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Impact of Good Corporate Governance and Auditor
Characteristics on Audit Quality
Murtanto1*, Hexana Sri Lastanti1, Jorgie Jovancha Appy1
1Accounting Dept, Trisakti University, 11440, Indonesia
Corresponding author’s email: murtanto@trisakti.ac.id
ABSTRACT
A quality audit is an audit conducted by a competent and independent auditor. Competent auditor means having
accounting, auditing, and information technology knowledge. Independent auditor means feeling free from conflicts of
interest with any related party. Apart from competence and independence, many factors that affect audit quality should
explore. This study examines the effect of good corporate governance effectiveness and auditor quality on audit quality,
with the auditor as respondents. The auditors were selected based on the purposive sampling method, with the criteria
of working in a Public Accounting Firm registered in the IAPI Directory and residing within the territory of the Republic
of Indonesia. The results confirmed that work experience, competence, integrity, objectivity, and professionalism
positively affect audit quality. However, independence does not affect audit quality. Accountants, a profession that
works based on stakeholder trust, require a competent, integrity, and impartial person who is full of ethical dilemmas in
the process of his work. The low competence will significantly impact audit quality and the economy. The inability of
auditors to maintain public trust by opportunistic actions, ignoring norms and morality has an impact on the credibility
and legality of the accounting profession.
Keywords: GCG Effectiveness; Auditor Characteristic; Audit Quality
1. INTRODUCTION
Relevant, accurate, and reliable financial reports will
result in good decision-making. Therefore, the financial
statements need to be audited by an independent CPA
Firm. An audit is a systematic process to obtain and
objectively evaluate evidence regarding statements about
economic activities and events, intending to determine
the suitability of these statements with established criteria
and communicate the results to relevant stakeholders.
SA 110 (PSA No.2) of the Professional Standards for
Certified Public Accountants (SPAP) [1] outlines the
purpose of an audit of financial statements by an
independent auditor. A financial statement audit often
gives a judgment on the fairness, in all significant
respects, of the financial position, results of operations,
changes in equity, and cash flows in accordance with
Indonesia's generally accepted accounting principles.
The auditor's report is a mechanism for the auditor to
present his opinion following the completion of an audit
in accordance with the auditing standards established by
the Indonesian Institute of Accountants. The auditor has
a reasonable belief that there are no major misstatements
in the financial statements, whether due to error or fraud.
Some cases of fraudulent corporate financial
statements involve accountants as perpetrators. Financial
statement fraud occurs when management intentionally
misleads users of financial statements by manipulating
financial statements in various ways outside the
provisions of Financial Accounting Standards. Brooks
revealed the exceptional cases of Enron, WorldCom,
Xerox in the US as evidence of the failure of corporate
management and auditors in carrying out their
professional responsibilities. As a result, people lose
confidence in public companies and the accounting
profession. In Indonesia, similar cases have also
occurred, such as the YPPI (Indonesian Banking
Development Foundation) [2], Bank Duta [3], Bapindo
[4], PT. Kimia Farma [5], Bank Lippo [6]. The auditors
who participate as perpetrators of white-collar crimes are
certainly experienced auditors and have held managerial
positions and even partners. This accountant becomes a
counselor to take advantage of gaps in financial standards
and information asymmetry between corporations and
stakeholders. Financial statement fraud schemes have
become very sophisticated and challenging to prove their
existence unless proven by themselves through
bankruptcy events, underpricing during the IPO,
https://doi.org/10.2991/978-2-494069-49-7_158
© The Author(s) 2023
Z. B. Pambuko et al. (Eds.): BIS-HSS 2021, ASSEHR 667, pp. 937–941, 2023.
complaints from the public, employees, consumers, and
parties who understand the existence of irregularities.
A quality audit comes from a quality CPA firm with
excellent resources, auditors, facilities, and
infrastructure. In a letter issued by the Ministry of
Finance of the Republic of Indonesia through the
Financial Professional Development Center (PPPK)
numbered S-253/PPPK/2019, the CPA Firm needs to
implement the Audit Quality Indicator Guidelines. The
Indonesian Institute of Certified Public Accountants
(IAPI) has issued through the Decision of the
Management Board. IAPI Number 4 of 2018. The Audit
Quality Indicators include auditor competence, ethics,
and auditor independence. Other indicators are the time
use of key engagement personnel, engagement quality
control, quality review result from external and internal
parties, range of engagement constraints, CPA Firm
organization, and governance and reward policies. . This
suggestion motivated this research. Previous empirical
findings prove that integrity, professionalism,
independence, and objective attitudes positively affect
audit quality [6]–[9]. Likewise, competence and
experience empirically proved have been shown to affect
audit quality [7], [10]. However, the influence of
organizational factors and CPA firm governance on audit
quality has not been proven and is the significance of this
study.
2. METHOD
This study hypothesizes the effect of good corporate
governance and auditor characteristics on audit quality.
The Data was obtained via questionnaires from auditors
of Public Accounting Firms (CPA) registered at the 2019
IAPI Directory in Indonesia.
Audit quality is an audit detection and report of
material misstatements. Audit quality in this study was
measured using 5 statement/question items. Corporate
governance is defined by the Indonesian Institute for
Corporate Governance as a process and structure applied
in company operations, increasing the value of the
company or organization in the long term while
considering stakeholders' needs. Corporate governance
variable measurement adopts from the previous study of
Chahine and safieddine [11].
Audit experience is the auditor's skills obtained
during the auditor's audit assignment for a certain period
and different examination objects to increase expertise
for the auditor. According to Molina and Wulandari [12],
audit experience is the auditor's knowledge based on
personal experience. The audit experience consists of two
dimensions, length of service and audit assignments, with
seven statements.
Auditor competency has three leading indicators:
personal auditors' quality, general knowledge, and
special skills possessed by auditors, which were adapted
from Sukriah et al. [13]. Three statement items represent
personal quality indicators, four represent general
knowledge, and three represent special skills. The
statement items were modified based on Sukriah et al.
[13]. Auditor independence has three indicators, the
relationship between auditors and auditees, independence
in carrying out work, and independence in reporting.
Four statement items represent the relationship between
auditors and auditees, indicators of independence in the
implementation of work are represented by four
statement items, and two represent indicators of
independence in reporting. The statement items were
modified based on Sukriah et al. [13].
Auditor integrity is a quality measure based on public
trust. It is a benchmark for members in testing all
decisions taken so that auditors are required to have an
honest and transparent attitude, be wise, brave, and be
responsible in carrying out their audits. In this research,
integrity uses seven statements.
Objectivity means that an auditor should not allow
bias or be influenced by other parties for his decision-
making to perform his audit task. In this study, objectivity
was measured using five statements.
Auditor professionalism is an attitude and behavior
that auditors must possess to fulfill audit assignments, be
responsible, earnestness as expected. In this study,
professionalism was measured using five statements.
3. RESULT AND DISCUSSION
3.1. Results
This study tests good corporate governance
effectiveness and auditor quality on audit quality. The
Simple Regression Analysis tests are present at Table 1.
The results of hypothesis testing in Table 1 show that
Audit experience, competency, objectivity, and auditor
professionalism positively affect Audit Quality. GCG
effectiveness, independence, and integrity do not affect
Audit Quality. A discussion of these findings is presented
next.
Murtanto et al.
938
Table 1 Hypothesis Testing
Variables
Expected Sign
Coefficient
Sign
GCG Effectiveness
+
-0.032
0.429
Audit Experience
+
0.095
0.005*
Competency
+
0.108
0.004*
Independency
+
-0.42
0.215
Integrity
+
0.007
0.908
Objectivity
+
0.443
0.000*
Auditor Professionalism
+
0.24
0.000*
Constanta
1.745
Adjusted R Square
0.791
Sign F Test
0.000
Dependent Variable: Audit Quality
*) significant at 5%
3.2. Discussion
The findings revealed that audit quality is positively
influenced by work experience, competence, integrity,
objectivity, and professionalism. GCG effectiveness,
independence, and integrity, on the other hand, have no
effect on audit quality. Audit quality is unaffected by
independence and integrity. Accountants are
professionals who rely on the public's trust. Auditors
encounter numerous pressures, including self-interest
conflicts with public objectives. Public pressure hopes
that the auditor becomes a moral agent and preserves
honesty, independence, and integrity. The government,
as a regulator, is putting pressure on the auditors, the
CPA company it represents, and the investing
community. Client pressure for financial statements that
fit the client's wishes as a source of money for the CPA
business. Auditors face additional pressure from KAP,
the employer's employer, who is concerned with the
outcome of the auditor's work.
Furthermore, the IAI/IAPI accounting professional
association, which enforces professional norms and
evaluates accountants' and KAP's work, provides ethical
rules with very subjective interpretations. These demands
were present throughout his auditing career. They
required a struggle to satisfy all of these stakeholders and
avoid various forms of bribery, both subtle and abusive.
Public accountants' transgressions include auditing
without working papers, providing views without
working papers, and purchasing and selling accountants'
signatures. This heinous behavior happens as a result of
the auditor's high moral hazard, auditee requests,
inadequate supervision, limited audit standards, and the
existence of an unhealthy mechanism in the allocation of
money in public accounting services.
This study's findings are remarkable. In his
professional life, the auditor has been able to interpret
and apply the accountant's code of ethics. Integrity,
objectivity, professionalism, and proficiency are basic
professional ethical principles that every accountant must
follow. The integrity principle states that in professional
and corporate relationships, each practitioner must be
firm, honest, and fair. The practicing accountant must not
deal with reports, communications, or other information
that is suspected of being materially false or misleading,
or with information that has to be revealed. According to
the objectivity principle, every practitioner must avoid
subjectivity, conflicts of interest, and undue influence
from multiple parties that could impair his professional
judgment, competence, and skepticism. To provide
competent professional services to the public, the
principle of competence necessitates that every
practitioner maintains and employ appropriate
professional knowledge and expertise. Professional
prudence and care necessitate that each practitioner
behaves and acts cautiously, thoroughly, and promptly in
accordance with the assignment's criteria. Professional
behavior dictates that all practitioners follow all
applicable laws and regulations and refrain from
engaging in conduct that could harm the profession. As
an expression of its responsibilities to service receivers,
third parties, other members, personnel, employers, and
the general public, the need to avoid behavior that can
discredit the profession should be met. All of these
ethical norms contribute to higher-quality audit results.
Independency, integrity, and GCG do not affect audit
quality. A professional accountant should behave
ethically. However, some conditions potentially reduce
ethical behavior. Threats to compliance with basic
principles of professional ethics include, firstly, threats of
self-interest due to financial reasons, dependence on
income from one client, close business relationships,
fears of losing clients, professional fees contingent on
assurance engagements. Secondly, self-review threats
arise from past work that the practitioner is responsible
for re-evaluating. The threat arises because of significant
error discovery, reporting of accountant's involvement in
data preparation of financial reporting audited, members
of the audit team being the client's officers (past or
current), members of the audit team have employed by
the client, directly to the subject of the engagement.
Thirdly, advocacy threats, threats due to statements of
attitudes or opinions that reduce the objectivity of
Impact of Good Corporate Governance and Auditor Characteristics on Audit Quality 939
practitioners. This threat arises from accountants
promoting shares of their clients' entities providing legal
advice to audit clients involved in litigation cases and
disputes with third parties. Forth, threats of intimacy arise
because of feeling emotionally close to the client so that
they sympathize with the interests of other parties. This
threat arises from accountants having family relations
(directly and indirectly) with officials in the client's
company, receiving preferential treatment because of the
closeness of the client and the long-standing engagement
relationship with the CPA firm. The last, threats of
intimidation, threats due to restrictions on practitioners to
be objective. These threats arise from the termination of
employment or replacement of the engagement team,
threats of litigation, threats of reducing the scope of work
to reduce the number of professional service fees.
4. CONCLUSION
This study presents empirical evidence on the role of
competence in auditor performance. Accountants, as a
profession that relies on stakeholder confidence, demand
a skilled, honest, and impartial person who faces ethical
quandaries on a daily basis. The lack of competence will
have a substantial impact on audit quality and the
economy. The incapacity of auditors to preserve public
trust through opportunistic actions, disregarding
standards and morality, has an impact on the accounting
profession's legitimacy and legality.
The results of this study provide reinforcement
Financial Professional Development Center (PPPK)
numbered S-253/PPPK/2019, and the CPA Firm has to
implement the Audit Quality Indicator Guidelines [14].
The implementation of the Audit Quality indicator guide
aims to improve audit quality and a form of
communication between CPA firm's service users and
other stakeholders.
ACKNOWLEDGMENT
This research is the Penelitian Unggulan Fakultas and
funded by the Faculty of Economics and Business,
Trisakti University.
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