Perceived audit quality, perceived audit fee, and auditor retention evidence from vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business TAN QUE ANH PERCEIVED AUDIT QUALITY, PERCEIVED AUDIT FEE, AND AUDITOR RETENTION: EVIDENCE FROM VIETNAM ID: 22110001 MASTER OF BUSINESS (Honours) SUPERVISOR: PHAM QUOC HUNG, Ph.D Ho Chi Minh City – Year 2014 ACKNOWLEGEMENTS First of all, I would like to express my appreciation to my supervisor, Dr Pham Quoc Hung for his enthusiastic instructions and supports I would like to acknowledge the comments from the ISB research committee on this thesis throughout the research process I am grateful for significant advice and comments from my colleagues and friends to revise the questionnaire I would like to thank all the respondents helping me complete the survey data collection Finally, I would like to give special thanks to my parents for supporting me all the time ABSTRACT The purpose of this research is to assess the impact of perception of audit customers in the aspects of quality and price on their decision to retain incumbent auditor A conceptual model was set up based on reviewing previous literature A survey was then conducted to collect data with respondents working at SMEs The final data with sample size of 145 was employed to implement data analysis The research found out a quite strong positive relationship between perceived audit quality and auditor retention, perceived audit fee and auditor retention Nevertheless, no association was found between perceived audit fee and perceived audit quality The significant finding is that all dimensions of audit quality were found to have positive impact on auditor retention, giving a good signal to the auditing market in particular, and the economy in general Key words: Perceived audit quality, perceived audit fee, auditor retention, SMEs, Viet Nam ABBREVIATIONS ASC: Accounting Service Company (Now known as AASC – Auditing and Accounting financial consultancy Service Company limited) CPA: Certified Public Accountant EFA: Exploratory factor analysis SMEs: Small and Medium-sized Enterprises VACO: Vietnam Auditing Company (Now known as Deloitte Vietnam Company limited) VACPA: Vietnam Association of Certified Public Accountants TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 GENERAL BACKGROUND 1.2 RESEARCH PROBLEM & RESEARCH QUESTIONS 1.3 SIGNIFICANCE OF THE RESEARCH 1.4 SCOPE OF THE RESEARCH 1.5 RESEARCH STRUCTURE CHAPTER 2: LITERATURE REVIEW AND HYPOTHESIS 2.1 LITERATURE REVIEW 2.1.1 Auditor retention 2.2.2 Perceived audit quality 2.2.3 Perceived audit fee 12 2.2 CONCEPTUAL MODEL 15 CHAPTER 3: RESEARCH METHOD 17 3.1 DATA NEEDS AND SOURCES 17 3.2 MEASUREMENT SCALE 17 3.3 SAMPLING 19 3.4 DATA COLLECTION METHOD 19 3.4.1 Preparation for data collection 19 3.4.1 Main survey 20 3.5 DATA ANALYSIS METHOD 21 CHAPTER 4: DATA ANALYSIS AND RESULTS 22 4.2 RELIABILITY AND FACTOR ANALYSIS 22 4.2.1 Reliability 22 4.2.2 Validity 24 4.3 TESTING HYPOTHESES 30 4.3.1 The relationship between perceived audit quality and auditor retention 30 4.3.2 The relationship between perceived audit fee and auditor retention 30 4.3.3 The relationship between perceived audit fee and perceived audit quality 31 4.4 MULTIPLE REGRESSION 32 4.4.1 Checking assumptions 32 4.4.1.1 Multicollinearity 32 4.4.1.2 Homoscedasticity 34 4.4.2 Checking conceptual model 35 4.5 SUMMARY FINDINGS 36 CHAPTER 5: DISCUSSIONs AND CONCLUSIONs 38 5.1 DISCUSSIONS AND IMPLICATIONS 38 5.2 LIMITATIONS 40 5.3 FUTURE RESEARCH 41 5.4 CONCLUSIONS 41 REFERENCE i Appendix iv Appendix vii Appendix x Appendix xi LIST OF TABLES Table 3.1: Audit quality measurement (apply SERQUAL model) 18 Table 3.2: Perceived audit fee and auditor retention measurement 18 Table 3.3: Sample description 21 Table 4.1: Cronbach's alpha 23 Table 4.2: KMO and Bartlett's Test for measures of independent variables 24 Table 4.3: KMO and Bartlett's Test for measures of dependent variable 24 Table 4.4: Rotated Component Matrixa 26 Table 4.5: Total Variance Explained 27 Table 4.6: Component Matrixa 28 Table 4.7: Total Variance Explained 28 Table 4.8: Correlations among the variables (Sig (2-tailed)) 29 Table 4.9: Correlation of auditor retention and perceived audit quality 30 Table 4.10: Correlation of auditor retention and perceived audit fee 31 Table 4.11: Correlation of perceived auit quality and perceived audit fee 31 Table 4.12: Correlations among the variables (Sig (1-tailed)) 33 Table 4.13: Coefficientsa 34 Table 4.14: ANOVAb 36 Table 4.15: Model Summaryb 36 Table 4.16: Summary findings 37 LIST OF FIGURES Figure 2.1: Conceptual model 16 Figure 4.1: Scatterplot 35 CHAPTER 1: INTRODUCTION This chapter will discuss the general background of the auditing market, research problems and research questions This is followed by the significance and scope of the research The research structure was also then presented The chapter starts with the general background of the auditing market that leads to objectives of this research 1.1 GENERAL BACKGROUND Along with the integration process and managerial requirements in practice by the Government, auditing industry in Vietnam is growing stronger and stronger, demonstrating its importance in the open economy From the two first auditing companies, VACO and ASC, established by the Ministry of Finance in May 1991, the report of VACPA (2013, p.1-2) shows that up to the late February 2013, there are 155 auditing firms in Vietnam having registered for practicing with 1,370 CPAs having registered for practicing in year 2013 Also according to this report, the total number of client firms in 2012 was 32,702, increased by 4.9% over 2011 (2013, p.3), still requires a greater supply of CPAs In other words, auditing market is still fertile Nevertheless, this attractive market is still the ‘catwalk’ of the big aged auditing firms, especially the ‘Big Four’ These four big auditing companies lead the market in terms of both quantity of clients and revenue (Doanhnhansaigon, 2013) For the big aged auditing enterprises with relatively stable amount of customers, open customer supply, the probability they fall into the situation bargaining for audit fee and competing with other competitors is less than the rest due to their advantages For instance, foreign-owned companies tend to employ foreign-owned auditing companies or member firms of foreign auditing companies The report of VACPA on reviewing work states out the situation of low audit fee for some audit contracts (2007, p.8) Audit fee is old-aged problem in auditing market since there is no clear standard to set up audit fee More importantly, according to Bui Van Mai, general secretary of VACPA, there is still no effective regulation to make the auditing market fairly competitive environment (Cafef) Thus, in tough economy like recently, when thousands of enterprises go bankruptcy, other enterprises that survive trying to cut cost becoming sensitive to audit fee, the price competition happening to retain or seek for customers gradually pushes general audit fee frame of the auditing to low level Accordingly, audit quality and prestigious of auditing profession in Vietnam are affected, while many local auditing firms still struggle for survive and develop in the local auditing market 1.2 RESEARCH PROBLEM & RESEARCH QUESTIONS From the state of auditing market in Viet Nam, local auditing firms, especially the small or fresh ones, struggles with the puzzle of audit fee and customers while having to keep the quality of the auditor’s report In such price competitive environment, even senior auditing enterprises have to be cautious while setting up audit fee for new clients, or asking greater audit fees in order not to lose major clients Nevertheless, audit fee is not the unique criterion for client firms to make decision to change or retain auditing firm Consequently, it is crucial for auditing firms to apprehend behavioral intentions of client firms using audit service There have been many researches in both developed and developing countries on behavioral intentions of customer in auditing market However, there has been very few specific research on the factors affecting decision of audit client firm to retain or change audit firm in Viet Nam, especially in the client firm’s point of view Hence, this research is to find out the impact of perception of customer firm on decision using audit service of incumbent audit firm in terms of both audit fee and audit quality in Viet Nam Accordingly, this paper helps answering following research questions: Does the perceived audit quality have impact on auditor retention? If question is yes, which dimension of audit quality has impact on auditor retention? expectation, they would ready to resign the incumbent audit firm Not as expected, though in tough economy, audit customers, even SMEs still rate the audit quality at high level criterion In which, reliability which means the ability that the audit team can perform the promised service is assessed as high rate The outside appearance with good facilities, equipment along with the attitude of caring, individualized attentions towards audit client also positively impact on their retention decision The difference in result between this research and previous researches as to all dimensions of audit quality having impact all auditor retention can be attributed to the SMEs in Viet Nam In practice, the audit fee in Viet Nam set by small auditing firms is not high While the financial statements audit services supplied by audit firms to audit client often include free consultant on some problems that SMEs face with Unlike the Big and some big audit firms in Viet Nam would charge more fees on non-audit services to clients This can be seen in the dimension of empathy in terms of individual attention It implies that the audit team might cover some obstacles of customers such as accounting record, or tax consultancy Besides, the audit team have to express their enthusiastic and willingness to help customers quickly and timely However, the perceived audit fee was found to have no relationship with perceived audit quality The result is not as expected, but not a surprise and hard to explain Audit clients those who are SMEs might perceive price and quality separately, not together As they assess the audit fee that is not acceptable compared to other provider for instance, this would lead them to their final decision, not through their perception of audit quality The finding that audit quality having impact on auditor retention in all dimensions is a good signal to auditing profession in particular and the economy in general In other words, small and medium enterprises gradually perceive the importance of audit quality Or they concern much about importance of financial statements, the premise for government to control better 39 To auditing firms, the result guided the dimensions that client firm actually assess the audit quality and lead to retention decision These are reliability, empathy & tangibles Specifically, client firms those who are SMEs, they need competent auditors knowing their needs, willing to help them And less importantly, the appearance of the audit team should look a little professional, and keep tasks timely, so that they could trust in This is necessary guidance for auditing firm to improve audit quality in client firm’s perception However, audit fee is still the strongest element for client firm Thus, this study suggested audit firms to improve audit quality in mentioned-above dimensions to compensate for a higher audit fee compared to other competitors This is the best way to strengthen auditing profession but also keep loyalty of and relationship with client firms 5.2 LIMITATIONS Firstly, this research limits the result for only audit clients those which are SMEs This is consistent with the real situation of small local auditing firms and also the intention of this thesis However, SMEs are not all customers in the market It exists the fact that there is a big difference in perception among the client groups such as between the small and medium-sized firms and large-sized ones, between the public-listed and non-public listed companies, between the local and foreign audit clients, etc Thus, this result may not perfectly be applied for auditing firms that the customers of those which are mostly large enterprises or auditing firms with varied customer group Another limitation is that this research applied scale measure for the dependent variable and test the impact of the factors directly on the auditor retention This measure is in line with previous researches while measuring behavioral intentions of customers Yet in practice, the decision of customers is simply ‘yes or no’ repurchase decision In other words, it can be applied the 40 dichotomous measure for the dependent variable Eggert & Ulaga (2002, 114-115) also suggested using the mediated impact model with affective variable, customer satisfaction, to check the relationship value Accordingly, by using the dichotomous measure variable and a mediating variable ‘customer satisfaction’ in the model, it may result in clearer view on the process how the perception of customers impacts on their satisfaction leading to their decision Lastly, this research faces the typical limitation in numerous prior studies pertaining to data collection method leading to self-report data (Butcher et al., 2013) This research gathered data answered by respondents coming from SMEs through the survey questionnaire Therefore, it is impossible to avoid this limitation 5.3 FUTURE RESEARCH Since there is still little researches in auditing market as to the simultaneous effect of the quality and price on retention decision, this subject would be attractive for further future research, especially in Viet Nam With the mentioned-above limitations, this research suggests for further researches investigating a wider and more sufficient research groups, and comparing the difference between the varied groups Besides, future researches may apply another data collection method, such as interviews, to conduct testing the model 5.4 CONCLUSIONS In this research, the writer provides an overview of perception of audit customers in aspects of quality and price, and the impact of these perceptions on auditor retention both separately and simultaneously Accordingly, both the quality and price in customer’s standpoint are found to have impact on retention decision In terms of audit quality, all the dimensions are found to be related to the retaining intention Besides, the association between the customer perception of quality and price is not found 41 The findings of the research give a good signal for the auditing market when stating that the SMEs gradually perceive the importance of audit work on financial statements expressed as audit quality and likely to consider audit quality as criteria to make decision However, this research is still subject to three dimensions These are the data collection method, the measure for dependent variable, and research subjects are SMEs For these limitation, and little studies in this area, this promises a fruitful further future researches in deep understanding the perception of varied customer groups on decision to retain incumbent audit firm 42 REFERENCE Birjandi, H et al (2013) The Relationship Between The Auditor And The Client And Its Impact on Audit Quality in Iran The Prudence Journal of Business Mangament Vol 1(2), pp 1320 Butcher, K et al (2013) Perceptions of Audit Service Quality and Auditor Rentention International Journal of 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Boston: Pearson Education Trasorras, R et al (2009) Value, Satisfaction, Loyalty and Retention in Professional Services Marketing Intelligence & Planning, Vol 27, No.5, 2009, pp 615 -632 Van Hang (Reporter) (2012, March 13) Most of The FDI Enterprises in Vietnam are smallsized ones Available from http://www.anninhthudo.vn/Kinh-doanh/Doanh-nghiep-nuocngoai-tai-Viet-Nam-da-phan-co-quy-mo-nho/439418.antd (In Vietnamese) Winer, R S (1986) A Reference Price Model of Brand Choice for Frequently Purchased Products Journal of consumer Research, 13, 250-256 Zeithaml, V.A (1988) Consumer Perceptions of Price, Quality, and Value: A Means-End Model and Synthesis of Evidence Journal of Marketing, 52(July), 2-22 iii APPENDIX QUESTIONNAIRE GENERAL INFORMATION Is your firm audited firm? a Yes b No Your firm's main activity area a Agriculture, forestry, and fishery b Industry and construction c Trading and service Total resources (Total assets) presented in your firm's balance sheet of 2012 a Below 10 billions VND b From 10 - 20 billions VND c From 20 -50 billions VND d From 50-100 billions VND e Over 100 billions VND Total employees of your firm in 2012 a Below 10 b From 10-50 c From 50-100 c From 100-200 e From 200-300 f Over 300 Your position a Director b Mananger c Chief accountant d Acountant e Other Did you interact with audit team in the audit of financial statements of 2012 a Yes b No iv ASSESSMENT OF INCUMBENT AUDIT FIRM IN 2012 Reliability: Reports prepared by my audit firm are easily understood by my organization The audit firm delivers services within a certain time frame as promised The audit firm is sympathetic and reassuring towards client's problems The audit firm is dependable in providing its/their services The audit firm has employees who are technically competent to perform the service Responsiveness: My audit firm provides timely services My audit firm provides prompt services Employees of my audit firm show willingness to help their clients My audit firm has proper documentation of the audit work performed 10 My organization is able to trust the employees of the audit firm Assurance 11 My organization experiences confidentiality on transactions with the employees of the audit firm 12 Employees of the audit firm are polite 13 Employees of the audit firm received adequate support from their organization to perform their task well 14 The services rendered by the audit firm commensurate with the fees charged Empathy 15 My audit firm provide my organization with individual attention 16 The employees of my audit firm not know the needs of my organization Strongly disagree Strongly agree → 7 1 2 3 4 5 6 7 Strongly disagree Strongly agree → 1 2 3 4 5 6 7 7 Strongly disagree Strongly agree → 1 2 3 4 5 6 7 7 Strongly disagree Strongly agree → 7 v 17 My audit firm does not have my organization's best interest at heart 18 My audit firm visit my organization at times convenient to us 19 My audit firm does inform my organization exactly when services will be performed Tangibles 20 The audit firm is equipped with the latest information technology 21 The physical facilities are visually appealing 22 The employees are well dressed and appear neat to show professionalism Perception of price 7 Strongly disagree Strongly agree → 1 2 3 4 5 6 7 Strongly disagree Strongly agree → 23 Audit fee compared to quality was acceptable 24 Audit fee compared to other companies was acceptable 25 Audit fee compared to expectations was acceptable Auditor retention 26 Next time we will buy again from our current supplier 27 In the foreseeable future we will consider our current supplier as part of our evoked set 28 We intend to continue the purchasing relationship with our supplier Strongly disagree Strongly agree → 7 vi APPENDIX BẢNG KHẢO SÁT (Mối quan hệ Chất lượng kiểm toán, phí kiểm toán định giữ lại công ty kiểm toán) PHẦN THÔNG TIN CHUNG: Doanh nghiệp Anh/Chị có bắt buộc phải kiểm toán hàng năm không a Có b Không Lĩnh vực hoạt động Doanh nghiệp Anh/Chị: a Nông, lâm nghiệp thủy sản b Công nghiệp xây dựng c Thương mại dịch vụ Tổng nguồn vốn (Tổng tài sản) thể bảng CĐKT năm 2012 Doanh nghiệp Anh/Chị: a Dưới 10 tỷ đồng b Từ 10 đến 20 tỷ đồng c Từ 20 đến 50 tỷ đồng d Từ 50 đến 100 tỷ đồng e Trên 100 tỷ đồng Tổng số lao động năm 2012 Doanh nghiệp Anh/Chị: a Dưới 10 người b Từ 10 đến 50 người c Từ 50 đến 100 người c Từ 100 đến 200 người e Từ 200 đến 300 người f Trên 300 người Vị trí Anh/Chị công ty a Tổng giám đốc b Giám đốc c Kế toán trưởng d Kế toán e Khác………………… Anh/Chị có tiếp xúc với nhóm kiểm toán BCTC 2012 a Có b Không vii PHẦN ĐÁNH GIÁ CỤ THỂ LIÊN QUAN ĐẾN CÔNG TY KIỂM TOÁN HIỆN TẠI (Đánh dấu vào thang đo từ 1- hoàn toàn không đồng ý đến - trung lập đến 7- hoàn toàn đồng ý" Độ tin cậy công ty Kiểm toán: Báo cáo Kiểm toán lập công ty Kiểm toán dễ hiểu Công ty Kiểm toán cung cấp dịch vụ khoản thời gian thỏa thuận Công ty Kiểm toán hiểu rõ vấn đề DN chúng tôi, đảm bảo cho vấn đề Công ty Kiểm toán độc lập việc cung cấp dịch vụ cho DN Nhân viên kiểm toán có kỹ chuyên môn cung cấp dịch vụ Khả phản hồi công ty Kiểm toán thời Hoàn toàn không đồng ý Hoàn toàn đồng ý → 7 7 Hoàn toàn không đồng ý Hoàn toàn đồng ý → Công ty Kiểm toán cung cấp dịch vụ kịp Công ty Kiểm toán phản hồi, cung cấp dịch vụ nhanh chóng, mau lẹ Nhân viên Kiểm toán nhiệt tình giúp đỡ khách hàng Công ty Kiểm toán có lưu giữ hồ sơ việc thực công tác Kiểm toán 10 DN tin tưởng vào nhóm kiểm toán Sự đảm bảo từ công ty Kiểm toán 11 Doanh nghiệp cảm thấy bảo mật giao dịch với nhóm kiểm toán 12 Nhân viên Kiểm toán tỏ lịch 13 Nhóm kiểm toán nhận hỗ trợ đầy đủ từ Công ty Kiểm toán để hoàn thành tốt công việc 14 Dịch vụ kiểm toán cung cấp tương xứng với mức phí kiểm toán 7 7 Hoàn toàn không đồng ý Hoàn toàn đồng ý → 1 2 3 4 5 6 7 7 viii Sự am hiểu công ty Kiểm toán 15 Công ty Kiểm toán dành cho DN quan tâm đặc biệt 16 Nhóm kiểm toán hiểu rõ nhu cầu DN 17 Nhóm kiểm toán thực lợi ích DN 18 Công ty Kiểm toán thực dịch vụ vào thời gian thuận tiện cho DN 19 Công ty Kiểm toán thông báo xác thời gian thực kiểm toán Những yếu tố vật chất công ty Kiểm toán 20 Công ty kiểm toán trang bị công nghệ thông tin tốt 21 Phương tiện vật chất (phương tiện lại, công cụ sử dụng,…) ưa nhìn 22 Nhóm kiểm toán ăn mặc đẹp, gọn gẽ thể chuyên nghiệp Nhận định mức phí kiểm toán → Hoàn toàn không đồng ý Hoàn toàn đồng ý 7 7 Hoàn toàn không đồng ý Hoàn toàn đồng ý → 7 Hoàn toàn không đồng ý Hoàn toàn đồng ý → 23 Mức phí kiểm toán so với chất lượng cung cấp chấp nhận 24 Mức phí kiểm toán so với công ty kiểm toán khác chấp nhận 25 Mức phí kiểm toán so với kỳ vọng Doanh nghiệp chấp nhận Tiếp tục sử dụng Công ty Kiểm toán cũ 26 DN tiếp tục sử dụng dịch vụ Kiểm toán công ty Kiểm toán 27 Trong tương lai gần, DN cân nhắc để công ty kiểm toán vào danh sách công ty Kiểm toán lựa chọn cho đợt Kiểm toán tới 28 DN dự định tiếp tục trao dồi mối quan hệ với công ty Kiểm toán Hoàn toàn không đồng ý Hoàn toàn đồng ý → 7 ix APPENDIX Definition of Small and Medium Enterprises in Decree No.56/2009/NĐ-CP dated 30 June 2009 Size Micro enterprise Total employees Small enterprise Total assets/Total resources Total employees Medium enterprise Total assets/Total resources Total employees Main activity area I Agriculture, forestry, and fishery Below 10 Below 20 billions VND From 10 to 200 From 20 From 200 to billions VND 300 to 100 billions VND II Industry and construction Below 10 Below 20 billions VND From 10 to 200 From 20 From 200 to billions VND 300 to 100 billions VND III Trading and service Below 10 Below 10 billions VND From 10 to 50 From 10 billions VND to 50 billions VND From 50 to 100 x APPENDIX xi ... relationship between perceived audit quality and auditor retention, perceived audit fee and auditor retention Nevertheless, no association was found between perceived audit fee and perceived audit quality... between perceived audit quality and auditor retention 30 4.3.2 The relationship between perceived audit fee and auditor retention 30 4.3.3 The relationship between perceived audit fee and perceived. .. of auditor retention and perceived audit quality 30 Table 4.10: Correlation of auditor retention and perceived audit fee 31 Table 4.11: Correlation of perceived auit quality and perceived