Audit Firm Reputation versus Auditor Capability: Their Effect on Audit Quality in Indonesia

Abstract

Objective - The emergence of the ASEAN Single Window has triggered the need for higher audit quality in ASEAN countries, including Indonesia. A recent study conducted in Indonesia reveals that the reputation of auditing firms, as rated by clients and users, and auditor's competence, as rated by the auditor, are the primary determinants of audit quality. The purpose of this study is to analyze whether the reputation or competence of an auditor affects audit quality, within manufacturing companies in Indonesia. Methodology/Technique - This paper contributes to the creation of new measurements for auditor capability, by highlighting empirical evidence concerning the determinants of audit quality in Indonesia. Findings - By using discretionary accrual as the inverse determinant of audit quality, the result show that financial statements audited by reputable auditing firms contain the same discretionary accruals as those audited by other firms. The results further demonstrate that auditor capability does not affect audit quality. Audit quality in Indonesia is therefore not determined by firm reputation or auditor capability. Hence, it is important to search for new determinants of audit quality. Research Limitations/Implications - The limitation of this research is the low number of reputable audit firms and specialized auditors used by the sample firms, which lead to the exclusion of numerous controlled variables that may be integral when explaining audit quality. Future studies may use other sample firms and use additional controlled variables, to further explain audit quality. Type of Paper: Empirical Keywords: Audit Quality; Discretionary Accrual; Audit Firm Reputation; Auditor Capability. JEL Classification: M40, M42.