The effect of audit quality offered by audit firms on client satisfaction , luận văn thạc sĩ

UNIVERSITY OF ECONOMICS HO CHI MINH CITYInternational School of Business ---Hoang Thi Kim Thuan THE EFFECTS OF AUDIT QUALITY OFFERED BY AUDIT FIRMS ON CLIENT SATISFACTION Ho Chi Minh Ci

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

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

SUPERVISOR: Dr Nguyen Thi Nguyet Que

Ho Chi Minh City – 2014

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

4.2 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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I would like to express my sincere gratitude to my supervisor, Dr Nguyen Thi NguyetQue for her valuable guidance, insightful comments and continuous support to my thesis I amsure 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 ISBwho 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 goodand bad times His continuous support in pursuing my study is invaluable to me

Ho Chi Minh City, February 22, 2014

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

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 secureabout 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 mustunderstand if they want to remain competitive and grow (Angelova and Zekiri, 2011) In today’sglobal competitive environment, it is recognized that high quality service is essential for firms thatwant to be successful in their business (Parasuraman et al., 1998; Rust & Oliver, 1994).Therefore, service quality and client satisfaction become interesting research subjects in themarketing literature as well as in the reality

In the auditing context, it is the same as other service industries that audit quality andclient satisfaction are very important Higher audit quality provided by audit firms will lead tohigher clients’ satisfaction and higher repurchase intentions After many well-known auditfailures, such as: Arthur Andersen's audit failure at Enron, Deloitte and Touche’s audit failure atU.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 satisfactionand repurchase intentions

In Vietnam, joining in the WTO has created a lot of opportunities to develop Vietnameseeconomy In this process, investors require the financial information more accurate and explicitthan ever before Accordingly, audit and non-audit services offered by audit firms are in greatdemand 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

mistakes in the audited financial statement of Vien Dong Pharma JSC, Toan Cau insurance jointstock company, Kinh Do Corporation…(Bich Loan and Gia Duong, 2013) Actually, audit firms inVietnam do not meet clients’ expectation of audit quality, the low audit quality decreases clients’satisfaction and many clients changed audit firms frequently The Vietnam Association ofCertified Public Accountants’ (VACPA) annual inspection in late 2010 revealed that almost allauditing firms under inspection more or less violated auditing standards According to auditquality assurance review result 2012, VACPA performed audit quality assurance reviews to 15auditing firms in Vietnam At the end of the reviews, 6 among 15 firms were rated as qualified, 8

as unqualified and one firm was not rated as subject to review under the specific request of theMinistry of Finance In a report sent to the Ministry of Finance, VACPA said several auditingfirms passed financial statements which contained mistakes reflecting the deficiencies of auditorsand board of directors on understanding current accounting standards According to a StateSecurity 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 fromtheir judgments, which could generate big differences between the actual and the on-paperbusiness results In the financial year of 2012, there was a series of scandals relating to thefinancial 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 manyauditing firms look for sales and do not invest adequately in their operations Nguyen ThanhTung, deputy director for AASC – among the leading Vietnamese auditing firms, indicated thatsome auditors might truncate auditing procedure and the truncating will lead to a low qualityauditing Therefore, it is essential to measure audit quality offered by audit firms and test the

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effects of audit quality provided by audit firms on client satisfaction in Vietnam, where the auditfirms are still young and inexperienced.

1.2 Research motivation

It is unable to deny the important role of audit service in our economy that is to ensure theaccuracy and explicit financial information in the financial market; thus, it helps to protect thehealth and stable development of the economy However, in recent years, due to impacts of theworld financial and economic crisis, many enterprises have faced to difficulties in their business

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

Many studies have been devoted to investigate the effects of audit quality of audit firms onclient satisfaction, especially in the developing countries and several models were used tomeasure audit quality provided by audit firms such as: SERVQUAL (Parasuraman, Zeithaml, andBerry, 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 qualityfactors from two aspects: audit firm and audit team Both these studies confirmed that audit teamfactors 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 relationshipbetween audit service quality, client satisfaction, behavioural intentions and loyalty using fivedimensions 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

specific-industry model named AUDITQUAL was empirically tested by some researchers, suchas: 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 forboth audit firms and client firms Regarding to benefits of audit firms, they can understand theclient requirements clearly, know what the most important factor influence client satisfaction Asthe results, audit firm can serve their client better, remain client loyalty as well as give their clientmore additional value Concerning benefits of client firms, through their opinion about the auditquality as well as their level of satisfaction, they can help audit firm recognize and improve theirweaknesses 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 clientsatisfaction in Vietnam, through the perception of client firms, using AUDITQUAL model.Specifically, the study aims to:

• Examine the relationship between reputation of the audit firm and client satisfaction

• Examine the relationship between capability of the audit firm and client satisfaction

• Examine the relationship between expertise of the audit firm and client satisfaction

• Examine the relationship between experience of the audit firm and client satisfaction

• Examine the relationship between responsiveness of audit firm and client satisfaction

• Examine the relationship between client service of the audit firm and client

satisfaction

• Examine the relationship between empathy of audit firm and client 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 orgeneral accountant who had working experience with auditors Collecting data process is designedinto two stages First, in the pilot study, author interviews nine chief accountants and generalaccountants using the draft questionnaire Their feedbacks are used to revise to make up the finalquestionnaire In the second stage, main study is conducted with sample of 380 respondents Aftercollecting 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 factoranalysis (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 clientsatisfaction, the facts of audit quality in Vietnam, research objective and significances of thestudy Chapter 2 represents some relative concepts such as: audit quality, client satisfaction andrelationship between them The research model and proposal research hypotheses will beintroduced in this chapter Next, chapter 3 presents the methodology including questionnairedevelopment, pilot study, and main study with the sample method, data analysis method Inchapter 4, the collected data will be analyzed Specifically, Cronbach’s alpha will be used to testreliability of scales, EFA for testing validity of measurements, and hypotheses testing by multipleregression Chapter 5 summarizes the results of this study, and mentions the limitations as well assuggestions for future research

CHAPTER 2: LITERATURE REVIEW 2.1 Introduction

This chapter reviews some relevant studies of audit quality, client satisfaction and therelationship between them Many perspectives were explored to measure audit quality, but thisstudy focuses on the AUDITQUAL The research model and research hypotheses will bepresented in this chapter

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

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

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 toSutton (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 theaudit 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 thebeholder” 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 theclient’s financial statements and report the material misstatements” This definition considersaudit quality to be dependent of two components The first component relates to auditors’technical competence to discover existing misstatements and the second component links toauditors’ objectivity to report the error in the audit report Palmrose (1988) adopted DeAngelo’sdefinition and defined audit quality in terms of level of assurance Therefore, the main function ofaudit is to provide assurance on financial statements that audited financial statements contain nomaterial misstatements and high audit quality is a compulsory requirement for users of financialinformation.

market-Some researchers considered “poor audit quality” by identifying the adverse outcomesfrom 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 engagementresults in litigation or a claim of malpractice against the audit firm” In other words, an auditfailure 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 indicatorsused 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 ofperspectives, and some models were used to measure audit quality Behavioural studies of auditquality examined perceptions of attributes or factors associated with audit quality, typicallyexamined 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 tomeasure 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

and Scott (2007), Turk and Avcilar (2009)… Lastly, the recent model named AUDITQUAL(Duff, 2004) was used to assess audit quality in nine dimensions.

Mock and Samet (1982) identified a list of potential attributes from the literature andsurveyed auditors in US to develop 32-item questionnaire to evaluate audit quality The findings

of the study identified five dimensions of audit quality including planning, administration,procedures, evaluation and conduct

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 auditpartners on factors that are perceived to affect audit quality The participants were required to ratethe importance of each of 15 factors (including 6 audit team factors and 9 audit firm factors) tooverall audit quality The team factors included level of partner/manager attention given to theaudit, planning and conduct of audit team work, communication between audit team andmanagement, independence exhibited by audit team members, mix of skills and depth ofexperience of team, and communication between audit team and audit committee The firm widefactors were provisions to keep auditors up to date technically, quality control procedures used bythe firm, regulatory agency expertise, overall reputation, sizes and locations of offices, provisionfor team rotation, litigation experience, recency and outcome of peer review and the relativesignificance of total professional fees The authors reported that the audit committee chairpersonsranked audit team factors as more important to audit quality than firm wide factors The auditpartners’ perceptions were consistent with those of the audit committee chairpersons

Similarly, Carcello, Hermanson and McGrath (1992) attempted to measure audit qualitybased on the perceptions of auditors, preparers of financial statements and users Their study usedSchroeder et al (1986) attributes of audit quality with some additional attributes to provide anextensive examination of audit quality They created a questionnaire based on 41 audit qualityattributes According to exploratory factor analysis (EFA), a statistical data reduction technique,they reduced these 41 audit quality attributes to 12 audit quality factors The authors suggestedthat four factors to be most important in determining audit quality, including audit team and firmexperience with the client, industry expertise (especially within the audit team), responsiveness toclient 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 ofaudit 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 auditquality.

However, Duff (2009) noted that although prior models using audit quality attributes (suchas: Schroeder et al., 1986; Carcello et al., 1992) contain similar attributes, these models have beendeveloped and used in isolation from each other The SERVQUAL and AUDITQUAL modelshave removed this shortcoming by integrating the attributes from the prior audit quality literatureinto multidimensional, structured models The initial SERVQUAL model proposed byParasuraman 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) toassess 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 listedcompanies 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 tointernal 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 behavioralaudit literature and the SERVQUAL scale of Parasuraman, Zeithaml, and Berry (1985) tomeasure four constructs of audit quality In the same manner, Turk and Avcilar (2009) in theirresearch, indicated that the SERVQUAL consists of the five-factor construct is suitable formeasuring 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

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

to create two distinct factors relating to technical quality and service quality Specially, technicalquality, 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 andClient 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 SERVQUALmodel was easy to use in service firms (Isa, 2005) However, there are some critics forSERVQUAL, such as: a simple revision of the SERVQUAL items is not enough for measuringservice quality across different service sectors (Ladhari, 2008) In addition, auditing is aprofessional service which is fundamentally different from other services, such as: hotel ortravel…It needs to be measured by a particular model in audit area Ladhari (2008) alsoconfirmed that industry-specific measures of service quality might be more appropriate than asingle generic scale Hence, the AUDITQUAL is very suitable to capture the audit qualitybecause it was set specifically for auditing service This model has been empirically tested bysome researchers (e.g Duff, 2004, 2009; Butcher, Harrison, and Ross, 2013) Due to these abovereasons, this study measured audit quality by using AUDITQUAL model in the Vietnamesecontext

2.3 Client satisfaction

In the marketing literature, the definition of client satisfaction has received much attentionbecause of its importance Oliver (1980) argued that satisfaction is the emotional evaluation ofperceived discrepancy between expectations and performance of product or service In the otherword, client satisfaction considered as after-purchase evaluation arises if the performance of theproducts 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 customerwill feels disappointed Zeithaml and Bitner (2000) defined that client satisfaction is theevaluation of a product or service in terms of whether that service has met their needs andexpectations The satisfied customer would remain loyal, required service more often, fewer pricesensitive and shall talk favorable things about the company.

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

2.4 Research framework and hypothesis development

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

2.4.1 Audit quality dimensions and Client satisfaction

Many studies derived from the marketing literature investigate the relationships betweenservice 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 researchersagreed that service quality is vital to maintain client satisfaction and higher service quality maylead to higher level of satisfaction It is quite easy to find many researches to support for therelationship 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

Behn et al, 1997; Carcello et al, 1992; Samelson, Lowensohn and Johnson, 2006…) also indicatedthat 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 andreputation are considered to be critical factors in overall evaluation of any organization (cited inBitner, 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 theorganization (cited in Fombrun, 1996; Hatch et al., 2003; Nguyen, 2006; Bravo et al., 2009) Astudy of Nedal Sawan and Ihab Alsaqqa (2013) examined audit quality in the Libyan oil industryand found that oil companies usually engaged audit firms with a good reputation It was easy tounderstand because good reputation audit firms (such as: Big Four) had greater resources,technical knowledge, capabilities and global reach, which allowed them to conduct the auditprocess more effectively, to publish more accurate information or to work with clients moreefficiently These things led clients to more satisfactory According to Chun (2005), a goodreputation for high quality means more customers, fewer dissatisfied customers and profitabilityincreases Andreassen (1994) found that reputation is positively correlated with satisfaction andloyalty Helm et al (2010) also analyzed the relationship between corporate reputation andconsumer satisfaction and declared corporate reputation as an antecedent of consumersatisfaction 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 clientsatisfaction

2.4.1.2 Capability and client satisfaction

DeAngelo (1981) stated that audit quality is the probability that the given auditor will bothdiscover material misstatements in the client’s financial statements and report the materialmisstatements Auditor is actively and directly involved in the whole audit process so theprobability 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 ethicalstandards and possesses good knowledge of accounting and auditing The capability of auditor isone of key factors to drive high audit quality and well audit performance and this increases thelevel of client satisfaction Thus, this study suggests the hypothesis as below:

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

2.4.1.3 Expertise and client satisfaction

According to Kilgore (2007), audit firms with multiple clients in the same industry may beargued to have a greater appreciation of the audit risks unique to that industry Conversely, auditfirms with few clients in an industry may not have the incentive or ability to keep up-to-date withchanges 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 industryspecific knowledge that may enable them to provide higher audit quality than non-specialistauditors The above findings shown that industry expertise enhances the performance of auditorand audit firm that drives to higher audit quality and higher level of client satisfaction Manyprevious studies confirmed the relationship between industry expertise and client satisfaction.Lowensohn, Johnson and Elder (2007) examined the relationship between auditor specializationand auditee satisfaction in the local government audit market Their study concluded thatexpertise of auditors associate with higher levels of client satisfaction The same thing wasexpressed by Behn et al (1997), Yuniarti and Zumara (2013) that there is a significant positiverelationship between industry expertise and client satisfaction Hence, we have this hypothesis:

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

2.4.1.4 Experience and client satisfaction

Gul et al (1994) stated that the audit should be performed and the report prepared withdue professional care by persons who have adequate training, experience and competence inauditing Similarly, Prachsriphum, Jantarajaturapath, Napat (2010) confirmed that knowledge andexperience both have important to work success in audit profession In terms of auditing, theexperience was obtained from accumulate audit tasks as well as from training and learningthroughout 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 sameclient for a long time Because the long time auditor who has the prior audit experience with theirclient, can understand the clients’ accounting system and business environment clearly Thus, theyserve client better Ismail (2010) indicated the significant positive relationship between the clientsatisfaction and the prior audit experience of the audit team Other researchers also confirmed thisrelationship, for example: Behn et al (1997), Yuniarti and Zumara (2013)… Based on theseliteratures, the hypothesis is proposed as follows:

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

2.4.1.5 Responsiveness and client satisfaction

Parasuraman et al (1991) defined responsiveness as the willingness to help customers andprovide prompt service In auditing context, Duff (2009) modified a new concept to defineresponsiveness Accordingly, responsiveness is the ability of the auditor to tailor their service toauditee needs Audit client always has some given requirements related to audit service andexpects 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 clientneeds will contribute to the level of client satisfaction Many prior studies confirmed thesignificant, positive relation between responsiveness and client satisfaction in audit context, suchas: Behn et al (1997), Ismail (2010), Yuniarti and Zumara (2013)…Therefore, we have thefollowing hypothesis:

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H5: There is a positive relationship between responsiveness of the audit firm and clientsatisfaction.

2.4.1.6 Client service and client satisfaction

In AUDITQUAL model, Duff (2009) described client service as “those processes theauditor 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 financialstatements free from material misstatements It meant that client service (or level of assurance) isone of key factors that drive high audit quality Thus, client service will contribute to clientsatisfaction Yuniarti, Zumara (2013) noted the significant positive association betweencommitment of audit quality and client satisfaction Ismail (2010) also indicated the similar thingthat 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 firmand client satisfaction

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

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 auditteefaces Client always expects the audit firm as well as auditor to make effort to understand theirneeds and demands Auditor can play a pro-active role and make a good contribution tomanager’s decision For example: auditor can assist the client by helping gather information andproviding guidance or making recommendations that managers will use for making businessdecision Hence, empathy is an important feature of service quality and it can enhance therelationship 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 inprofessional accounting firms Thus, in this study, we have the following hypothesis:

H7: There is a positive relationship between empathy of the audit firm and client

satisfaction

2.4.2 Research framework

Based on these above literatures, the relationship between dimensions of audit quality

and client satisfaction is briefly described in the Figure 2.1:

AUDIT QUALITY

Reputation

H2 Expertise

H3

Satisfaction H5

Responsiveness

H6

Empathy

Figure 2.1: Research model

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

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Hypothesis 3: There is a positive relationship between expertise of the audit firm

and client satisfaction

Hypothesis 4: There is a positive relationship between experience of the audit firm and client satisfaction

Hypothesis 5: There is a positive relationship between responsiveness of the audit firm andclient satisfaction

Hypothesis 6: There is a positive relationship between client service of the audit firm and client satisfaction

Hypothesis 7: There is a positive relationship between empathy of the audit firm and clientsatisfaction

2.5 Conclusion

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

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CHAPTER 3: METHODOLOGY

3.1 Introduction

The purpose of this chapter is to present brief description of the research methodologyused for this study This includes the research process, questionnaire design, sample method, datacollection method and data analysis method

EFA

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

• Pilot study: was conducted by interviewing 9 chief accountants and general accountantsabout the content, the number and the structure of questions in draft questionnaire to test thewording and meaning of the measurement scales After that, the author revised these responsesand 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 thisstudy

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

3.3 Questionnaire Development

As mentioned above, this study employs Duff’s (2004) model of AUDITQUAL tomeasure 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 andexternal users to capture perception of audit quality This study also employs 44 items to measureseven of the nine dimensions in AUDITQUAL, including Reputation, Capability, Client service,Responsiveness, Expertise and Experience The author used the five-point Likert scale formatranging 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 Beattie & Fearnley (1995)

of integrity

3 The audit firm has rarely been found negligent Carcello et al (1992)

in litigation against it – alleging inadequate auditperformance

4 The audit firm is objective Warming – Rasmussen &

Jensen(1998)

5 The audit firm is conscientious Warming – Rasmussen &

Jensen(1998)

6 The audit firm is credible to third parties Duff (2004)

7 The audit firm enjoys a good reputation Beattie & Fearnley (1995)

8 The audit firm is independent of the board of DeAngelo (1981)directors

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

10 The engagement partner has high ethical Parasuraman et al (1991)standards

11 The engagement partner is actively involved Parasuraman et al (1991)

in the engagement beginning with the initialplanning and throughout the audit process

12 The engagement partner has financial Parasuraman et al (1991)statement users’ best interests at heart

13 The engagement partner is keen to understand Duff (2004)what is happening within the client’s

organization

14 The audit team staff are highly competent Beattie & Fearnley (1995)

15 The audit team staff operate to high ethical Beattie & Fearnley (1995)standards.

Responsiveness 16 The audit firm is skillful in devising Carcello et al (1992)

accounting treatments that generate resultsmanagement wishes to obtain

17 The audit firm is willing to provide detailed Beattie & Fearnley (1995)cost information

18 The audit firm is willing to be flexible when Duff (2004)scheduling the timing of audit visits

19 The audit firm’s office are geographically Duff (2004)close to the client

20 The engagement is easily contactable Duff (2004)

21 There is a ‘good fit’ between the personality Duff (2004)

of the engagement partner and the financedirector

22 The relationship between the engagement Duff (2004)partner and finance director is relatively informal

23 Audit team staff create the minimum of Duff (2004)disruption so far as practically possible

24 The audit team develops stringent time Carcello et al (1992)budgets for each audit area and expects people to

contributory (e.g suggests potential acquisitiontargets).

Client Service 29 The audit firm regularly conducts client Duff (2004)

service review meetings

30 The engagement partner arranges regular Duff (2004)meetings with the client’s key staff to identify

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41 The senior manager and manager assigned to Carcello et al (1992)the audit are very knowledgeable about the

client’s industry

Experience 42 The engagement partner has been performing Carcello et al (1992)

the audit for the past three years

43 The manager of the audit firm has been Carcello et al (1992)performing the audit for at least two years

44 The senior manager of the audit firm has been Carcello et al (1992)performing the audit for at least two years

Client 45 The overall client satisfaction with the audit Bitner (1990); Bolton and

satisfaction quality offered by audit firms Drew (1991)

3.4 Pilot study

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 canhelp 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 chiefaccountants and general accountants of client firms Respondents, who work directly with theaudit firm and audit team for the financial year 2012, represent the existing clients of the sampledaudit 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 areDeloitte, Ernst & Young representative for Big4 audit firm, Auditing & Consulting Co., Ltd.representative for the top local audit firm and Thuy Chung Audit company representative forsmall audit firm Respondents were asked to indicate whether the questionnaire suitable formeasuring each dimension of AUDITQUAL model in Vietnam and reason if they said

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Based on their feedback, 12 items of the draft questionnaire were deleted, resulting to afinal questionnaire of 33 items The reason for deleted items was that the respondents have noinformation 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 thatthere are some items suitable for this group but unsuitable for other group Another reason is thatthe questionnaire was created over ten years ago in a developed country; therefore, some maybeare not appropriate in the Vietnam market now The result of pilot study will be shown inappendix A.

3.5 Main study

3.5.1 Sampling method

The population of this research comprised of companies who received the audit servicefrom 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 auditfirms for the audit services in year 2012 The list of respondents was extracted from companydatabase on website of State Securities Commission of Vietnam (SSG) Besides, some auditorsfrom auditing companies in Ho Chi Minh City supported author by delivering 130 questionnairesdirectly to their clients

3.5.2 Sample size

According to DeCoster (2004), minimum sample size used in statistic analysis should beequal to or greater than five times of the number of variables, but not less than 100 to generatereliable 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

The questionnaire was divided into two sections Section one contained the questions tomeasure audit quality and client satisfaction Section two contained items on demographicsdetails of the respondent, information about the client firm, including: the number of year usingaudit service, business industry, total equity of the client firm, the position of respondent, andtheir working experience

Respondents were CFO, chief accountant, general accountant, or accountant who hasexperience related to finance or accounting sectors and works with audit firm for the auditservices in year 2012 Based on author’s relationship with other auditors, questionnaires weresent 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 viaemail to the list of 250 respondents extracted from company database on website of StateSecurities Commission of Vietnam In this time, author usually called or sent email again topush the respondents to return the questionnaire At the end, author collected 52 responses over

250 distributed online questionnaires and 125 responses over 130 delivered hardcopyquestionnaires

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3.6 Data Analysis Method

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

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

Secondly, Cronbach’s Alpha was used to evaluate the reliability of measurement scalesand eliminate inappropriate components Cronbach’s alpha greater than 0.60 indicates satisfactoryreliability (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)

We noted that only factors with Eigenvalues greater than 1.0 are included in the model If thisvalue is less than 1.0, this means that the factors explain less information than a single item wouldhave explained (Leech, Barrett & Morgan, 2005) Total extracted variance larger than 50% will beaccepted (Hair et al., 1998).

Finally, as recommended by Leech, Barrett & Morgan (2005), if we have two or moreindependent variables and one normal (scale) dependent variable, multiple regression areappropriate Therefore, a multiple regression was conducted to identify the effect of eachindependent variable on dependent variable, in which, the dependent variable is client satisfactionand independent variables are components obtained in EFA step According to Pallant (2005), theconditions 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 dependentvariable 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 secondpart is pilot study to define the final questionnaire, the third part is main study and the last onedescribes the method to analyze data The effects of each dimension of audit quality on clientsatisfaction will be introduced in chapter 4

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CHAPTER 4: DATA ANALYSIS 4.1 Introduction

In this chapter, SPSS version 20 is used to investigate the effect of audit qualitydimensions on client satisfaction This chapter includes four main parts: the first part is sampledescription, the second part is Cronbachs’ alpha reliability analysis, the third part is Exploratoryfactor analysis (EFA) and the last part is multiple regression analysis to test the hypotheses

4.2 Sample description

This study gathered survey data from a convenient sample of 380 respondents Concretely,questionnaires were sent via email to 250 respondents, and distributed directly in hard copies to

130 respondents, who act as Chief Accountant, General accountant, or CFO One month later,

177 responses were obtained in both online survey and hard copies The number of usable answersheets put into analysis was 170 observations because of 7 invalid answers (i.e., they filled in thesame option for all questions) The sample characteristics are showed in the table 4.1 in AppendixD

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 2years (2,9%), 14 companies using audit service continuously in 3 years (8,2%) and 147 companiesusing 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 totalequity of under VND 10 million (3,5%), 16 companies with VND 10-20 million (9,4%), 14companies 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