Determinants of Auditor Choice in Tunisian Context Essay

The intent of this article is to analyze the association between the houses ‘choice of external hearer and the undermentioned client houses features: the degree of complexness in the organisation, investing chances, purchase and the costs of unwraping proprietary information to rivals.

We develop a logit arrested development theoretical account to prove the impact of houses ‘ features on hearer pick determinations made by 27 companies listed during a period of 2005-2008 in Tunisia.

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We find that houses with high investing chances and high degree of organisational complexness are more likely to engage “ Top 15 ” hearers. Further, houses with high purchase and high costs of unwraping proprietary information to rivals are less likely to engage “ Top 15 ” hearers.

Introduction

During the last decennary of last century, the informational opacity has been one of the factors that led to the most widespread fiscal dirts around the universe ( Enron, Worldcom, Parmalat… ) . In this respect, to guarantee the relevancy and credibleness of fiscal and accounting information provided by the company, the intercession of a legal hearer in the life of organisations is cardinal.

The legal hearer can therefore give sensible confidence that fiscal statements accurately reflect the company ‘s state of affairs. Therefore the audit of histories can extenuate the asymmetric information between the assorted stakeholders of the company ( stockholders, creditors, investors, employees… ) . In this context the legal audit finds its legitimacy in signaling theory and in bureau theory. Hence, in certifying to the credibleness of accounting information provided by direction, independent audits play an external monitoring function on behalf of the owners/shareholders and are an indispensable constituent of the corporate administration ( Abdel-khalik, 2002 ; Ashbaugh & A ; Warfield, 2003 ) . Nonetheless the public-service corporation of audit services depends upon the quality of scrutinizing.

Several anterior surveies documented that house with high bureau costs are inclined to take a high-quality hearer to relieve the possible bureau jobs ( Hay & A ; Davis, 2004 ; Fan & A ; Wong, 2005 ) . Relatively speaking, low-quality hearers may non be able to exert an effectual monitoring of clients ‘ fiscal coverage procedure ( Mayhew et al. , 2003 ) .

Therefore the quality of independent audits will straight impact houses ‘operations ( Cohen et al. , 2002 ) . There is ever a tradeoff between engaging a high-quality hearer to better the transparence of information, quality fiscal coverage and engaging a low-quality hearer to mask information. Due to the inability of straight detecting audit quality, several discernible factors are used as a alternate, including the size of audit houses ( De Angelo, 1981 ; Palmrose, 1988 ; Citron & A ; Taffer, 1992 ; Copley & A ; Douhett, 2002 ) .

Therefore, offers on the audit market are divided into two groups: the big audit houses supposed to supply a high quality audit service and other houses expected to supply a lower audit-quality.

We will seek to reply the inquiry: What are the house characteristics that influence the hearer pick determinations ( engaging high-quality hearer Vs low-quality hearers ) in Tunisian context?

The audit market in Tunisia nowadayss an interesting sphere for the survey of hearer pick. Because there are few empirical surveies that examine hearer pick determinations in the emerging economic systems. In add-on, the businesss of the Tunisian authorities to beef up the oversight function pursued by the legal hearer ( Act No. 2005-96 of 18 October 2005 on beef uping the security of fiscal dealingss ) , provides a good chance to analyze the hearer pick determinations for Tunisian listed companies.

This paper contributes to the literature in the undermentioned ways. First, it explores other determiners of hearer pick that have non been studied before in the Tunisian context, there are investing chances and the costs of unwraping proprietary information to rivals. Second, it eliminates the simple dichotomous differentiation between “ Big ” and “ No Big ” and proposes a new typology of the audit quality in the Tunisian audit market.

The intent of this paper is to analyze the association between the hearer pick determinations in Tunisia and the undermentioned client house features: the degree of complexness in the organisation, investing chances, purchase and the costs of unwraping proprietary information to rivals.

We develop a logit arrested development theoretical account to prove the impact of houses ‘ features on hearer pick determinations made by 27 companies listed during a period of 2005-2008 in Tunisia.

The empirical consequences show that houses with high investing chances and high degree of organisational complexness are more likely to engage “ Top 15 ” hearers. Further, houses with high purchase and high costs of unwraping proprietary information to rivals are less likely to engage “ Top 15 ” hearers.

The balance of this paper is organized as follows: the following subdivision reviews the scrutinizing environment in Tunisia. Section 3 outlines the anterior literature and hypotheses tested in this article. Section 4 describes the empirical analysis. Section 5 nowadayss our consequence. At Last, we offer reasoning comments and survey restrictions.

2. Auditing environment in Tunisia

2.1. Legal model

The scrutinizing profession in Tunisia was chiefly regulated by the Commercial Code of 1959, followed by the Commercial Companies Code in 2000 and besides the part of some specific statute law the profession of accounting.

For several old ages, the legal audit has been reserved entirely for Chiefs Accountants ; it is merely with the passage of Law No. 2002-16 of 04/02/2002 on the organisation of the accounting profession as the statutory audit has been extended to accounting technicians enrolled in the company of comptrollers in Tunisia.

Harmonizing to Article 13 of Law n A° 2005-96 of 18/10/2005 on beef uping the security of fiscal dealingss, the statutory audit is no longer a demand for joint stock companies but merely for limited liability companies that meet at least two of the bounds set by edict:

– Entire balance sheet: 100A 000 dinars ;

– Sum incomes excepting revenue enhancements: 300 000 dinars ;

– Average figure of employees: 10.

Under the commissariats of the jurisprudence of 04.17.1995 on the restructuring of companies in economic troubles, as supplemented and amended by Law No. 99-63 of 15.07.1999 and Law No. 2003-79 of 29 / 12 / 2003, the hearer is responsible for informing the Committee Monitoring Economic Companies of any economic adversity which may present a menace to the continuity of the activity of its client company, it must besides unwrap to territory lawyer anomalousnesss and discourtesies discovered during the class of his mission.

Through these Torahs, the legislative assembly has given great importance to the function of head comptroller in companies, it cooperates more with the statuary organic structures supervisory as the board of managers, and audit commission.

For this ground, the Tunisian legislative assembly does non discontinue to beef up the independency of the hearer, and this through Article 262 of the Commercial Companies Code that is mutual exclusiveness of the exercising of statutory hearer and besides through Article 13 Bi of Act No. 2005-96 organizes the hearer term of office and Article 13ter requires the assignment of two or more hearers for some companies.

2.2. Tunisian audit market characteristics

Since the early 1880ss, the map of audit in Tunisia has been regulated under public control. Furthermore, public control is now seen internationally as a major component in keeping assurance in the audit map.

However, the audit profession recognizes bounds in Tunisia, is a profession that remains negligible compared to developed states. In fact, the figure of chiefs comptrollers increased in a really little sum of one twelvemonth to another, or 751 houses are inscribed in the Order of the Chiefs Accountants of Tunisia in 2008. Whose bulk is composed of single audit houses and a minority is made up of big audit houses which are mainly representatives of the “ Big4 ” and of the big local audit houses.

The following tabular array shows the development of the figure of chiefs comptrollers over the past four old ages.

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Harmonizing to the National Institute of Statistics in 2007, the Tunisian economic context is characterized by a bulk of household companies is 85.6 % . While the Legal individuals are 14.4 % : 1 % of Public limited Companies, 10.8 % of limited liability companies and 2.6 % of other legal individuals.

The inside informations of this distribution are shown in the tabular array below.

Since 2007, there were about 691 audit houses are required to scrutinize the histories of Harmonizing to the distribution of Tunisian houses by legal signifier, we find that the country where the hearers provide services is limited public limited companies 5240 and 56,581 limited liability companies. This means that the audit market in Tunisia is characterized by competition and concentration.

The big international audit houses ‘Big 4 ‘ are the leaders in Tunisian audit market, the staying market is shared between big local audit houses and single audit houses.

We will analyse in the following subdivision the audit quality and determiners of hearer pick in position of the socio-economic Tunisian context.

Background and hypotheses development

3.1. Audit quality

Audit quality refers to two constituents: the ability to observe misstatements and the willingness to describe the misstatement uncovered in an audit battle ( De Angelo, 1981 ; Copley & A ; Douthett, 2002 ) . However, a assortment of definitions are used to proxy for audit quality in the literature. Due to the inability of straight detecting audit quality, several discernible factors are used as a alternate, including the size of audit houses ( De Angelo, 1981 ; Palmrose, 1988 ) . A high-quality hearer should hold independency, sufficient expertness, and high unity.

De Angelo ( 1981 ) suggests that the hearer independency is the joint chance that hearers will happen and describe misstatements in the fiscal statements. She argues that the quality of an auditing house is positively associated with steadfast size of the house ‘s market portion. Despite some recent high-profile instances ( e.g. , Arthur Andersen ) , the corporate grounds is strongly supportive that big audit houses can supply higher audits and better monitoring ( De Angelo, 1981 ; Lee et al. , 2003 ; Francis, 2004 ; Lennox, 2005 ) .

Previous surveies in Anglo-Saxons ‘ states, shows that there is a important difference between the audit quality from “ Large 4 ” and the audit quality from other audit houses “ No Big4 ” ( De Angelo, 1981A ; Palmarose, 1988 ) . Nevertheless, research workers from emerging states like China and Tunisia ( Zehri, 2007, Lin & A ; Liu, 2009 ) have non found the same consequences because the particulars of the audit market in these states are different from those in Anglo Saxon, due to cultural differences and socio-economic differences between the two environments.

Acknowledge the world of the audit market in emerging states and peculiarly in the Tunisian audit market, Zehri ( 2007 ) developed an empirical survey in 2007 on the legal audit quality in Tunisia.

She proposed a three-party typology of audit quality, which is better suited to the specificities of the Tunisian context:

The first typology: rank of hearer to big international houses “ Big4 ” .

The 2nd typologyA : big local audit houses who have more than ten old ages of experience, that is they are registered on the board of Order of the Chiefs Accountants of Tunisia ( OCAT ) before 1999 and they have a figure of confederates higher than 20.

The 3rd typology: other audit houses, obtained by extinguishing the first and 2nd typology.

It makes more sense so to make a new typology called “ big local audit houses ” , and to abandon the simple dichotomous differentiation “ Big / No Big ” . So, the big local audit houses in Tunisia have a high audit quality like audit quality of “ Large 4 ” hearers.

Zehri ( 2007 ) has shown that big local audit houses significantly limit the exercising of discretions accounting made by the managers of little and average Tunisian companies.

3.2. Hypothesiss development

– Organizational complexness

As a company grows larger it becomes more complex and hard to command ( Kinney & A ; Mc Daniel, 1989 ) . An increasing plus, figure of subsidiaries, locations and transactional complexness may cut down overall efficiency in the organisation and give rise to moral jeopardy jobs between the manager/owner and the subsidiaries.

De Angelo ( 1981 ) suggests that there exists a positive association between the size of the house and the audit quality. So as the society becomes larger, a higher quality audit will be needed

for monitoring or bonding and will besides be of comparatively greater benefit in proportion to its costs under any of the other accounts ( Hay & A ; Davis,2004 ) .

As a consequence, organisations that are complex are more likely to choose a high quality hearer ( Simunic & A ; Stein, 1987 ; Abdel-Khalik, 1993 ; knechel et al. , 2008 ) taking to our first hypothesis:

H1: The pick of hearer is positively associated with the complexness of the house.

Investing chances

Investing chances are growing options that can be taken or forgone at the managers’discretion ( Myers, 1977 ) . They represent future investings the value of which is unsure because they depend on discretional disbursals made by the directors. Hence, the directors are likely to hold more information about investing chances and their value than the stockholders ( Bizjak et al. , 1993 ) .

Furthermore, the direction of investing chances requires decision-making in an unsure environment and accordingly managerial action is more unobservable ( Smith & A ; Watts, 1992 ) .

Hence, stockholders of houses with high investing chances have a greater demand of supervising their directors.

In add-on, houses with high investing chances have a high audit hazard ( Tsui et al. , 2001 ) and high degree of discretional accumulations. Consequently theses houses are more needful to engage a high quality hearers. The 2nd hypothesis is as follows:

H2: The pick of hearer is positively associated with investing chances of the house.

-Leverage

Extensive anterior research suggests that one major beginning of a demand for scrutinizing is the demand to extenuate the client ‘s bureau costs originating from conflicting involvements among direction, proprietors and creditors ( Jensen & A ; Meckling, 1976 ) .

Companies in demand of funding will first turn to local Bankss or fiscal establishments. Evidence suggests that a company can cut down its effectual involvement rate by prosecuting high quality hearers ( Blackwell et al. , 1998 ; Mansi et al. , 2004 ) .

Prior research suggests that houses can utilize income-increasing accounting methods to avoid debt compact misdemeanors ( DeFond & A ; Jiambalvo, 1994 ) so an audit facilitates the enforcement of debt compacts that restrict direction actions.

Knechel et Al. ( 2008 ) suggest that a creditor ‘s hazard is besides affected by the extent of collateral available to back up a loan and the fanciful value of collateral may be overstated as a consequence of aggressive accounting patterns by a borrower. Consequently, the borrower ‘s pick of hearer is conditional on the extent of a house ‘s purchase, taking to our 3rd hypothesis:

H3: The pick of hearer is positively associated with a house ‘s purchase.

-Costs of unwraping proprietary information to rivals

A primary aim for any company is to develop and retain a competitory advantage. For rivals to successfully copy the scheme of another, have the inducement to vie, be able to name the beginning of the competitory advantage. Businesss have an inducement to avoid uncovering proprietary information that could be harmful to the competitory place of the company ( Porter, 1980 ) .

Several surveies suggest that competition additions as disclosing lessenings, and that the proprietary costs of revelation are higher in more competitory markets ( Harris, 1998 ; Verrecchia, 1990 ) .

Hiring a low quality hearer may increase the chances for a company to utilize income-decreasing accounting methods to mask the true public presentation of the house ( Knechel et al. , 2008 ) . This leads to our 4th hypothesis:

H4: The pick of hearer is positively associated with the costs of unwraping proprietary information to rivals.

4. Research methodological analysis

We describe foremost our sample and we are traveling to show the logistical arrested development theoretical account and eventually, we are traveling to specify all variables used.

4.1. Sampling

Our sample covers 27 Tunisian houses listed in Tunisian stock exchange ( TSE ) from the beginning of 2005 to the terminal of 2008.This houses are distributed in five concern sectors: the industry, the agribusiness, the services, the concern and the touristry.

We excluded the fiscal establishments because they are subjected to a specific ordinance in constitution of fiscal reporting.The informations of our theoretical account are taken from the fiscal coverage from the Tunisian Financial Market Council ( FMC ) . Others informations about hearers features are taken from the National Statistics Institute ( NSI ) and from the Order of the Chiefs Accountants of Tunisia ( OCAT ) .

4.2. Model specification

The basic aim of this survey is to analyze whether houses auditor pick is associated with their features ( organisational complexness, investing chances, purchase and the costs of unwraping proprietary information to rivals ) .

In this survey we use a binary categorization to split hearers in Tunisia into two classs: the 15 largest hearers “ Top 15 ” to proxy for high-quality hearers and “ no Top 15 ” to proxy for low-quality 1s.

Since the dependant variable ( auditor pick ) is binary in nature ( Top 15 vs no Top 15 ) , we applied logit arrested development with the undermentioned hearer pick theoretical account to prove Hypothesiss 1-4:

So Audior Choice = f { Organizational complexness ( proxy by MOD, CTR, CRV ) ; Investment chances ( proxy by INV ) ; Leverage ( placeholder by END ) ; Costss of unwraping proprietary information to rivals ( proxy by CONC, ROA ) } .

This arrested development will be estimated on the panel of 108 firms-year observations.

4.3. Variables Measures

Variables used in the present survey are defined as follows:

4.3.1. Dependent variable

CHOIX =1 if the hearer is a Top 15 ; 0 otherwise.

The Top 15 audit houses represent the high-quality hearer in Tunisia. So its includes the large national audit houses and “ the large 4 ” in Tunisia.

We are assumed that the large national audit houses in Tunisia represent the hearers are more than ten old ages old of experiences, that are registered on the board of the Order of the chiefs comptrollers of Tunisia ( OCAT ) before 1999 and they have a figure of confederates higher than 20.

4.3.2. Mugwumps variables

– Organizational Complexity

Mod: Is the ratio of wages to runing disbursals.

Reflects operational and informational complexness of an organisation ( Abdel-Khalik, 1993 ; Hay & A ; Davis, 2004 ) .

CTR: Is the ratio of stock list and receivables to entire assets.

Reflects plus and transactional complexness ( Stice, 1991 ; Hay et al. , 2006 ) .

CRV: defined the per centum growing in gross revenues for a specific company ( Kinney & A ; Mc. Daniel, 1989 ) .

For all three variables, we expect a positive association between the step of complexness and the pick of hearer.

-Investment chances

We use factor analysis to deduce a composite step of investing chances three variables. The steps of investing chances that I use in factor analysis follow Gul & A ; Tsui ( 1998 ) ; Lai ( 2009 ) .

Market to book plus ( FIRMASS ) : Is the ratio of the amount of market value of equity and book value of long-run debt to the entire assets of the house.

Market to book equity ( MKTBKEQ ) : Is the ratio of the market value of equity to book value of equity.

Gross belongings, works and equipment ( PPEGT ) : Is the ratio of gross belongings, works and equipment to the amount of market value of equity and book value of long-run debt.

Harmonizing to Myers ( 1977 ) , the value of a house consists of assets-in-place and investing chances. FIRMASS and MKTBKEQ are expected to be positively related to investing chances larger values of these steps mean higher house value in relation to assets-in- topographic point. Conversely, PPEGT is expected to be negatively related to investing chances because a higher value means more assets-in-place and a lower proportion of house value that is represented by investing chances.

INVi, T = FIRMASS + MKTBMEQ – PPEGT

We expect a positive association between the step of investing chances and the pick of hearer.

-Leverage

End: Is the ratio of entire liabilities to entire assets.

Reflects the per centum of financess used in the plus which consequence from external creditors ( Mitra et al. , 2007 ) ,

We expect a positive association between the step of purchase and the pick of hearer.

-Costs of unwraping proprietary information to rivals

Several surveies suggest that the proprietary costs of revelation are higher in more competitory markets ( Verrechia, 1990 ) . Consequently ; there is a relationship between steps of competition in the industry and hearer pick. Our step focuses on market concentration is the Herfindahl index “ CONC ”

CONC: Is the amount of divided by the square of the amount of Zi, where ZiA refers to the gross revenues of the I th sample house in our sample.

The general premise in the literature is that competition decreases as market concentration additions ( Harris, 1998 ) . A higher value of the ratio means that the industry is more concentrated, so we expect a positive relationship between CONC and the hearer pick.

The theoretical association between completion and concentration of the industry is equivocal so we besides use profitableness as an alternate step of competition.

ROA: Is the house ‘s return on assets.

A company has an inducement to engage a low quality hearer in order to do it easier to mask its true profitableness. So we expect a negative relationship between ROA and the hearer pick.

-Size

TAILLE: Is the natural logarithm of entire assets.

We expect a positive association between the step of house ‘s size and the pick of hearer.

5. Empirical consequences

The descriptive consequences refering the different variables presented above are set out in turn with those of the arrested development theoretical accounts.

5.1. Descriptive statistics

Table 4 provides selected descriptive statistics of the sample by Top 15 versus no Top 15 hearers.

The audit market in Tunisia is slightly different from that in US. The large 4 auditing houses dominate the market and audit most of the listed houses in the US. However, Top 15 audit houses in Tunisia have audited merely 62, 93 % of the sample listed houses in this survey.

Firms with Top 15 hearers have larger in size ( TAILLE ) than houses with no-Top 15 hearers. In add-on, they have higher investing chances ( INV ) than no-Top 15 houses, proposing that houses with high investing chances are more likely to engage Top 15 hearers. However, houses with Top 15 hearers have lower wages to runing disbursals ratio ( MOD ) , lower stock list and receivables to entire assets ratio ( CTR ) , lower per centum growing in gross revenues ( CRV ) , lower entire liabilities to entire assets ratio ( END ) , lower ( ROA ) and lower market concentration ( CONC ) than houses with no-Top 15 hearers.

The correlativity consequences for the variables used in theoretical account are presented in table 5.

The pick of Top 15 hearers is positively related, at the important degree, to the investing chances ( INV ) , industry concentration ( CONC ) and wages to runing disbursals ratio ( MOD ) , and negatively related to the stock list and receivables to entire assets ratio ( CTR ) .

5.2. Arrested development consequences

Table 6 provides empirical consequences from the arrested development to prove the association between houses ‘ features and their audit pick determinations. The sample consists of 27 listed houses during 2005-2008. With a pseudo R-square of 0.334 and a Chi-square of 43.953, the theoretical account is statistically important and can distinguish the listed houses taking Top 15 ( high-quality ) hearers from those taking no-Top 15 hearers.

The both complexness variables MOD and CRV have positive coefficient with a p-value of 0,221 and a p-value of 0,314 respectively.CTR has the predicted positive mark and its is important at the P & lt ; 0, 1 degree. The determination is consistent with H1. As a consequence, organisations that are complex are more likely to choose a high-quality hearer ( Simunic & A ; Stein, 1987 ; Abdel-Khalik, 1993 ; knechel et al. , 2008 ) . It suggests that Tunisian houses with organisational complexness and control, will be needed a high-quality ( Top 15 ) hearer for monitoring.

The coefficient for the variable of investing chances is positively important at the 1 % degree ( I?4 = 0,827 ; Wald = 10, 139 ) . It suggests that with a high degree of investing chances, the listed Tunisian houses are more likely to take a Top 15 ( high -quality ) hearer. The determination is consistent with H2. The consequence reveals that houses with high investing chances are more likely to hold more discretional accumulations. However, this relationship

is weaker when those houses are audited by Top 15 hearers. These consequences suggest that the likeliness of net incomes use is higher for houses with high investing chances but a high quality audit is able to control the use ( Lai, 2009 ; Tsui et al. , 2001 ) .

As indicated by I?5, the purchase is negatively related to taking a Top 15 ( high-quality ) hearer. The consequence is important at the 1 % degree ( I?5 = -3,066 ; Wald = 7,797 ) , proposing that houses with higher purchase are less likely to take a Top 15 hearer, which reject H2. Although some surveies found that houses with higher purchase can utilize income-increasing accounting methods to avoid debt compact misdemeanors, so high-quality audit facilitates the enforcement of debt compacts that restrict direction actions ( DeFond & A ; Jiambalvo, 1994 ; Knechel et al. , 2008 ) . Our happening demonstrates that houses with high purchase choose a no-Top 15 hearer to dissimulate their methods accounting use.

Consistent with H4, CONC is positively related to taking a Top 15 hearer, but merely at a fringy degree of 10 % . In add-on ROA has the predicted negative mark but its is non important. Proposing that when the costs of unwraping proprietary information to rivals are higher, a listed house is more likely to engage a high-quality ( Top 15 ) hearer. This determination indicates that competition additions as disclosing lessenings, and that the proprietary costs of revelation are higher in more competitory markets, so engaging a low quality hearer may increase the chances for a company to utilize income-decreasing accounting methods to mask the true public presentation of the house ( Knechel et al. , 2008 ) .

For the control variable, steadfast size ( log of entire assets ) is positively related to the choice of Top 15 hearers. The consequences suggest that big houses are inclined to engage high-quality hearers in the Tunisian stock market every bit good.

In drumhead, the empirical consequences support H1, H2, and H4 and reject H3, during the period 2005-2008.

6. Decisions

The intent of this survey is to look into the association between the houses ‘choice of external hearer and the undermentioned client house features: organisational complexness, investing chances, purchase and costs of unwraping proprietary information to rivals, in the Tunisia context.

Though logit arrested development, we identify the impact of the client house features variables on the hearer pick determinations undertaken by the 27 listed houses in Tunisia during 2005-2008.

The consequences of this paper indicate that houses with high investing chances and high degree of organisational complexness are more likely to engage high-quality “ Top 15 ” hearers. Further, houses with high purchase and high costs of unwraping proprietary information to rivals are less likely to engage “ Top 15 ” hearers.

We find that big local audit houses occupy a considerable topographic point in the scrutinizing Tunisian market and they show a high quality of audit. So we eliminated the simple dichotomy differentiation between “ Big N/no Big N ” and we proposed a three-party typology of audit quality in Tunisia: the large four, the big local audit houses and others. This new typology we allowed to categorise Tunisian hearers into two groups, Top 15 ( high-quality ) and no-Top 15 ( low-quality ) .

There are some restrictions in this survey. First our sample was based merely on the listed companies. Second our designation of the big national audit houses in Tunisia is subjective.

Future research could analyze others determiners of hearer pick such as audit commission features. Finally we suggest a reproduction of this survey by measuring the audit quality harmonizing to the direct attack.