Audit Firm Size, Auditor Industry Specialization and Audit Quality: An Empirical Study of Indonesian State-Owned Enterprises

Abstract

Early researches on listed firms proved that both audit firm size (Carey and Simnett, 2006; Francis and Yu, 2009; Chen et al.2009; Choi et al., 2010) and auditor industry specialization (Balsam et al., 2003; Krishnan, 2003; Solomon et al. 1999; Monsouri et al., 2009; Gull et al., 2009) have significant influence on audit quality. The present research was intended to determine whether audit firm size and auditor industry specialization have significant influence on audit quality in Indonesian State-Owned Enterprises (SOEs). This research is critical, since there are several case of financial statement manipulation  that have been performed on SOEs since 2001, and in 2003, 12 auditors have been recommended by BPK (Badan Pemeriksa Keuangan - The Supreme Audit of Indonesia) to be investigated by PPAJP  (Pusat Pembinaan Akuntan dan Jasa Penilai – The Center for Accountants and Apraisers Supervision) due to their role in manipulating SOE’S financial statement, which they were audited (Langgeng Subur, Chairman of PPAJP, akuntanonline.com, September 16^th, 2013).  The research was conducted on 36 SOEs by using 108 financial statements of years 2010-2012.  It found out that both audit firm size and auditor industry specialization have insignificant influence on audit quality of SOEs in Indonesia.The findings of  the present research were inconsistent with the earlier researches conducted on some listed firms (Carey and Simnett, 2006; Francis and Yu, 2009; Chen et al. 2009; Choi et al. 2010; Krishnan, 2003; Solomon et al.1999; Monsouri et al. 2009; Gull et al. 2009) that had found that both audit firm size and auditor industry specialization have significant influence on audit quality.

Keywords: audit firm size, auditor industry specialization, audit quality