goodwin and seow - 2002 -the influence of cg mechanisms on the quality of financial reporting and auditing in singapore

In the first case, the strength of theaudit committee, the existence of an internal audit function and the strength of a corporate code of conduct were manipulated.. In the secondcase, a

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The influence of corporate governance mechanisms on the quality of financial reporting and auditing: Perceptions of

auditors and directors in SingaporeJenny Goodwina, Jean Lin Seowb

Singapore, 639798

Abstract

This study uses two hypothetical cases to examine the perceptions of auditorsand directors in Singapore about corporate governance practices relating to thequality of financial reporting and auditing In the first case, the strength of theaudit committee, the existence of an internal audit function and the strength

of a corporate code of conduct were manipulated All three variables wereperceived to have some influence on financial reporting and audit quality.However, some interesting differences were found between the perceptions ofauditors and directors Auditors place more weight on the internal audit func-tion, possibly due to their familiarity with the role that internal audit can play

in reducing audit risk and enhancing controls Directors have more confidence

in board enforcement of a strong code of conduct, possibly reflecting the viewthat this encourages staff to adhere to higher ethical standards In the secondcase, audit partner rotation, outsourcing of internal audit services and whetherthe audit firm audited all companies within a group were manipulated Auditorsbelieved that their ability to resist management pressure was enhanced whenthey audited all companies within the group No significant differences werefound for the other variables, suggesting that neither group believes that thesepractices impair audit independence

Key words: Corporate governance; Financial reporting quality; Audit quality;

Audit independence

JEL classification: M40; G34

The authors acknowledge the helpful comments of two anonymous reviewers, Margaret Abernethy, Allen Craswell, Terry O’Keefe, Donald Stokes, and participants at the One-Day Symposium on Accountability and Performance in the New Millenium, Brisbane, Australia, February 2000, the 23 rd

Annual Congress of the European Accounting Association, Munich, Germany, March 2000 and the British Accounting Association Annual Conference 2000, Ex- eter, England, April 2000.

1 Introduction

There has been considerable debate in recent times concerning the need forstrong corporate governance (McConomy and Bujaki, 2000), with countriesaround the world drawing up guidelines and codes of practice to strengthengovernance (Cadbury, 1997) The underlying reason for this emphasis lies inconcerns over the integrity of securities markets (Millstein, 1999) Soundgovernance by boards of directors is recognised to influence the quality of financialreporting, which in turn has an important impact on investor confidence (Levitt,(1998 and 2000a) Strong governance should reduce the adverse effects ofearnings management as well as reduce the likelihood of misstatements arising

from fraud or errors (Beasley, 1996; Dechow et al., 1996; McMullan, 1996).

Traditionally, the external auditor has also played an important role inimproving the credibility of financial information (Mautz and Sharaf, 1961;Wallace, 1980) A high quality audit is generally regarded as one where theauditor both discovers misstatements (discovery) and is willing to report thosemisstatements (independence) (DeAngelo, 1981a and 1981b; O’Keefe andWestort, 1992) However, considerable criticism has been directed at the auditprofession for failing in both of these aspects (Knutson, 1994; Rabinowitz,1996)

The profession has been proactive in attempting to improve audit quality byissuing standards focused on discovery and independence For example, in theUnited States (US), greater responsibility for the discovery of fraud has beenplaced on the auditor by the issue of SAS no 82 Independence has received theattention not only of the profession but also regulators and stock exchangesaround the world Levitt’s (1998 and 2000a) criticisms of the failure of theauditing profession in the US to curb excessive earnings management, togetherwith the Security and Exchange Commission’s attempts to regulate audit inde-pendence have been well publicised As a result, there has been a concertedeffort to devise ways of enhancing independence (SEC, 2000; IndependenceStandards Board, 2000)

The profession has also responded to criticisms on audit quality by ing that, by its nature, the inherent limitations of an audit make it impossible toeliminate the risk of audit failure (Ricchiute, 1998; IFAC, 1994a) Furthermore,

emphasis-it is stressed that emphasis-it is primarily the responsibilemphasis-ity of the client to both preventand detect the occurrence of fraud, errors or other irregularities in the financialstatements (IFAC, 1994b) This responsibility can be met by putting into place

a strong system of corporate governance (Bishop et al., 2000; Rabinowitz, 1996).

In recognition of this, regulators and professional bodies have imposed ments or made recommendations concerning board structure, audit committeesand internal controls (Blue Ribbon Committee, 1999; Committee on CorporateGovernance, 2001)

require-The effect of sound governance practices on the quality of financial reportinghas recently received attention from researchers, particularly in the US (McMullen,

1996; Beasley, 1996; Beasley et al., 2000; Abbott et al., 2000) The main focus of

these studies has been the relation between audit committees and fraudulentfinancial reporting, with results generally supporting a negative relationbetween an active audit committee and the likelihood of a company being citedfor fraudulent reporting

While these results provide evidence from a strong and sophisticated capitalmarket environment, very little research has been conducted in countries wherecapital markets are less developed and where governance mechanisms are stillevolving However, sound corporate governance practices are equally, if notmore, important in countries that are attempting to gain credibility amongglobal investors This is particularly so in South East Asia as the region attempts

to regain investor confidence following the financial crisis of the late 1990s.This paper addresses the scarcity of research in this environment by explor-ing governance issues relating to the quality of financial reporting and auditing

in Singapore In spite of its size, Singapore plays an important role in settingstandards of corporate governance in the South East Asia/ Oceania region Notonly was it one of the first countries to legislate that all listed companies musthave an audit committee, but as part of a government-led drive to become thedominant regional financial centre, there has been considerable emphasis on theneed for sound governance (SES, 1996b; Ng, 1997; Goodwin and Seow, 1998and 2000) This study thus enables investigation into the perceived incrementaleffectiveness of some of the governance mechanisms proposed by variousglobal regimes within a regulatory framework that mandates a base level ofcorporate governance

In this study, we examine the perceptions of external auditors and directorsconcerning the impact of certain governance mechanisms on the prevention anddetection of control weaknesses, financial statement errors and fraud Whilethis provides only an indirect measure of the effectiveness of these mechan-isms, the findings reflect the considerable experience of these two groups In anycorporate governance regime, auditors and directors should have considerableinfluence over the accountability of management and the integrity of financialreporting Directors are in a position to set the ‘tone from the top’ with regard

to strong governance in their companies External auditors, through their tions with audit committees and client management, are able to influence theirclient’s strength of internal controls and integrity of financial reporting Thus,identifying the perceptions of these two key constituents should enhance ourunderstanding of the importance of corporate governance mechanisms In addition,interesting comparisons can be made to highlight any differences in the view-points of these two parties in order to encourage further debate on what constitutesstrong governance and where the balance of power/responsibility for corporategovernance should lie

interac-Directors and auditors of listed companies in Singapore participated in twoexperimental cases In the first, the strength of the audit committee, the exist-ence of an internal audit function and the strength of the company’s code of

ethical conduct were varied Participants were asked to indicate the extent towhich they believed that these corporate governance mechanisms would enablethe company both to prevent and to detect weaknesses in internal control, errors

in the financial statements, management fraud and employee fraud They werealso asked to indicate the extent to which they believed that the same mechan-isms would assist the company’s external auditors to perform their audit effect-ively and to resist pressure from management In the second case, three pieces

of information relating to the company’s external auditors were varied Thesewere audit partner rotation, outsourcing of internal audit services and whether thesame audit firm audits all companies within the group Participants were asked

to indicate the extent to which they believed that the auditors would be able

to resist pressure from management and also to detect weaknesses in internalcontrol, material errors in the financial statements, and management and employeefraud material to the financial statements

The results of the study indicate that auditors and directors perceive thatthe existence of an internal audit function and strict enforcement of a corpor-ate code of conduct have a significant impact on the company’s ability tostrengthen controls, prevent and detect fraud and financial statement errors andenhance audit effectiveness The results relating to a strong audit committee aremixed, with some impact on preventing and detecting financial statementerrors, detecting management fraud and enhancing audit effectiveness Thestudy also finds some interesting differences between the perceptions of auditorsand those of directors Auditors place more weight on the internal auditfunction as a mechanism to detect weaknesses in controls and to prevent anddetect fraud This may be due to auditors’ greater familiarity with the role thatinternal audit can play in reducing audit risk It may also be due to their preferencefor the presence of an internal audit function to enhance the internal controls intheir audit clients In contrast, directors have more confidence in a stronglyenforced code of conduct as a means of detecting control weaknesses, financialstatement errors and fraud This finding may reflect directors’ beliefs thatsetting the tone from the top encourages staff to maintain high ethical standards,while auditors may have experienced a lack of commitment to codes of conduct

(Cohen et al., 2000) The variables in the second case do not give rise to

signific-ant differences in the perceived ability of the auditor to detect control nesses and fraud However, when the audit firm audits all companies in a group,participants perceive that auditors would be more able to resist pressure frommanagement Auditors also appear to have more confidence than directors intheir ability to detect errors in financial statements

weak-The remainder of the paper is structured as follows weak-The next section vides the background to the study while the third section outlines the researchquestions addressed The fourth section summarises the research methods used,while the results are reported and discussed in the fifth section In the finalsection, some conclusions are drawn, the limitations of the study are noted, andthe implications of the findings and further research opportunities are discussed

pro-2 Background

As with any experimental design, the number of variables that we can ine is constrained by many interacting factors such as model complexity, thelength of the research instrument and the likely response rate From the numerouschecks and balances that have been suggested, we selected three client-relatedmechanisms that could influence the quality of the external audit and hence thequality of the financial statements We also selected three mechanisms relating

exam-to the external audiexam-tor which could affect audit quality and independence Ourselection was based on a review of the relevant literature, the results of anearlier survey of investors, auditors and directors (Goodwin and Seow, 2000)and the listing requirements of the Stock Exchange of Singapore (SES, 1998).1

The independent variables investigated in our study are of particular interest asprior research into these variables has produced mixed results

2.1 Client-related mechanisms

2.1.1 The strength of the audit committee

All listed companies in Singapore must have an audit committee, comprising

at least three members, the majority of whom must not be executive directors(Companies Act, 1994) The literature suggests that an effective audit commit-tee should play an important role in strengthening the financial controls of anentity (Collier, 1993; English, 1994; Vinten and Lee, 1993) A number ofstudies have found that companies with an audit committee, particularly whenthat committee is active and independent, are less likely to experience fraud

(Beasley et al., 2000; Abbott et al., 2000; McMullen, 1996) and other reporting

irregularities (McMullen, 1996; McMullen and Raghunandan, 1996) Findingsalso suggest that audit committees are effective in reducing the incidence ofearnings management that may result in misleading financial statements

(Defond and Jiambalvo, 1991; Dechow et al., 1996; Peasnell et al., 2000) Further,

they should enhance the effectiveness of both internal and external auditors

(Simnett et al., 1993) However, Cohen et al (2000) report that a number of

audit practitioners involved in exploratory interviews expressed concern overthe effectiveness of audit committees, with some partners suggesting that auditcommittees are not powerful enough to resolve conflicts with management

It is generally agreed that, for an audit committee to be effective, a majority

if not all members should be independent (Cadbury, 1992) and they should have

1

The SES was combined with the Singapore International Monetary Exchange in December

1999 and a new company, the Singapore Exchange Ltd (SGX), was formed The Listing Manual is now known as the SGX-ST Listing Manual Because this research was under- taken prior to December 1999, our references are made to the SES.

an understanding of accounting, auditing and control issues (Cohen et al., 2000;

Goodwin and Seow, 2000; Hughes, 1999; Lear, 1998) Further, the committeeshould meet regularly (Collier, 1993; Hughes, 1999) and strong channels ofcommunication should exist with both the external and internal auditors(Cadbury, 1992; Deloitte and Touche, 1998) Goodwin and Seow (2000) foundthat investors, auditors and directors all believe that a strong effective auditcommittee assists external auditors to perform the audit

2.1.2 Internal audit

While there is no mandatory requirement in Singapore for listed companies

to have their own internal audit function, the benefits of such a function havebeen noted by the SES (1996b) Furthermore, various corporate governancecommittees have recommended that companies should establish an internalaudit function (Cadbury, 1992; COSO Report, 1992; Committee on CorporateGovernance, 2001) Only a few studies have examined the benefits of internal

audit and results have been mixed Beasley et al (2000) report that companies

which experience fraud are less likely to have an internal audit function Cohen

et al (2000) found that 90 per cent of their respondents indicated that internal

audit could affect corporate governance but concern was expressed over thestrength of many internal audit departments In Singapore, while Goodwin andSeow (2000) found both investors and auditors strongly in favour of an internal

audit function, the results of a survey conducted by Goodwin et al (1998)

indicated that many companies listed on the SES did not have their own internalaudit function

2.1.3 Corporate code of conduct

Cadbury (1992) recommends that the board of directors should draw up acode of ethics or a statement of business practice to be published both inter-nally and externally Research findings in the US indicate that corporate codes

of ethics, accompanied by training and monitoring programs, have an impact onemployee behaviour (Pickard, 1995) There is also evidence that companies thatdisclose in their annual report a commitment to ethical behaviour or compliancewith their code of conduct outperform those companies without such disclos-ures (Stoffman, 1991; Verschoor, 1997 and 1998) The Working Group on CorporatePractices and Conduct (1993) in Australia argues that a code of ethical conductshould enhance the company’s reputation for fair trading and help to maintainhigh standards of behaviour throughout the organisation It should also giveemployees a clear idea of the company’s goals, help to develop pride among staffand give a focus to the organisation as a whole (Hicks, 1999)

Merely having in place a code of conduct is not, however, considered to be

sufficient (Howard, 1996) Cohen et al (2000) report that their interviewees

felt that, as such codes are generally given only superficial attention, they havelimited effect on reducing the potential for misstatements and fraud To be effect-ive, codes must be communicated throughout the organisation and be enforced

by management (Brooks, 1992; McNamee, 1992) Further, the board of directorsneeds to ensure that checks are performed to ensure that corporate values areadhered to (Howard, 1996) Goodwin and Seow (2000) found strong support for

a formal corporate code of ethical conduct to which staff should adhere ever, there has been very little empirical research into the effectiveness of a stronglyenforced code of conduct as a corporate governance mechanism

How-2.2 Auditor-related mechanisms

2.2.1 Rotation of audit partner

Mandatory rotation of audit firms has been suggested as a means of ing auditor independence (Brody and Moscove, 1998) However, considerableconcern has been raised about the adverse effects of such a requirement, par-ticularly on audit quality and audit fees (AICPA, 1978, 1992; Cadbury, 1992;Arrunada and Paz, 1997) As the AICPA (1992) argues, problem audits are morelikely to occur when the auditor lacks a sound understanding of the client’sbusiness, operations and systems As a result of these concerns, a within-firmrotation has been recommended, involving a periodic change of partners in

enhanc-charge of an audit (Cadbury, 1992; Wendell et al., 1998) In Singapore, the SES

(1998) requires2

that auditors of listed companies practise partner rotation at leastonce every five years However, Goodwin and Seow (2000) found mixed sup-port for partner rotation amongst auditors and the effectiveness of this practicehas not been tested empirically

2.2.2 The provision of internal audit services to the audit client

The impact on audit independence of the provision of other services to anaudit client has been the subject of intense debate (Briloff, 1987; Cadbury, 1992;Pany and Reckers, 1988; Wallman, 1996; Levitt, 2000b) Wallman (1996) sees

a positive impact on audit quality resulting from the more in-depth ing of the client obtained by providing other services He argues that staff whoprovide internal audit services are more likely to communicate problems to theauditor if they are employees of the audit firm, ‘thereby reducing the possib-ility of investor losses caused by fraud’ (Wallman, 1996, p.87)

understand-However, others are concerned that issues such as fee dependency and aninvolvement in management decision making could lead to a compromise of

2

This requirement remains in force as part of the SGX-ST Listing Manual (2000).

audit independence (Briloff, 1987; Gul, 1991; Knapp, 1985) Acciani (1995,p.50) argues that, when internal audit services are provided by the externalauditor, ‘the common checks and balances that exist between internal andexternal auditors’ are eliminated, thereby compromising external auditor inde-pendence and increasing the risk of unreported control weaknesses and fraud.

In an empirical study, Lowe et al (1999) found that loan officers’ perceptions

of audit independence and financial statement reliability were adverselyaffected when the external auditor assumed management responsibilities withrespect to internal audit However, perceptions were favourable when the auditfirm performed internal audit activities using personnel not involved in theexternal audit Swanger and Chewning (2001) found that financial analysts’perceptions of audit independence were lower when the external auditor per-formed internal audit services for the client compared to when another auditfirm performed those services or when the client employed its own internalaudit staff They also found, however, that perceptions of independence werehigher when different staff of the audit firm performed internal audit servicesfor the client compared to when the same staff provided those services Therecent ruling by the SEC (2000) allows an audit firm to perform no more than

40 per cent of a client’s internal audit work It also stresses that the auditormust not engage in management decision making with respect to internal auditwork performed for a client

2.2.3 Auditing all companies within a group

The SES (1996a) argues that, if different audit firms audit different nies within a listed group, the auditors of the group may not obtain ‘an accurateand comprehensive view of the entire group’s affairs’ (para.5.2) It is there-fore suggested that the same auditor audit all companies in the group to help

compa-to prevent frauds by direccompa-tors and managers of listed companies However, inrecognition of the difficulties that could occur if such a requirement wasmandated for all subsidiaries and associate companies both in and outside ofSingapore, the SES (1998) recommends3

that the same audit firm should beappointed to audit the parent company and its Singapore-based subsidiaries andassociates.4

Overseas subsidiaries and associated companies are required to beaudited by a reputable accounting firm, although no guidance is given on howreputability should be evaluated

There is little discussion in the academic literature on the advantages orotherwise of the same audit firm auditing all companies within a group

com-However, Moizer et al (1986) discuss the possible conflicts of interest that

can exist between primary and secondary auditors involved in the audit of a group

of companies, and the potential for client management to play off one audit

firm against the other While Moizer et al (1986) concentrate their discussion

on the issue of audit fees and audit tenure, their arguments suggest that theclient is more able to conceal important information from the auditor whenthe firm does not audit all companies in the group Discovery of irregularitiesmay therefore be more difficult Jubb and Houghton (1999) further suggestthat auditor-client relationships will be enhanced and audit efficienciesobtained when a common auditor audits all companies within a group Thesearguments imply that the transaction costs to the client associated with replac-ing the auditor are likely to be greater when a single audit firm audits all com-panies within the group Emby and Davidson (1997) also suggest that whentransaction costs are high, the auditor has more power to resist managementpressure They find empirical support for the argument that parent companyauditors have greater power to resist pressure from management of other com-panies within the group because of their relationship with the controllingentity’s management This suggests that audit independence can be enhancedwhen the audit firm audits all companies in the group but no empirical studieshave addressed this

3 Research questions

The following research questions are addressed in the study:

RQ1: Are auditors’ and directors’ perceptions of a company’s ability to prevent and detect control weaknesses, fraud and errors in the financial statements influenced by:

( a) the strength of the audit committee

( b) the existence of a strong internal audit function

( c) board enforcement of a strict code of ethical conduct for employees?

RQ2: Are auditors’ and directors’ perceptions of the ability of a company’s external auditors to perform the annual audit effectively and to resist pressure from man- agement influenced by:

( a) the strength of the audit committee

( b) the existence of a strong internal audit function

( c) board enforcement of a strict code of ethical conduct for employees?

RQ3: Are auditors’ and directors’ perceptions of the ability of a company’s external auditors to detect control weaknesses, fraud and errors affecting the financial statements influenced by:

( a) rotation of the audit partner in charge of the audit

( b) the provision of internal audit services by the external auditors

( c) whether the audit firm audits all companies within the group?

RQ4: Are auditors’ and directors’ perceptions of the ability of a company’s external auditors to resist pressure from management in the event of a dispute influenced by:

(a) rotation of the audit partner in charge of the audit

(b) the provision of internal audit services by the external auditors

(c) whether the audit firm audits all companies within the group?

4 Research methods

To answer the research questions, participants were asked to role-play as

‘director’ or ‘auditor’ on a review committee focused on corporate ance issues This design was used because it simulates the typical approachtaken by the Singapore government when addressing important issues per-taining to the business community Review committees have been establishedcomprising representatives from various interest groups to put forward theviews of that group on such matters as the corporate regulatory framework,disclosure standards and corporate governance.5

Thus, asking participants

to role-play as members of a committee was designed to add realism to theexperiment and encourage participants to take the tasks more seriously Tohelp ensure that respondents focused on their respective roles as directors orauditors, a separate covering letter was used for each group The letter to dir-ectors stressed that we were concerned with issues that directors consideredimportant for strong corporate governance and the covering letter to auditorsstressed that we were concerned with issues that auditors consideredimportant.6

Participants were told to assume that, in order to assess the level of ment on corporate governance issues, the chairman of the review committee

agree-5

Committees of this nature were established by the Ministry of Finance together with the Monetary Authority of Singapore and the Attorney-General’s Chambers in 1999.

6

While it could be argued that participants were not reviewing the cases as directors and

auditors per se but rather as members of a review committee, the study was framed to

cap-ture their views as either directors or auditors Furthermore, it can be argued that, even though role-playing, participants’ views would have been formulated from their individual experiences as either directors or auditors.

had developed two hypothetical cases.7

These cases differed in their focus, withone addressing the strength of the company’s corporate governance and theother addressing aspects relating to the external auditors.8

Participants wereasked to read the cases and respond to a series of questions In each case, threevariables were manipulated in a 2 × 2 × 2 between-subjects design Thisresulted in eight versions of each case.9

4.1 Experimental case one

The first case described a listed company with diverse interests The sameinternational audit firm had audited the company since its listing in 1989 andthe partner-in-charge had held that position for the last five years There werethree executive directors, an independent chairman and two other non-executivedirectors Participants were informed that they had no reason to doubt the integ-rity of board members or the management team, but that they did not knowthem personally They were also told that they had no direct knowledge of thecompany’s control systems but had no reason to believe that there were anyunusual weaknesses in controls This scenario was designed to portray a fairlyneutral picture of a company with no noticeable weaknesses in corporate gov-ernance other than with respect to the variables being manipulated

4.1.1 Independent variables

The first variable manipulated was the strength of the audit committee Allparticipants were advised that the company’s audit committee comprised threedirectors In the strong condition, all directors were independent and all hadaccounting and auditing expertise The committee met every two months andhad regular meetings with the external auditor The committee was well resourcedand the members were known to take their responsibilities very seriously In theweak condition, the committee comprised two independent directors and one

7

The research instrument comprised an instruction sheet, the two cases and some ical questions The instrument was pre-tested using post-graduate students and staff with business and auditing experience at a major university in Singapore Minor modifications were made to the final instrument based on the feedback received.

biograph-8

It could be argued that presenting participants with two separate cases might lead to fusion However, we believe the advantages of this approach outweigh the disadvantages Primarily, we were able to test more variables with a limited number of participants Had we used only one case with six independent variables, not only would we have required a much greater number of participants but the design could have generated complex interactions that would have been difficult to interpret.

con-9

To avoid demand effects, a participant could receive any one of the eight versions in the first experimental case together with any one of the eight versions in the second experi- mental case This resulted in 64 different versions of the instrument.

executive director Only the executive director had any accounting or auditingexpertise The committee met two or three times a year for the purpose of com-plying with statutory and listing requirements.

The second independent variable involved the internal audit function In onecondition, participants were told that the company had a strong and active internalaudit function led by an experienced internal audit manager who had direct access

to the audit committee In the second condition, participants were advised thatthe company did not have its own internal audit function as management feltthat it could not justify spending the necessary resources on such a function.The third variable concerned the company’s commitment to a written code ofethical conduct In the strong condition, participants were informed that theboard had developed a comprehensive code of ethical conduct with which staffwere required to be familiar and to comply The board regularly monitoredmanagement’s enforcement of the code In the weak condition, participantswere advised that, while the company had a written code of ethical conduct,this had not been updated for many years Further, the board did not monitormanagement’s enforcement of the code and little emphasis was placed on theneed for staff to be aware of its contents

manage-of these problems should they occur The final two questions related to theextent that the corporate governance mechanisms discussed in the case wouldassist the company’s external auditors to perform their annual audit effectivelyand to resist pressure from management For all questions, an eleven-pointscale ranging from zero to ten was provided, with zero being described as ‘to avery limited extent’ and ten described as ‘to a very great extent’

4.2 Experimental case two

The scenario developed for this case was also designed to portray a companywith no noticeable weaknesses in corporate governance Some backgroundinformation was provided about a second listed company with similar boardand management structure to the company in the first case The companyhad subsidiaries and associate companies in Singapore, Malaysia, China andTaiwan The company’s audit committee comprised the finance director and twonon-executive directors It met regularly and appeared to take its responsibil-ities seriously The company did not have its own internal audit function butoutsourced internal audit activities when necessary Participants were again

advised that they had no reason to believe that there were any unusual nesses in control systems and no reason to doubt the integrity of management.

weak-4.2.1 Independent variables

For this case, participants were told that the same international audit firm hadaudited the company since its listing in 1992 Three variables relating to this auditfirm were manipulated The first concerned the issue of audit partner rotation

In one condition, the partner in charge of the audit had been responsible for theaudit since the firm acquired the client Partner rotation in accordance withSingapore listing requirements would only be implemented in a few years’ time

In the other condition, the firm had recently implemented partner rotation andthe partner in charge had taken over the audit in the present year Prior to this,another partner had been in charge of the audit since the client was acquired.The second variable involved the provision of internal audit services to theclient In one condition, participants were advised that internal audit activitieswere provided by the internal audit division of the same audit firm while in theother condition, they were told that another international audit firm providedthese services

The final manipulation concerned the firm auditing all companies in thegroup In one condition, the firm audited all subsidiaries and associate com-panies while in the other condition, the overseas subsidiaries and associatecompanies were audited by local firms in their respective countries of operation

4.2.2 Dependent variables

Participants were asked to respond to five questions with the same scales as

in the first experimental case Four questions related to the extent that the nal auditors, in the course of a normal statutory audit, would be able to detectweaknesses in internal control, material errors in the financial statements, andboth management and employee fraud The last question concerned the extent

exter-to which the audiexter-tors would be able exter-to resist pressure from management

4.3 Participants and procedures

Participants in the study were directors and auditors of listed companies inSingapore Research instruments were mailed to some 400 directors of listedcompanies, randomly selected from corporate information available on the SESwebsite Responses were returned in a stamped-addressed envelope directly tothe researchers Usable responses were received from 71 directors.10

The great

10

While this represents a response rate of only 18 per cent, this rate is comparable to other studies involving directors in Singapore (Goodwin and Seow, 2000) and also in the U.S (Hermanson, 2000).

majority of respondents were males (70) and more than 84 per cent (60) wereover the age of 40 Approximately 69 per cent (49) of respondents indicated thatthey held more than one directorship and almost 65 per cent (47) were members

of an audit committee

For the auditor group, a number of audit partners were contacted and asked toassist in distributing the instrument to employees above the level of audit senior.Approximately 200 copies were distributed and 63 usable responses were maileddirectly to the researchers.11

Of these respondents, 21 (34 per cent) were partners,

26 (42 per cent) were managers and 15 (24 per cent) were supervisors Therewere 38 males and 24 females and almost 73 per cent (45) were aged 40 or less.Analysis of variance (ANOVA) was used to test for differences in responsesdue to experience, age and gender The tests indicated that these biographicaldifferences had no significant impact on the results

While low response rates are a possible cause of concern in the study, thereare a number of indicators that suggest that non-response bias is unlikely to be

a problem First, ANOVA tests revealed no significant differences between earlyand late respondents Second, the various versions of the research instrumentwere distributed evenly and were returned in reasonably similar proportions.12

Third, with regard to the director group, the biographical data supplied by

respondents is consistent with ad hoc evidence about the characteristics of

Singaporean directors13

, thereby giving no reason to suggest that respondentswere not ‘typical’ directors of Singapore listed companies

5 Results and discussion

5.1 Experimental case one (research questions 1 and 2)

Research questions 1 and 2 are explored using multivariate analyses of ance (MANOVA)14

supported by univariate analysis and multiple comparisontests where appropriate.15

The MANOVA results indicate that the internal audit