Ensuring auditor independence: The case for small and medium practices in Malaysia

Main Article Content

Nor Hafizah Zainal Abidin
Sherliza Puat Nelson
Maslina Ahmad


Research aim: The study aims to examine small and medium audit firms’ compliance with the independence requirements as stipulated in the International Standard on Quality Control 1 (ISQC 1) in Malaysia.
Design/ Methodology/ Approach: This study is qualitative in nature. It uses semi-structured interviews to gather input from 27 managers and partners of small and medium audit firms in Malaysia.
Research findings: The findings highlight variations in compliance practices on the independence requirements among small and medium audit firms. Some of the firms partially complied with the independence requirements, whereas others showed non-compliance. The findings further indicate that the majority documented their independence policies and procedures using an audit manual or audit checklist, communicated during the year. The study also found that the lack of financial and physical resources is considered the main hindrance to greater compliance.
Theoretical contribution/ Originality: There is a lack of research on the actual compliance with the independence requirements among small and medium firms in emerging economies. This study addressed that gap by focusing on small and medium audit firms in Malaysia. The majority of previous studies on regulatory inspection had focused on Anglo-Saxon countries.
Practitioner/ Policy implication: The findings suggest that small and medium audit firms have done their best to comply with the independence requirements despite constraints on financial and human resources. As such, further awareness of the importance of independence would enhance the compliance level as well as audit value and the quality of firms.
Research limitation: Interview data were extracted from a small sample; hence, generalisation may need to be defined more cautiously when applied to other contexts. Moreover, since the respondents were selected based on their agreement, the findings reflecting their practices may not be applicable to other small and medium audit firms.
Keywords: Independence, Breach and Threat, Small and Medium Firms, Qualitative Research, Interview, ISQC 1
Type of article: Research paper
JEL Classification: M42, M480


Download data is not yet available.

Article Details

Research Paper


Amirul, S. M., Md. Salleh, M. F., & Abu Bakar, M. A. (2015). Audit firm governance: An overview from Malaysia. Procedia Economics and Finance, 31, 632-639. https://doi.org/10.1016/S2212-5671(15)01151-X
Aobdia, D., & Shroff, N. (2017). Regulatory oversight and auditor market share. Journal of Accounting and Economics. 63(2-3), 262-287. https://doi.org/10.1016/j.jacceco.2017.03.001
Beasley, M. S., Carcello, J. V., & Hermanson, D. R. (2001). Top 10 audit deficiencies. Journal of Accountancy, 191(4), 63-66. https://www.journalofaccountancy.com/issues/2001/apr/top10auditdeficiencies.html
Beatty, R.P. (1989). Auditor reputation and the pricing of initial public offerings. Accounting Review, 64(4), 693-709. https://doi.org/10.1016/S1061-9518(96)90008-7
Bedard, J. C., Deis, D. R., Curtis, M. B., & Jenkins, J. G. (2008). Risk monitoring and control in audit firms: A research synthesis. Auditing: A Journal of Practice and Theory, 27(1), 187-218. https://doi.org/10.2308/aud.2008.27.1.187
Carlin, T. M., Nigel, F., & Laili, N. H. (2009). Investigating audit quality among Big 4 Malaysian firms. Asian Review of Accounting, 17(2), 96-114. https://doi.org/10.1108/13217340910975251
Chang, C. J., Luo, Y., & Zhou, L. (2017). Audit deficiency and auditor workload: evidence from PCAOB triennially inspected firms. Review of Accounting and Finance, 16(4), 478-496. https://doi.org/10.1108/RAF-03-2017-0050
Choi, J. H., Kim, C., Kim, J. B., & Zang, Y. (2010). Audit office size, audit quality, and audit pricing. Auditing: A Journal of Practice and Theory, 29(1), 73-97. https://doi.org/10.2308/aud.2010.29.1.73
Church, B. K., & Shefchik, L. B. (2012). PCAOB inspections and large accounting firms. Accounting Horizons, 26(1), 43-63. https://doi.org/10.2308/acch-50077
Culpan, R., & Trussel, J. (2005). Applying the agency and stakeholder theories to the Enron debacle: an ethical perspective. Business and Society Review, 110(1), 59-76. https://doi.org/10.1111/j.0045-3609.2005.00004.x
DeFond, M. L. (2010). How should the auditors be audited? Comparing the PCAOB inspections with the AICPA peer reviews. Journal of Accounting and Economics, 49(1-2), 104-108. https://doi.org/10.1016/j.jacceco.2009.04.003
DeFond, M. L., & Lennox, C. S. (2011). The effect of SOX on small auditor exits and audit quality. Journal of Accounting and Economics, 52(1), 21-40. https://doi.org/10.1016/j.jacceco.2011.03.002
Francis, J. R. (2004). What do we know about audit quality? The British Accounting Review, 36(4), 345-368. https://doi.org/10.1016/j.bar.2004.09.003
Hassan, Y. M., & Naser, K. (2013). Determinants of audit fees: Evidence from an emerging economy. International Business Research, 2(3), 56-74. https://doi.org/10.5539/ibr.v6n8p13
Hubberman, A. M., & Miles, M. B. (1994). Qualitative data analysis. London, England: Sage Publications.
Ismail, A. H., Mohd-Sanusi, Z., & Isa, Y. (2008, Dec). Implementation of audit quality control system: preliminary evidence from small and medium audit practices in Malaysia. Paper presented at the 9th Asian Academic Accounting Association Annual Conference, Dubai, United Arab Emirates.
Ismail, S., Haron, H., Ismail, I., & Vinten, G. (2007). Factors influencing auditors’ acceptance of the practice review system. Asian Academy of Management Journal, 12(2), 57-82. http://web.usm.my/aamj/12.2.2007/AAMJ%2012-2-4.pdf
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Kleinman, G., Lin, B. B., & Palmon, D. (2014). Audit quality: A cross-national comparison of audit regulatory regimes. Journal of Accounting, Auditing and Finance, 29(1), 61-87. https://doi.org/10.1177%2F0148558X13516127
Knechel, W. R. (2013). Audit quality and regulation. International Journal of Auditing, 20 (3), 215-223. https://doi.org/10.1111/ijau.12077
Malaysian Institute of Accountants (MIA) (2014). Practice Review Report 2009-2013. Retrieved from https://www.mia.org.my/v2/downloads/resources/publications/surveillance/practice/2009/MIA_Practice_Review_Report_2009_2013.pdf
Malaysian Institute of Accountants (MIA) (2018). The audit profession in Malaysia 2018. Retrieved from https://www.mia.org.my/v2/downloads/resources/publications/surveillance/practice/2018/MIA_The_Audit_Profession_2018.pdf
Nor, M. N. M., & Abidin, S. (2015). The structure of Malaysian audit market: from 2008 to 2010. Paper presented at the 3rd IBEA International Conference on Business, Economics and Accounting, Vietnam.
Numata, S., & Takeda, F. (2010). Stock market reactions to audit failure in Japan: The case of Kanebo and ChuoAoyama. The International Journal of Accounting, 45(2), 175-199. https://doi.org/10.1016/j.intacc.2010.04.004
Omar, N., & Mohd Alwi, M. J. (2007). International standard on quality control (ISQC 1): a survey report for the Malaysian Institute of Accountants (MIA). Working paper, Universiti Teknologi MARA, Selangor.
Omar, N., Sanusi, Z. M., Yaacob, N. A. & Mohamed, S. (2013, May). Audit quality assessment on an audit firm: compliance and challenges. Paper presented at the 5th International Conference on Financial Criminology, Selangor, Malaysia.
Sanusi, Z. M., Iskandar, T. M., Monroe, G. S., & Saleh, N. M. (2018). Effects of goal orientation, self-efficacy and task complexity on the audit judgement performance of Malaysian auditors. Accounting, Auditing and Accountability Journal, 31(1), 75-95. https://doi.org/10.1108/AAAJ-12-2015-2362
Sanusi, Z. M., Ismail, A. H., Isa, Y. M., Tapsir, R., Kasim, S., Muhamad, K., Chantrathevi, T., & Zaini, N. (2008, August). Audit quality control: development of self-assessment checklist for small and medium audit practices in Malaysia. Paper presented at the International Accounting and Business Conference, Johor Baru, Malaysia.
Tackett, J., Wolf, F., & Claypool, G. (2004). Sarbanes‐Oxley and audit failure: A critical examination. Managerial Auditing Journal, 19(3), 340-350. https://doi.org/10.1108/02686900410524355
Tepalagul, N., & Lin, L. (2014). Auditor independence and audit quality: A literature review. Journal of Accounting, Auditing and Finance, 30(1), 101-121. https://doi.org/10.1177%2F0148558X14544505
Vanstraelen, A., & Zou, L. (2020). PCAOB Inspections and Audit Fees: An Analysis of Inspection Rounds of Small Audit Firms. European Accounting Review, 1-32. https://doi.org/10.1080/09638180.2020.1828121
Wallman, S. M. (1996). The future of accounting, part III: Reliability and auditor independence. Accounting Horizons, 10(4), 76-97.