents should enhance our understanding of the importance of corporate governance mechanisms. In addition, interesting comparisons can be made to highlight any differences in the view- points of these two parties in order to encourage further debate on what constitutes strong governance and where the balance of power/responsibility for corporate governance should lie. Directors and auditors of listed companies in Singapore participated in two experimental cases. In the first, the strength of the audit committee, the existence of an internal audit function and the strength of the company’s code of 198 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 © AAANZ, 2002 ethical conduct were varied. Participants were asked to indicate the extent to which they believed that these corporate governance mechanisms would enable the company both to prevent and to detect weaknesses in internal control, errors in the financial statements, management fraud and employee fraud. They were also asked to indicate the extent to which they believed that the same mechanisms would assist the company’s external auditors to perform their audit effectively and to resist pressure from management. In the second case, three pieces of information relating to the company’s external auditors were varied. These were audit partner rotation, outsourcing of internal audit services and whether the same audit firm audits all companies within the group. Participants were asked to indicate the extent to which they believed that the auditors would be able to resist pressure from management and also to detect weaknesses in internal control, material errors in the financial statements, and management and employee fraud material to the financial statements. The results of the study indicate that auditors and directors perceive that the existence of an internal audit function and strict enforcement of a corporate code of conduct have a significant impact on the company’s ability to strengthen controls, prevent and detect fraud and financial statement errors and enhance audit effectiveness. The results relating to a strong audit committee are mixed, with some impact on preventing and detecting financial statement errors, detecting management fraud and enhancing audit effectiveness. The study also finds some interesting differences between the perceptions of auditors and those of directors. Auditors place more weight on the internal audit function as a mechanism to detect weaknesses in controls and to prevent and detect fraud. This may be due to auditors’ greater familiarity with the role that internal audit can play in reducing audit risk. It may also be due to their preference for the presence of an internal audit function to enhance the internal controls in their audit clients. In contrast, directors have more confidence in a strongly enforced code of conduct as a means of detecting control weaknesses, financial statement errors and fraud. This finding may reflect directors’ beliefs that setting the tone from the top encourages staff to maintain high ethical standards, while auditors may have experienced a lack of commitment to codes of conduct (Cohen et al., 2000). The variables in the second case do not give rise to significant differences in the perceived ability of the auditor to detect control weaknesses and fraud. However, when the audit firm audits all companies in a group, participants perceive that auditors would be more able to resist pressure from management. Auditors also appear to have more confidence than directors in their ability to detect errors in financial statements. The remainder of the paper is structured as follows. The next section provides the background to the study while the third section outlines the research questions addressed. The fourth section summarises the research methods used, while the results are reported and discussed in the fifth section. In the final section, some conclusions are drawn, the limitations of the study are noted, and the implications of the findings and further research opportunities are discussed. Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 199 © AAANZ, 2002 2. Background As with any experimental design, the number of variables that we can examine is constrained by many interacting factors such as model complexity, the length of the research instrument and the likely response rate. From the numerous checks and balances that have been suggested, we selected three client-related mechanisms that could influence the quality of the external audit and hence the quality of the financial statements. We also selected three mechanisms relating to the external auditor which could affect audit quality and independence. Our selection was based on a review of the relevant literature, the results of an earlier survey of investors, auditors and directors (Goodwin and Seow, 2000) and the listing requirements of the Stock Exchange of Singapore (SES, 1998). 1 The independent variables investigated in our study are of particular interest as prior research into these variables has produced mixed results. 2.1. Client-related mechanisms 2.1.1. The strength of the audit committee All listed companies in Singapore must have an audit committee, comprising at least three members, the majority of whom must not be executive directors (Companies Act, 1994). The literature suggests that an effective audit committee should play an important role in strengthening the financial controls of an entity (Collier, 1993; English, 1994; Vinten and Lee, 1993). A number of studies have found that companies with an audit committee, particularly when that committee is active and independent, are less likely to experience fraud (Beasley et al., 2000; Abbott et al., 2000; McMullen, 1996) and other reporting irregularities (McMullen, 1996; McMullen and Raghunandan, 1996). Findings also suggest that audit committees are effective in reducing the incidence of earnings management that may result in misleading financial statements (Defond and Jiambalvo, 1991; Dechow et al., 1996; Peasnell et al., 2000). Further, they should enhance the effectiveness of both internal and external auditors (Simnett et al., 1993). However, Cohen et al. (2000) report that a number of audit practitioners involved in exploratory interviews expressed concern over the effectiveness of audit committees, with some partners suggesting that audit committees are not powerful enough to resolve conflicts with management. It is generally agreed that, for an audit committee to be effective, a majority if not all members should be independent (Cadbury, 1992) and they should have 1 The SES was combined with the Singapore International Monetary Exchange in December 1999 and a new company, the Singapore Exchange Ltd (SGX), was formed. The Listing Manual is now known as the SGX-ST Listing Manual. Because this research was under- taken prior to December 1999, our references are made to the SES. 200 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 © AAANZ, 2002 an understanding of accounting, auditing and control issues (Cohen et al., 2000; Goodwin and Seow, 2000; Hughes, 1999; Lear, 1998). Further, the committee should meet regularly (Collier, 1993; Hughes, 1999) and strong channels of communication should exist with both the external and internal auditors (Cadbury, 1992; Deloitte and Touche, 1998). Goodwin and Seow (2000) found that investors, auditors and directors all believe that a strong effective audit committee assists external auditors to perform the audit. 2.1.2. Internal audit While there is no mandatory requirement in Singapore for listed companies to have their own internal audit function, the benefits of such a function have been noted by the SES (1996b). Furthermore, various corporate governance committees have recommended that companies should establish an internal audit function (Cadbury, 1992; COSO Report, 1992; Committee on Corporate Governance, 2001). Only a few studies have examined the benefits of internal audit and results have been mixed. Beasley et al. (2000) report that companies which experience fraud are less likely to have an internal audit function. Cohen et al. (2000) found that 90 per cent of their respondents indicated that internal audit could affect corporate governance but concern was expressed over the strength of many internal audit departments. In Singapore, while Goodwin and Seow (2000) found both investors and auditors strongly in favour of an internal audit function, the results of a survey conducted by Goodwin et al. (1998) indicated that many companies listed on the SES did not have their own internal audit function. 2.1.3. Corporate code of conduct Cadbury (1992) recommends that the board of directors should draw up a code of ethics or a statement of business practice to be published both inter- nally and externally. Research findings in the US indicate that corporate codes of ethics, accompanied by training and monitoring programs, have an impact on employee behaviour (Pickard, 1995). There is also evidence that companies that disclose in their annual report a commitment to ethical behaviour or compliance with their code of conduct outperform those companies without such disclos- ures (Stoffman, 1991; Verschoor, 1997 and 1998). The Working Group on Corporate Practices and Conduct (1993) in Australia argues that a code of ethical conduct should enhance the company’s reputation for fair trading and help to maintain high standards of behaviour throughout the organisation. It should also give employees a clear idea of the company’s goals, help to develop pride among staff and give a focus to the organisation as a whole (Hicks, 1999). Merely having in place a code of conduct is not, however, considered to be sufficient (Howard, 1996). Cohen et al. (2000) report that their interviewees Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 201 © AAANZ, 2002 felt that, as such codes are generally given only superficial attention, they have limited effect on reducing the potential for misstatements and fraud. To be effective, codes must be communicated throughout the organisation and be enforced by management (Brooks, 1992; McNamee, 1992). Further, the board of directors needs to ensure that checks are performed to ensure that corporate values are adhered to (Howard, 1996). Goodwin and Seow (2000) found strong support for a formal corporate code of ethical conduct to which staff should adhere. How- ever, there has been very little empirical research into the effectiveness of a strongly enforced code of conduct as a corporate governance mechanism. 2.2. Auditor-related mechanisms 2.2.1. Rotation of audit partner Mandatory rotation of audit firms has been suggested as a means of enhancing auditor independence (Brody and Moscove, 1998). However, considerable concern has been raised about the adverse effects of such a requirement, particularly on audit quality and audit fees (AICPA, 1978, 1992; Cadbury, 1992; Arrunada and Paz, 1997). As the AICPA (1992) argues, problem audits are more likely to occur when the auditor lacks a sound understanding of the client’s business, operations and systems. As a result of these concerns, a within-firm rotation has been recommended, involving a periodic change of partners in charge of an audit (Cadbury, 1992; Wendell et al., 1998). In Singapore, the SES (1998) requires 2 that auditors of listed companies practise partner rotation at least once every five years. However, Goodwin and Seow (2000) found mixed support for partner rotation amongst auditors and the effectiveness of this practice has not been tested empirically. 2.2.2. The provision of internal audit services to the audit client The impact on audit independence of the provision of other services to an audit client has been the subject of intense debate (Briloff, 1987; Cadbury, 1992; Pany and Reckers, 1988; Wallman, 1996; Levitt, 2000b). Wallman (1996) sees a positive impact on audit quality resulting from the more in-depth understanding of the client obtained by providing other services. He argues that staff who provide internal audit services are more likely to communicate problems to the auditor if they are employees of the audit firm, ‘thereby reducing the possib- ility of investor losses caused by fraud’ (Wallman, 1996, p.87). However, others are concerned that issues such as fee dependency and an involvement in management decision making could lead to a compromise of 2 This requirement remains in force as part of the SGX-ST Listing Manual (2000). 202 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 © AAANZ, 2002 audit independence (Briloff, 1987; Gul, 1991; Knapp, 1985). Acciani (1995, p.50) argues that, when internal audit services are provided by the external auditor, ‘the common checks and balances that exist between internal and external auditors’ are eliminated, thereby compromising external auditor independence and increasing the risk of unreported control weaknesses and fraud. In an empirical study, Lowe et al. (1999) found that loan officers’ perceptions of audit independence and financial statement reliability were adversely affected when the external auditor assumed management responsibilities with respect to internal audit. However, perceptions were favourable when the audit firm performed internal audit activities using personnel not involved in the external audit. Swanger and Chewning (2001) found that financial analysts’ perceptions of audit independence were lower when the external auditor performed internal audit services for the client compared to when another audit firm performed those services or when the client employed its own internal audit staff. They also found, however, that perceptions of independence were higher when different staff of the audit firm performed internal audit services for the client compared to when the same staff provided those services. The recent ruling by the SEC (2000) allows an audit firm to perform no more than 40 per cent of a client’s internal audit work. It also stresses that the auditor must not engage in management decision making with respect to internal audit work performed for a client. 2.2.3. Auditing all companies within a group The SES (1996a) argues that, if different audit firms audit different companies within a listed group, the auditors of the group may not obtain ‘an accurate and comprehensive view of the entire group’s affairs’ (para.5.2). It is therefore suggested that the same auditor audit all companies in the group to help to prevent frauds by directors and managers of listed companies. However, in recognition of the difficulties that could occur if such a requirement was mandated for all subsidiaries and associate companies both in and outside of Singapore, the SES (1998) recommends 3 that the same audit firm should be appointed to audit the parent company and its Singapore-based subsidiaries and associates. 4 Overseas subsidiaries and associated companies are required to be audited by a reputable accounting firm, although no guidance is given on how reputability should be evaluated. There is little discussion in the academic literature on the advantages or otherwise of the same audit firm auditing all companies within a group. 3 This requirement remains in force as part of the SGX-ST Listing Manual (2000). 4 Exceptions to this requirement are permitted if a listed company’s board and audit committee are satisfied that the standard and effectiveness of the audit will not be compromised. Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 203 © AAANZ, 2002 However, Moizer et al. (1986) discuss the possible conflicts of interest that can exist between primary and secondary auditors involved in the audit of a group of companies, and the potential for client management to play off one audit firm against the other. While Moizer et al. (1986) concentrate their discussion on the issue of audit fees and audit tenure, their arguments suggest that the client is more able to conceal important information from the auditor when the firm does not audit all companies in the group. Discovery of irregularities may therefore be more difficult. Jubb and Houghton (1999) further suggest that auditor-client relationships will be enhanced and audit efficiencies obtained when a common auditor audits all companies within a group. These arguments imply that the transaction costs to the client associated with replac- ing the auditor are likely to be greater when a single audit firm audits all companies within the group. Emby and Davidson (1997) also suggest that when transaction costs are high, the auditor has more power to resist management pressure. They find empirical support for the argument that parent company auditors have greater power to resist pressure from management of other companies within the group because of their relationship with the controlling entity’s management. This suggests that audit independence can be enhanced when the audit firm audits all companies in the group but no empirical studies have addressed this. 3. Research questions The following research questions are addressed in the study: RQ1: Are auditors’ and directors’ perceptions of a company’s ability to prevent and detect control weaknesses, fraud and errors in the financial statements influenced by: (a) the strength of the audit committee (b) the existence of a strong internal audit function (c) board enforcement of a strict code of ethical conduct for employees? RQ2: Are auditors’ and directors’ perceptions of the ability of a company’s external auditors to perform the annual audit effectively and to resist pressure from management influenced by: (a) the strength of the audit committee (b) the existence of a strong internal audit function (c) board enforcement of a strict code of ethical conduct for employees? RQ3: Are auditors’ and directors’ perceptions of the ability of a company’s external auditors to detect control weaknesses, fraud and errors affecting the financial statements influenced by: 204 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 © AAANZ, 2002 (a) rotation of the audit partner in charge of the audit (b) the provision of internal audit services by the external auditors (c) whether the audit firm audits all companies within the group? RQ4: Are auditors’ and directors’ perceptions of the ability of a company’s external auditors to resist pressure from management in the event of a dispute influenced by: (a) rotation of the audit partner in charge of the audit (b) the provision of internal audit services by the external auditors (c) whether the audit firm audits all companies within the group? 4. Research methods To answer the research questions, participants were asked to role-play as ‘director’ or ‘auditor’ on a review committee focused on corporate governance issues. This design was used because it simulates the typical approach taken by the Singapore government when addressing important issues per- taining to the business community. Review committees have been established comprising representatives from various interest groups to put forward the views of that group on such matters as the corporate regulatory framework, disclosure standards and corporate governance. 5 Thus, asking participants to role-play as members of a committee was designed to add realism to the experiment and encourage participants to take the tasks more seriously. To help ensure that respondents focused on their respective roles as directors or auditors, a separate covering letter was used for each group. The letter to directors stressed that we were concerned with issues that directors considered important for strong corporate governance and the covering letter to auditors stressed that we were concerned with issues that auditors considered important. 6 Participants were told to assume that, in order to assess the level of agree- ment on corporate governance issues, the chairman of the review committee 5 Committees of this nature were established by the Ministry of Finance together with the Monetary Authority of Singapore and the Attorney-General’s Chambers in 1999. 6 While it could be argued that participants were not reviewing the cases as directors and auditors per se but rather as members of a review committee, the study was framed to cap- ture their views as either directors or auditors. Furthermore, it can be argued that, even though role-playing, participants’ views would have been formulated from their individual experiences as either directors or auditors. [...]... between the two groups There are a number of other limitations which should be borne in mind when interpreting the findings of the study Some of the non-significant results relating to the audit committee may stem from the fact that, even in the weak condition, the audit committee still met the minimum criteria set down in the legislative and listing requirements of Singapore As a result, the manipulation of. .. Further investigation into the effectiveness of audit committees is needed in order to explain some of the inconclusive results of this study A more in- depth investigation of the variables in the second experimental case would be useful to determine whether there are indeed any benefits from imposing restrictions of this nature on external auditors Identification of the perceptions of other parties involved... services to the client In one condition, participants were advised that internal audit activities were provided by the internal audit division of the same audit firm while in the other condition, they were told that another international audit firm provided these services The final manipulation concerned the firm auditing all companies in the group In one condition, the firm audited all subsidiaries and associate... need to re-examine their requirements in these areas 6 Conclusion By examining the views of two groups who are heavily involved with corporate governance in Singapore, this study has provided insights into the perceived effectiveness of certain corporate governance mechanisms in enhancing both financial reporting and audit quality We have contributed to the literature in this area by focusing on mechanisms. .. strength of internal control or fraud prevention Both the existence of a strong internal audit function and a strongly enforced code of conduct are perceived to have a significant impact on the strength of internal controls, on fraud and error in financial statements and on audit effectiveness However, external auditors have © AAANZ, 2002 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223... fraud, the code of conduct variable is significant at the 05 level for both the prevention and detection of fraud, © AAANZ, 2002 214 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 while the internal audit variable is significant for the detection of fraud and marginally significant for the prevention of fraud (p = 073) The audit committee variable is not significant Tests of the interaction... Partner rotation in accordance with Singapore listing requirements would only be implemented in a few years’ time In the other condition, the firm had recently implemented partner rotation and the partner in charge had taken over the audit in the present year Prior to this, another partner had been in charge of the audit since the client was acquired The second variable involved the provision of internal audit... while the group variable is marginally significant at p = 071 Further tests of the interaction effect between code of conduct and respondent group again indicate that it is directors who believe that a strongly enforced code affects both the prevention and detection © AAANZ, 2002 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 213 Table 4 The extent to which the client-related mechanisms. .. versions in the second experimental case This resulted in 64 different versions of the instrument © AAANZ, 2002 206 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 executive director Only the executive director had any accounting or auditing expertise The committee met two or three times a year for the purpose of complying with statutory and listing requirements The second independent... reports the results of the ANOVA for the various dependent variables, showing the main effects and the significant first order interactions.17 Table 1 focuses on the prevention and detection of weaknesses in internal control Panel A shows that all mean responses are higher for the strong conditions compared to the weak conditions From Panel B it can be seen that the presence or absence of an internal . comparable to other studies involving directors in Singapore (Goodwin and Seow, 2000) and also in the U.S. (Hermanson, 2000). 208 Jenny Goodwin, Jean Lin Seow / Accounting and Finance 42 (2002) 195–223 ©. while in the other condition, they were told that another international audit firm provided these services. The final manipulation concerned the firm auditing all companies in the group. In one condition,. received the attention not only of the profession but also regulators and stock exchanges around the world. Levitt’s (1998 and 2000a) criticisms of the failure of the auditing profession in the US

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