Individual Assignment - Written Report The guidelines for the written report are as follows: • You are required to identify and critically discuss a current issue in financial management. • It is advisable to choose a topic of discussion which is relevant to your industry or your career path.(I already have a topic: Factors affecting the profit loss of engineering contractors) • You are expected to critically discuss the topic of your choice by referring to academic literatures and industry practices. At minimum, you are required to refer to 5 relevant journal articles and 5 relevant industrial updates i.e. books, magazine, industrial based conference proceeding, newspaper and professional write up. • The written report should not more than 5000 words(at least 4500 words) or 20 pages maximum. • Appropriate APA referencing system will be employed where applicable. • Your report should be type written, 1 ½ line spaced, font 12 Times New Roman and justify aligned. Please comb bind. • Use the provided cover page. • Please attach a copy of the grading scheme at the front of your coursework (after the Cover Page) during submission. Your written report should include: • • • • • • • • • Cover Page Student Particulars Assignment Report Allocation of Marks Background Issues and problem statement Significant of review Literature review Appendices (if relevant) Turnitin Report GRADING Written report will be graded according to the following distribution: • • • Content (thoroughness of preparation, information, and content) Style (grammar, writing quality, clarity of writing at the sentence level) Presentation (organization, clarity of writing at the paper level) What this means in practice is that if you do the work, but don't organize your thoughts or write clearly, you will end with at most a C. However, you will not be given full credit for content if the lecturer cannot understand what you're saying, so if you don't write clearly, you will probably end up losing points on content as well. CHAPTER 1 INTRODUCTION 1.1 Research Background The auditor’s roles are to provide an opinion on financial statement and to ensure that the statements are based on true and fair image of company performance to the stakeholders. They are authorized in checking the accuracy of business records. Opinions given by the auditor gives an added credibility to the financial statements (Maqableh, 2014). Commonly, investors often rely on financial statements provided by auditor in making investment judgement and increase the productivity of financial markets. Financial statements provided by the auditors are often reviewed as credible, unbiased opinion that truly reflects the company financial positions. There’s no doubt that auditor independence is the core of auditing profession when establishing its objectivity and integrity. Auditor independence, in particular, indicates the ability of an auditor to disregard any influence or control when conducting an opinion (AAA, 1973). Therefore, auditor must be, and must be seen to be independent of company management. Lack of independence causes audits to be considered to have little value (Johnstone, Sutton, & Warfield, 2001). This is further supported by Elliott and Jacobson (1998) that a particular interest may trigger a risk that could weaken the outcome of the audit which in turn impairs the auditor independence. Hence, independence is fundamental to the purpose served by auditors (Moore et al., 2002). This study is limited to only four variables as to keep the task manageable. Prior years, various studies are being carried out by scholars in examining the effect and significance of the concerns. For instance, Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) studied the factors that influence auditor independence in Malaysian-owned commercial banks loan officer’s perceptions. Furthermore, Abu Bakar and Ahmad (2009) also investigates auditor independence on the size of audit fees, audit firms, tenure, provision of management advisory services and audit committee. A study in Barbados by Alleyne, Devonish, and Alleyne (2006) also discusses about perceived auditor independence between auditors and users following the fall of Enron. Moorthy et al. (2010) 1 confers that auditor independence is crucial in improving the ability to present an independent audit decisions. The importance of auditor independence is highly relevant in Malaysia. Changes were being proposed to preserve the independence of auditors and investors interest by regulating code of ethics that serves as a guideline for auditors’ competency and independence (Shafie, Hussin, Yusof, & Hussain, 2009). In Malaysia, a number of modifications are being made by the regulatory and legislative authorities such as Malaysian Institute of Accountants (MIA) following the recent financial scandal. In assumption, auditor independence is significant for the existence of auditing itself (Abu Bakar, 2006). 1.2 Problem Statement Audit independence is the cornerstone of the audit profession. Auditors play a significant role in public life as its purpose is to serve the stakeholders. The impairment of auditor independence will jeopardize the entire community. For instance, when the top management is behind the wrongdoings and the auditor is having conflict of interest, they might want to conceal up the fraud. This questions the auditors’ objectivity as they are considered to be ‘watchdog’ for the stakeholders. The cumulative fraud made by the management which was covered up by the auditors might in turn put an end to the corporation itself sooner or later. This causes the investors to lose their money and thousands of employees losing their job (Chaabane, 2002). In recent years, the collapse of multimillion corporations such as Enron, Parmalat and WorldCom to name a few has raised concerns on the auditor’s independence. These financial scandals and corporate failures have weighed auditors down as the public often viewed it as audit failures. The increase in accounting scandals over the years has raised uncertainties that auditors’ professional judgments are doubtful. Although there was no evidence that the auditors were behind the wrongdoings, it still raises negative publicity towards the auditing professions. Failure in independence is enough to cause loss of confidence in audit and financial reporting (Fearnley & Beattie, 2004). More disturbingly, the issue related to independence has threatened the accounting profession as whole (Sutton, 1997). This is further agreed by O'Malley (1993) as the profession relies hugely on public trust. 2 1.3 Research Questions 1.3.1 General Question What are the factors that would affect the auditor independence in Malaysia? 1.3.2 Specific Questions The following research questions being recognized are: 1. What is the effect of provision of non-audit services to auditor independence in Malaysia? 2. What is the effect of audit fees on auditor independence in Malaysia? 3. What is the effect of tenure of audit services on auditor independence in Malaysia? 4. What is the effect of client’s audit committee on auditor independence in Malaysia? 1.4 Research Objectives 1.4.1 General Objective The main objective of this research is to determine the factors influencing auditor independence in Malaysia. 1.4.2 Specific Objectives 1. To investigate the relationship between the provision of non-audit services and auditor independence in Malaysia. 2. To investigate the relationship between audit fees and auditor independence in Malaysia. 3. To investigate the relationship between audit service tenure and auditor independence in Malaysia. 4. To investigate the relationship between client’s audit committee and auditor independence in Malaysia. 3 1.5 Significance of Study There are numerous researches on auditor independence being supported in developed countries such as United States and United Kingdom. The area of auditor independence are extensive and its potential factors are likely already been investigated. However, the studies concerning the effect of important factors on auditor independence in Malaysia is limited. The policy makers and officials had to generally evaluate and examine the audit legislation of developed countries and this reduces the effectiveness of policies implemented as the regulatory audit environment in Malaysia is different from other countries particularly on developed country. This study aims to examine the significant issues that could affect the auditor independence in Malaysia. The result of this study can contribute to a better understanding and may help to improve Malaysian auditor’s profession practices. In addition, the study may assist policy makers and regulatory bodies in pertinent policy making as it the paper serves as a strong basis particularly in Malaysian context as the empirical evidence concerning this issue have been reasonably inadequate. This study will also help applicable international accounting agencies towards the international harmonization of auditing standards around the world. 1.6 Scope of Study These research only emphases on the practices of auditors in public listed companies. The practices of auditors of non-public companies, government organizations and agencies, cooperatives and citizens are not subject to the requirements that is being studied here therefore, the outcome and thoughts in this paper may have little impact and significance on their practices. The target respondents of this research will be the auditors auditing public listed companies. The respondents will be the auditors who live or work around Klang Valley as the survey is conducted in Klang Valley. Klang Valley is chosen as this is where most of the audit firms are situated and companies ranging from medium to large. This research will mainly focus in Malaysia due to time and limitation constraints. 1.7 Dissertation Outline 4 Overall, this project is divided into three main chapters consisting of chapter one, chapter two, and chapter three. Chapter one presents the background, problem statement, research questions, objectives, significance of the study, scope of the study and research framework in achieving the research objectives. In the chapter two, literature reviews, framework element and theoretical foundation will be presented. Four factors that affecting auditor independence are presented here. Lastly, in chapter three consists of the research methodology being applied in the study which includes research design, research hypotheses, research equation, measurement, data collection method and data analysis. 1.8 Summary Generally, chapter 1 presents a general overview on the construction of the research. It serves as a guideline and provides a better understanding for readers before continuing to the next chapter which will further discuss the core of study based on literature review. This chapter also presents the significance contributions of the study. The final part of the chapter outlines the scope of the study and content of each chapter. 5 CHAPTER 2 LITERATURE REVIEW 2.1 Introduction The objective of this chapter is to present an outline of the literature regarding auditor independence. The review of relevant theoretical model clarified the basis of research theories. The chapter also discusses about the needs for an auditor by applying the ‘agency theory’ and ‘role conflict theory’. This current study is based on literature review of previous research. Theoretical framework is suggested to show a stronger picture on the important variables relationship. At the end of the chapter, four research hypotheses are developed for quantitative analysis. 2.2 Auditor Independence Independence can be defined as averting situations that would harm objectivity or allowing personal interest to influence judgement (Carey & Doherty, 1966). Auditor independence is described as the heart of auditing profession (Mautz & Sharaf, 1961). This is further agreed by Gramling and Karapanos (2008). Preserving the independence in audit function is compulsory and are required by the standard of profession itself (Chen, Elder, & Liu, 2005). Pany and Reckers (1983) indicated that the existence of auditor independence concept is originated from the birth of auditing where the needs for reliable financial statement are significant. However, the term ‘independence’ is hard to quantify. Many academics have concluded with various definitions that best fits the term auditor independence. For instance, DeAngelo (1981) stated that independence is when there is conditional likelihood that the auditor will report discovered errors. Pany and Reckers (1988) further define independence as the capacity to act with integrity and objectivity. Bartlett (1993) states that independence is when the auditor has an unbiased mental attitude in doing audit work. According to Gwilliam (1987), the concept of independence is wide-ranging making it difficult to define in single terms and may change over time. The absence of strong definition of independence in many previous studies has contributed an inconsistencies in the result achieved (Bartlett, 1993). 6 Auditor independence can be divided into two, which are fact and appearance (Beattie, Fearnley, & Brandt, 1999). This is proven by the Malaysian Institute of Accountants (MIA) that independence requires both; a) independence of mind and b) independence in appearance according to By-Law B-1.4(1) (Nur Barizah, 2009). Independence in fact (actual independence) is the capacity to maintaining a appropriate attitude while preserving the objectives in auditing their client. Whereas independence in appearance (perceived independence) is the perception by a third party that the auditor and client are not having a relationship which could suggests conflict of interest (Alleyne, Devonish, & Alleyne, 2006). Simply said, it is the public observations on the relationship between auditor and its client in making sure they are not having a conflict of interest. Both types of independence are critical elements in maintaining confidence on the auditing profession. However, it is difficult to measure independence in fact as it cannot be observed (Beattie, Fearnley, & Brandt, 1999) plus the thoughts of auditor’s mind itself adds up to the fact that’s making it nearly impossible to measure (Nieschwietz & Woolley, 2009). Therefore, this research only focuses on independence in appearance since the independence in fact is cannot be measured. Various interpretations of auditor independence by scholars indeed shows that the understanding of the concept is important as the fall of corporate firms and high profile accounting scandals are often linked with impairment of auditor independence. In the recent years, there is an increase in number of studies regarding auditor independence over the globe. For example, there are quite a number of research done in Malaysia such as Gul and Teoh (1984), Teoh and Lim (1996), and; Abu Bakar, Abdul Rahman and Abdul Rashid (2005). Most of the studies investigate the effect of audit firms providing non-audit services that could lead to impairment of auditor independence. While some of it agrees that combining audit and consultancy services could affect auditor independence, some on the other hand believed that independent could still be preserved. It can be said that there are no definite conclusions on this matter considering all the points has been taken. To recapitulate it can be said that auditors’ independence represents a situation where auditors are having no conflict of interest with the clients when giving their opinion. Having defined what is auditors’ independence, the next section will then discuss the factors that influence auditors independence. 7 2.3 Mandatory Audit Rotation Credibility of financial statements is determined by the auditor reporting quality. Without independence, the audit task performed can be questioned to the extent that the auditors are giving bias opinion in order to safeguard their client. According to DeAngelo (1981), audit quality is divided into two parts. They are i) to detect any misleading in the financial statement and ii) to report the misleading actions made by the client to the authority. This quality requires the auditors to have the competence and skills to be able to detect any fraud without impairing its auditor independence. Brody and Moscove (1998) cited that the way to increase audit quality is by mandatory audit rotation. This is further accepted in Geiger and Raghunandan (2002) that by rotating audit partner, it could reduce the client’s capability to adversely influence the auditor judgment and subsequently minimize auditor independence threat. Moreover, according to Teoh and Lim (1996), perceived audit firm rotation would improve auditor independence. In a study made by Dopuch, King, and Schwartz (2001), an auditor is less likely to produce a prejudiced report if audit rotation are implemented thus increasing public confidence and upturn in degree of investment due to perceived financial reporting quality. Big auditing firm are able to provide better auditing quality due to vast experience in specific firm characteristics (Thomas, Davis, & Seaman, 1998). In the United States, under the Sarbanes-Oxley Act, the lead audit and the reviewing partner are rotated every five years. Similarly, in Malaysia, the MIA states that merely the lead partner auditing public listed companies are to be rotated every five years (Malaysian Institute of Accountants, 2000). Findings found that economically troubled companies are more probable to change auditors than non-troubled companies as they needed to hire a new quality of auditors (Krishnan & Stephens, 1995). Likewise, Krishnan and Stephens (1995) also found that switching auditors does not likely to have their modified report to be removed in comparison with companies that does not switch their auditors. Therefore, if financially distressed companies maintaining the same auditors’ issues an unqualified report can be perceived that there is impairment in the auditor independence. 8 In the case of Malaysia, the auditors are mostly appointed for company affairs unlike what is stated under Section 9(6) of Malaysian Companies Act 1965 that states auditors as regulators (Malaysian Institute of Accountants, 2000). This makes the Malaysian companies are less attractive among foreign direct investments compared to its neighboring country, Singapore. As an example, our neighboring country, Singapore under Monetary Authority of Singapore (MAS) has demanded a change of audit firms every five years to all banks incorporated in Singapore under a new ruling. This is to prevent auditors from having excessive focus which in turn draws familiarity threats. However, there are no regulations binding banks and companies in changing audit firms after a certain period in Malaysia (Rohami, Wan Nordin, Mohd 'Atef, & Md Hairi, 2009). Nevertheless, there are certain drawbacks in implementing mandatory audit rotation. the expense of setting up compulsory audit rotation will be greater in arrears to the high start-up cost. Upon auditing a new firm, the auditors will have to study about the client’s business. This increases the cost of auditing as they have to focus more on understanding the company backgrounds, cultures and industries. This may restrain the audit firms in enhancing certain information and expertise in niche industries (Petty & Cuganesan, 1996). Petty and Cuganesan (1996) also stresses that the regulation of mandatory audit rotation will result in lower quality service from auditors. Lowensohn, Johnson, Elder, R, and Davies (2007) establish that audit quality is positively interrelated to specialization. Carcello and Nagy (2004) also approved the theory. A specialized auditor will more likely to discover material errors due to misstatement or wrongdoings in the financial statement (Wright & Wright, 1997). The rotation of audit firm put pressure on auditors specializing in specific industries as they are required for general audit on various industries (Johnson, Khurana, & Reynolds, 2002). The implementation of mandatory audit rotation also did not guarantee that audit quality will improve. Take Palmalat, a company in Italy for instance. The company is involved in accounting scandals even when they are following the law procedure that demands companies to change auditors every nine years. This has created an atrocity across Europe region and demonstrates that even the law of audit rotation could not aid in faultless audit quality. 2.4 Factors Influencing Auditor Independence 9 The typical empirical researches are focused on finding the significance of factors which could potentially affect the independence of auditors. Prior researches being made on the factors influencing independence are vast as the concepts are general. Some examples made by scholars are i) the effect of gift, by Pany and Reckers (1980), ii) audit firm size by Shockley (1981) and Gul (1989), and iii) the degree of competition in the audit services market by Knapp (1985)to name a few. This study however will focus only on four issues which are considered to be fairly significant factors that could influence auditor independence. All of the factors debated are based on previous studies. The factors are: (1) provision of non-audit services; (2) audit fees; (3) audit tenure; and (4) audit committee. The four factors will be discussed in the following four subsections. 2.4.1 Provision of Non-Audit Services (NAS) Over the years, many academicians have voiced out their concern that non-audit services could indicate impairment towards auditor’s independence (DeFond, Raghunandan, & Subramanyam, 2002). The argument that revolves around audit firms providing non-audit services to its audit clients has the ability to remain objective when auditing client’s financial statements while at the same time providing advisory services to the same client. The introduction of non-audit services to the client has created a new basis of self-interest conflict (Goldman & Barlev, 1974). Therefore, the ever increasing non-audit services have poses a risk due to the joint-provision of audit with non-audit services. Firth (2002) highlights that the possible effect on audit firm providing other services to their client are fee dependency and conflict of interest. The high fees collected from non-audit services could make an audit firm to be economically dependable on the audit client. This in turn jeopardizes the ability of auditor’s willingness to challenge any possible misstatements due to the fear of losing income (Kinney, Palmrose, & Scholz, 2004). The auditors may also lose their power in questioning the client’s use of doubtful accounting techniques as they are dependent on the client (Mitra, 2007). Furthermore, the capacity to make audit is becoming hard and eventually they have to sacrifice their objectivity due to decisions made must be in favor of the client (Basioudis, Papakonstantinou, & Geiger, 2008). The auditors may develop a close relationship between the client and this makes it difficult to remain independent (Schulte, 1965). 10 On the other hand, the provision of non-audit services is said to be useful as it increases the value and relative power over the clients. Hence, the auditors are able to repel management pressure and preserve their independence (Goldman & Barlev, 1974). This is supported by Mitra (2007) that by providing other services to their audit client, the auditors are able to increase their knowledge of an industry-specific base and related financial expertise creating a more well-informed auditor thus making them indispensable to their clients. According to Chien and Chen (2005), the additional services are provided as the audit firms are driven to gain competitive advantage, personnel attraction and retention, to accommodate client’s needs and risk modification. Similarly, Simunic (1984) added that auditor’s knowledge could be enhanced by providing non-audit services resulting in an improved and effective audit. Kinney, Palmrose, and Scholz (2004) held that the provision of non-audit services could increase audit firms’ reputations. Therefore, the auditors surely will not harm the firms’ reputation just to satisfy client’s demand, instead focusing more on the thoroughness and independence in order to provide a quality audit report. In addition, the jointprovision between audit and non-audit services gives advantage in terms of cost saving due to the knowledge spillovers (Barkess & Simnett, 1994). Past research has proposed that auditors are to act solely to their client without offering other services to safeguard independence (Canning & Gwilliam, 1999). However, Mautz and Sharaf (1961) cited that the prohibition of firms offering other services to the client will harm the relationship between the audit firm and its client. As a substitute to a total ban on provision of nonaudit services, it is suggested that the staff for non-audit services are separated or there should be a different division within the audit firm that handles non-audit services (Hillison & Kennelley, 1988). Mautz and Sharaf (1961) strongly believe that such action could protect the auditors from apparent pressures and influences in maintaining a solid structure in auditor independence. Arrunada (1999) also alleged that the use of different divisions offering other services will maintain independence. Hillison and Kennelley (1988) added three other options other than total halt on providing nonaudit services to audit clients: i) by offering non-audit services only to non-audit clients, ii) enforce a sanction on selected non-audit services to audit clients, and iii) assert full disclosure in the clients’ financial statements of the amount of non-audit services fees. By providing a full disclosure in the financial statement would be more effective means in monitoring the non-audit services charges 11 to ensure the amount does not lead to dependence on client threat. In Malaysia, the disclosure of non-audit services is only needed in listed companies. In US, the enactment of SOX 2002 has put more severe constraints on the provision of non-audit services following the recent accounting scandals made by large multimillionaire corporations such as Enron and WorldCom. This result in the authority giving a ban on joint provision of audit with internal audit and any certain types of non-audit services that is believed can create a conflict of interest. The act prohibiting auditors from providing certain non-audit services is deemed to safeguard auditor independence (Sori, Mohamad, & Abdul Hamid, 2001). The act also requires that any provisions to be made and that are allowed by the law must get an approval from independent audit committee (Maslina , 2012). Based on the above discussion, it can be seen that there is a relationship between non-audit services provision and auditor independence. This is because non-audit services still will create conflict of interest between external auditors and their clients. Thus it is included in this research conceptual framework. 2.4.2 Audit Fees Audit fees are the quantity in monetary term charged by audit firms to their clients for providing auditing services (Andre, Broye, Pong, & Schatt, 2011). The size of audit fees could affect auditor independence. Audit fees has becoming an issue in auditing due to the possibilities of reversing effects on audit quality as a high audit fees lead to a possible of increase in the ability of auditors to detect misstatement or may impair the auditor’s independence (Iyer & Rama, 2004). The studies made by Bailey (1992) investigate the audit fees pressure, audit fees owed by clients and auditor independence. Hefty audit fees are typically related with greater risk of impairing the auditor independence (Abu Bakar, Abdul Rahman, & Abdul Rashid, 2005). However, some study argued that high audit fees resulted in high quality audit (Abdul Wahab, Mat Zain, James, & Haron, 2009). A study made in both United States and United Kingdom found a major consequence of audit fees on irregular accruals (Ashbaugh, LaFond, & Mayhew, 2003). Moore, Loewenstein, Tanlu, and Bazerman (2002) agreed that high audit fees could create bias in the relationship between auditors 12 and clients. Similarly, Hay, Knechel, and Wong (2006) cited that auditors were to reduce audit fees only to receive consulting services from their clients would turn into independence threat as it shows a negative relationship between audit and non-audit services. Gul (2001) stresses that an auditor is highly dependable on a client when a significant portion of audit fees come from that client and this reliance may reduce the auditors’ ability to resist pressure. According to Ayer & Rama (2004), when a client is financially important to the auditor, the client may have the power to motivate auditors. In Malaysia, audit fees must be disclosed in the annual report as required by the Companies Act, 1965. Even though the requirement to disclose the amount of audit fees on financial statement, it does not ensure there are no impairment of auditor independence. The disclosure would at least provide some basic information to the users. The MIA through its Recommended Practice Guide (RPG) 7 concludes that the fees of the audit services depends on the degree of responsibilities, amount of time, risks and skills involved by auditors to perform their tasks. The MIA also recommends that the audit fees is calculated on the economic time basis used and the value of total assets or turnover is used as benchmark (Mazrah & Saidatunur , 2013). This simply means that large corporation and high income company audit fees will be slightly greater. The total fees on a single client also cannot surpass a certain percentage of the total income made by the audit firm. MIA has emphasized that any audit fees generated from a single client or its related entities surpassing 15% of the firm total income in two successive financial period, the audit client have to either refuse to perform audit or pull out from the assurance service. High fees from single client create a financial dependency situation which in turn could affect self-interest threat. Other countries such as United Kingdom and Australia also used this 15% criteria at which auditors will have to consider their objectivity (Nur Barizah, 2009). To recapitulate, there is a strong relationship between audit fees and auditor independence. Thus it is included in this research conceptual framework. 2.4.3 Audit Tenure 13 Audit tenure is measured by the length of years an auditor audits the clients (Louwers, 1998). The issue of long audit tenure compromising the auditors’ independence has long been a topic of argument in the United States (Mautz & Sharaf, 1961). The issue then seems to be relevant to other countries as well when there are deliberations among supervisory body, auditors and scholars (Geiger & Raghunandan, 2002). The concern of audit tenure is that the auditors may become too close and it could affect their honest judgments (Mautz & Sharaf, 1961). It is then agreed by Carey and Simnett (2006) that after serving the client for too long, the auditor may lose its objectivity and it reduces the ability to provide critical appraisal. Geiger and Raghunandan (2002) states that an increase in audit tenure attracts the tendency of auditors gradually divert their decisions with the interest of the management thus affecting independence. It is discussed that a long-term relationship could make the audit firms too devoted or indebted to the client that can undermine its independence, compromise objectivity thus reducing audit quality (Deis & Giroux, 1992). Other negative effects of long audit tenure comprises of complacency and lack of improvement (Mautz & Sharaf, 1961). Past studies have acknowledged two standpoints on the outcome of audit tenure on the reliability of financial statements which are from supervisory view and financial view (Geiger & Raghunandan, 2002). In point of supervisory view, long-term relationships with the client may lead an impairment of auditor independence (Geiger & Raghunandan, 2002). The long audit contract may lead to familiarity and personal connection between the auditors and clients (Gul, 2001). Raghunandan, Lewis, and Evans (1994) found that long audit tenure will affect audit quality. Equally, Vanstraelen (2000) also found negative relationship between audit tenure and the ability of auditor giving judgment. In Malaysia, Teoh and Lim (1996) found that retaining auditor for over than five years will impair auditor independence. A mandatory audit rotation is considered as one of effective means in overcoming the above problems. The International Federation of Accountants (IFAC) 2009 also recognized that the extended audit tenure on an assurance engagement would create a familiarity threat. The IFAC Code requires that audit partners are to be rotated at least every seven years. It is believed to enhance auditor independence and enable them to audit without affecting its objective (Wolf, Tackett, & Claypool, 1999). The idea is that, when the auditors are constrained not to audit the same client for consecutive years, they will have lower incentive to seek future economic gain 14 from the same client. Therefore, the auditors will be able to make opinions based on their own judgments without compromising its objectivity (Comunale & Sexton, 2005). In addition, mandatory audit rotation is believed that a new auditor in charge will have greater professional skepticism and new perspectives compared to previous auditor which may overlook some details (Nagy, 2005). However, there are conflicting opinions on this theory. The imperfection of this theory is already discussed in the earlier topics under ‘2.3 Mandatory Audit Rotation’. In economic viewpoint, maintaining audit tenure proves to give advantages to both client and audit partner. Clients usually do not have to suffer high start-up cost when establishing a new audit appointment. In Geiger and Raghunandan (2002), audit fees are usually given discounts in the early years of engagements to draw clients. Therefore, audit firm will seek for longer audit engagement to recover their losses during first year of service. Auditors will have less rigorous audit procedures as most of client details are collected in the initial year of engagement. Clients also have more confidence and maintain an easy to work attitude with towards the audit firm due to long association between them (Nur Barizah, 2009). Based on the above discussion it is argued that there is a potential relationship between audit tenure and auditor independence. Thus it is included in this research conceptual framework. 2.4.4 Audit Committee There is no final definition of an audit committee. Audit committee is viewed as independent committees who serve as a watchdog to the auditors from impairing their objectivity. An audit committee consists of a collective set of individuals that oversees financial reporting and disclosures. The committee members must be made up of independent outside directors with at least one having qualifications as a financial experts. This ensures that the objectivity of the directors is not damaged by the close relationship with the company management. The need of financial expertize are important as they can comment on the trustworthiness of financial statements (Burrowes & Hendriks, 2005). Accounting qualification plus experience are the main component in appointing members in the audit committee (Iyer, Michael Bamber, & Griin, 2013). 15 The directors in audit committee must have certain knowledge and experience in accounting and finance (DeZoort, 1998). It provides assurance that the auditor is, in fact independent to the stakeholders (Wolnizer , 1987). The role of audit committee is very significant in ensuring the consistency of financial reporting. As audit committee is often played by the individual outside of company management, they could provide better role in checking the auditor independence and the effectiveness of audit process (Bedard & Gendron, 2010). Therefore, the audit committee shows a positive relationship with auditor independence as the presence of audit committee will improve public perceptions on the auditor independence. The importance of audit committee is to act as a middle party between the company and the auditors. An independent audit committee could help alleviate auditor in disagreements with the management (Knapp, 1985). Audit committees have a vital role in both internal and external auditors. Internally, the auditors are responsible for ensuring the internal audit program is in line with the possibility of the internal audit activities (Carcello, Hermanson, Neal, & Riley, 2002). An effective internal audit does helps the audit committees in discharging its duties more effectively (Raghunandan, Read, & Rama, 2001). An effective internal audit function emerged from a strong base of audit committee. Ensuring the effectiveness of internal audit function is one of the vital functions towards corporate governance. The Malaysian Code on Corporate Governance (MCCG) also highlights the significance of operative audit committee and independent internal audit in maintaining corporate governance. To ensure effectiveness along the internal company system, a decent association between the audit committee and internal auditors are essential as it can eventually improve the quality of financial report (Rezaee & Lander, 1993). In addition, audit committee is also involved in selecting external directors and determining their fee. The audit committee has the control in retaining or removal of auditors whenever they seem unfit. Goldman and Barlev (1974) mentioned that the establishment of audit committee does limit the power of management over auditor as the appointment of external auditor is scrutinized first by the audit committee. Sori, Mohamad, and Karbhari (2009) also supported the argument as it eliminated dilemma faced by the auditors as the role of approving and reviewing audit fees fall to audit committee hands rather than management where it can create conflict of interest. Beattie, Fearnley, and Hines (2013) also held that the appointment of auditors by audit committee was 16 perceived to enhance audit quality. According to Abbott, Parker, and Peters (2004), an independent audit committee may demand for a greater external audit scope thus it reduces the risk of failure in detecting misstatement in the financial statements. Since 1993, audit committee is compulsory element in companies in Malaysia. In Malaysia, the MCCG requires that at least one of the members in audit committee must be a certified accountant registered under the Malaysian Institute of Accountants (MIA). The MCCG also emphasizes the need in having effective audit committee for all public listed companies. The revised MCCG also states the mandatory role of audit committee which includes the detail of audit committee compositions, meetings frequency and the need to keep up-to-date information in relevant financial and non-financial matters. Similar to this, the Bursa Malaysia Listing Requirements (2008) call for the need that all firms trading in the stock market must comply with the requirements set by MCCG upon the revised composition of the audit committee (Fatimah & Sherliza, 2012). In conclusion, there were various studies regarding the perceptions of audit committee on auditor independence or audit quality in prior years. It was said that the presence of audit committee does improve auditor independence. Clearly, the audit committee plays a greater role in the appointment of auditors, determining auditor fees and re-appointment or dismissal of auditors. Prior studies also shows that there is a need of member that possess a certain degree of qualification on accounting and finance related field in order to be effective in performing their roles. Thus audit committee is included in this research conceptual framework. Based on the above discussion, it can be seen that there is a potential relationship between audit committee and auditor independence. Thus it is included in this research conceptual framework. 2.5 Underpinning Theories The following two theories regarding auditor independence are proposed, namely, agency theory and role conflict theory. Subsections 2.5.1 and 2.5.2 will discuss the theories in detail. 2.5.1 Agency Theory 17 Agency theory focuses on the relationship between the principals and the agents. In this theory it is assumed that the agents are appointed by the principals in performing a certain services on their behalf. Commonly, for public listed companies the owners are the shareholders which does consists a large group of individuals having interest on the organizations. These groups are regarded as the principal and they appointed an agent which is the managers to perform duties on their behalf which includes delegating some degree of decision making authority (Jensen & Meckling, 1976). This relationship is expressed as a contract between the principals and the agents and the ‘firm’ is seen as a link or bond between them (Shankman, 1999). The basis of foundation theory is the assumption that the principals and agents self-interest which differ as different groups having different desires, goals and utility functions (Eisenhardt, 1989). The differences in primary objectives are regarded as ‘agency problem’ and may create direct conflict on the use of resource. Primarily, the objectives of the managers are to increase the shareholder’s wealth. Often there is impairment on the objectivity as the managers have their own interest and desires. Another glitch in agency problem is that it is challenging for the principals to validate the actions of the agents and whether they are behaving appropriately (Eisenhardt, 1989). In containing this agency problem, the principals will have to incur a rather costly solution in establishing behavioral incentives and monitoring the agent at the same time (Culpan & Trussel, 2005). Therefore, the need of auditors is crucial in the organization. An independent external auditor is appointed as a preventive measure in reducing the agency problem. They are needed in verifying the assertions made by managers as a means of monitoring purposes. The auditors are appointed authority to validate the financial reports made by the managers as the financial reports are evaluated on the managers’ performance. This method is considered effective rather than letting the principal making the observation themselves. Without the absence of verification, the managers have enticements to misrepresent the financial conditions of the firm for it to look favorable (Antle, 1984 ; Arnold & deLange, 2004). Based on the agency theory, the main objective of external audit is to ensure that the financial reports are prepared in the correct representation of the company by the management. This gives the public assurance that the financial statement has surpassed the auditor independence scrutiny (Arnold & deLange, 2004). The auditor independence is vital if they were to perform their task satisfactorily. The appointment of audit is believed to minimize agency cost as they have the means 18 and know-how in monitoring the manager’s behavior and able to report more proficient and effective to the principals (Arnold & deLange, 2004). The theory of agency further stressed by Culpan and Trussel (2005) that auditors must be not have any conflict of interest and be independent of the company and its agents. Without independence, the auditors will have little or no value in playing a role within the agency theory. For instance, the over dependence on non-audit services (NAS) will impair the auditor judgment as they are influenced by the reliance on fees provided. Consequently, the auditor loses its capacity to make arm’s length judgment about financial statement opinions (Arnold & deLange, 2004). This can be shown in the collapse of Enron. Arthur Anderson, at that time is Enron’s external auditors as well as internal auditor and financial advisors. At that time, CPA Firms in the US prior SOX 2002 were permissible to offer other services to their audit client. The size of the fees collected from Enron solely is more than half of that amount for consulting services. The dependence on income from Enron has negatively impaired the judgment made by Arthur Andersen as there is an appearance of conflict of interest that affects the external auditor (Maslina , 2012). Like other theories, agency theory also been criticized for having flaws. The theory is condemned for being too constricted since the theory only emphasized on the contract between principal and agent in a way that outweigh the principal more (Wright, Mukherji, & Kroll, 2001). This economic theory is too restrictive as it only views that individuals only seek for their own self-interest. This is further supported by Kleinman and Palmon (2001) that there are other factors rather than selfinterest that would affect an individual in decision-making which include personality, individual ethics and the firm’s culture. 2.5.2 Role Conflict Theory The role conflict theory is presented by Rizzo, House, and Lirtzman (1970) in their study of ‘Role Conflict and Ambiguity in Complex Organizations’ when there exists a need to create new theory for modern organizations as they cannot rely anymore on the principle chain of command due to current complex organizations. The role conflict is well-defined as the scopes of compatibilityincompatibility in satiating the roles they were expected to perform to a set of standards or settings which will impact role performance. When an individual are unable to perform well, they will 19 experience stress, displeased which leads to poor performance. The inconsistencies of behaviors expected will decrease individual satisfactions and thus affect the effectiveness of organizations as a whole (Rizzo, House, & Lirtzman , 1970) According to the study, there are four situations in which role conflict could arise. The following theory is being used before by Kahn et al. (1964). First condition is the person-role conflict. It simply means demands of a job or role that is incompatible with his or her skills or personality. Second condition is intrasender conflict. This conflict occurs when the individual having lack of competences, time or means in handling the roles given to him. The third condition is interrole conflict where an individual is required to handle more than one position in a situation which requires an mismatched behaviors or also known as overload in roles. The fourth situation is intersender role conflict which refers to differing expectations and organizational demands as individuals are given conflicting requests from others in the organizations which are in contradictory in terms of policies and standards of evaluations (Rizzo, House, & Lirtzman , 1970). The Rizzo, House and Lirtzman (1970) role-conflict theory is widely used as a basis in different areas. For instance studies made in relation to auditor independence, Bamber, Snowball, and Tubbs (1989) investigates the relationship between audit structure with role conflict and role ambiguity. Alleyne et al. (2006) uses the theory of role-conflict in studying the awareness of auditor independence between auditors and users in Barbados. Koo and Sims (1999) stress the need of separations of auditor’s role into monitoring and other services due to role conflict in auditors. Others studies made in different areas by Mohd Kamel (2011) that investigates the role stress on psychological strain among Malaysian public university academics also uses the role-conflict theory developed by Rizzo. For this study, the intersender role conflict is adopted due to its relevance that provides in the four factors affecting auditor independence in Malaysia namely provision of non-audit services, audit fees, audit tenure and audit client’s committee. The following theory is chosen as it is most applicable in the research application. Auditors are being at wits ends in satisfying the needs of both its clients and third party. Satisfying the needs of one party requires the expense of the other needs. For example, the management will want the auditors to ignore the manipulations made in financial statements (Koo & Sims, 1999), but the publics and investors needed the auditors to 20 maintain their professional ethics (Mills & Bettner, 1992). Therefore, this study seeks to examine the relationship between its independent and dependent variables. 21 2.6 Proposed Framework The relationship between the four factors and auditor independence are shown in Figure 1 below. Provision of non-audit services H1 Audit fees Auditor Independence H2 Audit tenure H3 H4 Audit committee Figure 1: Framework for establishing auditor independence The proposed framework above illustrates the dependent and independent variables of this study. The dependent variable in the framework is the auditor independence while independent variables consist of provision of non-audit services, audit fees, audit tenure and audit committee. These four factors are recognized as independent variables as they cause a change in auditor independence which is the dependent variable. 2.7 Summary This chapter offers theoretical information on the issues to be investigated in this research. The discussion also includes the theories used in the current study which are agency theory and role conflict theory. The chapter also explains the conceptual framework and its construct. 22 CHAPTER 3 RESEARCH METHODOLOGY 3.1 Introduction This chapter illustrates the investigation conceptual framework. The research hypotheses are listed followed by research equation. Measurement and questionnaire technique are discussed in this chapter. Subsequently, the data collection method and sampling method area explained in detail as a means of conducting the survey. Lastly, data analysis is presented to encapsulate the outcomes. 3.2 Research Hypotheses Based on the previous experimental studies on factors affecting auditor independence, the following hypotheses are proposed: H1: There is a significant relationship between the provision of non-audit services and auditor independence in Malaysia. H2: There is a significant relationship between the audit fees and auditor independence in Malaysia. H3: There is a significant relationship between the duration of audit tenure and auditor independence in Malaysia. H4: There is a significant relationship between the client’s audit committee and auditor independence in Malaysia. 23 3.3 Research Equation The equation derived based on the factors affecting auditor independence in Malaysia; AI = c + β NAS + β AF + β AT + β AC + e Where; AI = auditor independence C = constant NAS = non-audit services AF = audit fees AT = audit tenure AC = audit committee e = error 3.4 Operational Definition The following defines the dependent and independent variables which aids in making questions for the study. 3.4.1 Auditor Independence Auditor independence is well-defined as the ability of auditors to maintain as an independent unit functions while auditing clients audit process. It basically talks about the auditor’s ability in making professional judgment without the influence of the third party. Sustaining the independence in audit function is compulsory and vital by the standard of occupation itself (Chen, Elder, & Liu, 2005). 24 3.4.2 Provision of non-audit services Non-audit services are referred to other services provided by the audit firm to its audit client. It can be bookkeeping, internal audit services, management consulting, taxation and legal advices. The provision of non-audit services to audit clients has long been an argumentative issue (Goldman & Barlev, 1974). Many of the findings shows that the provision of non-audit services negatively affect the perceptions of auditor independence. 3.4.3 Audit Fees Audit fees refer to the amount of imbursement received for the help rendered from providing services to the client. It can be fees from auditing services and compliance services (Andre, Broye, Pong, & Schatt, 2011). It is argued that high audit fees causes’ firm dependency to the client and independence of auditors could be impaired. 3.4.4 Audit Tenure Audit firm’s tenure is the duration of period an auditor giving services to its clients. The duration of time between the auditor and client could influence the auditor from making truthful judgment due to close identification (Geiger & Raghunandan, 2002). 3.4.5 Audit Committee An audit committee is a set of group elected consisting of company’s board of directors. It comprises of independent outside directors with at least one of them having financial expertise. They are regarded as a watchdog to the stakeholders. The presence of audit committee could improve auditor independence. In Malaysia, audit committee has been made mandatory since 1993 (Maslina , 2012). 25 3.5 Measurement The sample items are based on the previous researches. Some modifications had been made based on the origins. They are mostly derived from Maslina (2012) and Abu Bakar, Abdul Rahman & Abdul Rashid (2005). 3.5.1 Independent Variables The measurement for independent variables are as illustrated in Table 3.1. Table 3.1 Measurement for Independent Variables. Variables Items Sources 1. Auditor providing non-audit services to its client may perform a more efficient and effective audit. 2. Auditor independence would be threatened if non-audit services are delivered by the same personnel involved in the audit. Maslina (2012) & 3. Audit firm should be totally banned from Abu Bakar, Abdul Provision of non-audit services (NAS) providing non-audit services. 4. Audit firms should provide non-audit services to Rashid (2005) non-audit clients only. 5. A maximum percentage of non-audit fees to total fees should be prescribed as a safeguard to auditor independence. 6. The client audit committee’s approval should be obtained before any non-audit services could be provided by an existing auditor. 1. Income from audit fees received from a Audit fees Rahman & Abdul particular audit client could cause an audit firm to be economically dependent upon that client. 26 2. Even though an audit firm is economically Maslina (2012); dependent on its audit client, it could still Abu Bakar, Abdul maintain its independence from the client. Rahman, 3. When an audit partner’s income is dependent on Abdul and Rashid, total fees generated from a single audit client, (2005) & Bailey his/her ability to remain independent would be (1992) affected. 4. Income generated from a listed audit client should not exceed 15% of audit firm’s total income. 5. In order to preserve client who have paid their fees, auditor will consider following to client disclosure requests. 6. When audit fees charged is primarily lesser, auditors tend to charge more in other engagement services. 1. A lengthy affiliation between an auditor and client company pose a threat to auditor independence. 2. A lengthy affiliation between an auditor and Maslina (2012) & client company affects the investors’ confidence Daugherty, in auditor independence. Audit tenure Dickins 3. The implementation of audit partner rotation will Higgs (2009) enhance auditor independence. 4. The implementation of audit firm rotation would add more costs to audit firms and audit client. 5. Independence could be enhanced by increasing the cooling off period from 2 years to 5 years before an audit engagement partner can rotate back to a client. 27 and The existence of audit committee may safeguard auditor independence if; 1. The committee is active, by holding more than 3 meetings a year. Maslina (2012) 2. They are responsible for the appointment and reAudit committee appointment of external auditors. 3. They review and approve audit fees. 4. They comprise a majority of independent and non-executive directors. 5. At least one member of the audit committee has accounting and financial expertise. 6. The external auditors report to and are monitored by the audit committee. 3.5.2 Dependent Variable The measurement for dependent variable is as illustrated in Table 3.2. Table 3.2 Measurement for Dependent Variable Variable Items Auditor 1. External auditor role is to be a public regulator independence 2. The existing audit standards set are very high Source 3. An external auditor does not look at every details on client transactions hence, samples and tests of relationship are relied when conducting an audit. 4. Additional main role of the auditor is to be an Solomon, insurer to majority shareholders losses. Reckers and 5. Another role of the auditor is to actively seek for Lowe (2005) & fraud, no matter how small the fraud is. Abu Bakar 6. Auditors of public listed companies should be Ahmad (2009) regulated by the accounting profession (i.e. the 28 & Malaysian Institute of Accountants or other professional accounting bodies) 3.6 Data Collection Types of population and sampling design are discussed in this section. 3.6.1 Target Population A target population is defined as a collection of individuals; occasions or records that comprise the appropriate info needed to response the quantity questionnaires (Cooper & Schindler, 2008). The target population of the study is auditors and accountants working in audit firms in Malaysia. They are chosen as a sample population in the study as they could epitomize not only the preparers of the financial statement, but also the users. Accountants and auditors are qualified individuals who have the prerequisite and training in creating knowledgeable judgment on auditor independence issue. The responses from these professional individual would denote the opinions of financier’s group as the shareholder often rely on them in terms of advice on investment decisions due to lack in accounting knowledge. In order to make an implication on the population, a sample measurement is chosen to apply in the research. In order to achieve quicker result, sampling method is compulsory due to budget and time constraint as the survey is not applied to the entire population. 3.6.2 Sampling Sampling is defined as the process of choosing the respondents, subjects or events for research purposes. Sampling method is varied into two which are probability and non-probability sampling (Sekaran, 2003). The probability sampling is where the entities in the population having equal likelihoods of being selected while non-probability sampling does not give all the individuals equal likelihoods of being selected. As this research is adopting survey method, the probability sampling is considered as the most appropriate sampling technique. The sample is haphazardly drawn out 29 from audit firms in Klang Valley. Therefore, the choice of accountants and auditors as the respondents are qualified in answering the questionnaire. 3.6.3 Research Instrument- Questionnaire Administration The present study examines on the issues related to auditor independence in Malaysia. This research uses a quantitative methodology through questionnaire survey in view of the following reason. For the research of auditor independence issues, a questionnaire is an effective tool to seek views on individuals (Ghauri & Gronhaug, 2010). Questionnaire is also favored within the large sample size therefore; it helps to enable hypotheses testing. The survey questionnaire is chosen as it is simple, quicker and easier to understand as it uses the rating scales in numerical form which requires the most five to ten minutes of respondents time. Hence, the use of quantitative method is more effective and the use of questionnaire permits the study to be administered in large quantities with a cheaper cost. The questionnaire will be conducted in the Klang Valley area. A total of 200 questionnaires are issued to the respondents. The questionnaire is issued to the respondents by hand. 3.7 Data Analysis A data analysis is the process of assessing data of each element using analytical and logical reasoning. There are various types of analysis method that can be used to examine the truthfulness of the data obtained throughout the research. The data composed are entered into the database and examined using Statistical Package for the Social Sciences (SPSS) version 22. SPSS software is chosen for the study in analyzing the questionnaire, means, frequency and data reliability. The first test is data examination which consists of data screening and data testing. The description and definition of each test is offered in the following two subsections. 3.7.1 Data screening 30 Once the data are entered into SPSS, the quality must be inspected first before starting the analysis. Data cleaning process is crucial as it reduce the risk of missing data, errors and outliers. Without proper screening, there will be large effect on the outcome of the analysis which leads to erroneous conclusions. 3.7.1.1 Missing Data A missing data is not unusual when conducting a research. Researchers do encounter missing data for various reasons. For instance, the subject might refuse to answer personal questions regarding their income level or having lack of motivation to respond. There are some cases where the data collected is missing due to data entry errors or equipment malfunction. A missing data could happen in two situations where the data is randomly missing or there is a pattern of the data point missing. There are various ways in handling missing data. One of the common ways is Listwise Deletion which is by deleting all cases that have missing data. The case will be excluded from statistical analysis even when the case is just missing value on a single variable (Allison, 2002) 3.7.1.2 Response Bias There are conditions in which the questionnaire is not being answered by the respondent which create a significance difference from those who did respond. As a result, it creates a bias on the findings as only the responded questionnaires are used. Hussey and Hussey (1997) states that the available data might not represent the population as a whole due to it being incomplete. Wallace and Mellor (1988) suggested a technique in detecting non-response and self-selection bias. They are by linking the replies of late respondents to the early respondents. The Mann-Whitney U test is used to examine the variances between these two groups. 3.7.1.3 Outliers Identification Outliers are defined as cases with extreme or unusual values. These outliers give the assumptions that the result may be a signal of unanticipated pattern that signal irregularities in data that need to 31 be addressed before proceeding with statistical analysis. Hair et al 1998 states there are four reasons outliers could exist which are data entry error, result of extraordinary events or unusual circumstances, unexplainable outliers and uniqueness in pattern caused by multivariate outliers (Sekaran, 2003). 3.7.2 Data Testing Data testing helps in meeting multivariate assumptions before the multiple regressions possibly will be tested. Here are four forms of data testing assumptions which includes normality, linearity, homogeneity and multicollinearity. 3.7.2.1 Normality A normality test is used to observe the degree of distribution data matches to the normal distribution (Hair, et al., 2005). The shape of variable frequency distribution should roughly approximate to a bell-shaped curve. 3.7.2.2 Linearity Assumption that the research variables are related to each other in a linear manner which is the scatterplot is a straight line. The Pearson correlation coefficients assess the degree of linear relationship between the two variables (Hair, Anderson, Tatham, & Black, 1998). 3.7.2.3 Homoscedasticity The assumption for homoscedasticity is the computable dependent variable having equal levels of variability across the independent variables (Hair, Anderson, Tatham, & Black, 1998) 32 3.7.2.4 Multicollinearity Several independent variables in multiple regression models are closely interrelated to another. Multicollinearity problems happened when the tolerance is less than 0.2 and its variance inflation factor is higher than 4.0 (Garson, 2008) 3.7.3 Goodness of Measure It is important to ensure that the instrument used in the study is accurate and measured. The goodness of data is divided into two which are reliability and validity. 3.7.3.1 Reliability Reliability is proven by measuring the data collected through test-retest reliability and internal consistency of the measure. There are many ways in measuring the reliability of the questionnaire. Cronbach’s alpha is one of the common measurements of reliability and is used in determining the consistency of variables in the questionnaire. They are used to determine the reliability or regular relationship of items in a survey to ensure its reliability (Cronbach, 1951). Therefore, the Cronbach alpha was tested to see how well the items in a set are positively correlated to one another. The Cronbach alpha coefficient accepted in the test is 0.5 and above (Sekaran, 2003) 3.7.3.2 Validity Validity refers to the scope which measures indicate what they are intended to measure. It states that the measurement in the questionnaire must be appropriate and match with the objective of the study. In collecting data for questionnaire, the validity is based on the accuracy, honesty and precise answer from the respondents. Cohen , Manion, and Morrison (2013) states that a research will not achieve full 100% validity. Therefore, the use of sampling design, appropriate instrument and proper statistical analysis helps in improving the validity of the research. 33 3.7.4 Descriptive Statistics Descriptive statistics comprises conversion of raw figures into information to designate a set of factors in a situation. In simpler word, it transforms a numerical data into a set of meaningful information which can be used for better understanding of result. Descriptive statistics is often used to deliver analysis for distribution patterns and data transcription errors. It can also provide descriptions on the basic demographic of the sample obtained from the survey. Descriptive statistics are usually characterized by measurements such as frequencies, measures of central tendency and dispersion (Sekaran, 2003). For instance, the frequency refers to the number of times several subsections occurred in which the percentage can be easily calculated. For example, the frequencies of how many respondents are female or male, etc. Aside from frequency, normality test also can be used in the descriptive statistics. 3.7.5 Demographic Information Statistical results for gender, education level, working experience, income level and others of the respondents. Include all the findings in one table. 3.7.6 Multiple Regression Analysis Multiple Regression Analysis is used in determining the correlation among the multiple independent variables and single dependent variables (Sekaran, 2003). They are determined by creating a mathematical regression which is represented by r square. The equation is used to predict and elucidate the affiliation between the four factors with auditor independence. The analysis also can define the factors that meaningfully influence the dependent variable. 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