The Auditor Tenure And The Qualiqv Of Audit: Mandatory Audit Firm Rotation And Audit Quality Evidence From The Manufacturing Firms Listed In Indonesia Stock Exchange (IDX).

TgE

AI]DITOR TENIIRE

AND

TgE

QUALITY

OF

AI'DIT:

MANDAMRY

AI'DIT

IIN,M ROTATION

AND

ATJDIT

QUALITY

Evid€m.

frou

t!.

Mrrrftctudog

ltrms

Lilted

in

Irdor€rtr

Stoct

Elchirs.

(IDx)

SKRIPSI

SrbElttcd

t!

prndd

fdtiuEclt ofa[.

FqqiFE

!a

for

Und.rsndu.t

d.sn.h.cononlc.

Evl

SYLIIANDY

N

ID

Nod.

0a153055

ACCOIJNTING

DEPARTMENT

FACULTY

OF

ECONOMICS

ANDALAS

UNTVERSITY

'\tsTR

Cl'

lhe Audiror Tenure

And

lhe

Quah!

OlAudir

Mandalory Audil

Fim R.hrion

An'l Audir Qtrdlity Evidence Fmm Thc Mantrlaclurir8

rnm\

l.i{ed

Id l.doncsia

Stek

Exchangc (ldx)

SvlfianJvN

This

iudv

dsc$es *hether

mandarory

aldit

fim

roration efiect audir

qualit'

Audit

fim

rotarion renccs by the

ludiror

tenure

md qualitt

of

dir bv quaiiry

ol

caming.

Qulli!

olsmings

rcfleds by

discttiom'rr

..cruil-

hrsed on previous

Es€rh

thri

uses a.cruals ro proxy for rhe qoiliry oreaminss Funhcr,

ll

audn ttualir)_

h

rholghr

ol rs

coisinining

exteme

mdnqcmc

decisios

in

rhe EFnLng

otlinai.i.lp.rformance,

rhcsc

dulrs

sugees

&

mmddory tobllon mav

Lead io

lo{sr

audit quaLit. In this

tqarch

the value

ofdiscEtionar}

a.cruals are

dividcd

into

three, .bsolute,

negative,

and

positive discreiionarl

acctuah Nesarive

disdionarl

rccruah

sbo*

a positive

rcl.rionship*ilh

AudirorTeiurc

rn,l rhe

tusr.fla.iables.

Which mean auditee more

coneflativevirh

the audno6

rhat have bccn lone fthrionship with them Auditeesrcndlo be more carelul

a.d

chms

to Jecrcas iheir incohc

that rcsul!

in ncgativ.

dhcEtionary moruals Posnive discrtrionary

ecrual

shows negative Elationship wirh absolute volue

ol

Discretionary adctuals.It means thar rhe lonCer audlbrtenuro rhe lowei p.sirive dhcretionar] acctuah.

In

slm.

thcrc

h

negative reLationship bcrween AbsoLute

Dkcrerionary Acctoals and

Audi|r

Tcnurc.lt

means that the highcr

nunberlhe

conpanies

rr.ined

lhe eme

addnor (longer tenure)

the

lowcr the

value

ol

abslute

disrttion.ry

accrals. Thc lower

value

of

AbsdLurc

dscretiora4

accruals retecLs the hisner eoming

qualiry

or

rilh

simple conclusion. audil quality is

incElr d

the atrdilor tenure incrmsc

CIIAPTER

I

'lhe

collaps

of

Enon

ud

its

audiior,

Afrhut

AtdeEn.

quickLy led

regrlatoE

rorldwidc ro

consid€r

dilIerenl dechankm

for

enhan.ing audiloi

indeFendeDt

Pdicular

anention has been given 10 apects

ol

lhe

ludilor{lient

Elationsiip

6at

could

inpaci

on audnor

indep.nds

q

whedEr

in

fact

or

in app@Ence.

lhe

aldiring prcfession

hd kdnidn0lly

opposed lhc implemenlarion

ol ary

nand.lory €arlarory EquiFmeni

for audn

lm

b

oturc

allq

a _3ive0

pedod

oft

nuE.

A

sysren

ol nudalory

audit

fim

wauld

rtqute

conpuies

lo

draie

their audit

fim,

heftaner called

audiio(

penodically

Lised

cmp€niB

in

Ihly

ond

a@il ue

require

b

otale

drei! auditor

ewry

nine

dd

tire

yes

psperively (Jscksn er

dl

2006).

TeDpo online

(April

166

2007)

@rd

Sin8apoE requiEd

iB

bnnk to iolaie lheir

ex6ml

audilor every frve

yets

since

2003i

in

the

ffe

yee

South

Kore. dacd rudilor

roralion is mandato.y.

Coe

alons in tnc

nel

yee (2001) Lilhumia also

sttlc

a

dddalory

auditor

rclalio.

ror

Indonesia

iisl.d

compsies at

Febddi

5, 2003,

E{uired to

sllle

their indepe.denr audiror

evcry

six

yea6

lhis

is rhe new

polict

sincs

b€loc

they

w.re

rcquiEd to

otite

ev€ry

tire

ysE.

Tie

fiNt

rule lhal

EquiEd

coftpsics

to

mrate dreir audiror

m

b€

fohd

in KeprlL@

Meten

Kewgn

Rqtblik

Itulomtja

Nomt

'23/KMK.A6/20A2

ndr ycr implsment€d until 2004. A one year toleFnce

{6

gived by the naularor

and 2001

is

consideGd as the

rFnsition

yd

Ar

2001

onpanies

that have

El'iied

rhc

sme ludnor

for

live

or

inoE

]eds

in a

o*

$ill

allows

lo

us

Ffricesolrhe

same

ludiror

u.t

the

ya6

ended

200l Furtncmor

cxplained in the

reputua

^lert.ti

Xtt@gn

tupublik

Indoresia

N.nor

359/r.MK 06D0Aj

knta.g J6o,4tuntan

Publik 2

l

4enal\

2AA3

Reenrly thc Indonesio Miniery

ol

Finsce, Sri

Mulldi

lndneoti

publhheJ a nes nrlc

olpublic

&coldad

b

lndoneia.

Tte p.licy h

lounds in

tle P.rtumn Menlei

XetdnAon IPMK) No. l1/PMK.1ut2Ut3

t

Fehwi

2AAB abou! public accounum sdvices. The newpolicy is $e

consummarionlfp€vious

pdiicl

thar

w6

considedd

no lo.eer

sufndient

*irh

thc

eeln

sndition

(Kep

L'h

Mentj

Keunsun (KMK)

No

123/K,UK 0d20A2

ud

KMK

No

359/KUK0

2Aa3). Onc

.f

nuy

Earons

lnd

€lui€

rhc cslablGhing

of

lhis

policy

wls

theE are somc cha4es in the

aatiarion

df public

aeoM60i.

BefoE-each public

accounht oas

Soup€d

in

the

asftidion ellcd

ltth

AlubEn

lndoncsia-Kompaftemen

Akunb

tublik.

Bul

now, lhey

re

gouped

lndcr

thc

In{irrr

Aklrirn

Pu hl ik Indonesi..

Thcsc

66tion

issue

6mes

to the surlilce

bc€us

society hare

k,n

Ihen

hsron

rhc public

&comrdt

p6fsion.]lF

Equircmenl to 6raie audibB

h

in

aftbpr

ro redue the

ti€lts

ro

audilor

independedce Largely

aising

ltom

timilianq

The

co.cen

is that

oler

the long

tem,

rhe

dditor

b€cooes too

clc

torhecliented

Ioscs

bk

orh€.

honesr disinrere$cdness . For

cwplq

aldilJr

indep€nde.ce

cm

deMse

os niendships develop,

lhc

ditor

beconcs

lm

Tlrir

iesca*h

invenigdes

*h.1her

mandarory audii

fim srario

cfrcct

auJirquali.y.

Auditllm

roldioi

Efl-r

by rhc audiror rcnute

lnd

rudir qualiry bv

qualil)

.l

earning

Ovenll, this

Esdch

tuund rha!

$cre

is

a

ncsrliYu

CHAI"If,RV

CONCI

JSION

ANII

LIMITATION

'.hr,u

i

'p

tic.seF

b.

ilr'dF.rc'on-^ r.ri

d

J

- 'd.o'

G0

T

I'

Pir.

$ar

rhc hi8her numbcr rhc conpanies

thi.ed

rhd

smc

auditor (lon-qer Gnuto)

fie

louer rhc ralue of absolutc

di$retionlry

&ruak

Th. low.rvaluc olabsoluh

dncEtionrr]

accruals

Eflecri thc

highcr

eanirg

qualiq

Or

sifi

simple coi.Lusion.

indit

quiily

G

incre

as tho audiror bnure

inc*ise

(Hl_rejsredl

Thc main issue rhal

cond

up with tl,is aldiror

muiion

problcm is that rhe

qornd

JF

. i

,

oependen

'uJi'oll|'c

oat"

ie.

'

bin"J

h(

i'n.

r d, r 'r!,T-xron'e1'? 'nr.rdlrdrquo

lredu

'i

n

BL'

ir;.r

indcpcidence is nor (hc only issuerhar n.cds to pur

inensideBtion

For

ekmplc.

audir

qdaliq

is

lo*er

in rhc carly yeam

of$c

aRliror4lienl

Elarionship. Audn

qMli{! is.lleged

b

b€ lowcr

in

the

eely }ea6

olrltc

ElarionshiP

btc,u$

rhc auditor

h

urlimlliarenh

cclie.fs

buei'!s,

op$ariors, sldems.

conrsls,.nd

'i _{hose in}

f.vor ol

_a

mand&t)

cha4c

_{of the audii}

fim

_{oltcn dclcnd}

$en

vies

by claimin* rhat audit qualit! dcrcriomtcs

s

audit enu.e incrcass

b€eus

M.d.ct.

wtt

stn

0n

d.n.21"

2009).

Ilamb€L E. Michae and Linda Snnh Bamber.2003. D.ccmber 2003 Discussion

ol

'Msd

o!-

Addir-Padner Rolatiotr,

ALdn

QualirJ_ and Market

Perccption: Flvidencc

lio} t"i\tan-

l]..!sm.!!!t

(March,

64,

Banor, Eli, IerdinMd

A

8ul,

Jldy

S.L.

Tsui

rnd

Llonad

N

Stem

2000 Dkcretionary

Acctuak

Models

and Audir

Qualificarnrn\'

\sv

$m

rum

rMatuh

lrd

20r u)

S.. Byune

T.

Ro. Jooh*a

rtn..

2007.

TIe

Elleci

of

Fim

Rctrtion

.n

Audil

_Qualiry: Evidence flon,

caremn-

Mara

Annalisa Prencite,

and Auditor

Chanee:

lnpmveAudirQualit)?.

Carc.ll..

Joeph V.

a.d Albcd

FindcialRcponing

Crheuk. Leo

M. C.

and

K@

Wdn

ndari.n

d

AuJir

and Marco

Tbfrbena.

2008

t)rrs

ManJarory Auditor

r||t

stn

.onr

lMqLh,

3

f

Casie.ella

Jcr,

aarry l-ewis. la.qucline Rcck.

$d

SdDnne Lo{ensohn. 2007

An

Emoirical Inveeirarion

ot

Auditor

R.hrion

Rcquircnents.

tryL.!!ta!!!l

I

ttteh,

I (lr, 2 009).

Chi.

Wdchun.

Huichi

tludg.

aM

Yichuo Tenure

lnd

Clienl

lmpoturce

on

liom

Audn Prnner

Basd

Dara

Lai

2005.

Audir

Repod

lig.

Audn

Panrer

Fim

RoEtion:

Lividcnce

fiom AuiElia

t-iao

2004.

Thc

Effsr

ol

Auditor

Discftrion,ryAeruah

Fvidence

tr 'l|i*an. nw.'sm.on lvd.h,

Chung, Hyces@. 200,1. Mandarory

Audltor

Rohri.n

and

Audir Qualitv:

Ai

Emp.icd Invc$ig4ion

ol

Audiror Dcsigmiion Policy

in

Korca.

n\ti

srn.roa

l,t@h

J11,2AA9)

Chu(h

.

BryaD

K. md

Pina

Zh$s.

2006

A

Modcl

ol

Mandalory Audiror Ro.dn'n.

ur'!)!!tpL

lMar.h,

dt" 2009)

cFbn-.

Aatud

D$i3ht

200,1.

An

Empiricat lnveslieation

of the Ellcc6

ol

Eamings Prediotabiln' dnd

A0dnor{lien!

RelarionshiPs on the

BoM

Cret)r

hatt€t.

ew\|

:in.@t

lMath,

3l"

20t)9)

Sd.

20!3.

Audilor 1enu.e and rhs AbiLitv to Meer

o'