factors affecting audit firms’ rotation: jordanian case… · two discussions with the client...

European Journal of Economics, Finance and Administrative Sciences

ISSN 1450-2275 Issue 96 December, 2017

© FRDN Incorporated

http://www.europeanjournalofeconomicsfinanceandadministrativesciences.com

Factors Affecting Audit Firms’ Rotation: Jordanian Case

Tariq “Moh’d Yaser” AlRajabi

E-mail: [email protected]

Lina Hani Warrad

Associate Professor, Accounting Department

Applied Science Private University, Amman, Jordan

E-mail: [email protected]

Abstract

The primary target of the financial statements is to introduce a summarized

overview about the performance and financial position of the firm; these statements are

used by the firms’ management, government, labor union and other stakeholders for

decision making procedure.

Also audit service is very significant to raise financial statement users’ confidence

in the financial report. This service will afford added value to the financial statement, in

which users use its presented information for decision making.

The concept of AFR is the lawful instruction of the period an audit firm continues

and offer professional services to its clients. It requires audit firms to be rotated after a

specific number of years in spite of the efficiency, quality, independence, confidence and

the desire of the shareholders to hold the audit firm.

The aim of this study is to determine the factors affecting audit firm’s rotation

(AFR) in the Jordanian listed firms. The study involved companies from all sectors, and

used seven sections Questionnaire to measure the factors that might affect the AFR. The

population is all the Jordanian listed firms, which consist of 261 companies as of 2015, and

the sample is 165 companies selected using random purposive sampling, two hundred (200)

Questionnaires were distributed and 130 Questionnaires were collected, out of which only

121 was considered in the study with complete answers.

The AFR is considered as the dependent variable in this study, and the factors

affecting AFR (Rotation Drivers) were considered the independent variables which were:

Accountability, Compliance to ISAs, Experience, Board Independence, Responses Delay

and finally the Audit Firm Size. After analyzing the gathered data and assumptions, the

study made the following conclusions: there is a significant effect between accountability

and AFR, and between experience and AFR, and there was an insignificant effect between

AFR and Compliance to ISAs, Board Independence, Responses Delay, and Audit Firm

Size.

This study recommends the audit firms to achieve a high level of accountability

with their clients, along with getting the experience which will make the audit process as it

should. It also recommends the researchers to add more potential factors that may affect

AFR in their studies.

6 European Journal of Economics, Finance and Administrative Sciences Issue 96 (2017)

Keywords: Audit, Audit Firms, Rotation, Audit Firm’s Rotation, and Amman Stock

Exchange (ASE).

1. Introduction Financial statements should be reliable and fair to indicate the realistic financial position of the firm to

allow the users to take the most suitable decisions and achieve the corporate objectives. Through

auditing the auditors are going to estimate the risk of errors and misstatements during the year to make

certain that the financial statements are fairly presented and to evaluate the performance and internal

control system of the firm. (Clements J., 2011).

The audit firm repute performs an effective role to make certain the credibility of financial statements

and many elements are combined to construct this repute. The most significant element is the auditor

independence (Simunic D., 1984).

Auditor board independence is the most essential advantage in audit profession. Shortage of auditor

independence may give rise to unfairness, problem between the audit firm and the client; in some

cases, it may bring about bankruptcy of business and harm it as Enron and WorldCom scandal which is

deemed the largest bankruptcy reorganization in American history. When the auditor is considered

being independent, the financial information is more secret for the public and used to make right

decisions. (Ghosh A., & Moon, D., 2004)

In the absence of AFR, the auditor may use the same approach and audit program for many years, but

the audit will loss the innovation it had in the beginning and will become foreseeable and inefficient.

Audit rotation shall help to earn a fresh outlook on the client's financial statements and the new audit

firm might be able to reveal things in statements that the previous firm couldn't detect and errors of the

previous firm. It also gives the opportunity to examine other firm's work instate of just applying the

peer review program. (Catanach A. H., Walker P. L., 1999)

The aim of this study is to carefully investigate the factors affecting AFR in Jordanian listed

companies, addressing the significance of these factors to classify the characteristics that might help

companies and audit firms in their contracting with each other.

2. Previous Studies A lot of researchers studied the audit rotation, whether related to AFR, or audit partner rotation. Below

we will list the most related topics to the research:

During the time that carrying out an annual audit of a client's financial statements, (Barbara A,

2006) study concluded that an audit firm's staff specified what appear to be a substantial misstatement.

Two discussions with the client have produce a dilemma in that the client denies to record what the

auditor considers as a necessary adjustment. The empirical study investigates whether the likelihood of

public accountants adjusting their audit report for this deviation from generally accepted accounting

principles is influenced by whether AFR is about to occur (no rotation v. rotation) under each of the

two levels of corporate governance (weak v. strong). The subjects include 105 CPA firm employees

and partners who have an average experience level slightly less than 14 years. Results showed that

auditors in the rotation position are more likely to adjust their audit report as differ from those in a

position in which a continuing relationship is expected.

(Lu and Sivarama k., 2009) examined the effects of audit firm rotation (MAR) on firms'

investment decision and auditor choice in a capital market setting using analytical methods; it had

found that when firms participate in opinion shopping, AFR increase investment efficiency for some

firms but decrease investment efficiency for other firms. It was done by examined the impacts of AFR

on firms’ investment decision and auditor choice in a capital market setting.

(Mustafa D., 2010) found the reasons of the shortage of auditor independence on AFR. The

study was done through a questionnaire created by the researcher (author) and distributed among audit

practitioners from the Big Four audit firms operating in Egypt.


The study revealed that Audit defeats result at most from the shortage of independence problem

which is an essential consequence of the extended auditor client relationship. To control such

undesirable consequences, auditor rotation is recommended in the Egyptian auditing and legal frame

work as a solution for the shortage of auditor independence problem.

(Daniels B., 2011) explored loan officers’ recognition of auditors’ independence and audit

quality under three empirical AFR stories, a case experiment with a between-subjects and results

indicated that loan officers do understand an increase in independence when the firm come behind an

AFR policy. However, the length of auditor tenure within rotation fails to significantly change loan

officers’ perceptions of independence. Results also showed that neither the presence of a rotation

policy nor the length of the auditor tenure within rotation significantly affects the loan officers’

recognition of audit quality.

(Anis, A., 2014) examined professional auditors’ recognition of the effect of AFR on audit

quality. It also examined the possible benefits and determining factors of auditor rotation by using the

descriptive methodology. The results concluded that rotation of auditors has a positive impact on audit

quality, a negative impact on client-specific knowledge, and a positive impact on auditors’

independence. The impact from the auditors’ perspective of industry specialization and fees

dependence on the relationship between auditor rotation and audit quality was also specified.

From the auditor’s perspective; (Said K., 2014) investigated the influence of AFR on auditor

independence in Bahrain. The study based on a questionnaire to investigate auditor’s perceptions of the

influence of audit AFR on auditor independence. The results showed that the larger part of auditors

agreed that AFR could protect auditor independence, it also concluded that there is a significant

relationship between AFR and auditor independence.

(Al-Araidah A., 2015) study found factors affecting audit rotation in the Jordanian financial

sector by using descriptive analytical method in the study. A questionnaire was distributed to 103

companies (13 trading sector, 26 insurance sector, 64 services sector) using purposive sampling. 156

questionnaires were distributed, 104 came back and 24 were eliminated from the results.

The study found that external audit rotation was effected by audit quality, independence, laws

and legislations, and judicial disputes, while the judicial disputes had the most influencing ratio among

all the mentioned factors.

(Onwuchekwal J., 2012) investigated whether the impact of auditor rotation on audit quality

relies on the mental frame auditors applied in evaluating management representations. In practice,

auditors can structure their assessments of management representations in through their likely

dishonesty (what we term skepticism) or potential honesty. Using psychology theory and a laboratory

experiment, he revealed that rotation improve audit quality when an auditor is probity frame, but that

this impact reverses when an auditor is skeptical. Thus, the interest of using a skeptical frame achieved

when auditors do not rotate, but requiring rotation can decrease audit effort for auditors using a

skeptical frame.

Furthermore, (Ottosson J., 2015) investigated and compared the responses from both EU

investor sand US investors in order to get their opinions about rotation of audit firms and to find out if

the investors’ opinions have had any influence on the legislators’ decisions regarding the contradictory

approaches in the EU and the US. The main research question is: Is there a difference between the

investors’ viewpoints of rotation of audit firms in the EU and the US?

42 responses were analyzed because investors are one of the essentially stakeholders and those

who should be most concerned with auditor independence and audit quality. The study revealed that

rotation of audit firms is not supported, according to the investors’ opinions. A pure majority of the

investors in the EU and all of the investors in the US unfavorable the rotation and comparable debates

were used both by EU investors and US investors. The investors do not believe that regulations on

rotation of audit firms will improve auditor independence or audit quality. The study also concluded

that legislators in the EU have not followed the investors’ opinions when they decided to regulate the

rotation in 2014. However, it does not explain why the legislators decided on two different approaches,

only that the decision by the legislators in the EU did not agree with the investors’ point of view.


3. Hypotheses 3.1 Main Hypothesis

H0: There is no significant effect of Rotation Drivers on the AFR.

3.2 Sub Hypothesis

H01: There is no significant effect of the accountability on AFR.

H02: There is no significant effect of compliance to ISAs on AFR.

H03: There is no significant effect of the experience on AFR.

H04: There is no significant effect of the board independence on AFR.

H05: There is no significant effect of the responses delay on AFR.

H06: There is no significant effect of the firm size on AFR.

4. Research Methodology The research depends on descriptive analysis and quantitative approaches that will provide the research

results, and will enrich the detailed information’s that will allow reaching the research results.

Questionnaires were distributed to the companies of the research sample. Regression analysis will be

used to measure the variables and the mentioned hypothesis.

4.2 Research Population

Population of the study: The population of the study consists of Jordanian listed firms as of 2015, of a

total of 261 companies from all four sectors (Banking, Insurance, Services, and Industry).

The sample of the study consists of 165 companies, which were selected randomly from all

sectors, ordered by their size (number of employees), along with the distance from the researcher’s

location (inside Amman).

4.2 Sampling

The questionnaire will target the financial managers, the board of directors, Internal Audit Specialist,

And Internal Auditors from the sample, to provide the most accurate data related to AFR from their

perspective.

A quantitative research method was used to collect the data, and a Questionnaire was

distributed to the companies, one to four Questionnaires for each company depending on the

availability of the targeted audience. (The questionnaire is provided in the appendix of this study).

Total of 200 Questionnaires were distributed, and 130 were collected, out of which 121 were

considered in the study with complete answers.

4.3 Research Model

The current study will investigate influence of variable in the extent of AFR and the factors (Rotation

Drivers) that may affect it as shown below:


Figure 1: Research Model (created by the researchers)

4.4 Variables of the Study

4.4.1 Dependent Variable_ Audit Firms’ Rotation (AFR)

• Audit Firms’ Rotation (AFR): As defined in the Sarbanes-Oxley (SOX) Act as “the process

that a company rotates its audit firm after a period of time. Also it has been proposed as a

potential solution to the possibility that long auditor tenure may lead to a deterioration of audit

quality” (Sarbanes-Oxley Act, Section 207).

This factor will be measured in the questionnaire by whether the company rotates its audit firm

or not.

4.4.2 Independent Variables_ Accountability, Compliance to International Standards on

Auditing (ISAs), Experience, Board Independence, Responses Delay, Audit Report Lag (ARL),

Firm Size

• Accountability: The term “accountability” is diverse and has evolved multi-dimensionally

from its traditional definition. The traditional view of accountability incorporates “the giving

and demanding of reasons for conduct” (Roberts J., Scapens R. 1985). It requires individuals to

explain (account for) and take responsibility for their actions, or failure to take actions.

• Compliance to International Standards on Auditing (ISAs): The ISAs were issued by the

International Auditing and Assurance Standards Board (IAASB) to establish standards and

provide guidance on the objective and general principles governing an audit of financial

statements. This factor will be measured by the level of compliance that the audit firm

considers in its audit process.

• Experience: the term “experience” describes the period during which the audit firm provides

its professional services to its clients.

• Board Independence: As realized in the Sarbanes-Oxley (SOX) Act as the concept for a

majority of board members to be independent from the company. Independence place when a

board member has not been and is not currently employed by the company or its auditor and the

board member’s employer doesn’t achieve an important amount of business with the firm. Each

company makes its own definition of significance (Sarbanes-Oxley Act, Section 103).

• Responses Delay: this term measures the audit firm delay in responses which the company

waits to take some action or to deliver reports to the audit firm.

• Audit Report Lag (ARL): determines the number of days between the client's fiscal year end

and the date of auditor’s report and is considered a crucial element for investors, companies,

external auditors, and regulators. They believe that it can affect the timeliness of financial

statements which in turn affects the level of uncertainty of the accounting information and

market reaction to the release of this information (Givoly and Palmon 1982); (Chambers and

Penman, 1984); (Ashton A., 1987); (Dao M., Pham, T. (2014).

Independent Variables Dependent Variable

Rotation Drivers

Accountability

Compliance to ISAs

Experience

Board Independence

Responses Delay

Audit Firm Size

AFR


• Firm Size: The firm size is defined by the number of employees that works in the audit field in

that firm.

5. Theoretical Framework 5.1 Arguments in favor of AFR

Supporter of AFR propose that in a long-standing relationship, auditors may become excessively

familiar with the company’s management and risk losing the professional skepticism necessary to stay

objective. Furthermore supporter debate that commercial pressure to keep a long-term economic

relationship with a specific company may undermine an audit firm’s commitment to the severity and

independence of the audit process.

Another joint rationale for firm rotation is that a new audit firm will manage the audit with

conscious eyes and may be more likely to notice matters than an incumbent audit firm. In addition, the

knowing that another firm will in the near future review the current auditor’s work could support the

professional skepticism of the incumbent auditor. Some also argue that mandatory firm rotation could

be a way to open up and resist concentration in the upper end of the audit market.

Sometimes auditors use the same methods and the same techniques in auditing a specific firm

which sometimes may lead to some misstatements and can increase the chances of firm fraud or

manipulation and that is consistent with (Hoyle A., 2011); (McLaren N. L., 2011) studies.

5.2 Arguments against AFR

5.2.1 Audit Quality

Mandatory firm rotation has not been assured to increase audit quality; actually, studies have revealed

that it may negatively impact it, particularly where there are shorter rotation periods. In contrast, one

feature of audit firm tenure is that the auditor gain significant knowledge and understanding of a

company over time, as well as a consciousness of its risks, all of which can improve audit quality.

Longer tenure can permit the audit firm to improve experience and credibility with the entity by

demonstrating, over time, its technical accounting expertise, the quality of its audit work and its

knowledge of the company’s business. (Joseph A. 2011)

5.2.2 Cost and Timing

Because of the learning curve audit firms confront with any new audit, audits can be less efficient at

the beginning of an engagement. While audit firms clearly can and do conduct movements effectively,

this is not without cost or risk; both the auditor and the company afford costs in getting up to speed.

The cost of mandatory firm rotation may also be increase because of a company’s specific

circumstances.

5.2.3 Does Auditor Rotation Affect the Auditor Independency?

Many studies e.g. (Al-Khouri, A. 2014); (Hoyle A., 2011); (McLaren N. L., 2011) showed a positive

significant relationship between the auditor rotation and the auditor independency, in general when the

auditor rotation increases the auditor independency. From the study of (Al-Khouri, 2014), the results

show a significant influence of the audit firm rotation on the independence of the auditor.

5.3 Auditor Experience and Audit Quality

It was argued that the brand name (high reputation) of an audit firm is not sufficient to encourage the

audit quality, but the industry knowledge and specialization is a critical element of the auditor’s

experience. As the auditor’s knowledge and experience with a client’s industry increase, the auditor is

fit to discover potential material misstatements and to set basis and hypotheses for industry specifc

routine errors (Knechel W., 2007). Also, it was revealed that the auditor’s experience in discovering


material misstatements decrease when they pass longer tenure with their clients, that they depend on

their prior experience with the client rather than spending more effort (Meyer et al., 2007), an issue that

would suggest the rotation as a solution to overcome auditor slag.

5.4 AFR Vs Audit Partner Rotation

Audit Partner Rotation (APR) is defined as the process where the key audit partners are required to

rotate off the audit engagement after a period of time, this is different from the AFR; in which the audit

firm would be rotated as a whole. In this study we are considering the AFR only, in which the audit

firm will be, rotated (Soo Young Kwon, et al., 2010).

5.5 Rotation in Jordanian Law

Auditor rotation is referenced in Jordanian regulation in article 33 - (of the temporary profession

regulating law number (73) for the year (2003) specified that “A certified auditor cannot be selected to

audit the financial statements of public shareholding corporations, or private shareholding corporations

or limited liability corporations for a period that exceeds four concurrent years except having the

approval of the Higher Committee of the profession”.

After investigating the existence of such a law in Jordan Association of Certified Public

Accountants (JACPA); they have denied having such legislation in their internal laws. After

questioning some audit firms; they also replied by that they unaware of this. This may be because of

not applying the law from the legislation, or due to being in-specific about the details in that law.

5.6 Accountability and AFR

Accountability occupies a significant role in the development of confidence during human interaction

(Friedman & Grudin J., 1998). As a first-class design aim of services in federated distributed systems

(Yumerefendi I., & Chase J.S. 2004).

Accountability from the auditor in engaging the audit work also influences the audit quality.

(Cloyd, 1997) investigated the interaction between accountability and expertise to determine quality in

engaging the audit work.

5.7 Experience and AFR

Experience is expertise gained by someone after a long time period of work. The employ of experience

as an independent variable is based on the assumption that repeated work in a long-time period will

develop the quality of work. (Kolodner J., 1996) argued that the experience could be utilize to develop

the decision making performance, in that research, which had similar finding to this paper, experience

was divided in two dimensions, i.e., how long the working period and the frequency in doing audit

engagements. It is interesting to re-examine the effects of experience as an independent variable on

audit quality because many researchers fail to prove this hypothesis. (Ashton R., 1990) argues that it is

because the accounting and audit decisions take time to learn.

5.8 Compliance to ISA’s and AFR

The objective of ISA is to set standards and supply guidance on the objective and general principles

conducting an audit of financial statements.

Audit firms are complied with all auditing standards; this was assured by the World Bank

report. This findings because of hard conditions and requirements of Jordanian laws regulating the

audit profession to be a certified public accountant as well as strict legal liabilities (Obaidat A., 2007).


6. Data Analysis and Results 6.1 Demographic of the Sample

The study used demographic variables which are: age, gender, academic qualifications, Specialization,

certifications, and current position.

1. Regarding the Age question, the following table shows the distribution of the research sample

participants according to age:

Table 2: Demographic characteristics (Age)

Age Frequency Percentage

Less than 30 years 56 46.3%

From 30 to less than 40 50 41.3%

From 40 to less than 50 13 10.7%

50 or more 2 1.7%

Total 121 100%

Based on the table 2 above, in the study conducted, the age bracket of the participants aged less

than 30 years was 46.3% which was the largest group of participants regarding age. This may indicate

that the targeted industry prefers young workers rather than older ones. On the other hand, participants

aged from 30 years to less than 40 years were 41.3% which is considered high too, supporting the

above indicator. Participants aged from 40 years to less than 50 years shows 10.7%, and participants

aged years or more was 1.7% as well.

2. Regarding the gender question, the following table shows the distribution of the research

sample participants according to gender:

Table 3: Demographic characteristics (Gender)

Gender Frequency Percentage

Male 106 87.6%

Female 15 12.4%

Total 121 100%

Based on the table 3 above, in the study conducted on the participants in the Gender section

shows that the Males percentage was 87.6%, and for Females was 12.4%.This might indicate that the

targeted industry/environment prefers to hire males rather than females or that the work market offers

more males than females, which might be more reasonable since the population ratio in Jordan

supports that.

3. Regarding the academic qualifications question, the following table shows the distribution of

the research sample participants according to academic qualifications:

Table 4: Demographic characteristics (Academic Qualifications)

Academic Qualification Frequency Percentage

Diploma 8 6.6%

Bachelor 86 71.1%

Masters 25 20.7%

PH.D. 2 1.7%

Total 121 100%


Based on the table 4 above, in the study conducted on the participants in the Academic

Qualifications section shows that Bachelor degree holders are 71.1% being the largest value. This

indicates that most the participants might be in the mid-level of their career or that the graduate studies

might be a challenge to them. On the other hand, the Master’s degree holders are 20.7%, and the

Diploma degree holders are 6.6% and the last one PH. D is 1.7% of the participants; this might be due

to the high demands for specialized skills.

4. Regarding the Specialization question, the following table shows the distribution of the

research sample participants according to Specialization:

Table 5: Demographic characteristics (Specialization)

Specialization Frequency Percentage

Accounting 112 92.6%

Business Administration 3 2.5%

Economics 1 0.8%

Other 5 4.1%

Total 121 100%

Based on the table 5 above, in the study conducted on the participants in the Specialization

section shows that Accounting Specialization participants were 92.6% being the highest score; which is

reasonable for the targeted sample. The Other field got 4.1%, and the Business Administration got

2.5% and the Economics got 0.8% of the participants.

5. Regarding the certification question, the following table shows the distribution of the research

sample participants according to certification:

Table 6: Demographic characteristics (Certifications)

Certificate Frequency Percentage

JCPA 7 5.8%

CPA 9 7.4%

CMA 3 2.5%

Other 3 2.5%

None 99 81.8%

Total 121 100%

Based on the table 6 above, in the study conducted on the participants in the Certification

section shows that most of the participants didn’t hold any certification for 81.8% of them. This

indicates that the certifications require specialized skills are considered costly for such bracket (from

the Age bracket above), the CPA holders were 7.4% and JCPA holders was 5.8%, and Other

certifications along with CMA scored 2.5%.

6. Regarding the current position question, the following table shows the distribution of the

research sample participants according to current position:

Table 7: Demographic characteristics (Current Position)

Position Frequency Percentage

Financial Manager 24 19.8%

Internal Auditor 23 19%

Accountant 62 51.2%

Other 12 9.9%

Total 121 100%


Based on the table 7 above, in the study conducted on the participants in the Current Position

section shows that 51.2% were Accountants; this might indicate that the companies have a larger

number of employees as accountants than other positions, also it might indicate that the higher levels

of positions in the companies might not be available to fill the questionnaire due to their work

schedule. On the other hand, Financial Managers position scored 19.8%, and Internal Auditor position

scored 19% and the last one Other for 9.9% of the participants.

6.2 Tool Validity

Table 8: Cronbach’s alpha for the study fields’

Section # Section Name Value of Cronbach's Alpha (α)

1 Rotation 0.704

2 Accountability 0.797

3 Compliance with ISA 0.631

4 Experience 0.601

5 Board Independence 0.650

6 Responses Delay 0.728

7 Size 0.659

Total Questionnaire 0.680

As shown in table 8 above; the total Cronbach’s alpha for the study fields was (0.680) while the

maximum value was for Accountability (0.797) and the lowest value was (0.601) for Experience. All

the values were above the minimum acceptable value (0.6) (Cronbach L. J., 1951), which led to the

stability of the results of the study. A specialized third party has verified the instrument, in order to

check the model strength and the validity to measure the study variables.

6.3 Data Collection Method Analysis

This research depended on two sources of information in order to gain the intended results for the

research, which are:

1. Gathering information from books, articles, past researches and other literature that has

addressed the audit rotation.

2. Building a questionnaire based on past literature reviews and distributes it to collect

participant’s opinions.

3. Analyzing the data using Statistical Package for the Social Sciences (SPSS) and finding relation

from the data gathered from the questionnaire.

6.4 Statistical Analysis

Means and standard deviation were calculated from the participant answers according to the

Questionnaire questions, to determine the rotation drivers’ effects on AFR. The descriptive statistics

for the study variables for the fields are distributed in the following table:

Table 9: Descriptive Statistics for the study variables

# Field Mean Std. Deviation

1 AFR 3.6171

0.831

2 Accountability 4.3994

0.612

3 Compliance with ISA 4.3196

1.842

4 Experience 4.3581

0.650

15

5

6

7

As seen in the above table 9 above; the AFR field achieved mean (3.617) and standard

deviation (0.831), and the Accountability achieved mean (4.399) and

the Compliance to ISA achieved mean (4.3) and standard deviation (1.842), while the Experience mean

was (4.4) and standard deviation (0.4), and the Responses Delay mean was (4.4) and the standard

deviation was (0.38), final

data is represented in the following figure:

1. Firm Rotation

Means and standard deviation were calculated for Firm Rotation

deviation for all its questions that were set to measure it in the Questionnaire.

Table 10:

Rank

1 Rotating the audit firm gives a good reputation to

company

2 Rotating the audit firm prevents having late payments or

delay in the audit process

3 The company encourages to rotate the audit firm every four

years

As seen from table 10 abo

(0.831), It can also be seen that question number 3 ranked first with mean (3.752) and standard

deviation (0.959), then question number 2 with mean (3.595) and standard deviation (0.748)

finally question number 1 with mean (3.504) and standard deviation (0.786).

European Journal of Economics, Finance and Administrative Sciences Issue 96 (2017)

Board Independence





deviation was (0.38), final


Firm Rotation



Descriptive Statistics for AFR

Rotating the audit firm gives a good reputation to

company

Rotating the audit firm prevents having late payments or


The company encourages to rotate the audit firm every four

years






Board Independence

Responses Delay

Size





deviation was (0.38), finally the Size mean was (4.0) and the standard deviation was (0.5). the above


Fig. 2

Firm Rotation




Question





Total






Board Independence

Responses Delay





ly the Size mean was (4.0) and the standard deviation was (0.5). the above


Fig. 2 Descriptive Statistics for the study variables




Question




As seen from table 10 above; the total mean for this field was (3.617) with standard deviation










Descriptive Statistics for the study variables



Rotating the audit firm gives a good reputation to the



ve; the total mean for this field was (3.617) with standard deviation





4.2672

4.4215

4.062







Means and standard deviation were calculated for Firm Rotation field by the means and standard


Mean

3.752

3.595

The company encourages to rotate the audit firm every four 3.504

3.617







deviation (0.831), and the Accountability achieved mean (4.399) and standard deviation (0.612), and





field by the means and standard


Mean

Std.

Deviation

3.752 0.959

3.595 0.748

3.504 0.786

3.617 0.831






1.946

0.604

0.765


standard deviation (0.612), and





Std.

Deviation Question #

0.959

0.748

0.786

0.831






standard deviation (0.612), and





Question #

3

2

1



deviation (0.959), then question number 2 with mean (3.595) and standard deviation (0.748), and


In the researchers’ opinion, the companies may tend to rotate the audit firm for some reasons

the company might find important, like good reputation, getting work on time with preferring to not

having late payments with the audit firm.

2. Accountability

Means and standard deviation were calculated for Accountability field by calculating the means and

standard deviation for all its questions that were set to measure it in the Questionnaire.

Table 11: Descriptive Statistics for Accountability

Rank Question Mean

Std.


1 The audit firm will be rotated if there are legal problems

between the firm and the company

4.495 0.659 3

2 The audit firm is committed during its service to the laws and

regulations related to the Specialization

4.37 0.502 1

3 The audit firm is responsible for misstatements that might

affect user information

4.330 0.675 2

Total 4.398 0.612


(0.612), It can also be seen that question number 3 got the highest rank with mean (4.495) and standard

deviation (0.659), then question number 1 with mean (4.37) and standard deviation (0.502), finally

question number 2 with mean (4.330) and standard deviation (0.675).

In the researchers’ opinion, the companies show some fear about legal problems with audit

firms, along with any misstatements that might happen from the auditor’s report that might affect the

information that user’s need, in order to get the decision based on its results.

3. Compliance to ISA

Means and standard deviation were calculated for Compliance to ISA field by calculating the means

and standard deviation for all its questions that are set to measure it in the Questionnaire.

Table 12: Descriptive Statistics for Compliance to ISA

Rank Question Mean

Std.


1 The audit firm would be rotated when it doesn’t comply to the

ISA

4.876 5.134 2

2 Misunderstanding the ISA between the audit firm and the

Company causes audit firm rotation

4.225 0.76105 3

3 The audit firm should have full knowledge of the ISA 4.214 0.4866 1

4 Rotating the audit firm every four years, is required by ISA 3.958 0.98655 4

Total 4.318 1.842



deviation (5.134), in second place comes question number 3 with mean (4.225) and standard deviation

(0.761), in third place comes question number 1 with mean (4.214) and standard deviation (0.4866),

finally comes question 4 with mean (3.958) and standard deviation (0.986).

In researchers’ opinion, the companies show a concern regarding the auditing standards, and

will try to avoid the audit firms which may not apply these standards in their reports, along with the

understanding to the same level for these standards with the audit firm.


4. Experience

Means and standard deviation were calculated for Experience field by calculating the means and

standard deviation for all its questions that are set to measure it in the Questionnaire.

Table 13: Descriptive Statistics for Experience

Rank Question Mean

Std.


1 Audit firm experience makes their work easier and helps in

achieving their goals faster

4.4628 0.73077 3

2 Audit firm experience is considered an important topic

when selecting the audit firm

4.429 0.630 1

3 Audit firm will be rotated when noticing it’s not having the

enough experience

4.1818 0.59161 2

Total 4.357 0.650

As seen from table 13 above; the total means for this field is (4.357) with standard deviation


deviation (0.730), and then comes question 1 with mean (4.429) and standard deviation (0.630), finally

comes question number 2 with mean (4.181) and standard deviation (0.591).

In the researchers’ opinion, the companies might prefer the wide experienced audit firm on less

experienced ones. This might be due to the working achievement and the less time estimated for work

compared to other firms.

5. Board Independence

Means and standard deviation were calculated for Board Independence field by calculating the means

and standard deviation for all its questions that are set to measure it in the Questionnaire.

Table 14: Descriptive Statistics for Board Independence

Rank Question Mean

Std.


1 Social relationship between audit firm members and the

company affects the independence negatively

4.677 4.52 2

2 Having a relationship between the audit firm and the board

of directors limits audit firm rotation

4.082 0.78088 3

3 Under the related regulations, the audit firm has an

acceptable degree of independence

4.04 0.538 1

Total 4.266 1.946

As seen from table 14 above; the total means for this field is (4.266) with standard deviation



(0.780), in last place comes question 1 with mean (4.04) and standard deviation (0.538).

In researchers’ opinion, the companies show a concern about any relation that might happen

between the audit firm members and the members of the company’s board, and that might lead to

affect the Independence of the audit firm, which might finally lead to manipulation in the audit report

because of some personal interests.

6. Responses Delay

Means and standard deviation were calculated for Responses Delay field by calculating the means and

standard deviation for all its questions that were set to measure it in the Questionnaire.

Table 15: Descriptive Statistics for Responses Delay


Rank Question Mean

Std.


1 Audit firm will be rotated if it delivers the requested reports

late

4.5041 0.647 3

2 Delivering replies in timely basis affects audit firm rotation 4.4545 0.562 1

3 Delivering replies in timely basis affects the use of information

mentioned in financial reports

4.3058 0.6033 2

Total 4.421 0.604

As seen from table 15 above; the total mean for the field are (4.421) with standard deviation

(0.604), and it can be seen that question number 3 got the highest rank with mean (4.504) and standard

deviation (0.647), and in second place comes question number 1 with mean (4.454) and standard

deviation (0.562), in last place comes question number 2 with mean (4.305) and standard deviation

(0.603).

In the researchers’ opinion, the companies find receiving replies/responses from audit firm as

an important topic, and prefers to get these replies on time; most likely because the importance of the

timeliness of the information will affect management decision making and investors decisions, and that

might be a selection concern regarding the auditor of the company. Also we can conclude that the

longer ARL was, the probability of rotating the audit firm is greater.

7. Size

Means and standard deviation were calculated for Size field by calculating the means and standard


Table 16: Descriptive Statistics for Size

Rank Question Mean

Std.


1 Large sized audit firms are preferred to the smaller audit firms 4.115 0.8582 3

2 The company changes the small audit firms more than larger

audit firms

4.099 0.7118 2

3 The large size of audit firm reduces the contracting risk

between the company and the audit firm

4.066 0.543 1

4 Larger size audit firms provide better audit services, making

rotation possibility lower 3.9669 0.9481 4

Total 4.061 0.765

As seen from table 16 above; the total means for the field is (4.061) and standard deviation

(0.765), and it can be seen that question number 3 got the highest rank with mean (4.115) and standard


(0.711), in third place comes question number 1 with mean (4.066) and standard deviation (0.543), in

last place comes question number 4 with mean (3.966) and standard deviation (0.984).

In the researchers’ opinion, the companies might prefer bigger audit firms on smaller ones, this

might be because of the stability that companies look for, or finding bigger firms more professional

than smaller ones.

6.5 Study Hypothesis Test

Linear Regression Test

In this section the hypothesis of the study will be tested using the Linear Regression and the results that

might support or reject the study hypotheses. If the results agree with all the sub hypotheses, then the

primary hypothesis will be accomplished.

• Primary hypothesis


• H0: There is no significant effect of Rotation Drivers on the AFR.

• Sub hypotheses

H01: There is no significant effect of the Accountability on AFR

To test this hypothesis, the researcher used linear regression test to check the direct effect of the

Accountability on AFR as shown in the table below:

Table 17: Linear regression test results of the direct effect of the Accountability on AFR

Dependent

Variable

R R2 F Unstandardized Coefficients

Independent

Variable

T Sig

Accountability .232ᵃ .540 6.779 Audit Rotation 2.81 .010

As seen in table 17 above; the result shows that there is a significant effect for the

Accountability on the AFR, because the significant value was (0.010) which is less than (0.05), the

value of R was (0.232) and the coefficient determination R² was (0.540), therefore about 54% of the

variation in AFR is explained by the Accountability. The restriction parameter (F) was (6.779), thus we

will reject the hypothesis “H01: There is no significant effect of the Accountability on AFR” at level

(α<=0.05).

This means that Accountability does affect the AFR, since companies tend to have a clear

relation with the audit firm in which the firm will be responsible for anything related to the reports it

provides, and companies probably change the audit firm in case it faces legal issues with that firm.

From the researchers’ point of view, the accountability factor seems to be one of the most

important factors that might affect AFR; in which the legal and regulation part is an important subject

that companies consider as an important topic, which might lead to future losses or legal issues if not

dealt with in a proper way.

• H02: There is no significant effect of the Compliance to ISA on AFR


Compliance to ISA on AFR as shown in the table below:

Table 18: Linear regression test results of the direct effect of the Compliance to ISA on AFR

Dependent

Variable


Independent

Variable

T Sig

Compliance to

ISA

.087ᵃ .008 .905 Audit Rotation 16.424 .343

As seen in table 18 above; the result shows that there is no significant effect for the Compliance

to ISA on the AFR, because the significant value was (0.343) which is greater than (0.05), the value of

R was (0.087) and the coefficient determination R² was (0.008), therefore AFR by Compliance to ISA

can’t be explained. And the restriction parameter (F) was (16.424), and a result the hypothesis will be

accepted “H02: There is no significant effect of the Compliance to ISA on AFR” at level (α<=0.05).

This means that Complying to ISA does not affect the AFR. Also Complying to ISA is not a

factor which companies might take as a selector when choosing audit firm, and that might be because

of the separation of concerns that many companies try to have.


From the researchers’ point of view, this factor might not be an important one, due to the

situation in Jordan, in which most companies try to get the final reports regardless of any ISA used by

audit firm (results are more important than the technique used or standards adapted).

• H03: There is no significant effect of the Experience on AFR


Experience on AFR as shown in the table below:

Table 19: Linear regression test results of the direct effect of the Experience on AFR

Dependent

Variable


Independent

Variable

T Sig

Experience .293ᵃ .086 11.199 Audit Rotation 2.555 .001

As seen in table 19 above; the result shows that there is a significant effect of the Experience on

the AFR, because the significant value was (0.001) which is less than (0.05), the value of R was

(0.293) and the coefficient determination R² was (0.086), therefore about 8.6% of the variation in the

AFR is explained by the Experience. And the restriction parameter (F) was (11.199), And thus the

hypothesis will be rejected “H0:3: There is no significant effect of the Experience on AFR” at level

(α<=0.05).

That means that Experience does affect the AFR. It might also show that the experience is

something the company’s takes regard seriously while the selecting of the audit firm, and prefer the

experienced firms other than the less experienced. This might be due to the better auditing or time

saving when dealing with the experienced firms.

From the researchers’ point of view, the experience might not be a very important factor, since

companies might prefer the fast service upon cost for example; assuming that an experienced audit firm

will cost more than other firm which is less experienced.

• H04: There is no significant effect of the Board Independence on AFR

To test this hypothesis, the researcher used linear regression test to check the direct effect of the Board

Independence on AFR as shown in the table below:

Table 20: Linear regression test results of the direct effect of the Board Independence on AFR

Dependent

Variable


Independent

Variable

T Sig

Board

Independence

.170ᵃ .029 3.551 Audit Rotation 21.546 0.062

As seen in table 20 above; the result shows that there is no significant effect for the Board

Independence on the AFR, because the significant value was (0.062) which is greater than (0.05), the

value of R was (0.170) and the coefficient determination R² was (0.029), thereforeAFR by Board

Independence can’t be explained. The restriction parameter (F) was (3.551), andthus the hypothesis

will be accepted “H04: There is no significant effect of the Board Independence on AFR” at level

(α<=0.05).

This means that Board Independence does not affect the AFR. It also means that companies in

this study didn’t show any concern of having relationships between the company and the audit firm,


and if any they would not be a part of the decision of selecting the audit firm or requesting an apology

letter from it.

From the researchers’ point of view, board independence should be an important factor

affecting AFR, since relationships between individuals can affect any decision that might break or

weaken that relationship.

• H05: There is no significant effect of the Responses Delay on AFR


Responses Delay on AFR as shown in the table below:

Table 21: Linear regression test results of the direct effect of the Responses Delay on AFR

Dependent

Variable


Independent

Variable

T Sig

Responses

Delay

.136ᵃ 0.19 2.253 Audit Rotation 3.554 .136

As seen in table 21 above; the result shows that there is no significant effect for the Responses

Delay on the AFR, because the significant value was (0.136) which is greater than (0.05), the value of

R was (0.136) and the coefficient determination R² was (0.019), therefore we can’t explain AFR by

Reponses Delay. The restriction parameter (F) was (2.253), thus the hypothesis will be accepted “H05:

There is no significant effect of the Responses Delay on AFR” at level (α<=0.05).

This means that Responses Delay does not affect the AFR. It also means that companies in this

study didn’t show any importance to any delay that might happen in any communication channel

between the company and the audit firm. We can also conclude that ARL is not a determinant factor of

the AFR.

From the researchers’ point of view, responses delay should’ve been an affecting factor, since

audit firms might not deliver the required reports in timely basis as they agreed before with companies,

which will make the possibility of conflicts and legal problems much higher with external parties.

• H06: There is no significant effect of the Size on AFR

To test this hypothesis, the researcher used linear regression test to check the direct effect of the Size

on AFR as shown in the table below:

Table 22: Linear regression test results of the direct effect of the Size on AFR

Dependent

Variable


Independent

Variable

T Sig

Size 0.050ᵃ 0.002 0.298 Audit Rotation 6.934 .586

As seen in table 22 above; the result shows that there is no significant effect for the Size on the

AFR, because the significant value was (0.586) which is greater than (0.05), the value of R was (0.050)

and the coefficient determination R² was (0.002), therefore AFR by Size of the firm can’t be explained.

And the restriction parameter (F) was (0.298), and thus the hypothesis will be accepted “H06: There is

no significant effect of the Size on AFR” at level (α<=0.05).

This means that Size does not affect the AFR. It also means that companies in this study didn’t

show any concern of the Size as something that may makes a difference in the selection if the audit

firm, or in the firm change if needed. This also indicates that the companies focus on the output of the


firm rather than the look and feel of the audit firm; the achievements of the firm are more important

than its size.

From the researcher’s point of view, the firm size factor might not be a factor affecting AFR, in

which the companies might prefer the lower cost for the auditing services from audit firms upon the

size or services provided by the audit firms.

6.6 Multiple Regression Test

In order to determine whether the independent variables can predict the dependent variable, the

researcher used multiple regression tests as shown in the table below:

Table 23: Multiple regression test for the study model

Model R R2 F Sig

1 .329ᵃ .108 2.797 .020

From the above table, we can conclude that as a set, R²=0.108 the predictors (independent

variables) can predict 11% of the dependent variable. And from p = .020 > .05, the overall multiple

regression model was insignificant.

Conclusion The study has driven important results that may enrich and help other literature review which are

related to the study subject. The researchers hope that the results would help in the following decisions:

• Audit firm contract renewal / cancelation from the company’s side; this decision might benefit

from the characteristics / factors of the audit firm(s), which might be more important than other

one(s).

• Audit firm self-development; these results might help the audit firm to try develop or enhance itself

by focusing on some areas that this study might point the interest to (ex: the most significant

factor(s)), which might lead to gain extra clients and preserve the currently existing ones.

The main results of the study that were revealed were:

• There is a significant effect of Accountability on AFR, this result agrees with the one that has

been revealed in the study of (Al-Araidah, A., 2015).

• There is a significant effect of Experience on AFR

• There is an insignificant effect of the rotation drivers (Compliance to ISA, Board

Independence, Responses Delay, Size) on AFR

According to the study results, the researchers have concluded that there are certain points affecting

AFR in Jordanian firms which are stated as follows:

• Listed companies in Jordan are highly concerned about the Audit Firm selection. This might be

to try to save efforts and money along with time.

• Not all characteristics of Audit Firm are considered from the Companies in Jordan; as the study

shows some are important and others are not that important.

• Most of the Listed Companies shows concerns regarding legal accountability and

misstatements that might happen from the Audit Firm affecting the financial information users.

Based on the previous results and discussions, the researchers recommend the following:

• For Companies


o To set criteria can to decide whether to select an Audit Firm or not, also to show

preference. This will make decisions related to Audit Firm selection much easier.

o To evaluate the Audit Firm in more than one area; such as performance, experience,

Accountability.

• For Audit Firms

o Invest in self-development for the firm and its staff, in order to be gain more experience

and knowledge in Audit processes.

o To get to a high level of Accountability, which is something important from the

company’s point of view, and might be an important factor regarding selection of Audit

Firm.

o Getting enough experience in market, in order to achieve the Audit Process in more

easily and smooth way.

• For Researchers

o Conduct more studies and Questionnaires that finds any other factors that might affect

the AFR.

o Try to increase the sample size and the number of factors.

o Make the study on the Audit Firm’s themselves, in order to get the other opinions

regarding AFR, which might support or reject these study results.

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