Perceived audit quality, perceived audit fee, and auditor retention evidence from vietnam

ABSTRACT The purpose of this research is to assess the impact of perception of audit customers in the aspects of quality and price on their decision to retain incumbent auditor.. Hence,

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

TAN QUE ANH

PERCEIVED AUDIT QUALITY,

PERCEIVED AUDIT FEE, AND AUDITOR RETENTION: EVIDENCE FROM VIETNAM

ID: 22110001

MASTER OF BUSINESS (Honours) SUPERVISOR: PHAM QUOC HUNG, Ph.D

I would like to thank all the respondents helping me complete the survey data collection

Finally, I would like to give special thanks to my parents for supporting me all the time

ABSTRACT

The purpose of this research is to assess the impact of perception of audit customers in the aspects of quality and price on their decision to retain incumbent auditor A conceptual model was set up based on reviewing previous literature A survey was then conducted to collect data with respondents working at SMEs The final data with sample size of 145 was employed to implement data analysis The research found out a quite strong positive relationship between perceived audit quality and auditor retention, perceived audit fee and auditor retention Nevertheless, no association was found between perceived audit fee and perceived audit quality The significant finding is that all dimensions of audit quality were found to have positive impact

on auditor retention, giving a good signal to the auditing market in particular, and the economy

in general

Key words: Perceived audit quality, perceived audit fee, auditor retention, SMEs, Viet Nam

ABBREVIATIONS

ASC: Accounting Service Company (Now known as AASC – Auditing and Accounting financial consultancy Service Company limited)

CPA: Certified Public Accountant

EFA: Exploratory factor analysis

SMEs: Small and Medium-sized Enterprises

VACO: Vietnam Auditing Company (Now known as Deloitte Vietnam Company limited)

VACPA: Vietnam Association of Certified Public Accountants

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION 1

1.1 GENERAL BACKGROUND 1

1.2 RESEARCH PROBLEM & RESEARCH QUESTIONS 2

1.3 SIGNIFICANCE OF THE RESEARCH 3

1.4 SCOPE OF THE RESEARCH 3

1.5 RESEARCH STRUCTURE 4

CHAPTER 2: LITERATURE REVIEW AND HYPOTHESIS 5

2.1 LITERATURE REVIEW 5

2.1.1 Auditor retention 5

2.2.2 Perceived audit quality 6

2.2.3 Perceived audit fee 12

2.2 CONCEPTUAL MODEL 15

CHAPTER 3: RESEARCH METHOD 17

3.1 DATA NEEDS AND SOURCES 17

3.2 MEASUREMENT SCALE 17

3.3 SAMPLING 19

3.4 DATA COLLECTION METHOD 19

3.4.1 Preparation for data collection 19

3.4.1 Main survey 20

3.5 DATA ANALYSIS METHOD 21

CHAPTER 4: DATA ANALYSIS AND RESULTS 22

4.2 RELIABILITY AND FACTOR ANALYSIS 22

4.2.1 Reliability 22

4.2.2 Validity 24

4.3 TESTING HYPOTHESES 30

4.3.1 The relationship between perceived audit quality and auditor retention 30

4.3.2 The relationship between perceived audit fee and auditor retention 30

4.3.3 The relationship between perceived audit fee and perceived audit quality 31

4.4 MULTIPLE REGRESSION 32

4.4.1 Checking assumptions 32

4.4.1.1 Multicollinearity 32

4.4.1.2 Homoscedasticity 34

4.4.2 Checking conceptual model 35

4.5 SUMMARY FINDINGS 36

CHAPTER 5: DISCUSSIONs AND CONCLUSIONs 38

5.1 DISCUSSIONS AND IMPLICATIONS 38

5.2 LIMITATIONS 40

5.3 FUTURE RESEARCH 41

5.4 CONCLUSIONS 41

REFERENCE i

Appendix 1 iv

Appendix 2 vii

Appendix 3 x

Appendix 4 xi

LIST OF TABLES

Table 3.1: Audit quality measurement (apply SERQUAL model) 18

Table 3.2: Perceived audit fee and auditor retention measurement 18

Table 3.3: Sample description 21

Table 4.1: Cronbach's alpha 23

Table 4.2: KMO and Bartlett's Test for measures of independent variables 24

Table 4.3: KMO and Bartlett's Test for measures of dependent variable 24

Table 4.4: Rotated Component Matrixa 26

Table 4.5: Total Variance Explained 27

Table 4.6: Component Matrixa 28

Table 4.7: Total Variance Explained 28

Table 4.8: Correlations among the variables (Sig (2-tailed)) 29

Table 4.9: Correlation of auditor retention and perceived audit quality 30

Table 4.10: Correlation of auditor retention and perceived audit fee 31

Table 4.11: Correlation of perceived auit quality and perceived audit fee 31

Table 4.12: Correlations among the variables (Sig (1-tailed)) 33

Table 4.13: Coefficientsa 34

Table 4.14: ANOVAb 36

Table 4.15: Model Summaryb 36

Table 4.16: Summary findings 37

LIST OF FIGURES

Figure 2.1: Conceptual model 16Figure 4.1: Scatterplot 35

CHAPTER 1: INTRODUCTION

This chapter will discuss the general background of the auditing market, research problems and research questions This is followed by the significance and scope of the research The research structure was also then presented The chapter starts with the general background of the auditing market that leads to objectives of this research

1.1 GENERAL BACKGROUND

Along with the integration process and managerial requirements in practice by the Government, auditing industry in Vietnam is growing stronger and stronger, demonstrating its importance in the open economy From the two first auditing companies, VACO and ASC, established by the Ministry of Finance in May 1991, the report of VACPA (2013, p.1-2) shows that up to the late February 2013, there are 155 auditing firms in Vietnam having registered for practicing with 1,370 CPAs having registered for practicing in year 2013 Also according to this report, the total number of client firms in 2012 was 32,702, increased by 4.9% over 2011 (2013, p.3), still

requires a greater supply of CPAs In other words, auditing market is still fertile

Nevertheless, this attractive market is still the ‘catwalk’ of the big aged auditing firms, especially the ‘Big Four’ These four big auditing companies lead the market in terms of both quantity of clients and revenue (Doanhnhansaigon, 2013) For the big aged auditing enterprises with

relatively stable amount of customers, open customer supply, the probability they fall into the situation bargaining for audit fee and competing with other competitors is less than the rest due

to their advantages For instance, foreign-owned companies tend to employ foreign-owned auditing companies or member firms of foreign auditing companies The report of VACPA on reviewing work states out the situation of low audit fee for some audit contracts (2007, p.8) Audit fee is old-aged problem in auditing market since there is no clear standard to set up audit

fee More importantly, according to Bui Van Mai, general secretary of VACPA, there is still no effective regulation to make the auditing market fairly competitive environment (Cafef) Thus, in tough economy like recently, when thousands of enterprises go bankruptcy, other enterprises that survive trying to cut cost becoming sensitive to audit fee, the price competition happening to retain or seek for customers gradually pushes general audit fee frame of the auditing to low level Accordingly, audit quality and prestigious of auditing profession in Vietnam are affected, while many local auditing firms still struggle for survive and develop in the local auditing market

1.2 RESEARCH PROBLEM & RESEARCH QUESTIONS

From the state of auditing market in Viet Nam, local auditing firms, especially the small or fresh ones, struggles with the puzzle of audit fee and customers while having to keep the quality of the auditor’s report In such price competitive environment, even senior auditing enterprises have to

be cautious while setting up audit fee for new clients, or asking greater audit fees in order not to lose major clients Nevertheless, audit fee is not the unique criterion for client firms to make decision to change or retain auditing firm Consequently, it is crucial for auditing firms to

apprehend behavioral intentions of client firms using audit service There have been many

researches in both developed and developing countries on behavioral intentions of customer in auditing market However, there has been very few specific research on the factors affecting decision of audit client firm to retain or change audit firm in Viet Nam, especially in the client firm’s point of view Hence, this research is to find out the impact of perception of customer firm

on decision using audit service of incumbent audit firm in terms of both audit fee and audit quality in Viet Nam Accordingly, this paper helps answering following research questions:

1 Does the perceived audit quality have impact on auditor retention?

2 If question 1 is yes, which dimension of audit quality has impact on auditor retention?

3 How is the impact of perceived audit fee on auditor retention?

4 Does the audit fee have impact on audit quality in audit client firm’s perspective?

1.3 SIGNIFICANCE OF THE RESEARCH

This research helps auditing firms have an obvious understanding of perception of client firms in terms of price and quality, and how it affects their decisions Audit fee is such an important criterion, but not the unique one affecting their decision Although in tough economy, audit quality is still a significant feature to consider retaining audit firm The research states the

dimension which has most impact auditor retention From that, auditing firms can follow to enhance the audit quality in the client’s standpoint to retain customer, not only point at audit fee Besides, the result of the research indicates that enterprises actually acknowledge the importance

of audit work This is a good signal for the economy and for the local auditing market in

particular

1.4 SCOPE OF THE RESEARCH

This research is conducted using survey data with respondents coming from SMEs, not from any enterprise This scope limits the research significance to customer group which are big

enterprises

There are two main reasons for choosing SMEs Firstly, except for the Big Four and some other big auditing firms such as AASC, A&C, AISC, BDO, etc., major clients of the rest are SMEs To some auditing firms, though audit contracts with SMEs do not create the most revenue, but these help increase income for the companies, especially in hard economy like recently In addition, statutory audited firms are mainly SMEs According to law on auditing, the local firms (not including state-owned firms; special businesses such as credit; insurance, etc.; and public listed companies) are not required to have financial statements audited While the survey conducted by

VCCI (Anninhthudo) shows that 63% FDI enterprises are SMEs Secondly, with the respondents mainly are accountants, chief accountants, data collected for SMEs group have more

significance Since the reality shows that in SMEs, the suggestion and behavior of these

respondents having significant importance on the final decision of their companies

1.5 RESEARCH STRUCTURE

The research goes through five chapters starting from this chapter exposing the general

background, the problem and objectives of it, its significance, scope and structure The next chapter reviews the extant researches and theories relating to the concepts of auditor retention, audit quality, audit fee; their associations one another; and then develops hypothesis, and the conceptual model It is followed by chapter three outlining the methodology of the research consisting data collection and sampling design; measurement scale; data analysis method

Chapter four presents the data analysis and the results and discussions Lastly, chapter five gives out the conclusions and implications

The first chapter have introduced the key points of the background of the auditing market, and so the research problems need to be solved Chapter 2 continued to show the review of related literature and the setting up hypothesis and the conceptual model

CHAPTER 2: LITERATURE REVIEW AND HYPOTHESIS

The three concepts relating the research problems are auditor retention, perceived audit quality, and perceived audit fee, those which are reviewed in this chapter While the relationship between the constructs are reviewed, the hypothesis are posited The conceptual model is then presented

at the end of this chapter

2.1 LITERATURE REVIEW

2.1.1 Auditor retention

In the research developing a model of repurchase intention, Hellier et al (2003, p.1764) defined retention, repurchase intention, as the decision of the customer on using again service from the same company considering their state and probable situations Repurchase intention is one of the behavioral outcomes of customers, and is also the latter approach to customer loyalty A

customer may either decide to retain incumbent provider, or turn to use service of the rival provider Along with the direct decision, the customer may intent to purchase the relationship with the provider, may say good or bad thing of the providers, and even suggest for others Eggert and Ulaga (2002) suggested the key thing was to create value for customers to have positive behavioral intentions It is actually a good advice to make impression on customers on the value created for them, some customers may come back to reuse service of the old provider Trasorras et al (2009, p.619) supported by arguing loyalty arising in customers as they perceive value obtained from the product or service, and it is the loyalty which leads to retaining decision

in turn

Auditor retention is the decision of audit client In practice, the repurchase intention of customers should be direct decision, yes or no, to use the service or product In auditing literature, this measurement for the retention concept was applied by Butcher et al (2013) as he used

dichotomous variable for the dependent variable However, the experimental researches in

auditing profession tend to apply items scale to measure the behavioral intentions (Morton & Scott, 2007) As customer loyalty that might be expressed as retention s a concept the

measurement of which is multiple-items scale Thus, the auditor retention variable would apply the measurement scale developed by Eggert & Elaga (2002)

2.2.2 Perceived audit quality

2.2.2.1 Audit quality

Service quality is not a new issue in marketing literature There is a huge range of researches and studies on this concept due to its significance Customers tend to consider service quality as a crucial feature in their perception For that reason, it gives rise the interest in evaluating quality

as it brings in competitive advantage in attracting and retaining customers This is proved by previous research stating that high service quality leading to customer loyalty, satisfaction, commitments and positive behavioral intentions, etc (Duff, 2004, p.26)

Similarly, audit quality is quite also a popular concept in auditing literature However, there is still lack of consensus on the definition Audit quality is defined by DeAngelo (1981, as cited in Birjandi et al., 2013) as the probability of auditor to find out material misstatements presented in the financial statements and report them This means that quality of audit identified by two elements of auditor, competence (detect misstatements) and independence (report errors) It also implies that audit quality is assessed at low level once auditors cannot not discover errors

existing in the financial statements or intentionally conceal them However, it is hard to assess audit quality through these two criteria As Duff (2004) noted that while technical competence was easier to conceptualize, independence might be supposed to be ‘independence in

appearance’ He argued that independence, which described as willingness to inform the errors

or fraud of financial statements of the auditor, and thus it might not be directly observable Another problem assessing competence is that how to know exactly whether due to inability of auditor or how the auditor actually performs audit work that the errors cannot be detected

Related parties those who use the financial statements are not supposed not to be able to access the file of working papers of audit team Besides, in her research, DeAngelo (1981, as cited in Iskandar, 2010, p.159) also suggested using audit firm size as the proxy for audit quality since she demonstrated that bigger audit firm (Big 8) providing better quality than the smaller audit This can explained that big audit firms having a better training system for their employees Palmrose (1988, as cited in Ismail, et al., 2006) also defined audit quality in another aspect using audit result, the reliability of audited financial statements, also the probability of financial reports containing no material misstatements This implies the actual audit quality when emphasizing the result of the audit work Under this definition, the quality of the audit is determined by the

degree of reliability of the audited financial statements which cannot be evaluated by users The common ground for evaluating quality of audit work is based on the audit work, or the assurance

on the audited financial statements prepared by enterprises In Vietnam, quality of audit is

currently recognized in such way to rate the conduct of the audit work Specifically, reviewing audit quality work is implemented annually by VACPA in some selected audit firms in terms of checking overall and particular degree of performing the standard procedures at rating scale for each audit work As discussed, this information is limited for users In addition to the definition

of DeAngelo (1981), Palmrose (1988), Birjandi (2013, p.15) cited some other researchers

suggesting the determination of audit quality (Titamn & Trueman, 1986; Davidson & Neu, 1993) quite similar in the manner of actual audit quality The above-mentioned definitions of audit quality raise the issue how to measure this construct

2.2.2.2 Perceived audit quality

Based on the problem of mixed result of measuring audit quality in auditing literature, there are many researches on evaluating quality of the audit from the view of audit client companies The perceptions of audit client promise appropriate measure for audit quality since they recommend what might constitute audit quality for they know which things from the audit brings in value to them Appropriately, Iskandar (2010, p.161) concluded to form audit quality by quality attributes pertaining to the audit firm and specific to audit team as suggested by Schroeder (1986) In auditing literature, there are three most typical models to measure perceived audit quality Firstly

as said that is the model using quality attributes (Schroeder et al., 1986; Carcello et al., 1992) Another prominent model is the SERQUAL model in in five dimensions developed by Zeithaml

et al (1990) reducing from the SERQUAL model in marketing literature with ten dimensions (Parasuraman et al., 1985) The most recent model is AUDITQUAL promoted by Duff (2004) assessing audit quality in nine dimensions

Though the attributes used in measuring audit quality are similar in models of Schroeder et al (1986), Carcello et al (1992), these models are tested and applied separately (Butcher et al.,

2013, p.58) An outstanding research applying this quality attributes model is of Morton & Scott (2007) formed an instrument to measure audit quality Experimental researches suggested that customers perceive quality as multidimensional construct The model using quality attributes have reached significance in measuring audit quality but not in integrated standard manner The SERQUAL and AUDITQUAL models have removed this problem in measuring audit quality The SERQUAL model firstly developed by Parasuraman et al (1985) was identified in ten dimensions of service quality: access, communication, competence, courtesy, security, tangibles, reliability, responsiveness, credibility, and understanding (as cited in Duff, 2004) From the basis

of this SERQUAL model, through experimental researches, the dimensions were reduced to five: assurance, empathy, reliability, responsiveness, and tangibles to measure service quality The SERQUAL model with 22 items is based on the idea of determining the quality as the gap

between customers’ expectation and their assessments of the specific performance of provider In audit setting, this model was then employed by Ismail et al (2006) proved reliability of

SERQUAL model with 22 items The five dimensions are recognized as follows:

1 Reliability: Ability to perform the promised service dependably and accurately

2 Responsiveness: Willingness to help customers and to provide prompt service

3 Assurance: Employee’s knowledge and courtesy, and their ability to inspire trust and confidence

4 Empathy: Caring, individualized attention to customers

5 Tangibles: Physical facilities, equipment personnel and written materials

Ismail (2006, p.740) also confirmed that it was applied in many fields such as banking,

insurance, appliance repair, brokerage, etc Since the SERQUAL model in measuring audit quality comes from marketing literature, not inherently reserve for audit quality and for auditing profession is a special industry, a model developed by Duff (2004) called AUDITQUAL to measure completely quality audit in two aspects: technical quality and service quality

AUDITQUAL model was with nine dimensions in first order: Reputation, capability,

independence, expertise, experience, responsiveness, non-audit services, empathy, and client service

The difference in the two mentioned models is that the AUDITQUAL model of Duff (2004) is set privately for auditing service Accordingly, AUDITQUAL model brings in a more

completely scale for audit quality that might be applied for all types of enterprises in a more

sufficient aspect However, this study did not mean that the scale of SERQUAL model becomes blurred Oppositely, the scale of SERQUAL is more appropriate for measuring audit quality in the perspective of SMEs because of its simplification but not of less significance This was supported by Isa (2005, p.18) as he argued that the SERQUAL model was easy to use in service firms and that was its advantage

2.2.2.3 Perceived audit quality and auditor retention

In a study to evaluate the influence of perceived audit quality on behavioral intentions of audit clients, by using the secondary information and conducting exploratory research, Morton & Scott (2007) generated a new instrument with 28 items for measuring service quality in the context of audit firm Following that, audit service quality consisted of credibility, reliability, control, and ancillary services Morton and Scott have also found this instrument to be valid and reliable In detail, Morton and Scott found out the relationship between the perception of service quality and client decision to retain audit firm services though it was weak Yet they found out no

association between service quality and intention to use additional services, but tendency to recommend service for others As a sequence, Morton and Scott suggested audit firm to be involved in not only the quality offered, but service quality perceived by audit clients, since it was significant not only to retain customers, but also to gain new customers (2007, p.26) The weakness in the association between audit quality and auditor retention in Morton and Scott’s study was due to the legislation of unlimited auditor’s tenure and high cost of changing auditor The majority of empirical studies of audit quality concentrated on the association of perception

of service quality attributes with auditor change or rotation (Johnson & Lys, 1986; Woo & Koh, 2001), or with audit client satisfaction and client loyalty (Ismai, I et al, 2006; Iskandar, T et al, 2010) indirectly The general consensus drawn from the results showed that if the audit client

was not satisfied with the audit firm’s service quality attributes, they had tendency to resign or change Client satisfaction was found to be a mediator for improving loyalty of clients to their auditors (Ismail, I, 2006, p 750), and incentives for giving up incumbent service provider

Among the researches on audit quality, Butcher, K (2013, p.55) highlighted that few empirical examining the direct impact of audit quality on decision to retain incumbent auditor The very first one to mention and test this association was of Pandit (1999) Following this fieldwork, Morton & Scott (2007) applying their self-developed instrument of audit quality to check the association in five dimensions Unlike the findings of Pandit (1999) showing a real impacts of service quality in terms of responsiveness to client’s needs and the audit’s involvement on the intention to re-purchase service of provider, the results given by research of Morton and Scott (2007) stated the relationship at weak degree due to legislation and high cost of changing

Overcoming this limitation, also testing this association in auditing service field, Butcher et at (2013) conducted their study applying AUDITQUAL model developed by Duff, A (2009) to measure audit quality in seven of the nine dimensions: Reputation, capability, assurance,

independence, expertise, experience, and responsiveness, removing the empathy and non-audit services dimensions Their finding supported the researches of Morton & Scott (2007) that there was association between them, but to be weak Relevant to the result of Pandit, a positive impact

of audit quality in terms of responsiveness on auditor retention was found in study of Butcher, K

et al (2009, 70) Their study also stated the positive association between audit quality dimension

of expertise and auditor retention Hence, the result suggested client-focused attention by audit firm to have client commitment and advocated the importance of auditor specialization

Based on reviewing extant literature of relationship between perceived audit quality and auditor retention, applying the SERVQUAL model employed by Ismail, I (2006) to measure the

perceived audit quality, this study suggest the hypothesis as follows:

H1: There is a significant and positive association between perception of audit quality and auditor retention

With measurement of audit quality in five dimensions according to SERQUAL model,

specifically, this paper suggests five sub-hypothesis:

H1a: There is a significant and positive association between reliability and auditor

2.2.3 Perceived audit fee

That is in the aspect of benefit, in the cost aspect, perceived audit fee, researchers also found the association of audit fee with behavioral intentions of client (Carcello & Neal, 2003; Kallunki et al., 2007; Ettredge et al., 2007), customer loyalty (Farag, M & Elias, R., 2011)

Audit fee, or just price in the audit client’s perspective, is defined as what is given up or

sacrificed to obtain a product (Zeithaml, V., 1998, p.10), and purchase a service in this context

Jacoby and Olson (cited in Zeithaml, V., 1998) discriminated price into objective and perceived ones, where objective price was the actual price and perceived price was encoded by clients Prior researches in marketing literature stated that as customers frequently recognize price in some ways that are most meaningful to them instead of always remembering the actual prices of

a product or service As usual, the perception of customers is through to assess the fairness of what they give Bolton (as cited in Dai, B., 2010) pointed out that past prices, competitor prices were references for customer to compare, and justify The assessment on whether the price of product or service is fair, according to Xia (as cited in Dai, B., 2010), is what customers really perceive, hence, is subjective In the context of this research considering the audit client’s

perception of what they ‘get’ (audit quality) and ‘give’ (audit fee) towards the behavioral

intention to retain incumbent auditor, audit fee discussed hereafter is supposed to be perceived price encoded by client firm

The customers consider price with their expectations based on their prior experience to see whether the price is acceptable or not that leads to their behavioral intentions, or affects the intention to repurchase service or product Numerous researches in auditing literature

investigated the impact of audit fee on behavioral intention to dismiss incumbent auditor

(Carcello & Neal, 2003; Kallunki et al., 2007; Ettredge et al., 2007) The consensus of the

findings among these researches concluded that audit client firm would consider alternative audit service provider as audit firm charge a higher audit fee Ettredege (2007) explained that clients suffering from higher audit fee had tendency to compare to similar firms with lower fees, and seek for alternative audit firm with hope that they would charge such lower rate Nevertheless, these prior researches concentrated on auditor retention from the standpoint of audit provider, and the relative audit fee variable in these researches was the change or level of actual price

(audit fee), not perceived price From the client’s point of view, complementing the extant

auditing literature on audit fee and auditor choice, Farag and Elias (2011) examined the impact

of audit fee on client loyalty This study is also the first one to measure the degree of client loyalty affected by relative audit fee in the client’s standpoint The result showed that the higher likelihood audit clients are loyal to their audit service supplier as they pay lower audit fee

relatively compared to other firms in the same industry Farag, M & Elias, R (2011, p 91) discussed that a client was supposed to be satisfied with the audit firm, and audit service if the client firm did not intend to abandon the incumbent audit firm Out of auditing literature, Dai, B (2010) examined the impact of perceived price fairness of dynamic pricing on customer

satisfaction, and behavioral intentions His findings stated that re-purchase intention was strongly and positively affected by perceived price fairness, and he suggested for provider using price fairness as an instrument to predict reaction of customers to their provider

To the best of researcher’s knowledge, though there are considerable researches investigating the impact of audit fee on client’s intention, in the auditing literature, there has been no research examining the impact of perception of audit fee in audit client’s standpoint on intention to retain incumbent auditor Based on the review the previous researches and their results, this paper suggests hypothesis as follows:

H2: Perceived audit fee is associated with the auditor retention

In marketing literature, there was not a unique result when examining the relationship between price and perceived quality Zeithaml (1998, p.11) cited while Monroe and Krishnan found a positive association between them, other researches showed the conflicting result that the

association was not always positive, but might be low or nonlinear (Peterson, 1970; Peterson & Jolibert, 1976) Though Peterson and Wilson argued that price-perceived quality relationship was

not universal and Bowbrick (as cited in Zeithaml, 1998) insisted that association was general and untestable to have a valued result, consumers tend to rely on price as a cue for quality It is actually appropriate in practice Once a product or service of a certain provider is quoted higher than of others, it is supposed to form in customers’ mind that the difference in price compensates for a higher quality An exception is that if the customers have experienced the products or services before and set up a standard to assess it However, to audit clients who are SMEs with limitation in recognizing the importance of audit work on financial statements, their perceptions may be varied Specifically, if one small enterprise is the subject of statutory audit, then hiring audit service for their statements is such a force Accordingly, the perception of audit quality may different from other audit clients The audit fee then may be the only criterion in their assessment Thus, their perception of price may have no association with perceived audit quality,

or even have negative association with audit quality Another research in professional accounting conducted by Hong, S & Wu, S (2003) from the client firm’s perspective found out significant and positive relationship between price and service quality

In auditing literature, there has been no research investigating the association of perceived audit fee and perceived audit quality However, as argued above, since the writer believes in a

significant recognition of the importance of audit work, the perception of audit fee is supposed to have positive relationship with perceived audit quality Thus, this research posits the hypothesis

as follows:

H3: Perceived audit fee is positively associated with perceived audit quality

2.2 CONCEPTUAL MODEL

Based on above literature review and complementing the idea of Zeithaml of perception of value

in customer’s perspective, considering perception of clients of ‘give’ and ‘get’ towards their

behavioral intentions in auditing fieldwork, this paper suggests the model of the relationship between perception of audit client in terms of benefit-cost and auditor retention as follows:

The literature review and the hypothesis presented in this chapter have set the basement for the next step of the research The next chapter would give out the mothodology of conducting the research

Perceived Audit quality

Perceived Audit fee

Auditor retention

Figure 2.1: Conceptual model

CHAPTER 3: RESEARCH METHOD 3.1 DATA NEEDS AND SOURCES

Based on the conceptual model and hypotheses posited in the literature review, the needed data was collected pertaining to three variables The dependent variable is auditor retention The two independent variables are audit quality and audit fee This paper used primary data newly

collected from a questionnaire survey conducted by this paper writer serving for testing the hypotheses and conceptual model

3.2 MEASUREMENT SCALE

This paper employed 7-point Likert-type scale from strongly disagree to strongly agree to

measure all the scale items of the three constructs In which, the audit quality construct apply the SERQUAL model employed by Ismail, I et al (2006) with 22 items presented in table 3.1 The perception of audit fee employed items used by Mahew & Winer (1992) and Winer (1986); and intention to retain incumbent auditor was measured by three items based on Eggert & Ulaga (2002), those which are presented in table 3.2

Table 3.1: Audit quality measurement (apply SERQUAL model)

Latent

Scale items variables

1 Reliability 1 Audit firm delivers services within a certain time frame as promised

2 Audit firm is sympathetic and reassuring towards client's problems

3 Audit firm is dependable in providing its/their services

4 Audit firm has employees who are technically competent to perform the

service

5 Reports prepared by Audit firm are easily understood by my organization

2 Responsiveness 1 Audit firm provides timely services

2 Audit firm provides prompt services

3 Employees of Audit firm show willingness to help their clients

4 Audit firm does inform my organization exactly when services will be

performed

3 Assurance 1 My organization is able to trust the employees of Audit firm

2 My organization experiences confidentiality on transactions with the

employees of Audit firm

3 Employees of Audit firm are polite

4 Audit firm's employees received adequate support from my company to

perform their task well

5 The services rendered by Audit firm commensurate with the fees charged

4 Empathy 1 Audit firm does not provide my organization with individual attention

2 The employees of Audit firm do not know the needs of my organization

3 Audit firm does not have my organization's best interest at heart

4 Audit firm does not visit my organization at times convenient to us

5 Audit firm has proper documentation of the audit work performed

5 Tangibles 1 Audit firm is equipped with the latest information technology

2 The physical facilities are visually appealing

3 The employees are well dressed and appear neat to show professionalism

Table 3.2: Perceived audit fee and auditor retention measurement

Perceived audit

fee (independent

variable)

1 Price compared to quality

2 Price compared to other companies

3 Price compared to expectations Re-purchase

intention

(Dependent

variable)

1. Next time we will buy again from our current supplier

2. In the foreseeable future we will consider our current supplier as part of our evoked set

3.3 SAMPLING

This research investigated the perceptions of SMEs in the aspects of audit quality and audit fee

on auditor retention Thus, this applied to SMEs

There are many issues in determining the sample size The investigation of one or many

variables, what percentage the response rate is, or constrains of time and resources may affect how large the sample size should be However, the issue is that whether that size is sufficient to conduct data analysis According to Tabachnick & Fidell (2007), the least sample size should be greater than the number calculated under the formula: 50 + 8*k for running multiple regression analysis, where k is the independent factors of the model Accordingly, the minimum size for this study should be greater than 98 Besides, for most of the studies, the sample size ranging from 30

to 500 are supposed to be appropriate (Roscoe, 1975) The sample size employed to conduct data analysis in this paper was 145 satisfying the above requirements

3.4 DATA COLLECTION METHOD

3.4.1 Preparation for data collection

Three in-depth interviews with two accountants and CPA to receive assessment of audit quality and audit fee, and their opinion of audit quality and audit fee affecting the auditor retention The questionnaire was completed then for translating into Vietnamese Translation period

experienced two steps Firstly receiving advice from experienced certified public accountant and fluent in English to translate the questionnaire into Vietnamese After that, the questionnaires were sent to three chief accountants to check and test for collecting advice for wordings and adjustments The English and Vietnamese questionnaires were presented in appendix 1 and 2 The pilot test with 64 responses was then checked whether there were things to change to get ready for the main test

Respondents were those who worked in small and medium enterprises, not including the micro enterprises, those were or were not subject of compulsory audit The basis of classifying an organization as small and medium enterprise followed the definition of SME in decree

No.56/2009/NĐ-CP dated 30 June 2009, which is presented in appendix 3 Of the 197

questionnaires sent through email with, there were only 39 responses (19.8%) Of the 450 paper questionnaires sent out directly, 173 responses were returned (38.4%) The total of 212 responses were then filtered to remove inappropriate responses such as incomplete ones (all were sent directly), respondents’ firm were not SMEs, the respondents did not interact with audit team directly or indirectly The sample size after filtering to conduct data analysis was 145 making up 68.4% of responses, and 22.4% of total questionnaire sent out The general information of the sample is presented in table 3.3

Table 3.3: Sample description

1 Compulsory audited enterprise

Agriculture, forestry, and fishery 12 8.3%

Industry and construction 36 24.8%

3.5 DATA ANALYSIS METHOD

Data analysis was implemented using SPSS 16.0 software Firstly, all the constructs were tested reliable by using Cronbach’s alpha measure Then exploratory factor analysis was applied for independent variable and dependent variable to check the convergent validity and to extract factors The factors were then saved as variables to implement multiple regression analysis The correlation coefficients among the variables were then used to test the discriminant validity After checking the reliability and validity, the hypotheses were tested by conducting correlation analysis between the constructs one another The model was finally tested by using multiple regression

Chapter 4 keeps the streaming of the thesis by showing the results of data analysis

CHAPTER 4: DATA ANALYSIS AND RESULTS

This chapter presented the results of using correlation instrument and regression analysis to examine the association between perceived audit quality and auditor intention, perceived price and auditor intention, perceived price and perceived audit quality The correlation analysis helped to check the hypothesis H1-H3 The correlation coefficient ranged from -1 (perfect

negative relationship) to 1 (perfect positive relationship) The linear regression analysis was employed to find out the best model to predict the auditor retention combining all the

to Leech et al (2005, p.67), the item-total correlation that were greater than 0.4 would make a good component of the summated rating scale All the items in each concept satisfied with moderately high and high correlations (greater than 0.5) Thus, there was no item deleted due to low correlation or to make the Cronbach’s alpha better