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An empirical comparison of non-Big 4 and Big 4 auditors perceptions of auditor independence

Philip Law
Department of Accounting, Faculty of Business Administration, University of Macau, Taipa, Macau
Abstract
Purpose Perceived independence is one of the corner-stones in auditing theory. Despite prior research on auditor independence, the results are inconclusive. The lack of research in the Hong Kong auditing environment motivates this study, particularly following the Enron debacle. The purpose of this paper is to examine the non-audit services (NASs), competition, rank and types of auditors, in respect of the independence problem as it relates to the practices of Hong Kong auditors in the post-Enron environment. Design/methodology/approach Four independent variables identied from literature gaps are examined, namely NASs, levels of competition, auditors of different ranks and types of auditors. Mixed ANOVA are employed to analyze survey responses from 207 Big 4 and 185 non-Big 4 auditors. Findings Results of the study show that the provisions of NASs and high competition could have a negative inuence on auditors perceptions of independence. Second, auditors perceptions that the inuence of NASs on independence depends on an individual auditors rank are supported. Senior managers have the highest mean rating on perceptions, while partners have the lowest mean rating. Results support the agency theory that the agent (senior manager) may not always act in the best interests for the principal. Finally, there is no difference between Big 4 and non-Big 4 auditors perceptions of the inuence of NASs and competition on independence. Originality/value The study revokes earlier US research that indicates that NASs provisions favorably inuence auditors perceptions of independence. It would be advantageous for a regulatory body to reconsider professional reforms such as prohibitions of NASs and the repercussions of non compliance of independence. Keywords Auditors, Auditing, Competitive strategy, Hong Kong Paper type Research paper

Non-Big 4 and Big 4 auditors perceptions 917

Introduction Independence is regarded as an important attribute of external auditors. The relatively recent corporate collapses, such as the Enron, has raised important questions about the independence of the auditor. Independence has been the focus of almost constant controversy, debate and analysis. In spite of these efforts, there are a number of crucial issues which remain unsolved in the research and literature. There is much debate whether the provision of non-audit services (NASs) should be prohibited (Shockley, 1981; Gendron and Suddaby, 2004; Alleyne et al., 2006; Carey et al., 2006; Gul et al., 2007) and some researchers argue that the provision of NASs would positively enhance independence (Bartlett, 1993; Emby and Davidson, 1998; Jenkins, 1999; Windmoller, 2000; Kinney et al., 2004). Other researchers indicate NASs provisions have no

Managerial Auditing Journal Vol. 23 No. 9, 2008 pp. 917-934 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900810908454

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inuence on the perceptions of independence (Corless and Parker, 1987; Sucher and Bychkova, 2001; DeFond et al., 2002; Quick and Rasmussen, 2005). The NASs literature on auditor independence is clearly controversial, especially in the post-Enron period (Kinney et al., 2004). The inconsistency of the results produced by these studies suggests opportunities for future research (Larcker and Richardson, 2004). There is lack of research into this issue in the Hong Kong auditing environment and this motivates to conduct a study to examine the perceptions of auditor independence in the Hong Kong context by examining four independent variables identied from the literature gaps. These include NASs, competition, the auditors rank and types of auditors (Big 4 and non-Big 4). Agency theory (Jensen and Meckling, 1976) is employed in analyzing the perceptions of auditors of different ranks. Second, extensive surveys are then followed. The survey consists of eight scenarios given to Big 4 and non-Big 4 auditors, based on the different degrees of NASs provisions and levels of competition. Auditors are asked to assess how much independence has been affected. A mixed ANOVA and post hoc analysis are performed to examine if there is different between the responses of Big 4 and non-Big 4 auditors, and between auditors of different ranks. In Hong Kong, there are currently no mandatory Auditing Standards to prohibit the provision of NASs to the clients or to monitor other perceived familiarity risks to independence. Though prior studies have been conducted in the USA (Bartlett, 1993; Jenkins and Krawczyk, 2001; DeFond et al., 2002; Gul et al., 2007), the national cultural differences in Hong Kong may not conform to that pattern. Investigation of the independence problem in the local setting was suggested by Beattie et al. (1999). In this respect, the views of Hong Kong auditors are likely to provide invaluable insights. Besides, after the 1997 sovereignty changeover from the British to the Chinese Government, Hong Kong has already become a Special Administrative Region of China. Hong Kong is currently adopting the One Country Two System operation, under the rule of Basic Law enacted by the Chinese Government since 1997. Whether this study under the current legal and political background would differ from the US and other studies, is unknown. The claimed impact of cultural differences on commercial behavior and perceived national cultural differences between Hong Kong in the Asia-Pacic region and the Anglo-American commercial environments also justies this research (Patel and Psaros, 2000; Majid et al., 2001). Hence, this study will be the rst research examining the NASs, competition, rank of auditors and types of auditors, in respect of the independence problem as it relates to the practices of Hong Kong auditors in the post-Enron environment. This study makes a contribution to the literature in the Asia-Pacic region and can assist regulators and professional bodies to develop policy and guidelines on independence issues. The results of this study show that the provisions of NASs and high competition could have a negative inuence on auditors perceptions of independence. Second, auditors perceptions that the inuence of NASs on independence depends upon an auditors rank, are supported. Senior managers have the highest mean rating on perceptions while partners have the lowest mean rating. Results support the agency theory that the agent (senior manager) may not always act in the best interests for the principal (Jensen and Meckling, 1976). Finally, there is no difference between Big 4 and non-Big 4 auditors perceptions of the inuence of NASs and competition on independence.

Importance of audit independence It is generally accepted that there are two types of auditor independence, actual and perceived independence (Firth, 1980; Shockley, 1981; Beattie et al., 1999). The notion of perceived independence is one of the cornerstones in auditing theory and in auditing practice (Bakar et al., 2005; Gul et al., 2007). Since the collapse of Enron in the USA, the profession and regulatory bodies such as the SEC have placed more attention to this controversial topic. The problems associated with auditor independence and the provision of NASs have increasingly come under scrutiny in the public media and by the auditing profession. The lack of auditor independence is an alleged factor underpinning the relatively recent corporate collapses and corporate scandals across the world, such as Enron, WorldCom, and Sunbeam in the USA; HIH and OneTel in Australia; and Parmalat in Italy. However, Hong Kong Big 4 and non-Big 4 accounting rms have been expanding their practices to include a wide array of NASs in their businesses. The buoyant markets in Hong Kong and China have led to the accounting rms employing more auditors to work in these NASs areas. The SEC in the USA often questions whether the provision of NASs would lead to a decrease of perceived independence (DeFond et al., 2002). An audit report is only benecial if it contains reliable and unbiased information audited by independent auditors. Once an auditor is perceived to lack independence, the audit work loses credibility and the value of the auditing function is severely impaired, if not lost (Firth, 1980). As a result, users will have less condence in the nancial statements. Therefore, the future of the auditing profession is argued to be dependent upon the perceptions of auditor independence (Koh and Mahathevan, 1993; DeFond et al., 2002). Justication of selecting Big 4 and non-Big auditors Jenkins and Krawczyk (2001) comment that the perceptions of professional CPAs from Big 4 and non-Big 4 auditors are important since they are the only audit practitioners who audit the nancial statements of companies. Johnson and Pany (1984) note that as it is the auditors who nally sign off their audit reports on their clients nancial statements, the study of the auditors perceptions of their own independence can provide constructive feedback to the regulators and accounting bodies to assist in accounting and audit policy decisions. Big 4 auditors audit most of the large companies (Shafer et al., 2001) while non-Big 4 auditors audit the medium and small rms, and the selection of both types of auditors can fully capture a comprehensive picture of the auditing profession in Hong Kong. Moreover, auditors are commercially sophisticated people (Canning and Gwilliam, 1999) and generally possess good accounting knowledge with which to interpret the independence concept rather than users (McKinley et al., 1985). NASs literature and hypothesis development Audit rms providing NASs to their audit clients are a contentious issue. NASs are generally classied as bookkeeping, internal audit services, various modes of management consulting, nancial information system design services, taxation services and legal advice (Arens et al., 2008). In the competitive audit market, there is evidence that the auditors have tended to undercut prices in order to get a foot in the door and obtain the subsequent lucrative NASs (Hussey and Lan, 2001). The concerns about NASs are based on the assumption that auditors are willing, or at least strongly tempted, to sacrice their independence in exchange for retaining the audit clients from which they might accrue large NASs revenues (DeFond et al., 2002). It is therefore no

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surprise that the majority of the empirical studies have found that the provision of NASs have had a negative inuence on auditors perceptions of independence (Shockley, 1981; Hillison and Kennelley, 1988; Teoh and Lim, 1996; Beattie et al., 1999; Gendron and Suddaby, 2004; Lindberg and Beck, 2004; Chien and Chen, 2005; Alleyne et al., 2006; Carey et al., 2006; Richard, 2006). Some studies show that provision of NASs positively enhances independence (Bartlett, 1993; Emby and Davidson, 1998; Jenkins, 1999; Windmoller, 2000) while some researchers have found that NASs have no inuence on perceptions of independence (Corless and Parker, 1987; Sucher and Bychkova, 2001; DeFond et al., 2002; Quick and Rasmussen, 2005). The inconsistency of the results produced by these studies suggests opportunities for future research (Larcker and Richardson (2004). Since the majority the NASs literature and the regulatory bodies in the US appear to conclude that the provision of NASs has a negative inuence on auditors perceptions of independence, alternative H1 are: H1. The provision of NASs has a negative inuence on auditors perceptions of independence. Agency theory model Agency theory proposes that the relationship between an employer (principal) and an employee (the agent) is represented by an employment contract (Eisenhardt, 1989). Agency theory presents a simplied view of the relationship where parties to the contract are assumed to be self-interested (Jensen and Meckling, 1976). Either party has the ability to exit the employment contract by incurring exit costs as a result of perceived imbalance or unfairness (Almer et al., 2005). Viewed through the lens of agency theory, the extent of professional contribution by the agent (manager) is affected by his/her effort, expertise, shrinking and bounded rationality. According to Almer et al. (2005), shrinking is conventionally dened to include any action by a member of a production team that diverges from the interests of the team as a whole. Shrinking includes negligence, oversight and self-interest and is the inevitable consequence of bounded rationality within agency relationships. Therefore, if the agent (manager) perceives imbalance between the work performed and the compensation packages received, the agent would choose to exit the contract under agency theory (Jensen and Meckling, 1976; Harrell and Harrison, 1994). Using the agency theory, Miller (1992) suggests information asymmetry arises when the principal (partner) cannot observe the behavior of audit managers. Agency losses occur when managers maximize their self-interest at the expense of the principal (partner) (Jensen and Meckling, 1976). In an audit, partners are the only auditors that have the responsibility to sign off their audit reports on their clients nancial statements. Therefore, Lindberg and Beck (2004) suggest that in the post-Enron environment, partners would try avoiding risks to the audit rms reputation by exercising more prudent audit judgment to avoid recurrence of corporate collapse and litigation. Auditors especially partners, are more careful and concerned with the audit assurance level for the reason of reputation protection and litigation avoidance (Asare et al., 2005). Therefore, the following hypothesis on auditors of different ranks under agency theory can be proposed as: H2. Higher ranked auditors have a more negative view of auditor independence.

Besides, empirical studies have been conducted on auditors of different ranks and produced inconsistent results. The focus has been on whether auditors of different ranks within rms entertain different perceptions in identical circumstances. The results are also inconclusive and frequently inconsistent. Several studies have indicated that auditors of different ranks have different perceptions of independence (Shockley, 1981; Farmer et al., 1987; Dijk, 2000; Elias, 2004); and others show that auditors of different ranks do not have different perceptions of independence (Iyer and Raghunandan, 2002; Desira and Baldacchino, 2005). In view of the mixed results on auditors of different ranks, alternative H2a is formed as: H2a. Auditors perceptions of the inuence of NASs on independence depend upon auditors of different ranks. Competition literature and hypothesis development Competition within the audit market has been identied consistently to be a factor threatening auditor independence (Shockley, 1981; Farmer et al., 1987; Beattie et al., 1999; Sucher and Bychkova, 2001; Umar and Anandarajan, 2004; MacLullich and Sucher, 2005). Shockley (1981) had found that audit rms operating in an environment characterized by a high level of competition for audit clients would have a greater risk of decreasing their audit independence than where audit rms operated in a low-competition environment. The sample was drawn from the (at that time) Big 8 auditors. The overall analysis ranked competition as the most important factor in the study. In a UK study (Beattie et al., 1999), the competition variable was found to be a factor inuencing auditor independence. The sample comprised audit partners. Within a single country, Beattie et al. (1999) argued that the factors affecting the perceptions of auditor independence were likely to change over time due to changes in the local economic, political, cultural and regulatory environment. These also varied across countries and investigation of these issues in their own particular national settings was suggested, implying the likely importance of national cultural differences. However, some researchers found that competition has a positive inuence on independence (Gul, 1989; Windmoller, 2000; Reynolds and Francis, 2001). Whether working in the competitive audit market environment could lead to pressures, inducing an economic dependency for the auditor to report favorably for the client, was argued by Reynolds and Francis (2001). The larger clients have the greater litigation risk and they found the auditors reported more conservatively for the larger clients for the reason of reputation protection and litigation avoidance. In addition to adverse reputation effects, the litigation costs would be greater, especially for large clients. It has also been suggested that reputation protection dominates the auditor behavior. Reynolds and Francis (2001) concluded that the economic dependency does not compromise auditor independence, the implications for regulators such as the SEC being that there is no obvious need to inject fee or scope regulations in auditor-client contracts. Competition in the audit market makes the auditor more careful and concerned with the audit assurance level in their services (Lindberg and Beck, 2004; Asare et al., 2005). Interestingly, interviews with some auditors in a qualitative study in Poland, MacLullich and Sucher (2005) revealed that in the younger generation top management may be more forward thinking, arguably less conservative, believe in brand creation if the rm is to be sustainable in the very competitive market. They

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stressed the importance of investing time in building client trust and relationships. Although these attitudes are still rare in Poland amongst the auditors, competition in the audit market inuencing the perceived independence issue seems undamaged, but to have been enhanced amongst some auditors. In view of these conicting results in prior literature, there is clearly room for more research in this area (Gul, 1989; Beattie et al., 1999; Umar and Anandarajan, 2004; Bloom and Schirm, 2005). Thus, in this study, Shockleys two levels of competition, high and low competition, are adopted. A study of the competition variable is thus included in this Hong Kong study as the second independent variable. Since the majority prior studies on the high competition variable support a negative inuence on auditors perceptions of independence, an alternative H3 is: H3. High competition in the audit market has a negative inuence on auditors perceptions of independence. Alternative H3a is formed as: H3a. Auditors perceptions of the inuence of competition on independence depend upon auditors of different ranks. Types of auditors In the Hong Kong auditing environment, Big 4 auditors audit most of the large companies, while non-Big 4 auditors audit the medium and small rms and thus the selection of both auditors in the sample can fully capture a comprehensive picture of the auditing profession. Reynolds and Francis (2001) comment that larger clients have the greater litigation risk and they found the auditors reported more conservatively for the larger clients for the reason of reputation protection and litigation avoidance. In addition to adverse reputation effects, the litigation costs would be greater, especially for large clients. As a result, H4 and H5 are proposed as: H4. Big 4 auditors perceptions of the inuence of NASs on independence are more negative than non-Big 4 auditors. H5. Big 4 auditors perceptions of the inuence of competition on independence are more negative than non-Big 4 auditors. Methodology 300 Big 4 auditors and 300 Non-Big 4 auditors were randomly selected from the publicly accessible Directory of CPAs booklet in Hong Kong (Tsui, 1996; Umar and Anandarajan, 2004). There was no matching of an individuals name with their organization. Dijk (2000) suggests the potential respondents could be contacted rst by telephone to see whether they agree to complete the questionnaire to increase the response rate (Shafer et al., 2001). Were they to agree to participate, the questionnaire would be sent to the auditors who are agreed to participate. Prior studies in Australia and Netherlands resulted in a response rate of 76 and 80 percent, respectively, (Roberts, 1999; Dijk, 2000) by contacting the respondents rst before sending off the questionnaires. Thus, similar techniques were used in this Hong Kong study in the expectation of a satisfactory response rate (Dijk, 2000; Desira and Baldacchino, 2005). Were the response rate unsatisfactory, a follow up procedure was planned a second

request, approximately three weeks after the initial mailing to the entire sample (Frank et al., 2001). Data were gathered using questionnaires in English versions with a ve-point Likert scale adapted from the previous scenarios questions (Shockley, 1981; Knapp, 1985; Pany and Reckers, 1987) and the pre-tests were found to be satisfactory. Likert scale 1 represent seriously undermines independence while score 5 represent strongly enhances independence. Moreover, in order to minimize the demand effect or learning effect by the auditors in these scenarios questions (Knapp, 1985; Gul, 1989), a randomized order of the scenarios questioning was undertaken so that the respondents answers would not be affected by the demand effect or their familiarity with the ow of the questions (Knapp, 1985; Gul, 1989; Dijk, 2000; Chung and Monroe, 2000). For example, each questionnaire would have different orders of the scenarios questions, such as 60, 25, 90 and 0 percent of NASs. Auditors were instructed in the letter to rate their perceptions of independence under the eight different scenarios situations. The mixed ANOVA design used in this study is similar to the ANOVA design adopted by prior researchers (Knapp, 1985; Gul, 1989; Choo and Trotman, 1991; Dijk, 2000; Fuller and Kaplan, 2004).

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Results There were 207 and 185 responses received from the Big 4 auditors and the Non-Big 4 auditors, respectively. There were 177 from the rst mail out and 30 responses from the second for the Big 4, returning an overall response rate of 69 percent. There were 155 from the rst mail out and 30 responses from the second for the Non-Big 4, returning an overall response rate of 62 percent. The items in the survey showed satisfactory levels of reliability with a Cronbachs a of 0.79 and normal distribution of the data has been met. The values of the skewness or kurtosis after dividing with their respective standard error are within the upper threshold of 3.29 except for two data sets (Field, 2005). Field (2005) mentioned that because of the large sample (in this case 392), this is not surprising with some signicance values. Instead, it is important to look at the shape of the distribution visually and the values of the skewness and kurtosis statistic rather than calculate their signicance. Therefore, from the histograms of the eight respective scenarios, the shapes of the data are reasonably normally distributed. Besides, reference is made to the normal Q-Q plots of the values expected where the distribution is normal (expected values) against the values actually seen in the data set (observed values). The eight normal Q-Q plots (the expected values were a straight diagonal line, whereas the observed values are plotted as individual points) show that all the eight lines dots have reasonably fallen on the straight diagonal line. As a result, it can be concluded that the data set reasonably met the assumption of normal distribution (Field, 2005). A t-test for non responses bias has been carried out for comparing rst 30 responses and second request 30 responses for the Big 4 and Non-Big 4 samples, respectively; however there were no signicant differences in perceptions about the independence scores. The notion of variance is at the heart of ANOVA (Green and Salkind, 2003) and the assumptions of homogeneity of variance have been met in this study. The Box test of equality of covariance has been achieved since it is not signicant, p 0.184. The descriptive statistics is shown in Table I.

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Number Mean SD Minimum Maximum

Table I. Descriptive statistics High comp (NAS-25 percent) 392 2.9872 1.21 1.00 5.00 392 2.5765 1.06 1.00 5.00 392 2.2857 1.03 1.00 5.00 392 3.5434 1.14 1.00 5.00 High comp(NAS-60 percent) High comp (NAS-90 percent) Low comp (NAS-0 percent) Low comp (NAS-25 percent) 392 3.3189 1.08 1.00 5.00 Low comp (NAS-60 percent) 392 3.0102 1.11 1.00 5.00 Low comp(NAS-90 percent) 392 2.701 1.11 1.00 5.00

High comp (NAS-0 percent)

392 3.1964 1.17 1.00 5.00

Hypothesis 1 From the multivariate test in Table II, the rst within subject independent variable NASs has an F-value 90.13, p , 0.05. Green and Salkind (2003) recommend reporting the familiar Wilks l value. The result is statistically signicant. H1 is thus supported. Since NASs is signicant and has four levels, pairwise comparisons are undertaken, using the Bonferroni comparison (Green and Salkind, 2003) to reveal where the difference exists. Field (2005) mentions that the Bonferronis test controls the Type 1 error rate very well, but is conservative. The pairwise comparisons (Table III) show all the four levels are signicantly different from each other, with p-value , 0.05. Level 1 NASs mean 3.46, Level 2 NASs mean 3.24, Level 3 NASs mean 2.73, and Level 4 NASs mean 2.36. This indicates higher level NASs provisions have a lower mean score for the perceptions of auditor independence rating.

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Variables COMP COMP* TYPESAUD COMP* SUBPOSIT NAS NAS* SUBPOSIT NAS* TYPESAUD Pillais trace Wilks l Pillais trace Wilks l Pillais trace Wilks l Pillais trace Wilks l Pillais trace Wilks l Pillais trace Wilks l

F 23.694(a) 23.694(a) 0.000(a) 0.000(a) 0.926(a) 0.926(a) 90.135(a) 90.135(a) 4.551 4.641 0.500(a) 0.500(a)

Sig. 0.000 0.000 0.989 0.989 0.428 0.428 0.000 0.000 0.000 0.000 0.683 0.683 Table II. Multivariate test

Notes: (a) exact statistic; Design: Intercept SUBPOSIT TYPESAUD SUBPOSIT TYPESAUD; within subjects design: COMP NAS COMP NAS

(I) NAS 1 2 3 4

(J) NAS 2 3 4 1 3 4 1 2 4 1 2 3

Mean difference (I 2 J) 0.225( *) 0.736( *) 1.102( *) 20.225( *) 0.512( *) 0.877( *) 20.736( *) 20.512( *) 0.366( *) 21.102( *) 20.877( *) 20.366( *)

SE 0.046 0.064 0.068 0.046 0.055 0.063 0.064 0.055 0.045 0.068 0.063 0.045

Sig. (a) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Table III. Pairwise comparisons

Notes: Based on estimated marginal means. *The mean difference is signicant at the 0.05 level. (a) adjustment for multiple comparisons: Bonferroni

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H2 and H2a Results from the multivariate test of the rst within subject independent variable (NASs), and the rst between subject independent variable (SUBPOSIT) are shown in Table II. NAS *SUBPOSIT interaction has an F-value 4.64, p , 0.05. The result is statistically signicant. Thus, auditors of different ranks within their rms have different perceptions of the inuence of NASs on the perceptions of auditor independence. H2a is supported. Between subject ANOVA reveals that the sub-position of auditors has an F-value 3.32, p-value , 0.05, (Table IV). The result is statistically signicant. This conrms the result in the above-multivariate test (Table II) and there are differences in the mean scores among the ranks of the auditors. Univariate tests of within subject ANOVA contrasts also show that Levels 2 and 3 of the NAS *SUBPOSIT are signicantly different from each other, with F 6.86, p-value , 0.05. So, pairwise comparisons and post hoc tests are performed to diagnose the differences. The Bonferroni pairwise comparisons in Table V show that the perceptions held by those at the senior manager rank and those at the staff and senior rank are signicantly different, with p-value , 0.05, staff and senior mean 2.89, manager mean 2.93, senior manager mean 3.18, partner mean 2.76, (Table VI). This indicates the senior manager having a signicantly higher rating than the staff and senior auditor, of the inuence of NAS on auditors perceptions of independence.

Variables Table IV. Between subjects ANOVA Intercept SUBPOSIT TYPESAUD SUBPOSIT * TYPESAUD

Type III sum of squares 1,940.254 4.977 0.193 0.061

F 3,889.977 3.326 0.388 0.040

Sig. 0.000 0.020 0.534 0.989

(I) Sub-position Staff and senior Manager Senior manager Partner

(J) Sub-position Manager Senior manager Partner Staff and senior Senior manager Partner Staff and senior Manager Partner Staff and senior Manager Senior manager

Mean difference (I 2 J) 2 0.045 2 0.293( *) 0.126 0.045 2 0.247 0.171 0.293( *) 0.247 0.418 2 0.126 2 0.171 2 0.418

Sig. (a) 1.000 0.028 1.000 1.000 0.125 1.000 0.028 0.125 0.087 1.000 1.000 0.087

Table V. Pairwise comparisons

Notes: Based on estimated marginal means. *The mean difference is signicant at the 0.05 level. (a) adjustment for multiple comparisons: Bonferroni

Partners have the lowest mean score ratings on the perceptions of independence. H2 is thus supported. Post hoc analysis is a necessary follow-up as the interactions between the NAS *SUBPOSIT is signicant (Green and Salkind, 2003). As a result, post hoc testing with Bonferroni, Hochberg, and Games-Howell reveals that senior manager vs the staff and senior pair has a signicant p-value of , 0.05. The post hoc results provide additional support to the above results in the pairwise comparisons and between subject ANOVA. H3 and H3a Table II shows that from the multivariate test, the competition (COMP) variable has an F-value 23.69, p , 0.05. Since competition is signicant and has two levels, pairwise comparisons are performed to reveal where the difference exists (Green and Salkind, 2003). The pairwise comparisons (Table VII) show each of the two levels is signicantly different from one another, with p-value , 0.05. With high-competition mean 2.78 while low-competition mean 3.11. That indicates high level of competition has a lower mean score for the perceptions of auditor independence rating. H3 is supported. For the COMP *SUBPOSIT variable in Table II, the F-value 0.93 and is not signicant, with p . 0.05. Hence, H3a is rejected. H4 and H5 From the multivariate test in Table II, it shows that both the NAS *TYPESAUD and the COMP *TYPESAUD variables are not signicant, with p-values . 0.05. Besides, between subject ANOVA in Table IV also shows the TYPESAUD has an F-value of 0.388, with p-value 0.53. Hence, H4 and H5 are both rejected. Discussion and implications Auditor independence has becoming a critical issue in recent years. The overriding objective of this study has been to obtain broader and more in-depth examinations of the phenomenon of perceived independence. The concomitant focus on corporate

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Sub-position Staff and senior Manager Senior manager Partner

Mean 2.893 2.939 3.186 2.768

Table VI. Mean

(I) COMP 1 2

(J) COMP 2 1

Mean difference (I 2 J) 20.323( *) 0.323( *)

SE 0.066 0.066

Sig. (a) 0.000 0.000 Table VII. Pairwise comparisons

Notes: Based on estimated marginal means. *The mean difference is signicant at the 0.05 level. (a) adjustment for multiple comparisons: Bonferroni

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governance mechanisms and increases in audit activities in respect of multinational companies, have magnied the importance of understanding the perceptions of independence in different socio-economic environments. This empirical study reveals a number of issues contributing to the controversies surrounding the audit profession and to the myriad claims against the auditors alleging impropriety. Unquestionably, the perceptions underpinning the rhetorical allegations from the SEC in the USA proclaiming that auditors providing NASs to their audit clients would impair auditor independence, is corroborated in this Hong Kong study. The controversy that providing NASs to audit clients has a negative inuence on auditors perceptions of independence, is supported in H1. The result is consistent with research ndings in respect of the US, UK and European samples of auditors (Shockley, 1981; Hillison and Kennelley, 1988; Beattie et al., 1999; Lindberg and Beck, 2004; Gendron and Suddaby, 2004; Alleyne et al., 2006; Iyer and Reckers, 2007). The implication of H1 is that Hong Kong Big 4 auditors agree that providing NASs compromises their independence. As expected, the candor of their perceptions could imply an admonitory signal to the regulatory authorities for immediate audit reforms and contemplation for future policy directions. The result in H1 corroborates the view that provision of NASs might be an insidious element within an audit. Since the Enron debacle, Hong Kong auditors are more conscientious about the NASs provisions on independence issues (Lindberg and Beck, 2004). Unequivocally, this Hong Kong study conrms prior research results in the UK and the USA. Noticeably, though Hong Kong is predominantly Chinese, with the inheritance from a previous UK jurisdiction, the different culture does not appear to be a factor for inducing Hong Kong auditors to rate the inuence of the NASs on positive independence. Interestingly, this Hong Kong study revokes the contradicting results from Jenkins and Krawczyk (2001) in the USA, that provision of NASs favorably inuenced auditors perceptions of independence. However, it would be benecial to conduct a longitudinal study to validate the results in the long run (Lawrence and Shaub, 1997). Auditors perceptions of the inuence of NASs on independence depending upon an auditors rank, are supported in H2a. Interestingly, there is a peculiar nding in this Hong Kong study and it could bring another opportunity for further research in a new issue and dimension. The NAS *SUBPOSIT rating depicts that the senior managers perception ratings are signicantly higher than the staff and senior group. The senior manager ratings are the highest amongst the four groups of auditors. That atypical phenomenon might reasonably be ascribed to the fact that this study was conducted in 2007 when the Hong Kong economy was extremely robust and the employment market exceptionally active. Those senior managers working in audit rms with eight to ten years audit experience are the most highly sought auditors in the market. From the employment advertisements in newspapers by recruitment agencies, there are considerable vacancies in the commercial sector in Hong Kong and projects relating to the Initial Public Offerings (IPO) in China (SCMP, 2006). Using the agency theory, Miller (1992) suggests information asymmetry arises when the principal (partner) cannot observe the behavior of audit managers. Agency losses arise when managers maximize their self-interests at the expenses of the principal (partner) (Jensen and Meckling, 1976; Almer et al., 2005). Since those senior managers could easily change jobs in the market, they might not be acting in the best interest of the principal (partner) (Jensen and Meckling, 1976), and this might indirectly

affect their work commitments. Given that promotions to partnership level are limited, as compared to the alluring outside commercial employment prospects, senior managers are the most highly demanded by the recruitment agencies (SCMP, 2006). As the nal sign off of the audited nancial statements rests with the partners, senior managers might have a loose threshold in their perceptions of independence. According to Almer et al. (2005), shrinking is conventionally dened to include any action by a member of a production team that diverges from the interests of the team as a whole. Shrinking includes negligence, oversight and maximizing self-interests (Jensen and Meckling, 1976) and is the inevitable consequence under the agency theory. Hence, this may be attributed to the highest ratings by the senior managers group to a certain extent. Future research is suggested to validate the result. However, in this Hong Kong study, it is encouraging to note that partners have the lowest mean score for the perceptions of independence. In the post-Enron environment, the result indicates that partners would try avoiding risks to the audit rms reputation by exercising more prudent audit judgment to avoid risks of litigation. The result of the COMP variable in H3 is supported, consistent with the majority of ndings in the US, UK and European samples of auditors (Shockley, 1981; Farmer et al., 1987; Beattie et al., 1999; Shafer et al., 2001; Sucher and Bychkova, 2001; Umar and Anandarajan, 2004; MacLullich and Sucher, 2005). This nding revokes the prior claims in Windmoller (2000). In this study, Hong Kong Big 4 auditors perceive there would be pressures for trying to accommodate the needs of their clients and simultaneously avoid losing their clientele. The high-competitive environment leads to increasing competition for audit clients. Displeased clients might exert pressures on auditors, giving clients greater bargaining power on the treatment of accounting issues. However, auditors tend to keep their advice objective under the pressure of retaining the clients. As a result, auditors independence might be compromised. Were the current auditors to disagree with the clients requests, it is suspected that dismissal of the current auditors would most likely occur in a high-competitive audit environment. Against that background, Hong Kong auditors perceptions that the high-competitive environment might impose threats to their audit independence, are explicable. The audit profession should thus prudently scrutinize this factor when setting future auditing standards and ethical guidelines. It is encouraging that the result in H3a demonstrates that the two independent variables are not inuencing each other on auditors perceptions of independence. It is also pleasing to note that Hong Kong auditors do not perceive the inuence of competition on independence depends upon the rank of the auditor. The Hong Kong audit profession can consider these issues to restructure the existing auditing standards and formulate future policy developments. H4 and H5 are both rejected. The perceptions of the Big 4 auditors and non-Big 4 auditors are not signicantly different, as shown in the Multivariate analysis and the Between subject ANOVA in Tables II and IV, respectively. It is imperative to contemplate the reasons underpinning the Hong Kong Big 4 auditors holding the same perceptions as the non-Big 4 auditors. First, auditors working in the Big 4 accounting rms might be recruited from the outside non-Big 4 rms. Similarly, those auditors who are working in non-Big 4 rms may also have been recruited from Big 4 rms. Since the employment market in Hong Kong is buoyant,

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the mobility of professional auditors is expected at all levels of rank. As a result, the perceptions from the Big 4 and non-Big 4 auditors may be the same, are explicable. Second, Hong Kong auditors are normally trained and educated under the international accounting qualications such as ACCA (UK), CPA(Aust) or CPA (USA) that generally bear the same technical requirements as with the International Auditing Standards. Given that the vast majority of Hong Kong Big 4 and non-Big 4 auditors are ACCA (UK) or CPA(USA) qualied (HKICPA, 2005), it is to be expected that their perceptions of this matter might be alike. Finally, assuming the working and quality assurance practices in the Hong Kong non-Big 4 rms conform to standards equivalent to those of the Big 4 rms, similar perceptions reached by the Hong Kong auditors might be explicable. Limitations Although the response rate is satisfactory, the non-respondent auditors perceptions cannot be captured. Koh and Mahathevan (1993) suggest future research can cover the perceptions of a wider group of users such as nancial analysts, the public or accountants in industry (Firth, 1980; Beattie et al., 1999), so as to examine any similarities or differences between the perceptions of a wider groups of people. It is recommended a longitudinal study would be valuable to understand the auditor independence in various points in time (Lawrence and Shaub, 1997; Gendron et al., 2006). Conclusion On the basis of the results of this study, professional reforms such as prohibition of NASs would be advantageous. The Hong Kong regulatory body and the Hong Kong Institute of CPAs, who have the ultimate responsibility for assuring auditors independence through ethical principles and regulatory restrictions, should consider the results of this Hong Kong study as a catalyst for professional reforms in the Hong Kong audit profession. The virtue of auditor independence is conducive and indispensable to the rigorous scrutiny of an audit. Given the current environment of regulatory regimes and the critical element of public condence required by the accounting profession and government, it is of paramount importance for auditors to maintain an appearance of and actual independence.
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Umar, A. and Anandarajan, A. (2004), Dimensions of pressures faced by auditors and its impact on auditors independence. A comparative study of the USA and Australia, Managerial Auditing Journal, Vol. 19 No. 1, pp. 99-116. Windmoller, R. (2000), The auditor market and auditor independence, European Accounting Review, Vol. 9 No. 4, pp. 639-42. Further reading Marchesi, M. and Emby, C. (2005), The impact of continuity on concurring partner reviews: an exploratory study, Accounting Horizons, Vol. 19 No. 1, pp. 1-10. Corresponding author Philip Law can be contacted at: PLaw@umac.mo

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