Do Managers Reappoint Auditor for Related Party Transactions? Evidence from Selected East Asian Countries

Abstract

We study the association between auditor reappointment (initial relationship stage), including recurring auditor appointment over several consecutive years (close relationship stage) and company engagement in related-party transactions (RPTs) for selected listed companies from Hong Kong, Malaysia, Singapore and Thailand. The results show that auditor reappointment has significant and negative associations with company engagement in RPTs. By contrast, the close ACR relationship increases company engagement in RPTs. The evidence also suggests that Big 4 audit firms can reduce company engagement in RPTs, even when they have a close relationship. However, the findings derived from a sub-sample of RPT companies suggest that the close relationship between Big 4 audit firms and their clients substantially encourages companies to engage in RPTs. Overall, these findings are consistent with theories in which higher audit quality is effective at monitoring RPTs, but the established relationship looks likely to create conflicting opinions that impair auditors' independent judgment. Nevertheless, the likelihood of conflict disappears when clients operate in countries that more effectively implement and enforce regulations and protect minority shareholders.

Impact of audit tenure and audit rotation on the audit quality: Big 4 vs non big 4

“…These findings support the argument that rotation could decrease audit quality due to competency issues where new auditors are not too familiar with their clients (Fitriany et al, 2016). On the other hand, several other studies have found the opposite results, which deduce that auditor rotation could increase audit quality (Kurnianingsih and Rohman (2014); Carey and Simnett (2006), Rahmat and Ali (2016), and Rickett et al (2016); Junaidi et al (2016)) These findings support the argument that audit firm rotation could improve audit quality because it increases the independence of auditors. Hence, these studies' inconclusive results encourage the importance of further investigation with a better dataset and methodology in this specific area for contributing more towards the ongoing debate.…”

“…More specifically, Corbella et al claim that the audit firm rotation raises the audit quality in clients audited by non-Big 4. In addition, Rahmat and Ali (2016) also argue that the established relationship created by auditor reappointment may intensify client engagement in related party transactions and interfere with auditors' independent judgment. Auditor rotation is also needed to ensure that client complies with the law as well as to incur fresh approaches to the audit process (Teh et al, 2016).…”

Controlling Shareholders’ Proxy and Multiple Directorships: Insight Evidence from Related Party Transactions

“…The regression model is as follows: Where, RPType it represents a vector that describes RPT and RPT-conflict. RPT, a total magnitude of RPTs disclosed in the financial statement in a year t, scaled by the beginning of total assets of year t. This measurement is consistent with Kohlbeck and Mayhew (2010) and Rahmat and Ali (2016). All RPTs are considered as representing opportunistic transactions, which probably used as tools to maximize personal benefits.…”

“…The objectives are examined by using 548 firms listed in Bursa Malaysia over a three-year period from 2012 to 2014 that consisted of a total of 1,550 observations. These firms are selected as RPTs are rampant among listed firms in Malaysia (Abdul Wahab et al 2011;Rahmat & Ali 2016). The environment and landscape of business in Malaysia are conducive for firms to engage in RPTs due to several reasons.…”

“…In addition, the implementation of corporate governance practice and enforcement of minority shareholders' protection in Malaysia are considered weak (Abdul Wahab et al 2011;Claessens et al 2000;Peng & Jiang 2010). These circumstances create a conducive landscape for firms to enter contracts with related parties (Munir et al 2013;Rahmat & Ali 2016).…”