The Auditor Tenure And The Quality Of Audit: Mandatory Audit Firm Rotation And Audit Quality Evidence From The Manufacturing Firms Listed In Indonesia Stock Exchange (Idx).
AI]DIIORTf,IiI'f,E AND ?HE QUALITY OF AT'DIT:
MANDAMI AT'I'T fiRM ROTATIOI{ AIi'D AUDIT
THE
QUATITY
Evid.nco f]!m rb. M$rufrcacrtls Flrm La..d in lrdoDdia
So*
Il
t.relGDX)
SKRTPSI
Srbdftd i! p.nli.l follilln.trt of.h...qolE6cnt for
Uldlrrrrdudc d.grd i! dnonls
*-,?L"..r.j iirliu,
ACCOUNTING DEPARTMEM
F'ACT'I,TY OF DCONOMI(--S
ANDAI,AS UNTVERSIIY
?009
.!BsTR{cT
TheAudn r Tcnu* ,And lhe QuaLiiy OfAuJir: Mandar. ,\udn Frm Ro.aioi
nd Audi!Qudnr Evidcicc Fro'n |he Manlf&iu.i'g Fims Lkt.d ln lndonesil
srock ExchatrBe (ldr)
SYLllandYN
Thn nudy r$cs.s *herhu mandarorr_ audn fi.n, mlarion cllccr audit
qualirt. AuJit fim oralion rel(6 b' rhc audiror teiure and qualir] olaudir bl
quolily ol *ming QuaLily olerfrid8s rsfl{t b} d scr.rionq.- acnul bNcd.f
Drlious asem.h lhar Lfs rc.rur s ro nnxy tbr rhe qualirl oaerdi.es Further il
audr qlali!- n thoqhr Df rs coDiraini4 cxt.m. mrnaeemenl decisiois li rhe
turcni',8 orhnncnlPrro d.e.theseRsuLrs sugget nrai aidaro.l rotarion nav
lesdb Lowr audir qlrlity In rhis Esarch ihe value.ldiscretionary a.cna[ a.c
Jividcd inlo lhEe, absolorc, negat ve. and posiliv. di$relionary acc.uals.
Neqarivc dncretomq accruals sho$ a |ositive reLaiionship $nh Audiio. lenurc
afd rhe rcn ofvariables Which mcan auditee more c.nseaxlivc snh the audiro*
that ha!e been long reloti.nship rirh rhem. Audiiees tend ro bc nore corefllmd
choose to dereasd $cn income thdl tosuh in neeatile di\r.rionary occuLr'
Posiriv. dis.rernnary accrull shors ne-!dnc rul.tionship sith ab$Lure vllue.f
Dhcrelioiart accn'dh. it nieans ihar lhe longcr audirorrenure thc lower positive
dh.reliomry accrurh. ln sum, ihers k iceariv. rclationshlp bet{ccn AbsoLLt
Discrelionary Accrual! and Audittr Ttntr.c h means ther ihe highcr nlmber rhe
.ompanies rerained rhe saDre audiror (longo renuE) the lo*cr the value ol
absolule discrerir)'ary accruais Lhc lolvd valuD of Ab{Lutc dioetiora'}
accnals rctlecB ihe hidcr cetrirg qualit) (Jr sirh simple conclusion. audil
quali(y is incrc6e$lhe atrditortenure i'rreasc
K.vn
s
uelit
tunurc
urni't:4tdlitt rtkliqwlir n.nlab^
tunD
The couap$
ol
Enrcn md its audiroi Arlhu Ande6en, quicklr led
Egularor world*ide ro consider dilTernt
n{hanim for
independent Pdicular ai€nrion has b€en Siven to
sp.ct
enhancin8 auditor
of rhc audiloElient
iclarionshiD that could impact on audiror independencd, vherher in
hct or
in
appdEnce The dudiling poie$ion hE taditionally opp.sd $c implehentllion
ol any mmdatory regulatory rcqunemert lor qudir
fim
ro
tuhie aiier a Siren
p.riod of lenu.e. A syneh oi mandarory audit fim would rtqune oohpsies nr
.ohrc ihen sudir fim. her€itd slled audilor, p.riodiolly Lisrud cmpaniG in
Ilaly and B@il
Nspcdively
rc
require ro roFte their ludilor ever] nine and nve yem
(kclFn
er al 2006). Temp. otrline (April 166 200?) recod
Sin8opore req0iEd iLs banl ro
2
003
i in rh. sme yed
alons in
ile
next
]e6
Sourh Korc.
*€E EquiEd
rcbt deir
coDr
every six
to mrare ev.ry
audiror
natd duditor
rorat
ion i s nandalory
Cu
e
{2004) Lithu&ia also $trlc r nmdalory auditor olalion lor
Indoncsja lisled
indepdndem auditor
olatc rhct exrcmal auditor every five yem sin.e
m
ies ar
Febnai 5. 2003, rc4triEd
!. rc6t $eir
yed. lhis is rhe ne* polict sine t€foE
filc ys6.
b€ liand in
The
liEt flle lhal EquiRd compsies r.
KepdM Meden KemAe
ltuloneia Nanot 123/KMK.46/2002 kdanE
.?rr: li EquiEd codpeicslo roble thei
they
Jatd,4kd
Republik
Plblik 30 Septenret
audilor every 6ve yem. Bur rhh rtrle
nor yet implenent€d until 2004. A one yetr loleFnc. wG gived by de ftgularor
dd
2001 is consideEd as .hc tansiion
y4r. Al
2001 cohpdies lhal have
ftrained rhc sme aldiror for live or moE yea6 in a rcw
senicesolthe s.me audjtor until
the
rho
ys6
nill allows lo
use
ended 2003. FurlhemoE explained jn
Ker''Ean Republik ltulotusia Nanor 359/K-UK062AA1
l:epututn
^leateti
tentana
J6o,4h[nta Publik 2l asnus
Miniq ol
R4enlly the lndonesi
n*
published a
2443.
Finrnco,
dlc olpublic accounbm in Indonesi!.
sri
Mulyani IndnNati
The policy is lounds
th. Perutorun Me\teti K?rdnAon l?ltlK) No |7/PMX.03/20A3 5
Febwi
it
2003
aboutpublic lccounrtntervices. The newpolicy h tnc consumnation olpftvious
Dolict thar
s6
considetod
no lonAer sllicient *nh rhc rec.nl condition
(Ktput6ah M.nlri Keuryuh (KMK)
159/KuK.A6/200:l). otre
al
n{y
w6
123/KMK042AA2 antl XMK No
rcasons thar rcqtriE Ihc eslablishing
policy was theE are sonc chnngB in the
c.ch pr6lic lccounrd!
No
goup€d
i.
B$iatjon
the
of public
ol
rhis
ecou.Ltt. BefoE.
$siarion dllcd Ikarin
Akunhn
lndonesia'Konpa4ehen Akundr Publik. Bu1 noq they are ercupLrd undcr the
in{ir
Akuni'n Puhlik lndoncsia.
Thcsc bLtion issue come! to Ihe sula@
bcsue sciety
have
bn lhcir
rrus on the public accountant prcfe$ion. The requiiemenr ro mrate audilos is an
atrnpr to Educe the tnrc8t ro audid iidep€ndene laryelt arisin! f6m
fmilianty.
The cdn&m is
to the clientrnd
lo*s
indep€ndenc€ can
ihat.ver the
Lons
rem. the dudnor becomes ioo close
bis or her "honen disinrerescdncsC. For
dccrw
6
exmde audilor
liiendships develop, the audiror bccon.s
closly idenlificd $ilh lhe inle6ts ot
le
olienl muagemcn! tho audn plan b€cones
CEAPTER V
This resedh invcsrigates wh€ther mandltory audn
fim sklion cfdl
.udil qdallry. Audit fim .ohrion refied by lhe auditor tenua ud sudil +ality by
quditt df cminA. t)verall, thh resech found thar theF is a
negaiivs
rlationship bcrwccn absolute dieretionary a*ruah dd tuditor ten!re. lt meds
thar tnc hi8her numb€r the doDpanics
the lower
.ainod lhe
de valu. of absolub diedionary
dhcretionary
same auditor (longer rcdure)
a4tulj
The lowcr value ol absolue
accrah rcnels the hignq eaning qu.liiy. or with
conclGion. audir quality
k
irorc 6 the audilo re.ure inclw
simple
(Hl-rejatedi
'l he mrjn hsue thar comes up with dris audilor Dration problcm
h thai
wodicd aboul rie indepcndenl ol oudlt6 if lhe @mponies rehined the
audiror
*ilh
no Linihrion renlP
sn €Ne
an oudit
the
me
qulity Eduction. B!r. in thct
indcpe.dcne is nol the o.ly issue tbrt nccds lo put in onsideBtion, For dxrnplc.
audn qualit, is lower in rhe edly
qurlitt h .lleAed to
audiror
ya^ olihe
be lower in thc etrly
h unfanililr with
thc
ThG
i
in aavor of
auditor4licnl Elalionship. Aldn
ycds ol tne EblionshiP btctu$ rhc
clienlt businsi op€Btions, slsroms, conhls, sd
monddory chanee of the sudil
view by claining thal audit quality delerioEles
d
fin
onen defend their
audit lenue incrcases b€coue
thc €lationshipbctwdn thc auditor and n\e clielt b@des
ro
siicr and
the
Rae.
Cil S., Byune l. Ro. J.ohsa Rho. 2007. The Ellel of Mandat .y Audir
Fim Rcleolion on Audit Qualiry, Evidcncc lior lhc Koran Audir
it'a&.|.
$d|c. t (Jzh, 21", 2AA9)
'-tv.
BanFir F Michcland Linda Sfrirh Banber.2003. Decemb€r 2003 Discussioi
ol Mandaiory audilPannq Rotarlon. Audi Qurlit] hd Nlarker
Nhh. o''
Perception: Llviduncc llom Taiwan". r\, {mr
B.nov. Eli, FerdinMd ,\ gtrl, Jltdy S.1.. l\ui. od L€onard N SIcnr' 2000
Discrclora4 Accnals Modcls and Audit Qualifi.dio.s
Marco];ombe& 2003. Audiror'ltnuE
Mandatory audiror Roralon Really
r,w\'
\!th.on' (i,ldrth Jltl,2AA9)
hnpovc Audir Qlali!v?
C.mern. MaL And.lisa Preicipe,
ud Atrdiror Change:
and
l\es
C.rcello. JoseDh V. and Albcn
l'in cialRcpoding.
canertlh.
Audn
Fifr Tcn
reand lrFudulent
lctt. Blrry l-swis, laqrclinc RccL ard Suzanne liwen$hn 2007
ln -rpi' cr l1!d r'rioi . \trd or Po! n P/.tri'-re r'
,,-" -
a tu.rh ,l'
)0n9)
(:heuk. Leo M. C. aid Ka'. Wah l-ai. 2005. Audn Repon lie. Audit l'jannc.
R.t'i.n and Audit Fim Rohrion: Evidence tom AusmLia.
-lhe
ElILu of Audito.
Chi, Wuchun, lluichi Huan!. and YichuD Liao. 2004.
IenLft and Cli$r Inpotuncc on DscRtioDr4 Accruah - Evidctce
liom Audir-P.dner Bo$d Dala in lairan r $Jrr,..e4 avrah
Chutre, Hyees@ 200,1. Mandalory Audiio. Roratnn ud ,^udir QualilY: An
F-mpni.al Investigarion ol Audit Dcsignalior Policy i,r Korea
itv|svnop
Church
.
Bryar K.
Robrion.
tMar.h )tt, )!ar)
hd
r
Pine ZhM!. 2006. A Model
sm cok lMa..h , 200e)
/
v*,
ol
Mandaroq Audir.r
An Empirical InvcsiSalion oi the Efecb !l
E.mines Pftdictabilir) dnd trdiror1]lic Rclationships on lhe Bond
Amn Dwieht
Ct dit )\{ket
200,1.
r*v!:rn.onlMorch
Soo. 1003
la3c^L
31"'.20A9)
Aldiro. TmuE a|d ihe ability
(Ma h 3t'',2anr)
w@oa
10
Mcct or
MANDAMI AT'I'T fiRM ROTATIOI{ AIi'D AUDIT
THE
QUATITY
Evid.nco f]!m rb. M$rufrcacrtls Flrm La..d in lrdoDdia
So*
Il
t.relGDX)
SKRTPSI
Srbdftd i! p.nli.l follilln.trt of.h...qolE6cnt for
Uldlrrrrdudc d.grd i! dnonls
*-,?L"..r.j iirliu,
ACCOUNTING DEPARTMEM
F'ACT'I,TY OF DCONOMI(--S
ANDAI,AS UNTVERSIIY
?009
.!BsTR{cT
TheAudn r Tcnu* ,And lhe QuaLiiy OfAuJir: Mandar. ,\udn Frm Ro.aioi
nd Audi!Qudnr Evidcicc Fro'n |he Manlf&iu.i'g Fims Lkt.d ln lndonesil
srock ExchatrBe (ldr)
SYLllandYN
Thn nudy r$cs.s *herhu mandarorr_ audn fi.n, mlarion cllccr audit
qualirt. AuJit fim oralion rel(6 b' rhc audiror teiure and qualir] olaudir bl
quolily ol *ming QuaLily olerfrid8s rsfl{t b} d scr.rionq.- acnul bNcd.f
Drlious asem.h lhar Lfs rc.rur s ro nnxy tbr rhe qualirl oaerdi.es Further il
audr qlali!- n thoqhr Df rs coDiraini4 cxt.m. mrnaeemenl decisiois li rhe
turcni',8 orhnncnlPrro d.e.theseRsuLrs sugget nrai aidaro.l rotarion nav
lesdb Lowr audir qlrlity In rhis Esarch ihe value.ldiscretionary a.cna[ a.c
Jividcd inlo lhEe, absolorc, negat ve. and posiliv. di$relionary acc.uals.
Neqarivc dncretomq accruals sho$ a |ositive reLaiionship $nh Audiio. lenurc
afd rhe rcn ofvariables Which mcan auditee more c.nseaxlivc snh the audiro*
that ha!e been long reloti.nship rirh rhem. Audiiees tend ro bc nore corefllmd
choose to dereasd $cn income thdl tosuh in neeatile di\r.rionary occuLr'
Posiriv. dis.rernnary accrull shors ne-!dnc rul.tionship sith ab$Lure vllue.f
Dhcrelioiart accn'dh. it nieans ihar lhe longcr audirorrenure thc lower positive
dh.reliomry accrurh. ln sum, ihers k iceariv. rclationshlp bet{ccn AbsoLLt
Discrelionary Accrual! and Audittr Ttntr.c h means ther ihe highcr nlmber rhe
.ompanies rerained rhe saDre audiror (longo renuE) the lo*cr the value ol
absolule discrerir)'ary accruais Lhc lolvd valuD of Ab{Lutc dioetiora'}
accnals rctlecB ihe hidcr cetrirg qualit) (Jr sirh simple conclusion. audil
quali(y is incrc6e$lhe atrditortenure i'rreasc
K.vn
s
uelit
tunurc
urni't:4tdlitt rtkliqwlir n.nlab^
tunD
The couap$
ol
Enrcn md its audiroi Arlhu Ande6en, quicklr led
Egularor world*ide ro consider dilTernt
n{hanim for
independent Pdicular ai€nrion has b€en Siven to
sp.ct
enhancin8 auditor
of rhc audiloElient
iclarionshiD that could impact on audiror independencd, vherher in
hct or
in
appdEnce The dudiling poie$ion hE taditionally opp.sd $c implehentllion
ol any mmdatory regulatory rcqunemert lor qudir
fim
ro
tuhie aiier a Siren
p.riod of lenu.e. A syneh oi mandarory audit fim would rtqune oohpsies nr
.ohrc ihen sudir fim. her€itd slled audilor, p.riodiolly Lisrud cmpaniG in
Ilaly and B@il
Nspcdively
rc
require ro roFte their ludilor ever] nine and nve yem
(kclFn
er al 2006). Temp. otrline (April 166 200?) recod
Sin8opore req0iEd iLs banl ro
2
003
i in rh. sme yed
alons in
ile
next
]e6
Sourh Korc.
*€E EquiEd
rcbt deir
coDr
every six
to mrare ev.ry
audiror
natd duditor
rorat
ion i s nandalory
Cu
e
{2004) Lithu&ia also $trlc r nmdalory auditor olalion lor
Indoncsja lisled
indepdndem auditor
olatc rhct exrcmal auditor every five yem sin.e
m
ies ar
Febnai 5. 2003, rc4triEd
!. rc6t $eir
yed. lhis is rhe ne* polict sine t€foE
filc ys6.
b€ liand in
The
liEt flle lhal EquiRd compsies r.
KepdM Meden KemAe
ltuloneia Nanot 123/KMK.46/2002 kdanE
.?rr: li EquiEd codpeicslo roble thei
they
Jatd,4kd
Republik
Plblik 30 Septenret
audilor every 6ve yem. Bur rhh rtrle
nor yet implenent€d until 2004. A one yetr loleFnc. wG gived by de ftgularor
dd
2001 is consideEd as .hc tansiion
y4r. Al
2001 cohpdies lhal have
ftrained rhc sme aldiror for live or moE yea6 in a rcw
senicesolthe s.me audjtor until
the
rho
ys6
nill allows lo
use
ended 2003. FurlhemoE explained jn
Ker''Ean Republik ltulotusia Nanor 359/K-UK062AA1
l:epututn
^leateti
tentana
J6o,4h[nta Publik 2l asnus
Miniq ol
R4enlly the lndonesi
n*
published a
2443.
Finrnco,
dlc olpublic accounbm in Indonesi!.
sri
Mulyani IndnNati
The policy is lounds
th. Perutorun Me\teti K?rdnAon l?ltlK) No |7/PMX.03/20A3 5
Febwi
it
2003
aboutpublic lccounrtntervices. The newpolicy h tnc consumnation olpftvious
Dolict thar
s6
considetod
no lonAer sllicient *nh rhc rec.nl condition
(Ktput6ah M.nlri Keuryuh (KMK)
159/KuK.A6/200:l). otre
al
n{y
w6
123/KMK042AA2 antl XMK No
rcasons thar rcqtriE Ihc eslablishing
policy was theE are sonc chnngB in the
c.ch pr6lic lccounrd!
No
goup€d
i.
B$iatjon
the
of public
ol
rhis
ecou.Ltt. BefoE.
$siarion dllcd Ikarin
Akunhn
lndonesia'Konpa4ehen Akundr Publik. Bu1 noq they are ercupLrd undcr the
in{ir
Akuni'n Puhlik lndoncsia.
Thcsc bLtion issue come! to Ihe sula@
bcsue sciety
have
bn lhcir
rrus on the public accountant prcfe$ion. The requiiemenr ro mrate audilos is an
atrnpr to Educe the tnrc8t ro audid iidep€ndene laryelt arisin! f6m
fmilianty.
The cdn&m is
to the clientrnd
lo*s
indep€ndenc€ can
ihat.ver the
Lons
rem. the dudnor becomes ioo close
bis or her "honen disinrerescdncsC. For
dccrw
6
exmde audilor
liiendships develop, the audiror bccon.s
closly idenlificd $ilh lhe inle6ts ot
le
olienl muagemcn! tho audn plan b€cones
CEAPTER V
This resedh invcsrigates wh€ther mandltory audn
fim sklion cfdl
.udil qdallry. Audit fim .ohrion refied by lhe auditor tenua ud sudil +ality by
quditt df cminA. t)verall, thh resech found thar theF is a
negaiivs
rlationship bcrwccn absolute dieretionary a*ruah dd tuditor ten!re. lt meds
thar tnc hi8her numb€r the doDpanics
the lower
.ainod lhe
de valu. of absolub diedionary
dhcretionary
same auditor (longer rcdure)
a4tulj
The lowcr value ol absolue
accrah rcnels the hignq eaning qu.liiy. or with
conclGion. audir quality
k
irorc 6 the audilo re.ure inclw
simple
(Hl-rejatedi
'l he mrjn hsue thar comes up with dris audilor Dration problcm
h thai
wodicd aboul rie indepcndenl ol oudlt6 if lhe @mponies rehined the
audiror
*ilh
no Linihrion renlP
sn €Ne
an oudit
the
me
qulity Eduction. B!r. in thct
indcpe.dcne is nol the o.ly issue tbrt nccds lo put in onsideBtion, For dxrnplc.
audn qualit, is lower in rhe edly
qurlitt h .lleAed to
audiror
ya^ olihe
be lower in thc etrly
h unfanililr with
thc
ThG
i
in aavor of
auditor4licnl Elalionship. Aldn
ycds ol tne EblionshiP btctu$ rhc
clienlt businsi op€Btions, slsroms, conhls, sd
monddory chanee of the sudil
view by claining thal audit quality delerioEles
d
fin
onen defend their
audit lenue incrcases b€coue
thc €lationshipbctwdn thc auditor and n\e clielt b@des
ro
siicr and
the
Rae.
Cil S., Byune l. Ro. J.ohsa Rho. 2007. The Ellel of Mandat .y Audir
Fim Rcleolion on Audit Qualiry, Evidcncc lior lhc Koran Audir
it'a&.|.
$d|c. t (Jzh, 21", 2AA9)
'-tv.
BanFir F Michcland Linda Sfrirh Banber.2003. Decemb€r 2003 Discussioi
ol Mandaiory audilPannq Rotarlon. Audi Qurlit] hd Nlarker
Nhh. o''
Perception: Llviduncc llom Taiwan". r\, {mr
B.nov. Eli, FerdinMd ,\ gtrl, Jltdy S.1.. l\ui. od L€onard N SIcnr' 2000
Discrclora4 Accnals Modcls and Audit Qualifi.dio.s
Marco];ombe& 2003. Audiror'ltnuE
Mandatory audiror Roralon Really
r,w\'
\!th.on' (i,ldrth Jltl,2AA9)
hnpovc Audir Qlali!v?
C.mern. MaL And.lisa Preicipe,
ud Atrdiror Change:
and
l\es
C.rcello. JoseDh V. and Albcn
l'in cialRcpoding.
canertlh.
Audn
Fifr Tcn
reand lrFudulent
lctt. Blrry l-swis, laqrclinc RccL ard Suzanne liwen$hn 2007
ln -rpi' cr l1!d r'rioi . \trd or Po! n P/.tri'-re r'
,,-" -
a tu.rh ,l'
)0n9)
(:heuk. Leo M. C. aid Ka'. Wah l-ai. 2005. Audn Repon lie. Audit l'jannc.
R.t'i.n and Audit Fim Rohrion: Evidence tom AusmLia.
-lhe
ElILu of Audito.
Chi, Wuchun, lluichi Huan!. and YichuD Liao. 2004.
IenLft and Cli$r Inpotuncc on DscRtioDr4 Accruah - Evidctce
liom Audir-P.dner Bo$d Dala in lairan r $Jrr,..e4 avrah
Chutre, Hyees@ 200,1. Mandalory Audiio. Roratnn ud ,^udir QualilY: An
F-mpni.al Investigarion ol Audit Dcsignalior Policy i,r Korea
itv|svnop
Church
.
Bryar K.
Robrion.
tMar.h )tt, )!ar)
hd
r
Pine ZhM!. 2006. A Model
sm cok lMa..h , 200e)
/
v*,
ol
Mandaroq Audir.r
An Empirical InvcsiSalion oi the Efecb !l
E.mines Pftdictabilir) dnd trdiror1]lic Rclationships on lhe Bond
Amn Dwieht
Ct dit )\{ket
200,1.
r*v!:rn.onlMorch
Soo. 1003
la3c^L
31"'.20A9)
Aldiro. TmuE a|d ihe ability
(Ma h 3t'',2anr)
w@oa
10
Mcct or