The Effect of audit quality offered by audit firms on client satisfaction

In this study, the author uses AUDITQUAL model Duff, 2004, 2009 focusing on seven dimensions of audit quality which were label Reputation, Capability, Expertise, Experience, Responsivene

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UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

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Hoang Thi Kim Thuan

THE EFFECTS OF AUDIT QUALITY OFFERED BY AUDIT FIRMS ON CLIENT SATISFACTION

MASTER OF BUSINESS (Honours)

Ho Chi Minh City – 2014

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UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

Hoang Thi Kim Thuan

THE EFFECTS OF AUDIT QUALITY OFFERED BY AUDIT FIRMS ON CLIENT SATISFACTION

MASTER OF BUSINESS (Honours)

SUPERVISOR: Dr Nguyen Thi Nguyet Que

Ho Chi Minh City – 2014

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INDEX

ACKNOWLEDGEMENTS 6

LIST OF FIGURES 7

LIST OF TABLES 7

LIST OF ABBREVIATION 8

ABSTRACT 9

CHAPTER 1: INTRODUCTION 10

1.1 Background to the research 10

1.2 Research motivation 12

1.3 Research objective 13

1.4 Research scope and methodology 14

1.5 Structure of the study 14

CHAPTER 2: LITERATURE REVIEW 15

2.1 Introduction 15

2.2 Audit quality 15

2.2.1 Definition of audit quality 15

2.2.2 Research on measurement of audit quality 16

2.3 Client satisfaction 19

2.4 Research framework and hypothesis development 20

2.4.1 Audit quality dimensions and client satisfaction 20

2.4.1.1 Reputation and client satisfaction 21

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2.4.1.2 Capability and client satisfaction 21

2.4.1.3 Expertise and client satisfaction 22

2.4.1.4 Experience and client satisfaction 23

2.4.1.5 Responsiveness and client satisfaction 23

2.4.1.6 Client service and client satisfaction 24

2.4.1.7 Empathy and client satisfaction 24

2.4.2 Research framework 25

2.5 Conclusion 26

CHAPTER 3: METHODOLOGY 27

3.1 Introduction 27

3.2 Research process 27

3.3 Questionnaire development 28

3.4 Pilot study 32

3.5 Main study 33

3.5.1 Sampling method 33

3.5.2 Sample size 33

3.5.3 Questionnaire design and administration 34

3.6 Data analysis method 35

3.7 Conclusion 36

CHAPTER 4: DATA ANALYSIS 37

4.1 Introduction 37

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4.2 Sample description 37

4.3 Reliability Analysis 38

4.4 Exploratory factor analysis (EFA) 40

4.5 Hypotheses testing 42

4.5.1 Pearson Correlation Coefficient 42

4.5.2 Testing assumptions of Multiple Regression 44

4.5.3 Regression analysis 45

4.6 Discussion of research findings 47

4.7 Conclusion 48

CHAPTER 5: CONCLUSION AND IMPLICATION 50

5.1 Conclusion 50

5.2 Managerial implications 50

5.3 Limitation and suggestion for future research 52

REFERENCES 53

APPENDIX 60

Appendix A: The findings of pilot study 60

Appendix B: Questionnaire (English version) 65

Appendix C: Questionnaire (Vietnamese version) 70

Appendix D: Descriptive Analysis 75

Appendix E: Total Variance Explained 77

Appendix F: Multiple Linear Regression Assumption testing results 78

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ACKNOWLEDGEMENTS

I would like to express my sincere gratitude to my supervisor, Dr Nguyen Thi Nguyet Que for her valuable guidance, insightful comments and continuous support to my thesis I am sure that this thesis would not have been possible without her supervision and constant help

I would like to acknowledge with much appreciation to leaders, teachers, and staffs in ISB who help me usefully all the subjects of my master course

I would like to thank my dear colleagues and friends for their invaluable advice, help, encouragement and support during the time I was doing this thesis

Last but not least, a special thank goes to my husband who always stay with me in good and bad times His continuous support in pursuing my study is invaluable to me

Ho Chi Minh City, February 22, 2014

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LIST OF FIGURES

Figure 2.1: Research model 25

Figure 3.1: Research Design Process 27

LIST OF TABLES Table 3.1: Draft questionnaire to measure audit quality 29

Table 3.2: Deleted items in pilot study 60

Table 3.3: Final questionnaire to measure audit quality 62

Table 3.4: Cronbach’s alpha reliability coefficient 35

Table 4.1: Sample characteristics 75

Table 4.2: Cronbach’s alpha reliability of first analysis 38

Table 4.3: Cronbach’s alpha reliability of final analysis 40

Table 4.4: EFA results 40

Table 4.5: Pearson Correlation 42

Table 4.6: Coefficients 44

Table 4.7: Regression results 45

Table 4.8: Hypotheses testing results 46

Table 4.9: The summary of hypotheses testing results 49

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LIST OF ABBREVIATION

AAA: American Accounting Association

WTO: World Trade Organization

VACPA: Vietnam Association of Certified Public Accountants

CPA: Certificated Public Accountant

CFO: Chief Financial Officer

SSC: State Security Commission

AASC: Auditing and Accounting Financial Consultancy Services Limited Company

SPSS: Statistical Package Software for Social Science

EFA: Exploratory Factor Analysis

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ABSTRACT

Audit quality is crucial for financial market to function smoothly due to its effects on the credibility of financial statements The users of financial statements are more likely to feel secure about the information presented in the financial statements if the audit of the financial statements

is perceived as high quality The current financial crisis and competitive business environment have brought on more challenges for audit firms They have confronted with the increasing

pressure from financial statement’s users to improve audit quality To be successful in this

environment, audit firms must continually strive to improve audit quality and hence, maximize client satisfaction This research aims at investigating the effects of audit quality provided by audit firms on client satisfaction in Vietnam

In this study, the author uses AUDITQUAL model (Duff, 2004, 2009) focusing on seven dimensions of audit quality which were label Reputation, Capability, Expertise, Experience, Responsiveness, Client Service and Empathy and test the effect of each dimension of audit quality

on client satisfaction An survey of 380 responses was conducted in the convenient method in Ho Chi Minh City, Dong Nai and Binh Duong Province A statistical package for social sciences (SPSS) version 20.0 was used to analyze the collected data Results show that seven dimensions

of audit quality including Reputation, Capability, Expertise, Experience, Responsiveness, Client Service and Empathy associated positively with client satisfaction and Experience has the most influence on client satisfaction

Keywords: Audit quality, AUDITQUAL, Client satisfaction.

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CHAPTER 1: INTRODUCTION 1.1 Background to the research

Service quality and client satisfaction are very important concepts that companies must understand if they want to remain competitive and grow (Angelova and Zekiri, 2011) In today’s global competitive environment, it is recognized that high quality service is essential for firms that want to be successful in their business (Parasuraman et al., 1998; Rust & Oliver, 1994) Therefore, service quality and client satisfaction become interesting research subjects in the marketing literature as well as in the reality

In the auditing context, it is the same as other service industries that audit quality and client satisfaction are very important Higher audit quality provided by audit firms will lead to higher clients’ satisfaction and higher repurchase intentions After many well-known audit failures, such as: Arthur Andersen's audit failure at Enron, Deloitte and Touche’s audit failure at U.S Adelphia Communications, PricewaterhouseCoopers’s audit failures at Tyco, Ernst & Young’s audit failure at Heath South Corporation, KPMG’s audit failure at Xerox Corporation…, audit firms are more and more focusing on the audit quality in order to increase client satisfaction and repurchase intentions

In Vietnam, joining in the WTO has created a lot of opportunities to develop Vietnamese economy In this process, investors require the financial information more accurate and explicit than ever before Accordingly, audit and non-audit services offered by audit firms are in great demand However, in recent years, there are many scandals in Vietnam financial market that led

to the bankrupt of some listed companies and caused big losses for stakeholders, such as: cheating

on financial reports of Bach Tuyet Cotton Corporation, giving unfaithful information and crucial

as unqualified and one firm was not rated as subject to review under the specific request of the Ministry of Finance In a report sent to the Ministry of Finance, VACPA said several auditing firms passed financial statements which contained mistakes reflecting the deficiencies of auditors and board of directors on understanding current accounting standards According to a State Security Commission (SSC) representative, many auditing firms did not carefully assess the risk

of large amounts on clients’ financial statements The auditors merely excluded those values from their judgments, which could generate big differences between the actual and the on-paper business results In the financial year of 2012, there was a series of scandals relating to the financial reports of listing companies, which involved big names like Quoc Cuong Gia Lai Corp and VietinBank… Those re-checked reports revealed great differences between the actual business results and announced ones Bui Van Mai, VACPA general secretary said that many auditing firms look for sales and do not invest adequately in their operations Nguyen Thanh Tung, deputy director for AASC – among the leading Vietnamese auditing firms, indicated that some auditors might truncate auditing procedure and the truncating will lead to a low quality auditing Therefore, it is essential to measure audit quality offered by audit firms and test the

It causes a lot of pressure and challenges for audit firms to evaluate and give their opinion about the financial statements In particular, auditors will be faced with the challenge of evaluating the effect of the credit crisis and economic downturn on a client’s ability to continue as a going concern, the challenge of evaluating fair value of assets and whether these effects on the client firm will be described or reflected in the financial statements (Gheorghe, 2009) Moreover, the market and client firm require higher and higher service quality from audit firm Thus, audit firms must focus on audit quality to maximize client satisfaction and survive in the current difficult environment

Many studies have been devoted to investigate the effects of audit quality of audit firms on client satisfaction, especially in the developing countries and several models were used to measure audit quality provided by audit firms such as: SERVQUAL (Parasuraman, Zeithaml, and Berry, 1991), AUDITQUAL (Duff, 2004, 2009), and models using audit quality attributes (Schroeder et al., 1986; Carcello et al., 1992)… In terms of audit quality attributes models, Schroeder et al (1986) examined perceptions of 15 attributes (including 6 audit team factors and

9 audit firm factors) associated with audit quality Carcello et al (1992) identified 12 audit quality factors from two aspects: audit firm and audit team Both these studies confirmed that audit team factors are more important to audit quality than audit firm factors Related to SERVQUAL model, Ismail (2006), Morton and Scott (2007), Turk and Avcilar (2009) examines the relationship between audit service quality, client satisfaction, behavioural intentions and loyalty using five dimensions of service quality and 22 items scales of SERVQUAL to measure audit quality Lately, Duff (2004) developed the AUDITQUAL in nine dimensions to assess audit quality This

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specific-industry model named AUDITQUAL was empirically tested by some researchers, such as: Butcher, Harrison, and Ross (2013)… However, very little research was conducted in Vietnam, where the audit and non-audit service is quite inexperienced Thus, this study attempts

to investigate the effects of audit quality offered by audit firms on client satisfaction in Vietnam, through the perception of the client firms It was conducted for the purpose of giving benefits for both audit firms and client firms Regarding to benefits of audit firms, they can understand the client requirements clearly, know what the most important factor influence client satisfaction As the results, audit firm can serve their client better, remain client loyalty as well as give their client more additional value Concerning benefits of client firms, through their opinion about the audit quality as well as their level of satisfaction, they can help audit firm recognize and improve their weaknesses and shortcomings Therefore, in long-term, client firm can get the better audit service

1.3 Research objective

The overall objective of this thesis is to determine the effects of audit quality on client satisfaction in Vietnam, through the perception of client firms, using AUDITQUAL model Specifically, the study aims to:

satisfaction

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1.4 Research scope and methodology

For author’s convenience, the survey to collect data is conducted in Ho Chi Minh City, Binh Duong and Dong Nai province The subject of this study is CFO or chief accountant or general accountant who had working experience with auditors Collecting data process is designed into two stages First, in the pilot study, author interviews nine chief accountants and general accountants using the draft questionnaire Their feedbacks are used to revise to make up the final questionnaire In the second stage, main study is conducted with sample of 380 respondents After collecting data process, author uses software SPSS version 20.0 to analyze the obtained data Cronbach’s alpha method is used to test reliability of the measurement scale Exploratory factor analysis (EFA) is used to test validity of the measurement scale Multiple linear regression is used to test the proposal hypotheses in this research

1.5 Structure of the study

This study consists of five chapters Chapter 1 is an overview of audit service and client satisfaction, the facts of audit quality in Vietnam, research objective and significances of the study Chapter 2 represents some relative concepts such as: audit quality, client satisfaction and relationship between them The research model and proposal research hypotheses will be introduced in this chapter Next, chapter 3 presents the methodology including questionnaire development, pilot study, and main study with the sample method, data analysis method In chapter 4, the collected data will be analyzed Specifically, Cronbach’s alpha will be used to test reliability of scales, EFA for testing validity of measurements, and hypotheses testing by multiple regression Chapter 5 summarizes the results of this study, and mentions the limitations as well as suggestions for future research

2.2 Audit quality

2.2.1 Definitions of audit quality

Many researchers (Kell et al., 1986; Defliese et al., 1988; Gil and Cosserat, 1996; Pound

et al., 1997; Gill et al., 1999; Gull et al., 1994; Gill et al., 2001) agree with the definition given by American Accounting Association (AAA) (1973), which defines auditing as "a systematic process

of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users” In the similar vein, Arens et al (1997) define auditing as "the process by which a competent, independent person accumulates evidence about quantifiable information related to a specific economic entity for the purpose of determining and reporting on the degree of correspondence between the quantifiable information and established criteria"

There have been a number of attempts to define audit quality in the past, and until today, there is no consensus among researches on a specific definition of audit quality According to Sutton (1993), the reason for the absence of consensus of a single definition of audit quality is due

to the apparent conflicting roles of participants in the audit market The major participants in the audit market can be divided into three groups that are external users, the client and the auditors Audit quality means different things to different people and depends on the “eyes of the beholder” The author reviewed some definitions of audit quality as below:

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The widely used definition by DeAngelo (1981) defined audit quality as “the assessed joint probability that a given auditor will both detect material misstatements in the client’s financial statements and report the material misstatements” This definition considers audit quality to be dependent of two components The first component relates to auditors’ technical competence to discover existing misstatements and the second component links to auditors’ objectivity to report the error in the audit report Palmrose (1988) adopted DeAngelo’s definition and defined audit quality in terms of level of assurance Therefore, the main function of audit is to provide assurance on financial statements that audited financial statements contain no material misstatements and high audit quality is a compulsory requirement for users of financial information

market-Some researchers considered “poor audit quality” by identifying the adverse outcomes from an audit, and then defined audit quality in terms of audit failure For example: Casterella et

al (2009) stated “…we believe poor audit quality is observable with hindsight if an engagement results in litigation or a claim of malpractice against the audit firm” In other words, an audit failure occurs if the auditor fails to comply with legal and professional requirements

In summary, there is still no consensus on a general accepted definition of audit quality The different perception of stakeholders in audit quality may have influence the type of indicators used to access audit quality

2.2.2 Research on measurement of audit quality

In the auditing literature, audit quality has been investigated within a variety of perspectives, and some models were used to measure audit quality Behavioural studies of audit quality examined perceptions of attributes or factors associated with audit quality, typically examined combinations of factors considered important in perceptions of audit quality (Kilgore, 2007) The review of behavioural studies in this section focused on three typical models to measure audit quality Firstly, this was the model using audit quality attributes (Mock and Samet,

1982, Schroeder et al., 1986, Carcello et al., 1992) Next, SERVQUAL (Parasuraman, Zeithaml, and Berry, 1991) was used to measure audit quality in researches of Ismail et al., (2006), Morton

Schroeder, Solomon and Vickery (1986) extended Mock and Samet’s (1982) investigation

by undertaking a study to examine the perceptions of audit committee chairpersons and audit partners on factors that are perceived to affect audit quality The participants were required to rate the importance of each of 15 factors (including 6 audit team factors and 9 audit firm factors) to overall audit quality The team factors included level of partner/manager attention given to the audit, planning and conduct of audit team work, communication between audit team and management, independence exhibited by audit team members, mix of skills and depth of experience of team, and communication between audit team and audit committee The firm wide factors were provisions to keep auditors up to date technically, quality control procedures used by the firm, regulatory agency expertise, overall reputation, sizes and locations of offices, provision for team rotation, litigation experience, recency and outcome of peer review and the relative significance of total professional fees The authors reported that the audit committee chairpersons ranked audit team factors as more important to audit quality than firm wide factors The audit partners’ perceptions were consistent with those of the audit committee chairpersons

Similarly, Carcello, Hermanson and McGrath (1992) attempted to measure audit quality based on the perceptions of auditors, preparers of financial statements and users Their study used Schroeder et al (1986) attributes of audit quality with some additional attributes to provide an extensive examination of audit quality They created a questionnaire based on 41 audit quality attributes According to exploratory factor analysis (EFA), a statistical data reduction technique,

that four factors to be most important in determining audit quality, including audit team and firm experience with the client, industry expertise (especially within the audit team), responsiveness to client needs, and audit firm compliance with the generally accepted auditing standards (GAAS)

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Consistent with Schroeder et al (1986), results indicated that three sampled groups of auditors, preparers of financial statements and external users consider characteristics related to members of audit team more important to audit quality than characteristics related to the audit firm Beside, the authors found significant differences between groups regarding individual aspects of audit quality

However, Duff (2009) noted that although prior models using audit quality attributes (such as: Schroeder et al., 1986; Carcello et al., 1992) contain similar attributes, these models have been developed and used in isolation from each other The SERVQUAL and AUDITQUAL models have removed this shortcoming by integrating the attributes from the prior audit quality literature into multidimensional, structured models The initial SERVQUAL model proposed by Parasuraman et al (1985) was suggested in ten dimensions of service quality, including: reliability, responsiveness, competence, access, courtesy, communication, credibility, security, understanding and tangibles In the later study, Parasuraman et al (1988, 1991), these ten dimensions were reduced to five dimensions, consisting of reliability, assurance, tangibles, empathy and responsiveness and 22 items scale were developed to measure these five dimensions

In audit context, Ismail et al (2006) adopted SERVQUAL (Parasuraman et al., 1991) to assess the audit service quality and to examine the relationship between audit service quality, client satisfaction and loyalty to the audit firms through the perception of Malaysian public listed companies In the other research, Morton and Scott (2007) assumed that audit quality is made up

of credibility (brand name), reliability (auditor competence), control (the auditor’s contribution to internal control) and ancillary services (service and attitude of audit team members) In the study, Morton and Scott (2007) developed a 28-item measure of audit quality based on the behavioral audit literature and the SERVQUAL scale of Parasuraman, Zeithaml, and Berry (1985) to measure four constructs of audit quality In the same manner, Turk and Avcilar (2009) in their research, indicated that the SERVQUAL consists of the five-factor construct is suitable for measuring the perceived service quality of audit firms

The most recent model to measure audit quality is AUDITQUAL suggested by Duff (2004, 2009) Like the SERVQUAL model, Duff (2004, 2009) investigated the AUDITQUAL model which integrates the attributes from the prior audit quality literature into a

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multidimensional, structured model The AUDITQUAL model consists of nine distinct dimensions which were labeled Reputation, Capability, Responsiveness, Independence, Non-audit services, Empathy, Client service, Expertise, and Experience These dimensions could be reduced

to create two distinct factors relating to technical quality and service quality Specially, technical quality, usually conceptualized as the competence and the objectivity of the auditor, is described

by five factors: Reputation, Capability, Independence, Expertise and Experience Service quality

is described by four factors: Responsiveness, Provision of Non-audit services, Empathy and Client service Using a 56 scale questionnaire, he surveyed the three sampled groups of auditors, auditees (entities that are being audited) and external users to capture perceptions of audit quality

He found that the AUDITQUAL model fitted the data well for each of the three samples

Many researchers used five-dimensional SERVQUAL to measure audit quality (e.g Ismail et al, 2006; Morton and Scott, 2007, Turk and Avcilar, 2009…) because the SERVQUAL model was easy to use in service firms (Isa, 2005) However, there are some critics for SERVQUAL, such as: a simple revision of the SERVQUAL items is not enough for measuring service quality across different service sectors (Ladhari, 2008) In addition, auditing is a professional service which is fundamentally different from other services, such as: hotel or travel…It needs to be measured by a particular model in audit area Ladhari (2008) also confirmed that industry-specific measures of service quality might be more appropriate than a single generic scale Hence, the AUDITQUAL is very suitable to capture the audit quality because it was set specifically for auditing service This model has been empirically tested by some researchers (e.g Duff, 2004, 2009; Butcher, Harrison, and Ross, 2013) Due to these above reasons, this study measured audit quality by using AUDITQUAL model in the Vietnamese context

2.3 Client satisfaction

In the marketing literature, the definition of client satisfaction has received much attention because of its importance Oliver (1980) argued that satisfaction is the emotional evaluation of perceived discrepancy between expectations and performance of product or service In the other word, client satisfaction considered as after-purchase evaluation arises if the performance of the products or services received higher than expectations Hence, if performance and expectations

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matches it will brings satisfaction to customer, and vice versus, if they do not match the customer will feels disappointed Zeithaml and Bitner (2000) defined that client satisfaction is the evaluation of a product or service in terms of whether that service has met their needs and expectations The satisfied customer would remain loyal, required service more often, fewer price sensitive and shall talk favorable things about the company

In auditing context, it is the same as other industries that client satisfaction is very important to achieve, because if the customer is not satisfied, they could change their auditor or it could create a negative reputation for the auditor Behn et al (1997) stated that audit quality can affect the client satisfaction, the same thing is expressed by Carcello et al (1992) that there is a significant, positive relationship between many of the audit quality attributes and client satisfaction

2.4 Research framework and hypothesis development

As noted in section 2.2.2, the original AUDITQUAL model consists of nine dimensions which were labeled Reputation, Capability, Responsiveness, Independence, Non-audit services, Empathy, Client service, Expertise, and Experience However, this study just focuses on seven dimensions that are Reputation, Capability, Responsiveness, Empathy, Client service, Expertise, and Experience Two dimensions called Non-audit service and Independence are not included in the model because these factors were rated as least important dimensions by all three groups of respondents according to Duff’s research (2004)

Many studies derived from the marketing literature investigate the relationships between service quality and client satisfaction (e.g Oliver, 1980; Bitner, 1990; Parasuraman, Zeithaml, and Berry, 1988, 1991, 1996; Taylor and Baker, 1994; Ismail et al, 2006) Most researchers agreed that service quality is vital to maintain client satisfaction and higher service quality may lead to higher level of satisfaction It is quite easy to find many researches to support for the relationship between audit quality and client satisfaction in the auditing literature Ismail et al (2006) examined the relationship between audit quality and client satisfaction and indicated a positive relationship between audit quality and client satisfaction Similarly, other scholars (e.g

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Behn et al, 1997; Carcello et al, 1992; Samelson, Lowensohn and Johnson, 2006…) also indicated that attributes of audit quality affect client satisfaction, and audit quality lead to client satisfaction The target of this research is to define how audit quality dimensions affect to client satisfaction

2.4.1.1 Reputation and client satisfaction

Abd-El-Salam, Shawky and El-Nahas (2013) pointed out that corporation image and reputation are considered to be critical factors in overall evaluation of any organization (cited in Bitner, 1990, 1991; Gronroos, 1984; Gummesson and Gronroos, 1998; Andreassen and Lanseng, 1997; Andreassen and Lindestad, 1998; Kandampully and Hu, 2007; Sarstedt et al., 2012) because of the strength that lies in the customers’ perception and mind when hearing the name of the organization (cited in Fombrun, 1996; Hatch et al., 2003; Nguyen, 2006; Bravo et al., 2009)

A study of Nedal Sawan and Ihab Alsaqqa (2013) examined audit quality in the Libyan oil industry and found that oil companies usually engaged audit firms with a good reputation It was easy to understand because good reputation audit firms (such as: Big Four) had greater resources, technical knowledge, capabilities and global reach, which allowed them to conduct the audit process more effectively, to publish more accurate information or to work with clients more efficiently These things led clients to more satisfactory According to Chun (2005), a good reputation for high quality means more customers, fewer dissatisfied customers and profitability increases Andreassen (1994) found that reputation is positively correlated with satisfaction and loyalty Helm et al (2010) also analyzed the relationship between corporate reputation and consumer satisfaction and declared corporate reputation as an antecedent of consumer satisfaction Based on these above literature, the hypothesis can be stated as follows:

H1: There is a positive relationship between reputation of the audit firm and client

satisfaction

2.4.1.2 Capability and client satisfaction

DeAngelo (1981) stated that audit quality is the probability that the given auditor will both discover material misstatements in the client’s financial statements and report the material misstatements Auditor is actively and directly involved in the whole audit process so the probability of finding violations depends on the auditor's technical capability According to Duff

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(2009), capability is the ability of auditor to conduct the work Ismail (2010) indicated that level

of audit client satisfaction with the work of audit team increases when the team actively involves

in the engagement, conducts the audit field work in the proper manner, and adopts high ethical standards and possesses good knowledge of accounting and auditing The capability of auditor is one of key factors to drive high audit quality and well audit performance and this increases the level of client satisfaction Thus, this study suggests the hypothesis as below:

H2: There is a positive relationship between capability of the auditor and client satisfaction

2.4.1.3 Expertise and client satisfaction

According to Kilgore (2007), audit firms with multiple clients in the same industry may be argued to have a greater appreciation of the audit risks unique to that industry Conversely, audit firms with few clients in an industry may not have the incentive or ability to keep up-to-date with changes and new developments in the industry Dies and Giroux (1992) concluded that firms with

a higher concentration of clients in a particular industry will provide greater audit quality Similarly, Meyer (2009) mentioned that industry specialist auditors have developed industry specific knowledge that may enable them to provide higher audit quality than non-specialist auditors The above findings shown that industry expertise enhances the performance of auditor and audit firm that drives to higher audit quality and higher level of client satisfaction Many previous studies confirmed the relationship between industry expertise and client satisfaction Lowensohn, Johnson and Elder (2007) examined the relationship between auditor specialization and auditee satisfaction in the local government audit market Their study concluded that expertise of auditors associate with higher levels of client satisfaction The same thing was expressed by Behn et al (1997), Yuniarti and Zumara (2013) that there is a significant positive relationship between industry expertise and client satisfaction Hence, we have this hypothesis:

H3: There is a positive relationship between expertise of the audit firm and client satisfaction

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2.4.1.4 Experience and client satisfaction

Gul et al (1994) stated that the audit should be performed and the report prepared with due professional care by persons who have adequate training, experience and competence in auditing Similarly, Prachsriphum, Jantarajaturapath, Napat (2010) confirmed that knowledge and experience both have important to work success in audit profession In terms of auditing, the experience was obtained from accumulate audit tasks as well as from training and learning throughout their careers Auditors who have more experience will have better performance Ismail (2010) shown that the client management is happy with auditors who have been with the same client for a long time Because the long time auditor who has the prior audit experience with their client, can understand the clients’ accounting system and business environment clearly Thus, they serve client better Ismail (2010) indicated the significant positive relationship between the client satisfaction and the prior audit experience of the audit team Other researchers also confirmed this relationship, for example: Behn et al (1997), Yuniarti and Zumara (2013)… Based

on these literatures, the hypothesis is proposed as follows:

H4: There is a positive relationship between experience of the audit firm and client satisfaction

2.4.1.5 Responsiveness and client satisfaction

Parasuraman et al (1991) defined responsiveness as the willingness to help customers and provide prompt service In auditing context, Duff (2009) modified a new concept to define responsiveness Accordingly, responsiveness is the ability of the auditor to tailor their service to auditee needs Audit client always has some given requirements related to audit service and expects audit firm to meet them For example: the auditor must meet deadline, release audit report

on time, or have effective communication to support client… Hence, responsiveness to client needs will contribute to the level of client satisfaction Many prior studies confirmed the significant, positive relation between responsiveness and client satisfaction in audit context, such as: Behn et al (1997), Ismail (2010), Yuniarti and Zumara (2013)…Therefore, we have the following hypothesis:

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H5: There is a positive relationship between responsiveness of the audit firm and client satisfaction

2.4.1.6 Client service and client satisfaction

In AUDITQUAL model, Duff (2009) described client service as “those processes the auditor has in place to assure a high quality audit” We noted that client service was labeled

“assurance” as Duff (2009) The role of auditor is to provide an assurance that financial statements free from material misstatements It meant that client service (or level of assurance) is one of key factors that drive high audit quality Thus, client service will contribute to client satisfaction Yuniarti, Zumara (2013) noted the significant positive association between commitment of audit quality and client satisfaction Ismail (2010) also indicated the similar thing that commitment of audit firm to quality is significantly related to client satisfaction Accordingly,

we also hypothesize that there is a positive relationship between client service of the audit firm and client satisfaction

H6: There is a positive relationship between client service of the audit firm and client satisfaction

2.4.1.7 Empathy and client satisfaction

Empathy was related to care, attention and understanding of the specific needs by the firm

to its customers (Parasuraman et al, 1988, 1991) Similarly, in auditing context, Duff (2009) defined empathy as the degree of understanding the auditor has with the challenges the audittee faces Client always expects the audit firm as well as auditor to make effort to understand their needs and demands Auditor can play a pro-active role and make a good contribution to manager’s decision For example: auditor can assist the client by helping gather information and providing guidance or making recommendations that managers will use for making business decision Hence, empathy is an important feature of service quality and it can enhance the relationship between audit firm and clients by increasing the level of client satisfaction Aga, Safakli (2007) stated a significant relationship between empathy aspect and client satisfaction in professional accounting firms Thus, in this study, we have the following hypothesis:

The hypotheses are tested in this study as follows:

Hypothesis 1: There is a positive relationship between reputation of the audit firm and client satisfaction

Hypothesis 2: There is a positive relationship between capability of the audit firm and client satisfaction

Figure 2.1: Research model

Client Satisfaction

H1 H2 H3 H4 H5 H6

Client Satisfaction

Client Satisfaction

H7

In this chapter, we reviewed some key concepts related to audit quality and client

satisfaction Most of prior research agreed that higher audit quality may lead to higher client satisfaction Many audit attributes were used to measure audit quality in previous study However, AUDITQUAL with seven dimensions (Reputation, Capability, Responsiveness, Empathy, Client service, Expertise, Experience) was used in this study to test the relationship between each

dimension of audit quality and client satisfaction The research methodology used for this study will be introduced in chapter 3

Back-translated questionnaire Revision

Draft Questionnaire

An survey of

380 responses

Reliability analysis

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The research design process of this study is described in figure 3.1 After identifying research problem, research objective and reviewing literature, the initial questionnaire was developed based on measurement used in relevant previous studies Next, the initial questionnaire was revised as the draft questionnaire through the back-translation process In research design step, there are 2 sub-steps:

• Pilot study: was conducted by interviewing 9 chief accountants and general accountants about the content, the number and the structure of questions in draft questionnaire to test the wording and meaning of the measurement scales After that, the author revised these responses and make up the final questionnaire

• Main survey: Final questionnaires were launched via email or sent the hard copy directly

to clients of audit firms Data collection was done in one month

In data analysis step, the collected data was cleaned and used to test reliability and validity

of the measurement scales by Cronbachs’ alpha coefficient and Exploratory Factor Analysis (EFA) method Next, the author used multiple regression method to test the hypotheses in this study

The final step, we reported and discussed the findings based on the results of data analysis step

3.3 Questionnaire Development

As mentioned above, this study employs Duff’s (2004) model of AUDITQUAL to measure audit quality provided by audit firms through customer judgment In the original model, Duff used a 56 scale questionnaires to survey the three sampled groups of auditors, auditees and external users to capture perception of audit quality This study also employs 44 items to measure seven of the nine dimensions in AUDITQUAL, including Reputation, Capability, Client service, Responsiveness, Expertise and Experience The author used the five-point Likert scale format ranging from strongly disagree =1 to strongly agree =5 Table 3.1 shows the measurement scales

of all independent and dependent variables in the model, as followed:

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Table 3.1: Items to measure audit quality (Draft questionnaire to measure audit quality)

Reputation 1 The audit firm is highly competent Beattie & Fearnley (1995)

2 The audit firm operates to the highest standards

of integrity

Beattie & Fearnley (1995)

3 The audit firm has rarely been found negligent

in litigation against it – alleging inadequate audit performance

8 The audit firm is independent of the board of directors

DeAngelo (1981)

Capability 9 The engagement partner is highly competent Parasuraman et al (1991)

10 The engagement partner has high ethical standards

Parasuraman et al (1991)

11 The engagement partner is actively involved

in the engagement beginning with the initial planning and throughout the audit process

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15 The audit team staff operate to high ethical standards

Beattie & Fearnley (1995)

Responsiveness 16 The audit firm is skillful in devising

accounting treatments that generate results management wishes to obtain

Carcello et al (1992)

17 The audit firm is willing to provide detailed cost information

Beattie & Fearnley (1995)

18 The audit firm is willing to be flexible when scheduling the timing of audit visits

Duff (2004)

19 The audit firm’s office are geographically close to the client

Duff (2004)

21 There is a ‘good fit’ between the personality

of the engagement partner and the finance director

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contributory (e.g suggests potential acquisition targets)

Client Service 29 The audit firm regularly conducts client

service review meetings

Duff (2004)

30 The engagement partner arranges regular meetings with the client’s key staff to identify issues of concern

Carcello et al (1992)

33 The audit team are willing to provide guidance on accounting principles

Beattie & Fearnley (1995)

34 There is frequent communication between the audit team and the audit committee

Beattie, Fearnley & Brandt (2001)

39 The engagement partner is very knowledgeable about the client’s industry

Carcello et al (1992)

40 The client has a knowledgeable and active audit committee

Carcello et al (1992)

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41 The senior manager and manager assigned to the audit are very knowledgeable about the client’s industry

Carcello et al (1992)

Experience 42 The engagement partner has been performing

the audit for the past three years

According to Malhotra (2004), the main purpose of pilot study is to test the questionnaire

on a small sample of respondents by trying to identify and excluding potential problems It can help to increase the reliability and to assure the appropriateness of the data collection instrument (Wong & Ko, 2009)

In preparation for this study, the draft questionnaire was used to interview nine chief accountants and general accountants of client firms Respondents, who work directly with the audit firm and audit team for the financial year 2012, represent the existing clients of the sampled audit firms In which, selected client firms consist of both manufacturing and service companies

in two sectors: local companies and foreign companies The audit firms for these clients are Deloitte, Ernst & Young representative for Big4 audit firm, Auditing & Consulting Co., Ltd representative for the top local audit firm and Thuy Chung Audit company representative for small audit firm Respondents were asked to indicate whether the questionnaire suitable for measuring each dimension of AUDITQUAL model in Vietnam and reason if they said

“inappropriate”

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Based on their feedback, 12 items of the draft questionnaire were deleted, resulting to a final questionnaire of 33 items The reason for deleted items was that the respondents have no information to answer the question or the question is inappropriate to measure audit quality Actually, Duff (2004) developed the measurement scales to survey three groups of respondent (auditors, auditees and investors) with the same questionnaire Hence, it is easy to understand that there are some items suitable for this group but unsuitable for other group Another reason is that the questionnaire was created over ten years ago in a developed country; therefore, some maybe are not appropriate in the Vietnam market now The result of pilot study will be shown in appendix A

3.5 Main study

3.5.1 Sampling method

The population of this research comprised of companies who received the audit service from audit firms in Vietnam To be convenient, the company will be chosen in Ho Chi Minh City, Binh Duong Province, and Dong Nai Province

A survey of 380 responses was conducted Specifically, questionnaires were sent via email

to 250 respondents, who act as chief accountant, general accountant or CFO and work with audit firms for the audit services in year 2012 The list of respondents was extracted from company database on website of State Securities Commission of Vietnam (SSG) Besides, some auditors from auditing companies in Ho Chi Minh City supported author by delivering 130 questionnaires directly to their clients

3.5.2 Sample size

According to DeCoster (2004), minimum sample size used in statistic analysis should be equal to or greater than five times of the number of variables, but not less than 100 to generate reliable results:

n>=100 and n>=5k (where k is the number of variables)

We have 33 variables in this research, thus, the minimum sample size required to run EFA is:

3.5.3 Questionnaires design and administration

measure audit quality and client satisfaction Section two contained items on demographics details of the respondent, information about the client firm, including: the number of year using audit service, business industry, total equity of the client firm, the position of respondent, and their working experience

Respondents were CFO, chief accountant, general accountant, or accountant who has experience related to finance or accounting sectors and works with audit firm for the audit services in year 2012 Based on author’s relationship with other auditors, questionnaires were sent directly to 130 respondents in hardcopy version Besides that, author also used Google Doc

to create a questionnaire with the same content of hardcopy version, and then, sent the link via email to the list of 250 respondents extracted from company database on website of State Securities Commission of Vietnam In this time, author usually called or sent email again to push the respondents to return the questionnaire At the end, author collected 52 responses over

250 distributed online questionnaires and 125 responses over 130 delivered hardcopy questionnaires

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3.6 Data Analysis Method

A statistical package for social sciences (SPSS) version 20.0 was used to analyze the collected data Process of analysis is carried out as follows:

Firstly, descriptive statistics was performed to describe the general view of the sample characteristics

Secondly, Cronbach’s Alpha was used to evaluate the reliability of measurement scales and eliminate inappropriate components Cronbach’s alpha greater than 0.60 indicates satisfactory reliability (Nunnally & Bernstein, 1994) and the item-total correlation should be greater than 0.30 Leech et al (2007) provide the following rules of Cronbach’s alpha reliability coefficient shown in table 3.4:

Table 3.4: Cronbach’s alpha reliability coefficient (Leech et al., 2007)

Cronbach’s alpha Internal consistency

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We noted that only factors with Eigenvalues greater than 1.0 are included in the model If this value is less than 1.0, this means that the factors explain less information than a single item would have explained (Leech, Barrett & Morgan, 2005) Total extracted variance larger than 50% will

be accepted (Hair et al., 1998)

Finally, as recommended by Leech, Barrett & Morgan (2005), if we have two or more independent variables and one normal (scale) dependent variable, multiple regression are appropriate Therefore, a multiple regression was conducted to identify the effect of each independent variable on dependent variable, in which, the dependent variable is client satisfaction and independent variables are components obtained in EFA step According to Pallant (2005), the conditions to accept the result of multiple linear regression are:

• The sample size is n > 50 + 8m ( where m is the number of independent variables)

• No multicollinearity is found

• No outliers are found or in case they are, no significant impact of outlier is found

• Normality and linearity should exist

The adjusted R squared value indicates how much of the variance in the dependent variable was explained by the model

3.7 Conclusion

This chapter provided the overview of the research methodologies used for this research This chapter composes four main parts: the first part is questionnaire development, the second part is pilot study to define the final questionnaire, the third part is main study and the last one describes the method to analyze data The effects of each dimension of audit quality on client satisfaction will be introduced in chapter 4

D

The samples shows that there are 4 companies using audit service of the audit company in

1 year (2,4%), 5 companies using audit service from the same audit company continuously in 2 years (2,9%), 14 companies using audit service continuously in 3 years (8,2%) and 147 companies using audit service continuously in over 3 years (86,5%)

In terms of business industry, there are 15 agriculture, forestry and fishing companies (8,8%), 81 industry and construction companies (47,6%), 74 trade and services companies (43,5%)

Concerning total equity reflected in balance sheet of the year 2012, 6 companies have total equity of under VND 10 million (3,5%), 16 companies with VND 10-20 million (9,4%), 14 companies with VND 20-50 million (8,2%), 50 companies with VND 50-100 million (29,4%) and

84 companies with above VND 100 million (49,4%)

Regarding position, 3 respondents are accountant (1,8%), 47 people are general accountant (27,6%), 105 people are chief accountant (61,8%) and 15 people are CFO (8,8%)

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In the sample, 36 respondents (21,2%) have from 3 to 5 years working experience in accounting and finance field while 134 respondents (78,8%) have over 5 years experience in accounting and finance It means that they have enough knowledge and experience to give their opinion about the audit quality

4.3 Reliability Analysis

In order to test the reliability of the scales, Cronbach’s alpha coefficients were computed for each variable As mentioned above, the scale is reliable if Cronbach’s alpha greater than 0.60 and the corrected item-total correlation should be greater than 0.30 In case, the corrected item-total correlation is negative or less than 0.30, this item needs to be deleted

Table 4.2 shows the results of first reliability analysis The Cronbach’s alpha score of Reputation scales is 0.853 However, item labeled Reputation 8 has the corrected item-total correlation below 0.30 so that we need to eliminate this item

The Empathy scales have Cronbach’s Alpha score unsatisfactory (0.554) because of the

low corrected item-total correlation variable If we deleted item named Empathy 4, the Cronbach’s alpha will increase to 0.888

Item labeled Client_Service1 has negative corrected item-total correlation, and it made Cronbach’s alpha of Client_Service scales too low (0.560) It is necessary to remove these items and run Cronbach’s alpha again

Table 4.2: Cronbach’s Alpha reliability results of first analysis

Item Deleted

Scale Variance if Item Deleted

Corrected Total Correlation

Item-Cronbach's Alpha

if Item Deleted Reputation: Cronbach’s Alpha = 0.853