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Gadjah Mada International Journal of Business Vol.
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: 315-336 Does Auditor Rotation Increase Auditor Independence? Junaidi,1 Jogiyanto Hartono,2 Eko Suwardi,2 Setiyono Miharjo,2 and Bambang Hartadi 1 Faculty of Informatics Technology and Business.
Universitas Teknologi Yogyakarta.
Indonesia.
Faculty of Economics and Business.
Universitas Gadjah Mada.
Indonesia Abstract: This study aims to empirically test the effects of auditor rotation and auditor tenure on an auditorAos independence in companies listed on the Indonesia Stock Exchange during the years 2002-2010.
This study using logistic regression estimation technique.
The results show that, statistically, the auditorAos tenure has significant negative effects on the auditorAos independence, measured by the tendency to give a Aogoing concernAo opinion.
Furthermore, the results also show significant differences between the effects of short and long term tenures on the auditorsAo independence.
Auditor rotation has significant positive effects on the auditorsAo independence.
Abstrak: Penelitian ini bertujuan untuk menguji secara empiris pengaruh rotasi auditor dan masa kerja auditor terhadap independensi auditor pada perusahaan yang listed di Bursa Efek Indonesia selama tahun 2002-2010.
Penelitian ini menggunakan teknik estimasi regresi logistik.
Hasil penelitian menunjukkan bahwa secara statistik, masa kerja auditor berpengaruh signifikan negatif terhadap independensi auditor yang diukur dengan kecenderungan memberikan opini Aoberkelanjutan.
Ao Hasil penelitian juga menunjukkan perbedaan signifikan antara pengaruh masa kerja auditor yang pendek dan lama pada independensi auditor.
Rotasi auditor berpengaruh positif signifikan terhadap independensi auditor.
Keywords: audit quality.
going concern.
JEL classification: M42 * Corresponding authorAos e-mail: masjoen@uty.
ISSN: 1141-1128
http://journal.
id/gamaijb Junaidi et al.
Introduction This study empirically re-tests the effect of rotating auditors on the independence of auditors, in relation to the phenomenon of the artificial rotation of auditors in Indonesia, before the appearance of the newest regulation on partnersAo .
ublic accountant.
The results of the empirical study show different outcomes on whether or not the mandatory auditor rotation is important.
Geiger and Raghunandan .
Myers et al.
Johnson et al.
state that auditing and financial reporting, and auditorsAo tenure are passively related, so that the results of the research do not support the existence of mandatory auditor rotation.
Daugherty et al.
Johnson et al.
Siregar et al.
do not find evidence that rotating auditors increases the quality of financial reports.
In Indonesia, the regulation about mandatory auditor and partner rotation has faced some alterations.
The regulation began with the Decree of the Minister of Finance No.
423/KMK.
06/2002 which was superseded by No.
359/KMK.
06/2003, that obliges companies to limit an auditorAos assignment period to 5 years and a public accountantAos to 3 years.
That decree then was revised by the Decree of the Minister of Finance No.
PMK.
01/2008 about public accountantsAo service which limited the auditorAos assignment period to 6 years and the public accountantAos to 3 years.
On April 6, 2015 the government published Government Regulation No.
20 of 2015 about Public AccountantsAo Practices (PP 20/2.
which is a further regulation of Law No.
5 of 2011 about public accountants.
In relation to the regulation of public accountantsAo service rotations, it is written in Article 11 PP 20/2015.
Article 11 Verse .
which explains that: The service of au- diting of historical financial information, as meant in Article 10 Verse .
letter AuaAy, of any certain entity by a public accountant is limited to 5 .
years financial records in Furthermore, this research also tests whether the artificial rotation of auditors can influence the auditorsAo independence.
Mautz and Sharaf .
state that an auditor must be aware of a lot of conditions which may tend to influence their attitude and independence.
On one side, an auditorAos tenure is related to the high professionalism that is obtained by the auditor, in this case, from a long tenure, because the auditor may get a better understanding about the businessAo processes and the risks facing the clientAos company.
the other hand, an auditorAos tenure is related to the lower awareness of the auditor, because of the over-familiarity between the auditor and the client (Mautz and Sharaf.
The importance of auditor independence encourages the regulator to regulate the length of an auditorAos assignment period in order to improve independence.
However, the empirical findings which show the effects of auditorsAo tenure and rotation on the auditsAo quality have not been conclusive.
Some research shows that tenure has negative influences on an auditAos quality (Mansi et al.
Nagy 2005.
Mai et al.
Coram et al.
Giri 2.
On the other hand, other research does not support the claims that tenure has negative influences on the quality of the audit (Geiger and Raghunandan 2002.
Myers et al.
Ghosh and Moon 2.
Furthermore, whether or not auditor and partner rotation is important is still debatable.
The studies on auditor rotation are related to the auditAos fee, financial reportAos quality, and auditAos quality (Daugherty et al.
Johnson et al.
Siregar et al.
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not find that auditor rotation improves the quality of financial reports.
Yet.
Geiger and Raghunandan .
Knechel et al.
show that auditor rotation has negative influences on financial reports and auditsAo qualities.
Artificial rotation is a condition in which, conceptually, there has been a change of auditor so that the relationship between the audit firm and the client ends, but in fact such a relationship is still ongoing (Junaidi et Tenure is suspected of breaking the auditorAos independence, since over a long time period there may be over-familiarity between the client and the auditor (Mautz and Sharaf, 1.
Deis and Giroux .
Mansi, et al.
Nagy .
Mai, et al.
state that tenure has negative effects on auditsAo qualities.
Coram et al.
finds evidence that, probably, to maintain their clients, auditors tend to lower the standards expected of a professional public accountant.
In contrast.
Geiger and Raghunandan .
Myers et al.
Ghosh and Moon .
reject the statement that tenure brings negative effects to an auditAos quality.
Conflict of interests is suspected to be a factor in the audit qualityAos degradation.
Carrera et al.
shows that more than half of all the auditor-client negotiations really influence the audit reports.
Dharmasaputra and Nafi .
state that EnronAos financial reporting scandals in 2001 were proven to encourage many countries to strengthen their regulations on auditors and their partners.
However, whether or not mandatory auditor rotation is important has since been debatable.
According to Dharmasaputra and Nafi .
, most of the other countries consider that such a regulation is less important, because there are only a few countries adopting such regulations, including Indonesia.
Some research in America does not support the idea that the duration of the relationship between the auditor and client has a negative influence on the auditAos quality (Ghosh and Moon 2005.
Myers et al.
Geiger and Raghunandan 2.
Geiger and Raghunandan .
state that the errors in auditsAo reports are significantly more prevalent at the beginning of a relationship between the auditor and client.
Ghosh and Moon .
find that the perception of investors towards the quality of profits will increase when the auditorAos tenure is longer.
Carcello and Nagy .
find the evidence that cheating in financial reporting is more likely to happen in the first three years of an auditorAos tenure.
Shafie et al.
, who did their research in Malaysia, shows that auditorsAo tenure has significant positive effects on the quality of the auditorsAo reports.
Meanwhile there is some research which proves that auditorsAo tenure brings negative effects to the auditAos quality (Mai et al.
Nagy 2005.
Mansi et al.
Junaidi 2.
Johnson et al.
do not find evidence that auditor rotation, when done to anticipate an auditorAos tenure, increases the quality of the financial reports.
Hartadi .
finds that audit fees significantly influence the auditAos quality, while auditor rotation and the auditorAos reputation do not significantly influence the auditAos quality which is measured by its total accrual.
Giri .
finds that tenure has negative effects on the auditAos quality, while the auditorAos reputation has no effect on it.
However.
Siregar .
finds that there is no evidence that the duration of the auditorAos tenure and auditorAos rotation increase the auditAos quality.
Auditor independence will be tested when the auditorAos firm is placed in a situation when they have to give their opinion about their clientAos financial reports.
The In317 Junaidi et al.
donesian AccountantsAo Association .
, which has now become the Institute of Indonesian Public Accountants, has adopted auditing standards related to the assumption of Aogoing concernsAo that has been regulated in the United States of America by the Statement on Auditing Standards (SAS) No.
The auditorAos considerations of an entityAos ability to continue as a Aogoing concernAo SAS No.
59 (AICPA, 1.
requires the auditor to evaluate whether there is a substantial hesitancy regarding the professionalism of the clientAos company to go on as a Aogoing concern.
Ao To give an audit opinion about companies where the professionalism of their sustainability is questionable is not an easy The decision about a Aogoing concernAo is a very difficult and ambiguous one (Chow et Carmichael and Pany 1993.
Carcello and Neal 2.
When the auditor has decided that there is a substantial hesitancy about the clientAos sustainability, the auditor is allowed to give an unqualified modified report, or even a disclaimer.
Yet, almost no authoritative guidance or research has been published that an auditor can use to decide which type of published Aogoing concernAo reports to issue (Lasllae and Anandarajan 1.
Theory and Hypothesis Development Audit Quality DeAngelo .
states that an auditAos quality contains 2 elements, the auditorAos competency and independency.
Competence means that auditing must be done by those who have the skills and have completed some qualified technical training.
Independence, in terms of an audit, means the auditor takes a non-biased viewpoint when carrying out the audit, evaluating the results, and making the auditAos report.
Coram et al.
state that the quality of an audit is shown by the probability of the auditor finding unintentional/ intentional errors in companiesAo financial reports, and the probability of the findings being reported in and attached to the auditAos Furthermore.
Peecher and Piercey .
state that an auditAos quality is the probability of an auditor finding and reporting violations found in the clientAos accounting The probability of the discovery of a violation depends on the technical professionalism and independence of the auditor.
The Concept of Independency Independency is a mental attitude possessed by auditors to stop them from taking sides when auditing (Mautz and Sharaf 1.
Audit service users see that the auditorAos independence from the financial reports is present when the reports from the compiler and the users are being audited.
Independence is a component of professionalism which has to be maintained by professional public accountants.
Independence, in this case, is that public accountants prioritize the publicAos needs above the clients or auditorsAo interests when auditing the financial reports of the clients.
Thus, in this case, the stance of the auditor is likely to be to prioritize the publicAos Audit Standards in Indonesia for AoGoing ConcernAo PSA No.
30 and SA Section 341 (IPSA .
provide guidance to auditors, regarding the impact of the ability of the business unit to continue to function in the auditorAos opinion as follows:
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If the auditor believes that there are doubts about the ability of the business unit to survive for a reasonable period of time, the auditor should:
Obtain information about the managementAos plans to reduce the impact of conditions and events.
Establish the possibility that such a plan is effectively implemented.
If the management does not have a plan to reduce the impact of conditions and events on the ability of the business unit to survive, the auditor should consider making a statement of intent to not give any opinion.
If the management has a plan, the next step is for the auditor to consider the effectiveness of the plan, as follows:
If the auditor finds no effective plan, the auditor must express no opinion.
If the auditor finds the plan is effective and the client expresses these circumstances in the notes of the financial statements, the auditor expresses an unqualified opinion.
If the auditor finds the plan is effective but the client does not disclose the circumstances in the notes of the financial statements, the auditor expresses an unfair opinion.
Furthermore, the Institute of Indonesian Public Accountants .
published the Interpretation of the Statements for Standard Auditing (IPSA 30.
as a replacement for PSA 30, which aims to provide interpretation, clarification, and further guidance to the auditors when applying the PSA 30 regulation on the auditorAos judgment about a companyAos ability to maintain its viability.
Auditor Tenure and Audit Quality Auditor tenure shows the duration of the relationship between an auditor and client.
Some research that has uncovered the relationship between tenure and audit quality includes works by Geiger and Raghunandan .
Johnson .
Myers et al.
Manry, et al.
Carcello and Nagy .
Ghosh and Moon .
Carey and Simnett .
Knechel and Vanstraelen .
Shafie et al.
AlThuneibat et al.
Most of the research in America rejects the statement that the duration of the relationship between an auditor and client brings negative effects to an auditAos quality .
or example like Geiger and Raghunandan 2002.
Myers et al.
Carcello and Nagy 2004.
and Ghosh and Moon 2.
Carey and Simnett .
state that there are two main arguments that support the negative associations of an auditorAos long tenure and audit quality which are: .
The degradation of independence which may be caused by the intensity of the personal relationship between the auditor and the client.
the deterioration in the audit partnerAos capacity to effect critical appraisal .
escribed in the IFAC Code of Ethics as familiarity The development of a personal relationship between the management of the client company and the auditor will threaten the auditorAos independence.
Davis et al.
explain that the supporters of auditor rotation contend that such rotation will provide Aoa new appearanceAo for the companyAos financial information.
They claim that the longer an auditor tries to keep a client, the less the auditor maintains their objectivity when assessing the clientAos statements, and the greater is the possibility that there will be undetected errors in the financial reports.
Junaidi et al.
Carey and Simnett .
show that there is a negative significant relationship between audit partnersAo tenure and the auditAos quality, and auditors will have a lesser tendency to give a Aogoing concernAo opinion in a long tenure obser vation.
Knechel and Vanstraelen .
show that an auditorAos decision about a Aogoing concernAo opinion is not influenced by tenure, in a sample of bankrupt companies, while in a sample of Aostill in businessAo companies they find some evidence of a negative relationship between an auditorAos tenure and giving a Aogoing concernAo Moreover they also state that the evidence of whether the length of the tenure increases or decreases the quality is weak.
Longer auditor tenures may be related to the loss of awareness through over-familiarity with the client (Mautz and Sharaf.
Long auditor tenures can create economic benefits for the auditor to become less independent, in this case an auditor can bow to the clientAos pressure, in order to maintain future audit fees (Hoyle, 1.
Davis et al.
Ghosh and Moon .
, and AlThuneibat et al.
conclude that an auditAos quality decreases as the duration of the tenure grows.
Based on the concept and results of the research which are revealed, a hypothesis can be postulated as follows:
Hypothesis 1: Auditor tenure has negative effects on the auditorAos independence.
Auditor Rotation and Audit Quality The research by Geiger and Raghunandan .
Myers et al.
Johnson et al.
find that auditing and financial reporting, and audit firmsAo tenure have a positive relationship, so that the results of the research do not support mandator y auditor rotations.
Geiger and Raghunandan .
find evidence that auditors may be influenced by clients which they had in previous years, and do not support the arguments that propose mandatory auditor rotation.
Myers et al.
say that they do not find any evidence that supports the perception that low quality audits are related to long tenures by the auditor.
Knechel and Vantraelen .
find evidence that there is no market reaction to auditorsAo tenure and switching, whereas the auditorsAo independence is not hampered by the duration of the relationship between the auditor and their Lim and Tan .
show that the quality of the audits carried out for companies by professional auditors are higher than those by non-professional ones, when the auditorAos tenure is longer.
Furthermore, the increase in the auditAos quality with a long tenure is higher, if the auditor has a lower audit fee range than the client.
If a professional auditor for certain industries has to be rotated, there may be no other choice for companies other than to have to hire a non-professional auditor, which potentially decreases the auditAos efficiency and effectiveness (Knechel et al.
Chi et al.
and Siregar .
do not find that mandatory auditor rotations increase an auditAos quality.
They have studied audit data from Taiwan, with a rotation period of five years, which became mandatory It is not mentioned that they also found no consistent evidence that supports the conviction that mandatory audit firmsAo rotation based on investor perceptions increases the auditAos quality.
The supporters of rotation show that an auditAos quality will increase as a result of the decreasing familiarity with the client (Nagy 2.
Furthermore.
Jennings et al.
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using an experimental study approach analyzing the opinions of 49 judges that attended an advanced course at the National College Yuditial, perceived that evidence regarding auditorsAo independence can be increased by strengthening the audited companiesAo governance and auditor rotation.
Furthermore.
Fargher and Liwei .
find evidence that at the start of a period of tenure, the quality of the accounting policy decreases, but when there is a rotation, the quality of the accounting policy increases.
Mandatory auditor rotations are based on 2 assumptions:
Long relationships between the auditor and client will interfere with the auditorAos independence, and influence his/her capability for being neutral and objective, and .
mandatory auditor rotation will overcome problems .
f they exis.
related to the long relationship between the auditor and the client (Jones, 2.
Yurianto .
explains that generally, in day-to-day practice, the Decree of the Minister of Finance No.
17/PMK.
01/2008
creates tricky situations for both audit firms and their partners to exchange partners.
For this business, an auditor may change his name to maintain and audit the same client.
The name change appears to show that the auditor has been rotated, as per the regulation, even though in reality, the switch of auditors is considered to be an artificial rotation, since the client is still in the same relationship with the auditor who has just changed his name.
This long period of association between the auditor and client can destroy the auditorAos Long auditor tenures may cause over-familiarity between the client and auditor (Mautz and Sharaf, 1.
Based on the concept and the results of previous researches, a second hypothesis can be formulated as follows:
Hypothesis 2: Auditor rotation has a positive influence on the auditorAos independence.
Methods Population and Sample The population used in this research are auditors working in companies that are listed on the Indonesian Stock Exchange.
The samples were chosen by using the purposive sampling method.
Further, the sample selection process based on the criteria above is explained as shown in Table 1.
Research Model The research model measures the effects of auditor tenure and auditor rotation on the tendency of the auditor to give a Aogoing concernAo opinion by considering some control variables as Equation 1:
Ln [ 1Oe = a b1TENURE b2ROTATION b3REPUTATION b4LSIZE b5AGE e.
Notation:
IND:
Independence as a dummy variable, 1 shows independent, 0 shows not independent.
TENURE:
The relationship periods between auditor and client which substantively happen, measured in years.
ROTATION:
Dummy variable, 0 means no rotation, and 1 means auditor rotation.
REPUTATION: The size of the auditor, which are differentiated Junaidi et al.
Table 1.
Sample Selection Process
Description Amount
Companies published financial reports in 2002-2010
2,809
Companies with incomplete data
Companies published successive financial reports in 2002-2010 with complete data
1,847
Companies without auditor rotation 1,298 Companies with real auditor rotation .
he auditor was changed/ switched with another new one and the affiliation was changed as wel.
Companies with artificial auditor rotation .
he auditor changed their name and the affiliation kept goin.
Companies audited by an auditor in a certain period of time, after a 1 year break the companies were audited by the same auditor.
Total company samples 1,847 Note: *) artificial rotation into auditor with big 4 affiliated .
and auditor with non-big 4 affiliated .
measured consist of the dependent and independent variables.
The definition of the operational and all the research variablesAo measurements are explained below.
LSIZE:
Logarithm of total assets.
Dependent Variable AGE:
The ages of the companies, which are measured in The dependent variable for this research model is independence.
This variable is shown by the matrix 2x3 as shown in Table 2.
Constants The opinion, which is given by the auditor, is divided into two, they are the Aogoing concernAo opinion and the Aonon-going concernAo The probability of a company facing financial problem.
is measured by using the revised Z-Score Altman model .
, in which Z= 6.
56 WCTA 3.
26 RETA
72 EBITTA 1.
05 BVETL e.
If the value of the Z-Score is less than 1.
1, it is predicted that the company is likely to be bankrupt .
n a AodistressAo are.
, which is then b1,b2,b3,b4,b5: Coefficients Error Definition of Variable Operational This research tests the effects of the auditorAos tenure and rotation on their independence in cases where a Aogoing concernAo opinion is given.
The variables which are Gadjah Mada International Journal of Business Ae September-December.
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Table 2.
Matrix of the Relation between Financial Condition and Auditor Opinion Financial Condition Auditor Opinion GCO (AoGoing ConcernAo Opinio.
NGCO (AoNon-Going ConcernAo Opinio.
Distress I (Independen.
NI (Not Independen.
Grey Area Non Distress NI (Not Independen.
Notation:
Distress:
Companies which faced financial problems Grey Area:
Cannot determine whether companies are run well or face financial problems Non Distress:
Companies which did not face any financial problems based on the Altman method .
GCO:
AoGoing concernAo opinion given by the auditor NGCO:
AoNon-going concernAo opinion given by the auditor NI:
Not an independent auditor Independent auditor given the value of 1.
If the Z-Score is between 1.
1 and 2.
6, it is predicted that the company did not have any guarantee of their financial condition always being stable .
n a AogreyAo are.
, which is given the value of 2.
the Z-Score is more than 2.
6 it is predicted that the company is not likely to go bankrupt .
n a AosafeAo are.
, which is then given the value When the condition of a company is in AodistressAo, it supposes that their auditor gives them a AoGoing ConcernAo Opinion (GCO).
the auditor does not give a GCO, it can be concluded that the auditor is not independent.
Another scenario for the auditor to be judged as not independent is that when the condition of a company is not in AodistressAo, the auditor gives a GCO.
On the other hand, if a company is in a AoDistressAo (D) condition and the auditor gives it a GCO, it can be concluded that the auditor is independent.
Another scenario for the auditor to be judged as independent is that when a company is not in a AodistressAo condition, the auditor gives a NGCO.
The last but not least scenario is that if a company is in a AoGreyAo Area (GA) condition and the auditor gives either a GCO or NGCO, it can be concluded that the auditor is independent.
Independent Variable Auditor Tenure The variable of the auditorsAo tenure shows the duration of the relationship between an auditor and client, which is measured in years.
Although an auditorAos tenure is measured by the number of years, as per the research by Myers et al.
and Ghosh Junaidi et al.
and Moon .
, there is a difference with this research and the previous studies.
Myers et al.
and Ghosh and Moon .
measured the tenure by the number of years the relationship between the auditor and client existed in formal terms, whereas, in this research, the auditorsAo tenure is measured based on the duration of the relationship between the auditor and client in substantive terms, by considering the existence of any artificial auditor rotations.
The audit firm changes its name .
he name of a partner is changed in some wa.
, and the firmAos affiliations are kept going.
Auditor Rotation The second independent variable is auditor rotation which shows that there has been a change/switch of auditor done by the client, either voluntarily or mandated by regulations/law.
The rotation variable is a dummy variable, where q shows that there has been an auditor rotation, and 0 shows that there is no rotation.
Control Variable This research uses some control variables to control the factors which may influence an auditorAos independence as per the research by Carey and Simnett .
and Knechel and Vanstraelen .
Those are the auditorAos reputation, the companyAos size, and the companyAos age.
Furthermore, it can be seen that there exist artificial auditor rotations.
Artificial rotations show that it seems there has been some sort of auditor rotation but in fact the relationship between the auditor and the client is still ongoing.
Artificial rotation is done using the following methods:
Analysis of the Results The audit firm changes its name .
ll the partnersAo names are change.
and the firmAos affiliations are kept going.
The auditor who audits a client is changed/ switched for another auditor, but after one year goes by, the first auditor resumes auditing the original client.
Descriptive Statistics Descriptive statistics for each variable can be explained by the Table 3.
Table 3 explains that the total number of company Table 3.
Descriptive Statistics of Company Samples Variable Minimum
Maximum
Average Standard
Deviation Rotation 1,847 Tenure 1,847 Age
1,847
Reputation 1,847 Logarithm of total assets 1,847 Independence 1,847 Gadjah Mada International Journal of Business Ae September-December.
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samples in this research is 1,847.
The variables consist of five independent variables:
Rotation, tenure, age, reputation, and the logarithm of total assets, and one dependent variable, independence.
The rotation variable is a categorical variable with a minimum variable value of 0, and a maximum of 1, with a standard deviation of 0.
The tenure variable shows the duration of the unification between the auditor and client, which has a minimum value of 1 year and a maximum value of 13 years, with an average value of 75 years and a standard deviation of 2.
The variable of the companiesAo ages shows a minimum value of 2 years and a maximum value of 95 years with an average value of 90 years and a standard deviation of The reputation variable is a dummy variable which has a minimum value of 0, a maximum value of 1, and a standard deviation of 0.
The variable of the logarithm of total assets shows a minimum value of 5, a maximum value of 16, an average value of 54 and a standard deviation of 1.
Furthermore, the independence variable is a categorical variable with a minimum value of 0, a maximum value of 1, and a standard deviation of 0.
Table 4 shows that from all the samples, as many as 23.
3 percent have more than 5 years of tenure, and the remaining 76.
7 percent have less than 5 years of tenure.
It means that although there has been a rotation, tenure is substantively still ongoing.
From Table 4, it appears that the shortest tenure is 1 year and the longest is 13 years.
Table 4.
Descriptive Statistics of Company SamplesAo Tenure Table 5.
Descriptive Statistics of Auditor
Tenure Tenure Frequency Rotation Percentage Cumulative Percentage Total
Frequency Percentage No auditor rotation 1,298 Auditor rotation Total
1,847
Table 6.
Descriptive Statistics of Independence Independence Frequency Percentage Not independent Independent 1,296 Total
1,847
1,847
Junaidi et al.
The rotation variable can be seen in Table 5, during the period from 2002-2010 there had been 549 auditor rotations.
The deTable 7.
Multicolinearity Testing Colinearity Statistic Variable Tolerance VIF Tenure Rotation Age Reputation Logarithm of total assets Table 8.
Capability of the Models to Classify Independence Independence Observation Not Independent Independent Total percentage Not Independent Independent 1,272 Percentage scription of the independence variable can be seen in Table 6, from 2002-2010 there were 551 audits of firms which were indicated as not being independent, and 1,296 audits which were considered independent.
Multicolinearity Testing Based on the test results shown in Table 7, it is seen that the VIF values < 10.
Thus, it can be concluded that there is no multicolinearity problem with the research Capacity of Model Classification Table 8 shows the capacity of the models to classify the auditorsAo independence.
total, 72.
1 percent of the models are able to correctly estimate the auditorsAo independence.
Appropriateness of Logistic Regression Model The next step is assessing the appropriateness of the logistic regression model by using Hosmer and LemeshowAos goodness of fit testing.
The results of the appropriateness testing show that the value of Hosmer and LemeshowAos goodness of fit is 0.
Because the value of significance is bigger than 0.
Table 9.
Results of Logistic Regression Testing Variable p-value Rotation *) Tenure **) Age Reputation Logarithm of total assets Constant Nagelkerke R Square is 0.
Notes: *) Tenure shows the duration of the relationship of the auditor in auditing the client, which is measured in **) Rotation is a dichotomy variable that shows the existence of rotation which is described by the value of 0 for no auditor rotation, and the value of 1 for auditor rotation.
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the logistic regression model is appropriate to be used for explaining the independence.
Hypothesis Testing The testing of Hypotheses 1 and 2 supported the results of the logistic regression testing, as shown in Table 9.
Based on the summary, model testing shows the Nagelkerke R Square value is 0.
This indicates that the independent variable in the model can explain the dependent variables 7 percent of the time, and the rest is explained by other variables.
Hypothesis 1Aos testing was for the effects of tenure .
he duration of the relationship between auditor and clien.
on their independence.
The testing shows a significance value of 0.
000, with a coefficient of -0.
Thus.
Hypothesis 1, which is explained statistically, is supported.
This shows that the duration of the relationship between the auditor and client has negative effects on the auditorAos independence.
The results of the analysis show that the relationship between auditor and client over a long time period make the auditor tend to be less or not independent.
There have been regulations on the limits of a relationshipAos duration between auditor and client, which is a maximum of 5 However, the descriptive statistic shows that 23.
5 percent of tenures last more than 5 years.
This shows that although there have been clear regulations on the period of the relationship between auditor and client, the auditors still look for chances to keep their relationships with their clients going, so this influences the auditorsAo independence.
This finding supports Knechel and Vanstraelen .
Carey and Simnett .
Giri .
and Junaidi et al.
who show that there is a negative relationship between auditorsAo tenure and the tendency of the auditors to give Aogoing concernAo opinions on the back of long tenures.
As a result, the limitation of the relationshipAos duration between auditor and client is important since, over a long time period, the relationship can reduce the auditorAos independence.
Opinion giving is an important part of an auditorAos job.
Thus, as professionals, auditors must be able to show their commitment to maintaining their independence.
The existence of limitations to the length of the relationshipAos duration between auditor and client is seen as an effort to maintain and improve the auditorsAo independence.
The regulations on auditorsAo rotation are expected to be applied effectively, to maintain the auditorsAo independence.
Further, the second hypothesisAo testing analyzes the effects of auditorsAo rotation on auditorsAo independence.
The analysis shows the significance value is 0.
000 with a positive direction .
coefficient of 1.
This indicates that the hypothesis which states that auditor rotations positively influence auditorsAo independence is statistically supported.
This studyAos findings differ from Siregar et al.
who found no evidence that longer auditorsAo tenures and auditorsAo rotations increased the quality of This is in line with the first hypothesis, that the lengthy duration of the relationship between an auditor and his/her client can reduce the auditorAos independence.
Therefore, rotation can increase the auditAos quality since a long relationship can reduce the auditorAos independence, considering the familiarity between the auditor and client.
Even though there are debates on whether or not the regulation about rotation is important, this writer thinks that such a regulation is still needed, considering that, as professionals, accountants surely have to maintain their quality and Junaidi et al.
Sensitivity Analysis This research also includes some sensitivity testing to check for the robustness of the main modelAos testing.
Sensitivity Test on the Effect of the Types of Auditor Rotations on AuditorsAo Independence.
This test is done to see the effect of auditor rotations on auditorsAo independence.
The types of rotations are divided into two:
An artificial auditor rotation and a non-artificial auditor rotation.
The analysis shows a p-value of 0.
000 and a coefficient value of 1.
This indicates that artificial rotation has significant negative effects on the auditorsAo independence.
This finding supports the first hypothesis which states that auditorsAo tenure has negative effects on auditorsAo independence.
It means, even though there is a rotation, the relationship between the audi- tor and the client does not end, so that this ongoing relationship can interfere with the auditorAos independence.
The Effects of Auditor Tenure on AuditorsAo Independence in Each Industry The effects of auditorsAo tenure on auditorsAo independence in each industry can be seen in Table 10.
The tenure is divided into short tenure and long tenure.
Short tenure means the maximum period of the relationship between auditor and client is 5 years, and long tenure means the relationship lasted more than 5 Table 10 shows that the types of companies which are most likely to have long tenure and whose auditors are not independent are manufacture companies, numbering 67, whereas companies with long tenure but have independent auditors is also manufacture companies, which number 174.
Table 10.
The Effects of Auditor Tenure on AuditorsAo Independence in Each Industry Not independent Independent Industry Long Tenure Amount Short Tenure Amount Long Tenure Amount Short Tenure Amount Agriculture Animal feed Mining Construction Manufacturing Transportation Communication Wholesale & retail Banks.
Credit agency.
Securities.
Insurance.
Real estate Hotels & travel services Others Gadjah Mada International Journal of Business Ae September-December.
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The Effects of Auditor Rotation on AuditorsAo Independence in Each Industry This test is carried out to see the effects of auditor rotations on auditorsAo independence, in this case it is tested on companies with rotations and companies without rotations.
Table 11 shows that the greatest number of companies that have rotation and whose auditors are independent is again the manufacture companies, numbering 148.
The next test is done to see the effects of the type of rotation on the auditorsAo independence in each industry.
There were 549 rotations during our observation period.
Table 11 describes that artificial rotations without independent conditions occurred in the bank- ing, credit agency, securities, insurance, and real estate industries, amounting to 26 instances, whereas artificial rotations with independent conditions occurred in manufacture industries as 116.
Table 13 shows that artificial rotations occurring after more than 5 years tenure amounted to 89 rotations, and in less than 5 years tenure they numbered 163 rotations.
Table 14 explains the relationship between the type of rotation and the auditorsAo Based on Table 14, it can be seen that auditors who have affiliations with big 4 and have done an artificial rotation amount to 155, whereas auditors who have affiliations with non-big 4 auditors and have done an artificial rotation number 97.
Table 11.
The Effect of Auditor Rotation on AuditorsAo Independence in Each Industry Not independent Independent Industry No rotation Amount Rotation Amount No rotation Amount Rotation Amount Agriculture Animal feed Mining Construction Manufacture Transportation Telecommunication Wholesale & retail Banks.
Credit agency.
Securities.
Insurance.
Real estate Hotels & travel services Others Junaidi et al.
Table 12.
The Effects of Rotation Type on AuditorsAo Independence in Each Industry Not independent Independent Artificial Non-Artificial Rotation Rotation Artificial Non-artificial Rotation Rotation Industry Amount Amount Amount Amount Agriculture Animal feed Mining Construction Manufacture Transportation Telecommunication Wholesale & retail Banks.
Credit agency.
Securities.
Insurance.
Real estate Hotels & travel services Others Table13.
Relation between Rotation and Tenure Table 14.
The Relation between Rotation Type and AuditorsAo Reputation Tenure Type of Rotation >5 years Amount CA 5 years Amount Artificial Real Rotation type Artificial Real Amount Amount Non big 4 Big 4 AuditorAos Reputation Gadjah Mada International Journal of Business Ae September-December.
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Control Variable Testing The control variable is a variable which is controlled or made constant so that the relationship of the independent variable towards the dependent variable is not influenced by external factors which have not been There are three variables which are put into the companies in our study: The companyAos size, their auditorAos reputation, and the companyAos age.
The companyAos size shows a significance level of 0.
866 which means this variable does not influence auditorsAo independence, measured by them giving a Aogoing concernAo opinion.
This case is different from the research of Mutchler et al.
, and Knechel and Vanstraelen .
, which stated that an auditor who gives a Aogoing concernAo opinion is inversely proportional to the size of their clientAos company.
The age variable shows a significance level of 0.
Thus, the age variable statistically does not influence the independence.
This finding supports the results of research done by Knechel and Vanstraelen .
and contradicts the research of Carey and Simnett .
which stated that the age variable is inversely proportional to the tendency of getting a Aogoing concernAo opinion.
Older companies tend to be able to adapt better to the conditions of their businessAo environment.
Experienced managers of these companies will be able to anticipate any financial problems that may influence the auditAos quality.
The auditorsAo reputation variable shows a significance value of 0.
This means that, statistically, the reputation variable does not significantly influence an auditorAos independence.
This is related to the quality of the auditing carried out, and the audit firm, whether it is big or small, which does not have any difference on the quality of the audits it Big and small auditor firms will maintain their quality, based on the Professional Public AccountantsAo Standards.
This is different to the research done by Mutchler, et al.
Francis and Yu .
and DeFond et al.
which found that the larger firms of auditors were more likely to give Aogoing concernAo opinions.
Result and Policy Implication Based on the analysis, the logistic regression shows that tenure has a negative effect on an auditorAos independence.
There are some significant differences between the effects of a short tenure and the effects of a longer tenure on the auditorAos independence.
Those results are supported by a sensitivity test which shows that tenures of up to 6 years have negative effects on auditorsAo independence.
This gives the implication that over a long period, an auditor-client relationship can reduce the auditorAos independence.
For that, regulation on the duration of the relationship between auditor and client must effectively enforce the limitations of auditorsAo tenure.
The government has published the Decree of the Minister of Finance No.
KMK.
06/2002, which was superseded by the Decree of the Minister of Finance No.
KMK.
06/2003, which obliged companies to limit an auditorAos assignment period to 5 years and a public accountantAos to 3 years.
That decree then was revised by the Decree of the Minister of Finance No.
17/PMK.
01/2008
about public accountantsAo service which set the limit of the auditorsAo assignment period at 6 years and public accountantsAo at 3 years.
Based on the results of this research, the effectiveness of the auditorsAo tenure regulation of 6 years needs to be reconsidered, since auditor tenures of up to 6 years have negative effects on auditorsAo independence.
other words, since long tenures can decrease Junaidi et al.
auditorsAo independence, the regulation on auditorsAo tenure should be for a maximum of 5 years, or less.
This limitation to 5 years is in line with Law No.
5 of 2011 about public accountants.
In relation to the regulation on public accountantsAo service rotation, it is written in Article 11 PP 20/2015 in which Article 11 Verse .
explained that: The service of auditing historical financial information as per what is meant in Article 10 Verse .
letter Aua,Ay to a certain entity by a public accountant is limited to be at most only 5 .
years financial records in succession.
Until today, the regulation on auditorsAo rotation is only effective for local auditors, whereas there is no regulation about foreign auditorsAo rotations.
Practically, this regulation can be bypassed by employing an artificial rotation of auditors, in which the auditors only change their names.
Thus deeper consideration about regulating the rotations is really If the assumptions given in this research are right, that basically auditors do not want to lose their clients, and auditorsAo tenures are reduced .
maximum of 5 year.
, there will be an equalization of income for the audit firms, without neglecting their quality.
It can be concluded that instead of the regulation on auditorsAo rotation being bypassed so easily, it would be better if the government regulates the partners in audit firmsAo rotations.
This is in line with the newest regulation on the rotation of public accountants as presented in Article 11 of Government Regulation 20/2015.
Research Findings AuditorAos independence is still an interesting topic to be studied by empirical research.
If the assumptions used in this research are right, that basically auditor firms do not want to lose their clients and their potential fees, it means that independence becomes a very crucial thing, even though the effects of audit fees on the quality of audits have not been conclusive.
In other words, the effects of tenure on an auditAos quality can be biased towards the companyAos size, since big companies are assumed to be more complex, so that the potential fees will be higher.
Another finding is that artificial rotations substantially cause auditorsAo relationships with their clients to be maintained.
a result, it can be concluded that the regulation for mandatory auditorsAo .
rotation are needed.
Conclusions.
Limitations, and Suggestions Nowadays, it is considered that the quality of the audits being carried out has dropped, since there are many suspected factors that influence the quality.
Auditor tenure is a factor that may interfere with an auditorAos independence, considering that over a long time period there can be over-familiarity between the client and auditor.
The phenomenon of the artificial rotations occurring in Indonesia is interesting and worthy of deeper study considering the regulation for mandatory auditorsAo rotation that has been published by the government.
Artificial rotation shows a condition in which, theoretically, there has been a change of auditor, so that the relationship between the audit firm and the client ends, but in fact the relationship is still ongoing.
The relationship between auditor and client over a long period of time can interfere with the auditorAos independence.
Artificial auditor rotation is also worth further study since the relationship between auditor and client over a long period of time is also suspected to interfere with the Gadjah Mada International Journal of Business Ae September-December.
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auditorAos independence.
The results of this study show that the duration of the relationship between the auditor and client has negative effects on the auditorAos independence.
That kind of long term relationship can make the auditor less independent.
The results of the sensitivity analysis show that there are significant differences between the effects of a short tenure and long tenure on auditorsAo declared bankrupt.
Furthermore, the period of observation is also limited, starting from 2002 up to 2010, because after the year 2008, the regulation for the relationship period between auditor and client was changed.
This research focuses only on companies which were listed on the Indonesian Stock Exchange, whereas there many other mediumand small-scale companies that could be included in the research.
Auditor rotation significantly influences auditorsAo independence.
The positive direction of this result shows that auditor rotation can maintain an auditorAos independence.
This result implies that auditor rotation is important since a long relationship between the auditor and their client can influence the auditorAos independence.
Furthermore, sensitivity analysis shows that artificial auditor rotation has negative effects on the auditorsAo This indicates that the thinking behind artificial rotation needs to be given further attention, especially by the auditorsAo regulatory body.
The regulation of auditorsAo rotations is important and must be able to be enforced effectively in practice.
What needs to be avoided are auditor rotations which are done for the sake of fulfilling the regulation, but which neglect the fact that there is a bigger need to be maintained, which is the auditorsAo independence, to boost the quality of the audits they carry out.
This finding confirms the concept of independence, in that an auditor has to possess a strong mental attitude to not take any side when auditing.
One of the artificial auditor rotation measurements uses the assumption that, after a grace period of 1 year from the end of the first relationship period, the client will be audited by the same audit firm, but in fact the firm that actually does the audit is the previous audit firm.
The researcher faced some difficulties in collecting evidence about the auditors who carried out the audits in that 1 year grace period.
Limitations Future research could be done into the same topic, but with different measurements of the auditsAo quality, such as fraud and the financial reportsAo quality.
Besides, future research can include the fee variable as one of the indicators that may influence an auditAos Future researches can also be done The research into the effects of auditorsAo tenure on auditorsAo independence, which is measured by their giving Aogoing concernAo opinions does not include data from companies which faced financial problems, or were Independence is measured by seeing the relationship between the results of the auditorsAo stated opinions and the financial condition of the audited companies.
This research does not include companies which were considered to be doubtful of remaining as a Aogoing concernAo and which were then made Although statistically, an auditorAos tenure has significant negative effects on the auditorAos independence, theoretically it has not been proven, as the results of research which tested those issues have not been conclusive.
Suggestions Junaidi et al.
using the same approach, by extending the duration of the observation period and widening the sample to include not only companies that are listed on the Indonesian Stock Exchange, but also those which are not listed.
Besides this, the study into tenure can be broadened by testing the duration of the relationship of the audit firmsAo partners and References