An Investigation into the Association between Ownership and the Decision to Switch the Auditor in TSE

Document Type : پژوهشی

Authors

• Mahdi Omidfar ¹
• Mahdi Moradi ²

¹ Azad University, Mashhad, Iran

² Ferdowsi University of Mashhad, Mashhad, Iran

https://doi.org/10.22067/pm.v23i12.35844

Abstract

According to agency theory, structured corporate governance mechanisms should lead to financial reporting with high quality. As ownership concentration is observed as an important factor with in corporate governance (Mashayekh & Abdollahi, 2011), it seems that the identity of controlling owners can play a crucial role in audit quality and improvement of information quality. Ownership concentration, throughthe increase of supervision and elimination of free riding, can create positive switches in the company. On the other hand, block holders and managers can use their control rights to achieve personal benefits and this violates the rights of other shareholders (Ebrahimi Kordlor & Erabi, 2010). These probabilities and the lack of effect of ownership concentration on different dimensions of company can present different theories regarding the behavior of block holders, and contradictory results might be reported by the researchers.
In this study, by controlling important factors including qualitative factors of audit (e.g. audit size and auditor’s opinion) and corporate factors (e.g. firm size, leverage and profitability) empirically, the relationship between corporate ownership concentration is investigated as one of the external mechanisms of corporate governance with the auditor switch among the companies listed in Tehran Stock exchange.
2. Theoretical Framework
According to the review of literature, the high percent of stock held by block holders is that they have great influence on management. There are two contradictory views about the role of great owners in companies.
2.1 Active Supervision Hypothesis
Regarding the relationship between major ownership and audit quality, Han et al., (2009) state how institutional ownership affects audit quality of financial statements. They believe that institutional investors can affect corporate policies to apply corporate mechanisms to reduce supervision costs. The evidence showed that the companies mostly appoint auditors when there is high long-term institutional ownership. This shows that long-term institutional investors consider high quality audit as a method to improve corporate governance while their supervisory costs are reduced.
2.2 Opportunism Hypothesis
The followers of self-interest hypothesis believe that it is highly probable that big investors use special benefits as access to confidential information to be used for trading goals and achieving personal benefits. Fan and Wong (2002) found that the managers with control benefits reported accounting information for their personal goals and claimed that profit does not have reliability for external investors.
3. Methodology
In this research, the subjects are companies listed in TSE from 2004 to 2011 (8-year period). For the hypothesis test, as dependent variables are artificial, logistic regression analysis is used. The study data are collected from Rahavard Novin and financial statements of companies from RDIS site, and are analyzed using SPSS18 software.
4. Results and Discussion
Based on the obtained results, there is a positive and significant relationship between internal organizational ownership and negative switch of auditor and the first hypothesis is supported. In other words, by the increase of internal organizational ownership, the negative switch of auditor is increased (using low quality auditor). The result is consistent with the report of Lin and Liu (2010). They showed that the increase of ownership of the biggest shareholder in the company was associated with the negative switch of auditor. The results of second hypothesis test showed that external organizational ownership had no significant relationship with positive switch of auditor. In other words, external organizational ownership had no effects on the type of auditor switch.
5. Conclusions and Suggestions
The results of the study showed that major internal organizational ownership had a positive and significant relationship with auditor switch decision (negative) in TSE. Based on the evidence, internal owners prefer the negative switching of auditor. In other words, internal organizational blockholders are less inclined to high quality auditors. One reason is that major internal organizational shareholders can use low quality auditors and achieve personal benefits. The results of the studies by Ebrahimi Kordlor and Erabi (2009), Osta (2011), Feisali (2011) and Truong and Heaney (2007) supported this hypothesis.
Based on the results of study, the following recommendations are presented for further studies:
• The evaluation of earnings management among the companies with auditor switch (negative and positive),
• The evaluation of other variables affecting the auditor switch process as board of directors characteristics,
• The evaluation of this issue by other statistical and engineering techniques including artificial intelligence methods

Keywords

• Outside block shareholders
• Inside block shareholders
• Audit Switching
• Audit Quality

References

1. Abbaszadeh, M. R, Kadivar, H; and Khorami, S. (2013). "Auditing density and auditing quality", 11th National Accounting Conference, Ferdowsi University of Mashhad. (In Persian)

2. Abdullah, S.N; Mohamad Yusof, N.Z.; and Mohamad Nor, M.N. (2010). "Financial restatements and corporate governance among Malaysian listed companies", Managerial Auditing Journal, Vol.25, No.6, pp.526-552.

3. Abdullah, W. Z.W; Ismail, and Jamaluddin, N. (2008). "The impact of board composition, ownership and CEO duality on audit quality: The Malaysian evidence ", Malaysian Accounting Review, Vol 7, No 2, pp 16-28.

4. Adeyemi, S.B; Fagbemi, T.O. (2010). "Audit Quality, Corporate Governance and Firm Characteristics in Nigeria", International Journal of Business and Management, Vol. 5, No. 5, pp 169-179.

5. Bagherpour, M; Monroe, G.S; and Shailer, G. (2009). "Auditor switching in an increasingly competitive audit market", SSRN Working Papers Series, Pgs31.

6. Bagherpour, M. A; Meshkani, A, Olfat, A; and Bagheri, M. (2011). "Prediction of audit switching in Iran: A data mining approach", Accounting and Auditing Researches, Vol. 2, No. 2, pp. 9-24. (In Persian)

7. Banimahd, B; Akbari, R. (2010). "Investigation of the Association between Z’Altmans Bankruptcy Index and Auditor Change", Management Accounting, Vol. 3, No. 3, pp. 41-47. (In Persian)

8. Banimahd, B; Fallah Mirabbasi, S. (2010). "Association between accounting conservatism and auditor change of listed firms in Tehran Stock Exchange (TSE)", The Financial Accounting & Auditing Researches, Vol. 7, No. 2, pp. 69-93. (In Persian)

9. Banimahd, B; Moradzadeh Fard, M; and Zinali, M. (2013). "Relationship between Change of Independent Auditor and Change of Audit Opinion", Journal of Accounting Knowledge, Vol. 4, No. 14, pp. 91-108. (In Persian)

10. Ben Ali, C; Lesage, C. (2010). "Ownership concentration and audit fees: do auditors matter most when investors are protected least?" downloaded from http://hal.archives-ouvertes.fr.

11. Boloo, G; Maham, K; and Godarzi, E. (2010). "Independent Auditor Changes and Information Transparency of Listed companies in Tehran Stock Exchange (TSE) ", Journal of Accounting Knowledge, Vol. 1, No. 1, pp. 111-135. (In Persian)

12. Byun, H.Y; Hwang, L.S; and lee, W.J. (2011). "How does ownership concentration exacerbate information asymmetry among equity investors?" Pacific-Basin Finance Journal, Vol.19, pp. 511–534.

13. Chi, W; Huang, H. (2005). Discretionary Accruals, Audit-firm Tenure and Audit-partner Tenure: Empirical Evidence from Taiwan. Journal of Contemporary Accounting and Economics,1(1), 65-92.

14. Choi, S; Choi, Y; Gui, F; and Lee, W. (2015). "The impact of mandatory versus voluntary auditor switches on stock liquidity: Some Korean evidence", The British Accounting Review, Vol. 47, pp. 100-116.

15. Cohen, D.A; Dey, A; Lys, T.Z. (2008). Real and Accrual-Based Earnings Management in the Pre- and Post-Sarbanes-Oxley Periods. Accounting Review, 83(3), 757-787.

16. DavidsonIII, W.N; Jiraporn, P; and DaDalt, P. (2005). "Causes and consequences of audit shopping: An analysis of auditor opinions, earnings management and auditor changes", SSRN Working Papers Series.

17. Ebrahimi Kordlor, A; Erabi, M. J. (2010). "Ownership Concentration and Earnings Quality in the Listed Companies in Tehran’s Stocks Exchange", Financial Accounting Researches, Vol. 2, No. 4, pp. 95-110. (In Persian)

18. Fan, J.P.H and Wong, T.J. (2002). "Corporate ownership structure and the informativeness of accounting earnings in East Asia", Journal of Accounting and Economics, Vol. 33, pp. 401-425.

19. Feisali, I. (2011). "Effect of corporate governance on selected auditor type", Master's Dissertation, Islamic Azad University, Central Tehran Branch. (In Persian)

20. Firth, M. Fung, P.M.Y. and Rui, O.M. (2007). "Ownership, two-tier board structure, and the informativeness of earnings: Evidence from China", Journal of Accounting and Public Policy 29, pp. 463-496.

21. GAO (Government Accountability Office). (2003). Required Study on the Potential Effects of Mandatory Audit Firm Rotation.

22. Gul, F; Lee, D; and Lynn, M. (1992). "A note on audit qualifications and switches: Some further evidence from a small sample study", Journal of International Accounting, Auditing", Vol.1; iss1; pp.111-120.

23. Hamekhani, S; Parvare, Y. (2012). "Investigation factors of auditor change in Iran", The First Regional Conference in New Research and Solutions in Accounting and Management, Shafagh Tonekabon high-education institution. (In Persian)

24. Han, S; Kang, T; and Rees, L. (2009). "The association between institutional ownership and audit properties", SSRN Working Papers Series.

25. Hassas Yeganeh, Y; Shahriary, A. R. (2010). "Concentrated Ownership and Conservatism Evidence from Tehran Stock Exchange", Financial Accounting Researches, Vol. 2, No. 2, pp. 77-94. (In Persian)

26. Hudaib, M; T.E, Cooke. (2005). "The Impact of Managing Director Changes and Financial Distress on Audit Qualification and Auditor Switching", Journal of Business Finance&Accounting, 32(9) & (10), pp 1703-1739.

27. International Organization of Securities Commissions (IOSCO). (2005). Strengthening capital markets against financial fraud. Madrid, Spain: IOSCO.

28. Jensen, M. C; Meckling, W.H. (1976). "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", Journal of Financial Economics, 3, pp 305-360.

29. Jung, K; Kwon, S.Y. (2002). "Ownership structure and earnings informativeness: Evidence from Korea", The International Journal of Accounting, Vol, 37, pp.301-325.

30. Karami, G. R; Hoseini, A, and Hasani, A. (2010). "Studying relationship between corporate governance mechanisms and conservatism of listed firms in TSE", Accounting and Auditing Researches, Vol. 2, No. 7, pp. 86-99. (In Persian)

31. Kim, J.-B., Min, C.-K., & Yi, C. H. (2004). "Selective auditor rotation and earnings management: Evidence from Korea". Working paper. Hong Kong Polytechnic University.

32. Krishnan, J; Krishnan, J and Stephens R.G. (1996). "The Simultaneous Relation Between Auditor Switching and Audit Opinion: An Empirical Analysis ", Accounting and Business Research. Vol. 26, No. 3, 224-236.

33. Krishnan, V. G. (2007). "Did earnings conservatism increase for former Andersen clients?". Journal of accounting, auditing and finance. Vol, 22. Pp. 141-163.

34. Lee, Ho Young; O'Keefe, Terry; and Stein, Mike. (2003). "Client characteristics, abnormal accruals and auditor switches: An empirical study", Asia-Pac fic Journal of Accounting & Economics, No.10, pp 31-

35. Lin, Z.J; Liu, M. (2010). "The determinants of auditor switching from the perspective of corporate governance in China", Advances in Accounting, incorporating Advances in International Accounting, Vol26, pp.117-127.

36. Mahdavi, G. H; Monfared Maharloei, M; and Erahimi, F. (2011). "The Effect of Corporate Governance on Auditor’s Choice for the Companies Listed in Tehran Stock Exchange ", Quaterly Journal of Securities Exchange Journal, Vol. 4, No. 13, pp. 135-155. (In Persian)

37. Mahdavi, A. G; Midri, A. (2005). "Ownership structure and efficiency of listed firms in TSE", Journal of Economic Researches, No. 71, pp. 107-132. (In Persian)

38. Mahdavi, G. H; Ebrahimi, S. (2010). "Auditor change: Red or green light?", Auditor, No. 49, pp. 115-123. (In Persian)

39. Mashayekh, S; Abdolahi, M. (2011). "Investigating the Relation Between Ownership Concentration, Firm Performance and Dividend Policy in the Companies Listed in Tehran Stock Exchange", Financial Accounting Researches, Vol. 3, No. 4, pp. 71-86. (In Persian)

40. Mitra, S; Jaggi, B; and Al-Hayale, T. (2015). "Auditor’s Downward Switch, Governance, and Accounting Conservatism", Journal of Accounting, Auditing & Finance, online publish, July 07, pp. 1-31.

41. Moharami, B. (1999). "Importance of auditing firm features in auditor selection process by firms and auditor change of Iranian corporations", Master's Dissertation, Tehran University. (In Persian)

42. Mosavi Shiri, M; Bafandeh Imandost, S; and Boland Raftar Pasikhani, M. (2013). " Application of K-Nearest Neighbor (KNN) for Predicting Corporate Financial Distress in Tehran Stock Exchange", Financial-Monetary Economics (prior Knowledge and Development), Vol. 20, No. 6, pp. 48-66. (In Persian)

43. Myer, J.N. (2005). The length of auditor-client relationships and financial statement restatements. Doctoral Dissertation, Texas A&M University.

44. Nikomaram, H; Movakel, E. (2014). "Affecting factors on auditor change from corporate governance approach", The Financial Accounting and Auditing Researches, Vol. 6, No. 24, pp. 1-20. (In Persian)

45. Nonahal Nahr, A. A; Jabarzadeh Kangarloei, S; and Pourkarim, Y. (2010). "The Relationship between Auditor Quality and Accrual Reliability", Journal of Accounting and Auditing Review, Vol. 17 No. 61, pp. 55-70. (In Persian)

46. Osta, S. (2011). "Investigating the relationship between Ownership Structure and Earning Management", Financial Accounting Researches, Vol. 3, No. 2, pp. 93-106. (In Persian)

47. Rezazadeh, J, Zarei Moraveg, K. (2009). "Affecting factors on auditor change in Iranian corporations", Accounting Study Quarterly, Vol. 20, pp. 89-105. (In Persian)

48. Rohi, A; Imanzadeh, P. (2009). "Studying reasons of auditors change of listed firms in TSE", The Financial Accounting & Auditing Researches, Vol. 4, No. 1, pp. 185-198. (In Persian). (In Persian)

49. Tehran Stock Exchange. (2007). "Act of trustful auditing firms of stock exchange", Tehran, Iran. (In Persian)

50. Truong, T; Heaney, R. (2007). "Largest shareholder and dividend policy around the world", The Quarterly Review of Economics and Finance, Vol, 47, pp.667-687.

51. Tu, Guoqian. (2012). "Controller changes and auditor changes", China Journal of Accounting Research, No.5, pp45-58.

52. Sadeghi, H; Rahimi, P; and Salmani, Y. (2014). "The Effect of Macroeconomic and Governance Factors on Financial Distress in Manufacture Firms Listed in Tehran Stock Exchange", Financial-Monetary Economics (prior Knowledge and Development) Vol. 21, No. 18, pp. 107-127. (In Persian)

53. Sajjadi, H; Zaranejad, M; and Jafari, A. R. (2009). "The Effect of Corporate Attributes on Quality of Financial Information Reporting of the Listed Companies in Tehran Stock Exchange", Journal of Accounting and Auditing Review, Vol. 16, No. 57, pp. 51-68. (In Persian)

54. Schneider; A. (2015). "Does information about auditor switches affect investing decisions?", Research in Accounting Regulation, Vol. 27, pp. 39-44.

55. Setayesh, M. H; Ghorbani, A; and Golmohamadi, M. (2010). "Studying effects of corporate governance on earnings smoothing of listed firms in TSE", Accounting and Auditing Researches, Vol. 2, No. 7, pp. 34-51. (In Persian)

56. Stanley,J; DeZoort,F.T. (2007). Audit firm tenure and financial restatements: An analysis of industry specialization and fee effects. Journal of Accounting and Public Policy, 26, 131–159.

57. Vito, J.D; Laurin, C.I; and Bozec, Y. (2008). "Corporate ownership structure and innovation in Canada", SSRN Working Papers Series.

58. Zhong, K; Gribbin, D.W; and Zheng, X. (2007). "The effect of monitoring by outside blockholders on earnings management", Quarterly Journal of Business and Economics.