Dr. Philip K. Law is an Assistant Professor of Auditing and Accounting,
University of Macau. Dr. Law obtained his Doctor of Business Administration
degree from University of Newcastle, MBA degree from Heriot Watt University,
UK and BSc(Hons) Accounting degree from University of Hull, UK. Dr. Law is
a CPA, FCCA, ACMA, United Kingdom, and a Certified Fraud Examiner, USA,
and Certified Financial Services Auditor, USA. This paper is modified from part
of his Doctoral Thesis from University of Newcastle.
1
Philip K. Law
“Perceptions of auditor independence after Enron debacle:
Hong Kong Evidence”
Abstract
Auditor independence has been the subject of decades of intense empirical research
and philosophical debate. Despite the occurrence of the Enron debacle, there are a
number of crucial issues which remain unsolved. Prior research of the drivers of
auditor independence were contestable and inconclusive. The perceptions of
practicing auditors of those drivers are thus of paramount importance for policy
development and implementation.
Against that background, three variables are
examined: Non audit services (NASs), levels of competition and gender of auditors
for their influence on the perceptions of 218 “Big 4” Hong Kong auditors. A mixed
ANOVA analysis reveals the rhetorical allegations of the US SEC, proclaiming that
NASs provisions would negatively influence perceptions of auditor independence,
and the similar ideas underpinning the enactment of the Sarbanes Oxley Acts, are
corroborated in this Hong Kong study. Audit professionalism and work commitments
of Senior Managers emerge in this study to be problematic; that the commercialism of
Senior Managers might at times have overridden their professionalism. But,
noticeably encouraging, the results demonstrate that post-Enron, Hong Kong “Big 4”
auditors, especially Partners, are more professional and sensitive to the concomitants
of corporate collapses’ undeniably damaging repercussions to society; their audit
acumen not overwhelmed by current booming Hong Kong economy. The highly
competitive audit environment is shown to lead to perceptions of negative
independence, and gender has no influence on auditors’ perceptions of independence
in respect of the provision of NASs and competition. Those implications might
reasonably presage fellow auditors’ and regulatory bodies’ future contemplation of
matters pertinent to independence, and be a catalyst for immediate professional
reforms in Hong Kong.
Key words: Auditor independence, non audit services; competition; gender
_____________________________________________________________________
2
Dr. Philip K. Law is an Assistant Professor of Auditing and Accounting, University of Macau. Dr. Law
obtained his DBA degree from University of Newcastle, MBA degree from Heriot Watt University,
UK and BSc(Hons) Accounting degree from University of Hull, UK. Dr. Law is a CPA, FCCA,
ACMA, United Kingdom, and a Certified Fraud Examiner, USA, and Certified Financial Services
Auditor, USA. This paper is modified from part of his Doctoral Thesis from University of Newcastle.
Introduction
This paper aims to provide an insight on the issue of auditor independence in a Hong
Kong context by examining the influence of gender, non audit services and
competition on the perceptions of auditor independence. Auditor independence has
been a fertile area for research, especially the Big 4 accounting firms have widened
the scope of the services beyond the traditional statutory audit. The non audit services
provided by the Big 4 firms to the clients are a lucrative business. Regulatory bodies
have tried to keep pace with the changing auditing market by enacting laws such as
the US Sarbanes Oxley Act to prohibit the provision of non audit services to the client.
The impairment or lack of auditor independence is a main cause of many corporate
collapses across the world, such as the US Enron case. Independence is regarded as
the cornerstone of the accounting profession. The reality and perception of auditor
independence is fundamental to public confidence in financial reporting and audit
assurances. After the Enron debacle, the problems associated with auditor
independence have been receiving much attention in the public media and by the
auditing profession. Malpractice by auditors, and in particular exercising a lack of
independence have been alleged contributing factors underpinning those events.
The concern of auditor independence is the perceived danger that auditors will not
undertake their tasks with independence in circumstances in which they offer both
audit and non-audit services (NASs) to their clients. The Enron case showed that
Arthur Andersen received $25 million for the audit work and $27 million for the non
audit services (Quick and Rasmussen, 2005). Allegedly their independence was
impaired. This arose the ongoing debate regarding the extent to which auditor should
be allowed to provide non audit services to their audit clients in nowadays
competitive audit environment. After the collapse of Enron, the Sarbanes Oxley Act
2002 was enacted in the US, with provisions prohibiting auditing firms from
3
providing certain (but not all) non audit services to audit clients. Section 201(g)
prohibits audit firms providing those non-audit services contemporaneously with the
audit. Section 201(g) point 9 also allows the Public Company Accounting Oversight
Board (PCAOB) to ban any other services that it determines inappropriate to continue.
Some research supports the argument that the provision non-audit services would not
compromise auditor independence, due to the potential possibility of litigation,
reputation costs and disciplinary proceedings from the accounting bodies and
regulators (Reynolds and Francis, 2001; DeFond et al., 2002; Ashbaugh et al., 2003;
Goldwasser, 2005).
To date, there has been no research into the Hong Kong auditors’ perceptions of their
own independence in the Auditing profession. Against that backdrop, the purpose of
this research is to examine the influence of the problem factors identified from the
auditing literature, on Hong Kong “Big 4” auditors’ perceptions of their own
independence. In Hong Kong, there are currently no mandatory enforcing Auditing
Standards to prohibit the provision of non audit services to the clients or to monitor or
modify other perceived familiarity risks to independence. Aggressively, the Big 4
accounting firms in Hong Kong continuously provide the non audit services to their
client, especially in the Greater China market. There are significant vast recruitment
of auditors to join the non audit services in the Hong Kong and China market. Audit
practice in Hong Kong may reflect the challenges to auditor independence that the
Enron case spawned and prevail in the perceptions audit independence in western
countries. It may also be that audit practice in Hong Kong does not conform to that
pattern. The claimed impact of cultural differences on commercial behaviour and
perceived national cultural differences between Hong Kong in the Asia pacific region
and Anglo-American commercial environments justify this research. (Agacer and
Doupnik, 1991; Patel and Psaros, 2000; Majid et al., 2001). Therefore, this paper
aims to provide an insight on the issue of auditor independence in the Hong Kong
context by examining Hong Kong Big 4 auditors’ perceptions of the influence of
NASs, competition and gender on auditor independence. In this respect the views of
Hong Kong auditors is likely to provide invaluable insight and provide further
4
understanding of the factors influencing auditor independence from the Hong Kong
perspectives.
The importance of audit independence
Auditor independence has long been referred to as the cornerstone of the auditing
profession (Mautz and Sharaf, 1961), been seen as crucial to the validity of external
audit (Sucher and Bychkova, 2001), seen by the Chairman of the American Institute
of Certified Public Accountants (AICPA) and it would seem embraced by the Hong
Kong Institute of Certified Public Accountants (HKICPA) as indeed the cornerstone
of the accounting profession and one of its most precious values.
In that context the International Standards on Auditing (ISA) 200 states that the
objective of an audit of financial statements is to enable the auditor to express an
opinion whether the financial statements are prepared, in all material respects, in
accordance with an identified financial reporting framework. If outside parties doubt
the independence of the reporting auditors, then a number of possibilities could arise.
Firth (1980) mentions the following three impacts:
1) Audits may be perceived to be valueless. Audit work and audit fees would
disappear.
2) The Government may involve more auditing matters and could move towards a
state-controlled audit board.
3) Other regulatory bodies such as Stock Exchanges may become more involved in
auditing matters. This may result in lower earnings for auditors and lessen the
powers of the professional accounting bodies and the CPAs.
Overall the pervading rhetoric appears to be that, when auditors discharge their
responsibilities, independence in fact and both in appearance should always be
present (Mautz and Sharaf, 1961; Firth, 1980; Shockley, 1981; EFAA, October 1998;
Hussey and Lan, 2001). Hence, it is generally argued vital that auditors maintain their
independence, ensure high quality of audits are maintained at all times, and that
5
without auditors’ independence, the credibility of the audited financial statements
would be reduced to the detriment of parties of interest and, indeed, to the accounting
and auditing profession (Bakar et al., 2005). Indeed, in the wake of Enron and the
subsequent demise of the Arthur Andersen firm the future of the auditing profession’s
continuation was argued to be dependent upon the perceptions of auditor
independence; that once an auditor is perceived to lack independence, the audit work
loses credibility and the value of the auditing function is severely impaired, if not lost
(Firth, 1980; Koh and Mahathevan, 1993; DeFond et al., 2002); that an audit report is
only beneficial if it contains reliable and unbiased information. When users of the
audit report do not believe that the auditor is independent, less confidence and
assurance will be put on the resulting auditor’s opinion in the audit report (Quick and
Rasmussen, 2005).
The setting for the study
The HKICPA is the only statutory body in Hong Kong to oversee the auditors’ work
and all auditors need are to follow and comply with the Statements of Auditing (SAS)
and the Statement of Standards Accounting Practices (SSAP) when performing the
audit and preparing the audit report. Most CPAs in Hong Kong are qualified members
from the ACCA (UK), AICPA(US), CPA(Australia) and CA(Canada). All the
partners and the reporting auditors need to have a valid CPA practicing certificate
issued by the HKICPA when they sign off the audit report. The certificate is renewed
annually subject to no disciplinary actions or other proceedings being reviewed by the
HKICPA. In Hong Kong, the Big 4 accounting firms employ the biggest number of
auditors in the industry, their client numbers are large and client base is diverse.
Therefore, the Big 4 auditors are selected as the representative sample in this study.
There are several reasons for studying the auditors’ perceptions of their own
independence. Johnson and Pany (1984) note that as it is the auditors who finally
“sign off” their audit reports on their clients’ financial statements, they are suitably
studied. In addition, Jenkins and Krawczyk (2001) comment that the perceptions of
professional CPAs from Big 4 auditors are important since they are the only audit
6
practitioners who audit the financial statements of companies and that Big 4 auditors
audit most of the large companies (Shafer et al., 2001). Second, as the auditors are
the only people who are “responsible” for giving their independently formed audit
opinions on the financial statements – attesting to whether they true and fair
(Carcello et al., 1992), the question of whether auditors are complying the
independence requirement can best be answered by the auditors themselves
(European Federation of Accountants and Auditors, 1998). Third, Agacer and
Doupnik (1991) commented that auditors are selected, rather than users, because
auditors are more familiar with the concept of independence. Moreover, practitioners
are familiar with the concept of independence as a critical element of their
professional status. Users may be unaware or may misunderstand the independence
concept. The study of the auditors’ perceptions of their own independence can
provide constructive feedback to the regulators. The feedback and results received
from such enquiry can be communicated local audit and accounting bodies, such as
the HKICPA, which can direct the opinions of the Hong Kong auditors to the Hong
Kong regulators or to the international accounting bodies to assist in accounting and
audit policy decisions.
Following the collapse of Enron in US, the corporate governance of companies and
the independence of their auditors have received more attention than in the past
(Raghunandan, 2003). In that context auditors’ independence has become a
significant issue for the profession. Although the US has enacted the Sarbanes Oxley
Act 2002 to prohibit auditors’ provision of Non Audit Services to their clients,
contemporaneously of the audit, certain NASs are still permitted. Hong Kong, at
present, does not have any mandatory Auditing Standards prohibiting auditors
providing NASs to their audit clients in the competitive auditing market. National
culture is alleged to possibly have an impact on auditor independence (Agacer and
Doupnik, 1991; Patel and Psaros, 2000). Patel and Psaros (2000) found, for example,
that national culture may influence how auditor independence is perceived amongst
the Australian, Malaysian, Indian and UK students.
Of course, students usually do
not have the experience and the accumulated professional wisdom of seasoned
7
practitioners. But the observation might reasonably be taken as indicative of the state
of affairs. Understandably then, the background of the independence debate as it has
developed in western and other cultures might be expected to have influenced the
Hong Kong debate. In the US, the UK, and Australia, for example, the major
professional accounting bodies have set down professional conduct and ethical rules
relating to independence. Accordingly, auditor independence is internationally
recognized to have two distinct dimensions:
1) independence in fact, which is an unbiased attitude of the auditor and
2) independence in appearance, which is the perception by a reasonable observer
that the auditor has no relationship with an audit client which could suggest a
conflict of interests (AICPA, 2005).
The AICPA (2005) in its Principles of Professional Conduct sets down the following
for CPAs to observe:
“For a member in public practice, the maintenance of objectivity and independence
requires a continuing assessment of client relationships and public responsibility.
Such a member who provides auditing and other attestation services should be
independent in fact and appearance.”
The credibility of auditors is argued to depend not only on the reality, on actual
independence, but also just as importantly on the perceptions of independence (Mautz
and Sharaf, 1961; Shockley, 1981; EFAA, October 1998). Users will lose confidence
in the audit work when the “appearance perception” of auditor independence is not
preserved. In nowadays Hong Kong the market is booming and users of financial
statements might reasonably be expected to refer to the reports of the reporting
auditors and audited financial statements of their client companies. Business is
transacted nationally and internationally. Users of multinational companies’ financial
statements are expected to be placing great reliance on the audited financials, on
auditors’ opinions for confirmation of the truthfulness of companies’ financial
reporting (Umar and Anandarajan, 2004). Since there are different local accounting
8
and auditing standards in different countries, the resulting financial reporting of
corporations may vary greatly. Even though there exist the International Financial
Reporting Standards (IFRS) and the International Standards on Auditing (ISA), not
all countries comply with them. Therefore, it is to be expected that the professional
judgment and independence of the auditors’ is heavily relied upon and trusted by
users (Hodge, 2003). In view of the importance of the auditors’ perceptions of
independence, researchers worldwide have been investigating this paramount issue
(Knapp, 1985; Beattie et al., 1999; Frank et al., 2001; Umar and Anandarajan, 2004;
Desira and Baldacchino, 2005; Gendron et al., 2006). However, given the
contradictory results found in the literature, investigation of this issue is ongoing.
That there has not been any research undertaken of Hong Kong auditors’ perceptions
of their own independence, justifies the pursuing of the study in this Asian region.
Clearly, perceptions of the auditor independence problem have been the subject of
receiving attention since the 1960s (Mautz and Sharaf, 1961; AICPA, 1978;
DeAngelo, 1981; Arens et al., 2005), and are justifiably chosen in the post-Enron
period in this study (Lindberg and Beck, 2004).
Variables for studying perceptions of auditor independence in Hong Kong
Thus this study examines the influence of the provision of NASs and competition on
auditors’ perceptions of their own independence in the Hong Kong audit environment.
The results of will fill a gap in the literature on auditor independence and should
assist in devising policy to manage this contentious issue (Gul ,1987; Beattie et al.,
1999; Frank et al., 2001). One between subject independent variable is examined,
gender. There is conflicting literature regarding the variable in the context of the
independence issue, and as no previous enquiry has been conducted in Hong Kong,
this study will be the first examine the NASs, competition and gender of auditors, in
respect of the independence problem as it relates to the practices of Hong Kong
auditors. Whether the results in Hong Kong are similar to or different from prior
Western studies encompassing the three variables is unknown. The results can thus
contribute to a better understanding and comparison of audit practitioners and
accounting professionals in Hong Kong and their international counterparts.
9
Literature review of auditor independence
Over the years an extensive literature on the subject of auditor independence has
emerged. A focal point of much of that literature has been the identification of those
factors which have, and those that do not have, an influence on auditors’ perceptions
of independence (Beattie et al., 1999). Arens et al., (2005) have lately defined audit
independence as the outcome of auditors taking an unbiased viewpoint in the
performance of the audit tests, the evaluations of the results and the issuance of audit
reports. The audit report would represent the fairness of the financial statements with
the unbiased viewpoint from the reporting auditors. Indeed, in the audit market there
are demands for the external auditing services providing an opinion as to whether the
audited financial statements show a ‘true and fair view’ - to shareholders,
bondholders, company managements and other interested parties (Chow, 1982).
Within that framework the value of auditing draws heavily on the qualities of
integrity, objectivity, impartiality of the auditors’ work and their competence (Bakar,
et al., 2005; Richard, 2006). It is generally accepted that there are two types of
auditor independence, actual and perceived independence (Firth, 1980; Shockley,
1981; Beattie et al., 1999). Independence ‘in fact’ or actual independence can be
defined as the auditor’s state of mind, the ability to make objective and unbiased audit
decisions (Dykxhoorn and Sinning, 1981). It basically refers to the mental attitude of
the auditor in terms of professional objectivity (Gul and Tsui, 1992). On the other
hand, independence ‘in appearance’ or perceived independence refers to others’
perceptions of the auditors’ independence. This notion of perceived independence is
one of the cornerstones in auditing theory and in auditing practice (Firth, 1980;
Beattie et al., 1999; Bakar et al., 2005). Since independence ‘in fact’ is unobservable
(Beattie et al., 1999; Bakar et al., 2005), research has focused upon identifying the
factors, the circumstances, which have the potential to influence auditor independence
and assessing their impact upon perceived independence. Most of the literature on
auditor independence suggests the credibility attributed to financial statements
depends on the perceived independence of the auditor (Firth, 1980; Dykxhoorn and
Sinning, 1981). For example, Firth (1980) argues that if the auditor is not seen to be
10
independent, users will have less confidence in the financial statements. The auditors’
opinions on the financial statements will be possibly of no value, certainly of lesser
value than where independence is at least perceived (Firth, 1980). Arens et al., (2005)
concur that even if auditors are independent in fact, were users to believe the auditors
are the advocates for the client, most of the value of the audit function is lost.
Within the literature there are signs that the regulatory authorities, such as the SEC in
US, are more prescriptive in their concern over the auditor independence issue than
elsewhere (DeFond et al., 2002). Perhaps in response in the Post-Enron period
auditors have been assessed to be more conservative than in the past (Lindberg and
Beck, 2004). In response to the Enron incident a number of significant changes in
audit regulation have been taken place worldwide, such as the enactment of the
Sarbanes-Oxley Act in US (Tackett et al., 2004). Kinney et al., (2004) criticize the
SEC for holding the presumption of a causal relation between the provision of NASs
and auditor independence lacking empirical evidence to confirm its speculation.
Independence in auditing is thus perceived by the regulators to be an essential feature
in the efficient operations of the financial market (DeFond et al., 2002).
But
curiously, despite Hong Kong being a major international financial market and Stock
Exchange, no mandatory regulations or Auditing Standards exist in Hong Kong
prohibiting or otherwise regulating the provision by auditors of NASs to their audit
clients. Since the economic environment within which perceptions of auditor
independence are formed is subject to continuous change over time, it is reasonable to
expect that policy makers constantly address new threat factors and seek new
regulatory safeguards to deal with the changing environment (Beattie et al., 1999).
The mainstream of empirical studies on the auditors’ perceptions of independence
have focused on identifying the factors which potentially influence auditor
independence and assessing their impact upon perceived independence (Shockley,
1980; Beattie et al., 1999; Gendron et al., 2004; Alleyne et al., 2006). One strand has
tried to identify the influence of various factors on auditors’ perceptions of
11
independence, whether significantly or insignificantly influencing auditors’
perceptions (Teoh and Lim, 1996; Beattie et al., 1999; Gendron et al., 2004; Chien
and Chen., 2005; Alleyne et al., 2006). The empirical research on this issue has
produced inconclusive results (Bartlett, 1993; Jenkins and Krawczyk, 2001; Sucher
and Bychkova, 2001; Gendron et al., 2004; Quick and Rasmussen, 2005; Alleyne et
al., 2006). In the second strand of studies on auditors’ perceptions of independence
the focus has been on the differences in the perceived auditor independence amongst
various groups (Farmer et al., 1987; Dijk, 2000). The focus has been on whether
auditors of different genders within firms entertain different perceptions in identical
circumstances. The results are also inconclusive, frequently inconsistent (Farmer et
al., 1997; Dijk, 2000; Shafer et al., 2001; Iyer and Raghunandan, 2002; Marchesi and
Emby, 2005). That inconsistency is disturbing, bearing in mind that, as noted above
( 1.4 ) Jenkins and Krawczyk (2001) comment that the perceptions of professional
CPAs from Big 4 firms are important since they are the only audit practitioners who
audit the financial statements of large and commercially consequential companies. If
auditors are themselves uncertain regarding the observance of independence, how
might they be expected to devise mechanisms by which it might be assured in the
audit procedures and processes they employ?
New auditing standards and ethical guidelines are being developed in an ongoing
process around the world (Tackett et al., 2004; Bakar et al., 2005; Gendron et al.,
2006). Arguably, Hong Kong’s contribution to that process is inconsistent with its
importance as a financial centre.
Against the background of the literature, and
particularly following the hand-back of the sovereignty of the colony to China in
1997, this current study promises to provide interesting insights for the development
of the auditing policy in an expanding global commercial environment.
NASs literature and hypothesis development
Throughout their history audit firms have provided a variety of NASs to the clients
(Gul and Tsui, 1992; Canning and Gwilliam, 1999; Lindberg and Beck, 2004). Indeed,
the scale and extent of the provision of the NASs have increased substantially,
12
especially as management consultancy, legal services and taxation services have
expanded (Frank et al., 2001; Firth 2002; Kinney et al., 2004). A large and growing
percentage of many public accounting firms’ total revenues have been derived from
non audit work provided to their clients (Ezzamel et al., 1996; Turner et al., 1999)
and this has given greater prominence to the associated independence issue, and
particularly so following the collapse of Enron (Raghunandan, 2003). Hence the
issue of auditor independence is receiving much more attention than in the past, and
especially the regulatory argument favoring the prohibitions of NASs being provided
to audit clients (Firth, 2002).
Some alternative solutions are designed to alleviate the suspected problems. For
example, it is suggested there is much more need for immediate reforms and
developing a stronger more accountable auditing systems (Clarke et al., 2003). Dean
et al., (2002), noted the specific calls to prohibit joint provision of audit and NASs,
the mandatory appointment of the audit committees and auditor rotation,
recommended to enhance auditor independence, for reliable financial statements are
the very objects of the independence rules.
Audit firms providing non-audit-services to their audit clients are a contentious issue.
NASs are generally classified as bookkeeping, internal audit services, various modes
of management consulting, financial information system design services, actuarial
services and legal and expert (for example, tax) advice (Arens et al., 2005); the
evidence being that those activities are the routine non audit services worldwide
(Craswell, 1992; Hussey and Lan, 2001; Kinney et al., 2004; Bakar et al., 2005).
Understandably, amongst the factors identified in the literature which might threaten
the perceived independence of the auditor, the provision of NASs by audit firms to
their audit clients has been the subject of the most heated debate (Canning and
Gwilliam, 1999). The concerns about NASs are based on the assumption that auditors
are willing, at least strongly tempted, to sacrifice their independence in exchange for
retaining the audit clients from which they might accrue large NASs revenues
13
(DeFond et al., 2002). The concerns about whether auditor would compromise their
independence are arguable.
Against that background, it is no surprise that majority of the empirical studies have
found the provision of NASs to have had an influence on auditors’ perceptions of
negative independence (Shockley, 1981; Hillison and Kennelley, 1988; Teoh and Lim,
1996; Beattie et al., 1999; Gendron et al., 2004; Lindberg and Beck, 2004; Chien and
Chen, 2005; Alleyne et al., 2006; Carey et al., 2006; Richard, 2006), others show that
it positively enhance auditor independence and could nevertheless improve clients’
operations (Bartlett, 1993; Jenkins, 1999; Windmoller, 2000; Jenkins and Krawczyk,
2001; Kinney et al., 2004) ; still others have shown NASs has no influence on
perceptions of independence (Corless and Parker, 1987; Sucher and Bychkova, 2001;
Quick and Rasmussen, 2005).
The inconsistency of the results produced by these studies suggests opportunities for
future research (Larcker and Richardson (2004), especially in the Hong Kong Asia
Pacific region. The NASs literature on auditor independence is clearly controversial,
ambiguous, especially in the post-Enron period (Kinney et al., 2004). In view of the
majority NASs literature and the regulatory bodies in the US appear to support that
the provision that NASs has an influence on auditors’ perceptions of negative
independence, alternative hypothesis H1 are:
H1:
The provision of NASs has an influence on auditors’ perceptions of negative
independence.
Competition literature and hypothesis development
Competition within the audit market has been identified consistently to be a factor
threatening auditor independence (Shockley, 1981; Farmer et al., 1987; Beattie et al,
1999; Sucher and Bychkova, 2001; Umar and Anandarajan, 2004; MacLullich and
14
Sucher, 2005). Shockley (1981) had found that audit firms operating in an
environment characterized by a high level of competition for audit clients would have
a greater risk of decreasing their audit independence than where audit firms operated
in a low competition environment. The sample was drawn from the (at that time) Big
8 auditors. The overall analysis ranked competition as the most important factor in
the study. Shockley (1981) commented that in a highly competitive environment,
competition for audit clients increased and this gave clients greater opportunities and
incentives to replace incumbent auditors. Therefore, in Shockley’s research, two
levels of competition were defined in a firm’s geographical area: high competition
and low competition. The competition variable had a definite potential impact on the
credibility of the independence assumption, such that future policy makers should
take this effect into account for improving perceptions of independence. Thus, in this
study, Shockley’s two levels of competition: high competition and low competition,
are adopted. In a qualitative study in Poland, MacLullich and Sucher (2005)
examined auditor independence through interviews with auditors. It reported that as a
result of the competitive Polish audit market, audit firms charged low fees for the
audit services to the audit clients who were unable to pay the high costs of audits; that
the practice of switching audit firms by the clients was common in the Polish audit
market, and since the audit fees were too low in the competitive audit market,
auditors possibly may not behave and perform the audit work in a proper and
professional manner. Performing audits in “a way as quickly as possible as opposed
to as effectively as possible” was identified to be a common phenomenon. Ethical
conflicts and problems were frequent. An interview with a Big 4 Audit Manager
disclosed that the low transparency in the audit market resulted in “very little in the
press about auditors getting into trouble,” professionalism and ethical issues were
thus presented to be a likely problem for Polish auditors; auditors may be over
familiar with clients and the degree of thoroughness in the audit investigations may
be lower, affecting the independence of the auditors.
However, some researchers found that competition has a positive influence on
independence (Gul, 1989; Windmoller, 2000). Research in New Zealand by Gul
15
(1989) showed a result significantly different from Shockley (1981) - the competition
factor enhancing the auditor independence. Though Gul’s sample comprised bankers,
they are commercially sophisticated (Canning and Gwilliam, 1999) and generally
have good accounting knowledge with which to interpret the independence concept
(Mckinley, et al., 1985). Gul’s non auditor sample provides interesting insight into
perceptions of auditor independence.
Windmoller (2000), a senior Partner of PricewaterhouseCoopers in Germany agreed
that in the nowadays competitive audit market, their global business clients need
services - installation of IT systems, advice for privatization of certain industries,
taxation, mergers consulting, - from their auditors. Auditors need to be providing
value added through global coverage services to their international clients. There is
no doubt, as professed confidently by Windmoller (2000) that their services are of
consistent high quality in the competitive audit market, not decreasing but enhancing
auditors’ perceptions of positive independence.
In view of these conflicting results in the prior literature, there clearly is room for
more research in this area (Shockley, 1981; Gul, 1989; Beattie et al., 1999; Umar and
Anandarajan, 2004; Bloom and Schirm, 2005). Vanasco (1996) claims that cross
cultural differences may affect auditor independence effectiveness, - that there is a
lack of consensus as to what is auditor independence in the profession, and second,
independence possibly experiences diverse national-specific interpretations. A study
of the competition variable is thus included in this Hong Kong study as the second
independent variable in the ‘within subjects’ repeated ANOVA. Since the majority of
the literature on extensive high competition supports an influence of perceptions of
negative independence, an alternative hypothesis H2 are:
H2: High competition in the audit market has an influence on auditors’ perceptions
of negative independence.
16
For the interaction effects between the independent variables of NASs and
competition (Lindsay, 1992), alternative hypothesis H3 emerge to examine the
interaction effect between NASs and competition.
H3: The influence of the provision of NASs on auditors’ perceptions of independence
depends on the level of competition in the audit market (Interaction effect)
Between Subjects independent variables: gender of auditors
The empirical research on the gender of auditors on auditor independence has
produced inconsistent results.
In Larkin (2000), the respondent US auditors were asked to evaluate ethical and
unethical situations encountered in practice. There appeared to be a gender effect,
suggesting females auditors had a greater ability to identify ethical behavior their than
male counterparts. The research suffered the limitation of a small sample size - only
64 auditors. Iyer and Raghunandan (2002) found there were gender differences in the
perceptions of former employees of CPA firms about their ability to resolve
disagreements involving CPA firms and client companies. It was statistically
significant with a p value of 0.026. A similar study by Glover et al., (1997) support
that there is an influence of gender on the ethical decisions and behaviour, with
women made more ethical decisions than men at statistically significant levels. In a
more recent study, Iyer et al., (2005), found the gender differences in the perceptions
of US accounting firm alumni studied, females having lower ratings than the male
auditors.
In contrast, other research has returned contrary results. Shafer et al., (2001) in the
ANOVA model analysis revealed that gender had no influence on the ethical
judgments or behavioral intentions of Big 4 auditors, including the partners, managers
and staff auditors in the US. The issue is non-trivial. For professional accountants’
values and ethical standards are important issues for consideration in their expanding
17
role in the society. If auditors’ values and ethical standards are questionable with the
gender effect, it may call into question of the integrity and independence of the
practicing CPAs in their expanding role in the society (Shafer et al., 2001).
Given that Iyer and Raghunandan (2002) found gender differences in the perceptions
of former employees of CPA firms, Umar and Anandarajan (2004b) extended their
research results in the US with a sample of auditors in three States’ from the Big 4
accounting firms. The findings revealed that the gender factor has little influence on
auditors’ perceptions of independence ( p value 0.31). However, their research was
acknowledged with the inherent limitations of oversimplification of the case study.
Umar and Anandarajan (2004b) agreed that the generalizability of their research was
further limited with the sample of auditors came from only three states.
Gender differences in ethical decision making have been the topic of numerous
empirical studies (Larkin, 2000) and the findings pertaining to this issue have been
mixed. But prior research has not examined whether there are gender differences in
auditors’ independence perceptions (Iyer and Raghunandan, 2002). Likewise, there is
increasing number of females entering the public accounting profession (ACCA Hong
Kong, 2005; HKICPA, 2005), the research of the gender factor has implications for
the success of socialization processes and the practice development of accounting
firms (Iyer et al., 2005). Similarly, in Hong Kong there are more female accounting
graduates than male graduates working for the public accounting firms in the Big 4
(ACCA Hong Kong Branch, 2005; HKICPA, 2005), the research of the gender effect
could facilitate the employment and training of staff in public accounting (Giacomino
and Akers, 1998; Iyer et al., 2005). Hence, in this study, the gender of auditors in the
Big 4 firms is used as the grouping factor in the between subjects variable in the
mixed ANOVA analysis.
In view of the mixed views on the gender variable it is examined in this Hong Kong
study.
18
Alternative hypothesis H4 is formed to examine the interaction effect between the
provision of NASs and the gender of the auditors in the audit firm.
H4: The influence of the provision of NASs on auditors’ perceptions of independence
depends on the gender of the auditors in the audit firm (Interaction effect).
Similarly, alternative hypothesis H5 emerge to examine the interaction effect between
competition and gender of the auditors in the audit firm
H5: The influence of the competition in the audit market on auditors’ perceptions of
independence depends on the gender of the auditors in the audit firm (Interaction
effect).
Methodology
Winer (1971) mentions that the combination of a within and between subjects
ANOVA design (Mixed ANOVA) is a convenient and economic use of subjects. At
the same time, it can facilitate the tests of the effects of all the variables. The
ANOVA design used in this study is similar to the ANOVA design adopted by
(Knapp, 1985; Gul, 1989; Choo and Trotman, 1991; Dijk, 2000; Fuller and Kaplan,
2004) for examining the auditor independence issues. Shannon and Davenport (2001)
mentioned that the mixed ANOVA entails a most useful analysis. The interaction
between the within subjects variables and the between subjects variables would be
calculated in SPSS and it allow examination of whether auditors’ perceptions change
from one scenario to another, i.e. the percentages increase in NASs or competition
levels, is dependent upon the membership in a particular group, i.e. gender of auditors
(Shannon and Davenport, 2001).
For analysis purposes the literature examining auditor independence can be classified
as either ‘within subjects design’ or ‘between subjects design’. For ‘within subject
19
design’, the NASs and the competition variables’ can normally be analyzed using
repeated measure ANOVA (Shockley, 1981; Knapp, 1985, Gul, 1989; Teoh and Lim,
1996). For the ‘between subject design’, the gender variable is generally classified as
the appropriate grouping variables in the ANOVA design (Lawrence and Shaub, 1997;
Dijk, 2000). Simnett and Trotman (2002), commented that the ‘within subjects’ and
‘between subjects’ designs are common research methods for examining
independence issues. These research methods have been commonly applied to
examine the auditors’ own perceptions or others’ perceptions of auditor independence
(Knapp, 1985; Dijk, 2000). The ANOVA factorial design that predicts a specific
interaction between two or more factors is most likely to lead to useful results
(Simnett and Trotman, 2002), by virtue of the uniqueness of the mixed factorial
ANOVA’s power that can analyze the interactions results for the ‘within subject’
variables and the grouping variables examined.
Therefore, 300 Big 4 auditors were randomly selected from the publicly accessible
Directory of CPA booklet (Tsui, 1996; Neidermeyer et al, 1998; Umar and
Anandarajan, 2004). Accordingly, they were selected from the “Big 4” accounting
firms: KPMG, PricewaterhouseCoopers, Ernst and Young, Deloitte. There was no
matching of an individual’s name with their organization. Dijk (2000) suggests the
potential respondents could be contacted first by telephone to see whether they agree
to complete the questionnaire to increase the response rate (Shafer et al., 2001). Were
they to agree to participate, the questionnaire with the Survey Information Sheet
would be sent to the auditors who are agreed to participate. Prior evidence in
Australia and Netherlands suggests there would be a response rate of 76% and 80%
respectively (Roberts, 1999; Dijk, 2000) by contacting the respondents first before
sending off the questionnaires. Thus similar techniques were used in this Hong Kong
study in the expectation of a satisfactory response rate (Sekaran, 2000; Dijk, 2000;
Desira and Baldacchino, 2005). Moreover, Hussey and Hussey (1997) suggest that
the response rate could also be increased by keeping the questionnaire as short as
possible and using closed questions of non sensitive nature. Hence it was anticipated
20
that, with all the questions being closed, the response rate would be optimistic. Were
the response rate unsatisfactory, a follow up procedure was planned, - a second
request, approximately three weeks after the initial mailing to the entire sample
(Frank et al., 2001).
5 point Likert scale was adapted from the previous scenarios questions (Shockley,
1981; Knapp, 1985; Pany and Reckers, 1987) and the pre-tests, found to be
satisfactory. The concern of any ambiguity of the questions was not an issue in this
study for the above reasons. Hence the content validity of the questionnaire is
regarded to be high (Cavana et al., 2001). Moreover, in order to minimize the
“demand effect or learning effect” by the auditors in these scenarios questions (Knapp,
1985; Gul, 1989), a randomized order of the scenarios questioning is undertaken so
that the respondents’ answers would not be affected by the demand effect or their
familiarity with the flow of the questions (Knapp, 1985; Gul, 1989; Dijk, 2000;
Chung and Monroe, 2000). Part of the questionnaire is attached in Appendix 1.
Results
Demographic information is shown in Table 1. There were 103 female and 115
male ‘Big 4” Hong Kong auditors in this survey. There were 219 responses from the
300 questionnaires sent to the auditors, one blank return reducing those usable to 218:
188 from the first mail out and 30 responses from the second, returning an overall
response rate of 72%. The items in the survey showed satisfactory levels of
reliability with a Cronbach’s alpha of 0.8038 and normal distribution of the data has
been met. A test for non responses bias has been carried out for comparing first 30
responses and second request 30 responses; however there were no significant
differences in perceptions about the independence issues. The notion of variance is at
the heart of ANOVA (Coakes, 2005) and the assumptions of homogeneity of variance
have been met in this study. The Box’s test statistic is non significant (p=0.533) and
the assumption in Mixed ANOVA has been met.
Table 1
21
Descr ip tiv e St ati sti cs
High competition,NAS-0%
High competition,NAS-25%
High competition,NAS-60%
High competition,NAS-90%
Low competition,NAS-0%
Low competition,NAS-25%
Low competition,NAS-60%
Low competition,NAS-90%
Male or female
female
male
Total
female
male
Total
female
male
Total
female
male
Total
female
male
Total
female
male
Total
female
male
Total
female
male
Total
Mean
3.1262
3.1913
3.1606
2.9126
2.9304
2.9220
2.5825
2.6174
2.6009
2.2524
2.3565
2.3073
3.7087
3.6087
3.6560
3.3981
3.4000
3.3991
3.0485
3.0696
3.0596
2.7379
2.7304
2.7339
Table 2
22
Std. Deviation
1.17723
1.13087
1.15080
1.16406
1.17519
1.16729
.99533
1.10487
1.05227
.98736
1.10176
1.04817
1.12573
1.15239
1.13835
1.02268
1.17578
1.10358
1.08807
1.16771
1.12824
1.09331
1.20177
1.14917
N
103
115
218
103
115
218
103
115
218
103
115
218
103
115
218
103
115
218
103
115
218
103
115
218
Mul tiv a ria te T estsb
Effect
Comp
Comp * gender
NAS
NAS * gender
Comp * NAS
Comp * NAS * gender
Pillai's Trace
Wilks' Lambda
Hotelling's Trace
Roy's Largest Root
Pillai's Trace
Wilks' Lambda
Hotelling's Trace
Roy's Largest Root
Pillai's Trace
Wilks' Lambda
Hotelling's Trace
Roy's Largest Root
Pillai's Trace
Wilks' Lambda
Hotelling's Trace
Roy's Largest Root
Pillai's Trace
Wilks' Lambda
Hotelling's Trace
Roy's Largest Root
Pillai's Trace
Wilks' Lambda
Hotelling's Trace
Roy's Largest Root
Value
.175
.825
.212
.212
.001
.999
.001
.001
.431
.569
.757
.757
.001
.999
.001
.001
.002
.998
.002
.002
.004
.996
.004
.004
F
45.883 a
45.883 a
45.883 a
45.883 a
.309 a
.309 a
.309 a
.309 a
54.035 a
54.035 a
54.035 a
54.035 a
.078 a
.078 a
.078 a
.078 a
.160 a
.160 a
.160 a
.160 a
.294 a
.294 a
.294 a
.294 a
Hypothesis df
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
3.000
Error df
216.000
216.000
216.000
216.000
216.000
216.000
216.000
216.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
214.000
Sig.
.000
.000
.000
.000
.579
.579
.579
.579
.000
.000
.000
.000
.972
.972
.972
.972
.923
.923
.923
.923
.830
.830
.830
.830
a. Exact statistic
b.
Design: Intercept+gender
Within Subjects Design: Comp+NAS+Comp*NAS
Hypothesis 1
From the multivariate test Table 1, in SPSS, the first ‘within subject’ independent
variable - Non Audit Service (NAS) - has an F value=54.08, p<0.05. Green and
Salkind (2001) recommend reporting the familiar Wilks’ lambda value. The result
is statistically significant. H1 is supported. Since NAS is significant and has four
levels, pairwise comparisons are undertaken using the Bonferroni comparison
(Shannon and Davenport, 2001; Green and Salkind, 2001; Field, 2005) to reveal
where the difference exists. Field (2005) mentions that the Bonferroni’s test
controls the Type 1 error rate very well, but is conservative. The pairwise
comparison (Table 2) shows all the four levels are significantly different from
each other, with p value <0.05.
Table 3
23
E sti m ate s
Measure: MEASURE_1
NAS
1
2
3
4
Mean
3.409
3.160
2.830
2.519
Std. Error
.064
.062
.058
.059
95% Confidence Interval
Lower Bound Upper Bound
3.282
3.535
3.038
3.283
2.716
2.943
2.403
2.636
Pair wise C om p ar ison s
Measure: MEASURE_1
Mean Difference
(I) NAS (J) NAS
(I-J)
Std. Error
1
2
.248*
.047
3
.579*
.062
4
.889*
.070
2
1
-.248*
.047
3
.331*
.053
4
.641*
.066
3
1
-.579*
.062
2
-.331*
.053
4
.310*
.047
4
1
-.889*
.070
2
-.641*
.066
3
-.310*
.047
Based on estimated marginal means
*. The mean difference is significant at the .05 level.
a. Adjustment for multiple comparisons: Bonferroni.
Sig.a
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
.000
95% Confidence Interval for
Differencea
Lower Bound Upper Bound
.124
.373
.414
.744
.704
1.075
-.373
-.124
.189
.473
.465
.817
-.744
-.414
-.473
-.189
.185
.435
-1.075
-.704
-.817
-.465
-.435
-.185
Level 1 NAS mean 3.41, level 2 NAS mean 3.16, level 3 NAS mean 2.83, and
level 4 NAS mean 2.52, indicate the higher level NAS has a lower mean score for
the perceptions of auditor independence rating.
Hypothesis 2
Table 1 shows that from the multivariate test the second ‘within subject’
independent variable, Competition (COMP) has an F value=45.83, p<0.05.
Since competition is significant and has two levels, pairwise comparison
using Bonferroni’s comparison (Shannon and Davenport, 2001; Green and
24
Salkind, 2001; Field, 2005) reveals where the difference exists. The pairwise
comparisons in Table 3 shows each of the two levels is significantly different
from one another, with p value <0.05. With high competition mean = 2.74, low
competition mean =3.21. - that high level of competition has a lower mean score
for the perceptions of auditor independence rating.
Table 4
E sti m ate s
Measure: MEASURE_1
Comp
1
2
Mean
2.746
3.213
Std. Error
.058
.062
95% Confidence Interval
Lower Bound Upper Bound
2.631
2.861
3.091
3.335
Pair wise Com p ar iso n s
Measure: MEASURE_1
Mean Difference
(I) Comp (J) Comp
(I-J)
Std. Error
1
2
-.467*
.069
2
1
.467*
.069
Based on estimated marginal means
*. The mean difference is significant at the .05 level.
a. Adjustment for multiple comparisons: Bonferroni.
Sig.a
.000
.000
95% Confidence Interval for
Differencea
Lower Bound Upper Bound
-.602
-.331
.331
.602
Hypothesis 3
From the multivariate test - Table 1, the COMP*NAS interaction reports an F
value=0.16, p=0.92. The result is statistically insignificant.
Hypothesis 4
Results from the multivariate testing of the first ‘within subject’ independent
variable, NAS, and the ‘ between subject’ independent variable are shown in
Table 1: Gender of auditors (NAS*gender) interaction has an F value= 0.078,
25
p>0.05. The result is statistically insignificant. Thus genders of auditors within
their firms do not have different perceptions of the influence of NASs on the
perceptions of auditor independence.
Between subject ANOVA reveals that gender has an F value =0.03, p value=0.86,
(Table 4). The result is statistically insignificant. This confirms the result in the
above multivariate test (Table 1) and there are no differences in the mean scores
among the gender of the auditors. Univariate tests of ‘within subject ANOVA
contrasts’ (Table 5) also show that different levels of NAS*Gender are not
significantly from each other, with all p value >0.05.
Table 5-Between subjects ANOVA
T ests of B et we en -Sub je ct s E ff ec ts
Measure: MEASURE_1
Transformed Variable: Average
Type III Sum
Source
of Squares
Intercept
1929.360
gender
.016
Error
114.287
df
1
1
216
Mean Square
1929.360
.016
.529
Table 6
26
F
3646.456
.030
Sig.
.000
.862
T ests of W it hi n- Su bj ec ts Co n tra st s
Measure: MEASURE_1
Source
Comp
Comp * gender
Error(Comp)
NAS
Comp
Level 1 vs. Level 2
Level 1 vs. Level 2
Level 1 vs. Level 2
NAS * gender
Error(NAS)
Comp * NAS
Level 1 vs. Level 2
Comp * NAS * gender
Level 1 vs. Level 2
Error(Comp*NAS)
Level 1 vs. Level 2
NAS
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
vs. Level 2
vs. Level 3
vs. Level 4
vs. Level 2
vs. Level 3
vs. Level 4
vs. Level 2
vs. Level 3
vs. Level 4
vs. Level 2
vs. Level 3
vs. Level 4
vs. Level 2
vs. Level 3
vs. Level 4
vs. Level 2
vs. Level 3
vs. Level 4
Type III Sum
of Squares
47.310
.319
222.718
13.417
23.779
20.912
.041
.018
.023
103.083
133.702
103.327
.110
.074
.188
1.211
.000
.518
404.716
393.926
300.257
df
1
1
216
1
1
1
1
1
1
216
216
216
1
1
1
1
1
1
216
216
216
Mean Square
47.310
.319
1.031
13.417
23.779
20.912
.041
.018
.023
.477
.619
.478
.110
.074
.188
1.211
.000
.518
1.874
1.824
1.390
F
45.883
.309
Sig.
.000
.579
28.113
38.416
43.716
.085
.029
.047
.000
.000
.000
.771
.866
.828
.058
.040
.135
.646
.000
.373
.809
.841
.713
.422
.991
.542
Hypothesis 5
Table 1 shows the interaction has an F value= 0.309, p=0.579 - statistically
insignificant.
Discussion and implications
The controversy that providing NASs to audit clients has a significant influence
on auditors’ perceptions of negative independence, is supported in hypothesis 1.
The result is consistent with research findings in respect of US, UK and European
samples of auditors (Shockley, 1981; Hillison and Kennelley, 1988; Beattie et al.,
1999; Lindberg and Beck, 2004; Gendron et al., 2004; Alleyne et al., 2006;
Richard, 2006). It is imperative to contemplate the reasons underpinning the Hong
Kong “Big 4” auditors holding the same perceptions as emerged in those US and
UK studies. That invites several possible explanations. First, as the Hong Kong
Auditing Standards are consistent with the International Auditing Standards
regime, the perceptions of Hong Kong auditors might be influenced by the
International Standards (NASs provisions are not recommended), and accordingly,
their perceptions similar to those of their counterparts. Second, Hong Kong
27
auditors are normally trained and educated under the international accounting
qualifications such as ACCA (UK), CPA(HK) or ICAEW(UK) that generally
bear the same technical requirements as with the International Auditing Standards.
Given that the vast majority of Hong Kong “Big 4” auditors are ACCA (UK)
qualified (ACCA Hong Kong, 2005; HKICPA, 2005), it is to be expected that
their perceptions of this matter might be alike.
The implication of H1 is that Hong Kong “Big 4” auditors agree that providing
NASs compromises their independence. Their concern is whether NAS provisions
might induce auditors, in effect, becoming pseudo decision makers for the client
(Shockley, 1981) or lacking of candor in their judgments. In avoidance of the
recurrence of the Enron debacle, Hong Kong auditors especially Partners, have
exercised the prudent judgment in their audit work The result in H1 corroborates
the NASs provisions might be an insidious element within an audit. After the
Enron debacle, Hong Kong auditors are more conscientious with the NASs
provisions on the independence issues (Lindberg and Beck, 2004).
For Hypothesis 2, Hong Kong “Big 4” auditors’ perceptions that the high
competitive environment might impose threats to their auditor independence, are
explicable. The result of the COMP variable in hypothesis 2 is supported,
consistent with the majority findings in US, UK and European
samples of
auditors (Shockley, 1981; Farmer et al., 1987; Beattie et al, 1999; Shafer et al.,
2001; Sucher and Bychkova, 2001; Umar and Anandarajan, 2004; MacLullich
and Sucher, 2005). In this study, Hong Kong “Big 4” auditors perceive there
would be pressures for trying to accommodate the needs of their clients and
simultaneously avoid losing their clientele. The high competitive environment
leads to increasing competition for audit clients. Displeased clients might exert
pressures on auditors, giving clients greater bargaining power on the treatment of
accounting issues. Auditors tend to keep their advice objective under the pressure
of what the client wants. Therefore, Hong Kong auditors perceive the opinions of
the audit report may not fully reflect the true financial position of the client. Thus,
28
the perception is that independence might be compromised for the sake of
retaining audit clients. In view of that, the audit profession should prudently
scrutinize this factor when setting future auditing standards and ethical guidelines
It is interesting to know that the result in hypothesis 3 demonstrate that the two
independent variables are not influencing each other on auditors’ perceptions of
independence. It is pleasing to note that Hong Kong “Big 4” auditors do not
perceive the NASs provisions interact with the levels of competition on
independence. Were the result significant, policy makers would be perplexed to
diagnose the problem, for the economy is constantly changing and as a result,
levels of competition would vary. Policy makers could consider these two
variables in a separate manner for future policy developments.
Mixed ANOVA results perspicuously indicate that neither hypothesis 4 nor
hypothesis 5, is supported. It shows that the ‘between subject’ variable “gender”,
does not have an influence on the two ‘within subject’ variables, NASs and
COMP. That phenomenon might be explicable by Hong Kong “Big 4” auditors
receiving equivalent professional technical training and practical fieldwork
exposure, thus their audit acumen gained through work experience should be
identical. Accordingly, there is no reason why the gender factor could make a
difference in their perceptions. It is also encouraging to note from this result that
the gender makes no difference in the perceptions of independence, as Hong
Kong has more female graduates entering the Big 4 auditing profession than in
the past.
Koh and Mahathevan, (1993) suggest future research can cover the perceptions of
a wider group of users such as financial analysts, public or accountants in industry
(Firth, 1980; Humphrey et al., 1993; Beattie et al., 1999) so as to understand the
perceptions of a wider groups of people. Finally, this study is limited to capture
auditors’ perceptions in only a cross-sectional design. It is recommended a
longitudinal study would be valuable to understand the auditor independence in
29
various points in time (Lawrence and Shaub, 1997; Gendron et al., 2006) and the
researcher anticipates that a longitudinal further study can be made to extend the
results in this Hong Kong study.
Conclusion
This research examines Hong Kong “Big 4” auditors’ perceptions of the influence
of NASs and competition on auditor independence. First, the results show that
NASs and high competition could have an influence on auditors’ perceptions of
negative independence. Second, there is no interaction effect between the NASs
and competition on auditors’ perceptions of independence. Third, the gender
variable has no influence on the provision of NASs and competition on auditors’
perceptions of independence in Hong Kong.
The problems of auditor independence are multifaceted and pervasive in the
profession, as evidenced by prior research. This empirical study reveals a number
of issues contributing to the controversies surrounding the audit profession and to
the myriad claims against the auditors alleging their impropriety. Unquestionably,
the perceptions underpinning the rhetorical allegations from SEC in the US
proclaiming that auditors’ providing NASs to their audit clients would impair
auditor independence, is corroborated in this Hong Kong study. Against the
backdrop of previous audit failures, it is hoped that the implications of this study
could bring premonition to the Hong Kong auditors for immediate audit reforms.
It is pleasing to note that from the results of this study, the current booming Hong
Kong economy would not overwhelm auditors’ mindsets in the process of this
study, especially the audit partners.
At the very least, this Hong Kong study boldly unveils auditors’ own candor and
foresights to the resolutions of these problems, rather than from other peoples’
perceptions, that is exceptionally valuable for future policy implementation. The
findings of this study might be expected to spur the regulatory bodies to require
30
auditors to undertake the processes necessary to ensure future audits comprise a
rigorous, and importantly an unequivocally independent, scrutiny of their clients
affairs. The attribution of this study to the various implications may shed
directions to those regulatory authorities pertinent to the issue for future
contemplation of this hot debate problem. Those underpinnings could act as
catalysts for immediate professional reforms in Hong Kong such as immediate
prohibitions of NASs, mandatory rotation of auditors, peer reviews of audit firms
and formation of audit committee would be advantageous.
31
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Appendix -1
QUESTIONNAIRE
Questionnaire on auditors’ perceptions of independence in the Hong Kong Auditing Profession
Thank you for taking the time and effort to complete the questionnaire. All the information you
provide us will be treated in the strictest confidence
Part A
NON AUDIT SERVICES IN A
HIGHLY COMPETITIVE ENVIRONMENT
Scenario 1
Competition- High
Non audit services: 0% non audit services of audit fees
Please circle what you think the perceptions of auditor independence to be when the above is provided to
the client in addition to the normal audit services:
Seriously
undermines
independence
Slightly
undermines
independence
No effect on
independence
Slightly enhances
independence
Strongly enhances
independence
1
2
3
4
5
Scenario 2
Competition- High
Non audit services: 25% non audit services of audit fees
Please circle what you think the perceptions of auditor independence to be when the above is provided to
the client in addition to the normal audit services:
Seriously
undermines
independence
Slightly
undermines
independence
No effect on
independence
Slightly enhances
independence
Strongly enhances
independence
1
2
3
4
5
Scenario 3
39
Competition- High
Non audit services: 60% non audit services of audit fees
Please circle what you think the perceptions of auditor independence to be when the above is provided to
the client in addition to the normal audit services:
Seriously
undermines
independence
Slightly
undermines
independence
No effect on
independence
Slightly enhances
independence
Strongly enhances
independence
1
2
3
4
5
40