The determinants and consequences of auditor choice in Indonesia
Author: Kurniawati, Heny
Under the direction of: Philippe Van Cauwenberge and Heidi Vander Bauwhede
Ghent University
English text
Keywords: Economy, Indonesia, Audit firms, Growth, Sustainable economy.
Abstract
One important prerequisite for sustainable economic growth – which is an important goal for many emerging countries - is access to finance (Ayyagari, Demirguec-Kunt, & Maksimovic, 2008 ; DemirgucKunt & Maksimovic, 1998). Unfortunately, access to financing for companies in emerging countries is often hindered by severe information asymmetry (Atkins & Glen, 1992). Auditing is one of the monitoring mechanisms used by firms to reduce agency problems between managers and company’s stakeholders (Jensen & Meckling, 1976 ; Watts & Zimmerman, 1983). By verifying the validity of financial statements and providing assurance that financial statements faithfully reflect a company’s underlying economics, auditors play a role as financial intermediaries enhancing the credibility of financial information (Becker, DeFond, Jiambalvo, & Subramanyam, 1998 ; DeFond & Zhang, 2014) and reducing information asymmetry. The first study examines whether the affiliation of local Indonesian audit firms with one of the Big4 reduces the cost of debt for listed companies in Indonesia. This study demonstrates that companies audited by local audit firms affiliated with Big4 audit firms enjoy significantly lower interest rates even in a less-litigious environment like Indonesia. This finding is consistent with the idea that creditors perceive the choice of a reputable high quality auditor as a signal of credible financial information. The second study investigates whether the potential impact of foreign investors and board members might have on auditor choice depends on whether they originate from a developed versus from another emerging country. The study highlights that in an emerging country like Indonesia especially ownership and board membership from developed foreign countries is positively associated with the selection of Big4 audit firms. This finding supports the view that cultural differences drive different tendencies of auditor choice. Foreign investors and board members from developed countries probably attach more importance on the assurance from high quality Big4 audit firms, as compared to foreign investors from emerging countries. The third study examines whether the choice of Big4 audit firms affects the capital structure of companies. The study documents that companies audited by Big4 audit firms display lower debt ratios than those audited by non-Big4 audit firms, consistent with the idea that reduced information asymmetry.
