This chapter will discourse the old literature reappraisal on quality control, quality service, satisfaction degree and degree of non-audit fees being charged. It will overview the relationship between quality control, quality service, satisfaction degree and degree of non-audit fees, theoretical model and development of hypothesis.
Servicess offered by Audit Firms
Basically, audit house provides confidence services to organisation ( Messier, 2000 ) The intent of this confidence service is to undertake the dissymmetry information that occurred in principal-agent relationship. By this confidence service, the study that made by agent can be dependable and trusted for principal.
However, Audit house can besides supply non-audit services. Messier ( 2000 ) addresses three non confidence service classs that can be besides provided by Audit Firm, which are: Tax Service, Management Advisory Services, and Accounting and Review Services. The item will be described in the subdivision
2.1.1 Audit Service
Auditing is the accretion and rating of grounds about information to find and describe on the grade of correspondence between the information and established standards ( Arens, Elder & A ; Beasley, 2003 ) . Fiscal statement audit is the finding by the hearers whether the fiscal statements of a company shows a true and just position.
Messier ( 2000 ) states that there are 4 types of audit services, which are:
Financial Audit Services. It determines whether the fiscal statement nowadays reasonably in conformity to the Generally Accepted Accounting Principle
Conformity Audit. It determines the extent to which regulations, policies, Torahs, compacts, or governmental ordinances are followed by the entity being audited.
Operational Audit. It involves a systematic reappraisal of an organisation activities in respects of efficiency and effectivity
Forensic Audit. It investigates the sensing or disincentive of a broad of deceitful activities such as: Business Fraud, Employee Fraud, Criminal Investigation, Shareholder disputes, Business Economic Losses, and Matrimonial Disputes.
The end product and result of an audit is an auditor sentiment on the work under probe. For fiscal statement audit, it would be whether they will publish a qualified or an unqualified sentiment. A Audit Services consist of fiscal, operational, and information engineering audits in conformity with sanctioned programs and its established policies and procedures.A Further, Audit Service complies with the Code of Ethics and the Standards for the Professional Practice of Internal Auditing. It is promulgated by The Institute of Internal Auditors, every bit good as other professional auditing criterions which may be applicable to the public presentation of work assignments.
In carry oning confidence service such as auditing, the audit house has to follow the ordinance organic structure such as Institute of Certified Public Accounting ( ICPA ) ( Arens, Elder & A ; Beasley, 2003 ) . This ICPA has several regulations and criterions that must be followed by audit house. Messier ( 2000 ) categorizes the regulation and criterions as:
Bylaw. It establishes the regulations and ordinance that govern the activities of ICPA such as admittance, keeping, and expiration of rank.
Code of Professional Conduct. It establishes the usher for all audit houses in the public presentation of their professional duties. It consists of Principle Code and Rules of Conduct.
Statements on Auditing Standards. It is established by the Board of Auditing Standard for set uping by and large accepted auditing criterions and publishing the dictums on scrutinizing affairs.
Statements on Standards for Accounting and Review Services. It is established by the Accounting and Review Services Committee for set uping the behavior of digest and reappraisals.
Standards for Performing and Reporting on Peer Reviews. ICPA issues Statements on Standards for Attestation Engagement. This statement covers the analyzing fiscal prognosis, internal control coverage, and other attestation. The intent is to guarantee the dependability of the attestation service that deliver by audit house.
Statements on Standards for Consulting Services. ICPA in every state normally establishes one organic structure called Management Advisory Service Executive Committee. The intent is to supervise the audience activities that delivered by audit house. The name of the criterion is Statements on Standards for Consulting Services.
Statements on Duties in Tax Services. ICPA besides establishes the Statements on Duties in Tax Practice. It emphasizes on the audit house responsibilities when involved with revenue enhancement battle.
Statements on Quality Control Standards. It is a regulation of behavior that made to keep the quality control of audit house. It is established to guarantee that a house ‘s pattern meets the professional criterions.
As this research wants to look into the Quality Control, this research emphasizes on the quality control. The inside informations of this issue will be described in other subdivision.
2.1.2 Non-Audit Servicess
Non-audit services by and large refer to the services above and beyond the related audit services or services other than traditional CPA work. Some bookman in their surveies use different footings for the same relevant issues viz. , “ Management Advisory Service ” ( MAS ) and “ Management Consulting Service ” ( MCS ) . Schemer and Kiger, 1982 ; Pany and Reckers, 1983 suggested there is no peculiar limitation for the range or categorization on non-audit services but diverse categorization methods have been employed by the research workers. Non-audit service is defined as service rendered by the accounting house that do non ensue in the look of an sentiment, negative confidence, a sum-up of findings or other signifier of confidence ( Gill & A ; Cosserat, 1996 ) . The types of non-assurance services rendered are revenue enhancement, secretarial pattern, audience and internal audit reappraisal. Purcell and Lifison ( 2003 ) described non-assurance services as traditional occupation for comptroller ( including confidence, investing confidence, commercialism enrollment and accounting personal businesss, and so on. ) Tax involves among others to help clients to fix the revenue enhancement returns and to help them in be aftering their revenue enhancement. Secretarial is to help clients to fix the entry of paperss to the Companies Commission and audience involves giving their positions on whether a certain exercising by the client would be damaging to the company and besides offering assorted options of how a job can be solved.
Messier ( 2000 ) categorized the non-audit services into three types, which are:
Tax Services. Audit house deliver service of fixing and registering revenue enhancement returns, supplying advice on revenue enhancement and estate planning, supplying representation on revenue enhancement issue.
Management Advisory Services. It covers the confer withing activities that may affect supplying advice and aid refering an entity ‘s organisation, forces, finance, operations, systems, or other activities.
Accounting and Review Services. Audit house provides a figure of accounting services such as book maintaining, paysheet processing, and fixing the fiscal statement.
The audit services and non-audit services provided by audit houses to its clients are required to be separated. Johnson and Nelson ( 2002 ) , found in their surveies, non-audit services were used as tolls to increased audit house ‘s income. Arrunada ( 1999 ) states that supplying the non-audit service is a fillip for the houses because non much work had to be done because they are already familiarized with the client ‘s histories. The proviso of non-audit services by hearers to their audit clients has been regarded by the regulators in the UK, the US, Australia and assorted states as a menace to auditor independency. In 2000, The Investor Responsibility Research Center ( IRRC ) reported that Enron paid $ 25 million to Anderson for confer withing services and $ 27 million for audit-related services. It show clearly that the fees paid for non-audit services are important and comparable to the fees paid for scrutinizing services and therefore give rise to the possibility of struggle of involvement.
Harmonizing to Sarbanes-Oxley Act Title II, Section 201 Point G and H, a registered public accounting house may prosecute in any non-audit service, including revenue enhancement services, that is non described in any of paragraphs ( 1 ) through ( 9 ) of subdivision ( g ) for an audit client, merely if the activity is approved in progress by the audit commission of the issuer, in conformity with subdivision ( I ) .It means that an audit house can give audit service and non-audit service as long the audit commission O.K. it on the audit battle. The Non audit services that can be provided are:
( 1 ) clerking or other services related to the accounting records or fiscal statements of the audit client ;
( 2 ) fiscal information systems design and execution ; H.R.3763-28
( 3 ) assessment or rating services, fairness sentiments, or contribution-in-kind studies ;
( 4 ) actuarial services ;
( 5 ) internal audit outsourcing services ;
( 6 ) direction maps or human resources ;
( 7 ) agent or trader, investing advisor, or investing banking services ;
( 8 ) legal services and adept services unrelated to the audit ; and
( 9 ) any other service that the Board determines, by ordinance.
Hay, Knechel, and Wong ( 2006 ) found the audit fee has been shown to depend on auditee size, on assorted steps of auditee hazard and complexness and other features, on hearer properties, and on features of the audit battle.
Reappraisal of the Literature Review
This subdivision reexamine the literature of quality theory, quality control, Level of Fee, the relationship between non-audit service and degree of fee, the relationship between quality control and degree of fee, and the relationship between quality service and degree of fee. This literature is of import as it will be used to analysis the consequences.
De Angelo ( 1981 ) introduced the quality theory theoretical account as shown in figure 1, where the control on the audit house is divided into four factors: one commanding on the steadfast factors such as human resource, control procedure, and industry experience. The 2nd factor refer to commanding on audit squad factors such as supervising, planning, and public presentation the service, client experience and professionalism.
Furthermore, surveies by De Angelo, 1981 and Palmrose, 1988 suggested that observing the stuff misstatements is influenced by how good the quality control system on the audit house influence the audit squad in executing their services
Simunic ( 1984 ) developed a theoretical account in which audit fees are cross-subsidised by non-audit work: competitory force per unit areas in the audit market might so oblige hearers to dismiss their audit fees, so that higher non-audit net incomes would be associated with lower audit fees. He suggested that as an result to high service quality, hearer able to bear down higher fees.
Several surveies have several definitions of service quality. Lewis and Booms ( 1983 ) as cited by Bungsu ( 2004 ) defined service quality as a step of how good the service degree delivered lucifers client outlooks. Delivering quality service means conforming to clients ‘ outlooks on a consistent footing. However, Parasuraman, Zeithaml & A ; Berry ( 1985 ) argue that most research workers and directors of service houses agree that service quality involves a comparing of outlooks with public presentation.
Gronroos ( 1984 ) as cited by Bungsu ( 2004 ) proposed that there are two types of service quality, proficient and functional quality. Technical quality involves what the client is really having from the service. The client can frequently mensurate the service result in an nonsubjective mode. Functional quality is the mode in which the service is delivered which refers to the interaction between service supplier and receiver of a service. The conceptual theoretical account of service quality developed by Gronroos is the first one which the intent is to increase apprehension of clients ‘ service quality perceptual experiences and the factors that influence those perceptual experiences.
Parasuraman et Al ( 1985 ) developed another theoretical account for service quality known as SERVQUAL. This theoretical account provides a engineering for mensurating and pull offing service quality which attempts to turn out the salient activities of the service organisation that influence the perceptual experience of quality.
Ziethaml, Parasuraman, and Berry ( 1990a ) has defined service quality as a multidimensional construct and they identified there are five cardinal dimensions of service quality. The first construct is dependability. Reliability is defined as the ability to present the promised service faithfully and accurately. It is a state of affairs where maintaining promises of bringing, monetary value and ailment handling. Secondly is responsiveness which described as willingness to assist clients and supply prompt service. It measures stresses service forces ‘s attitude to be attentive to client petitions inquiries and ailments. Third, confidence is the service quality dimension that focuses on the ability to animate trust and assurance. Fourthly, empathy is the service facet that stresses the intervention of clients as persons. Last, tangibles are the service dimension that focuses on the elements that represent the service physically.
Surveies by Haron, Ismail, Ibrahim and Isa 2006 utilizing the SERVQUAL theoretical account in scrutinizing sector found that public listed companies in Malaysia were merely satisfied with touchable dimensions and client trueness partly mediates the relationship between dependability dimensions and client satisfaction. Bungsu ( 2004 ) states that there was a positive relationships between client trueness and service quality but she found that SMEs were non satisfied with all the SERVQUAL dimensions particularly on dependability dimensions. Che Din ( 2008 ) used partial SERVQUAL theoretical account to analyze the relationship between SMEs perceptual experiences on service quality and degree of fees.
Degree of the fees
Wynne ( 2008 ) defines degree of fees as an mean monetary value at which merchandise of service being charged. In modern economic, degree of fees were defined as an exercising to setup a specific criterion in footings of weight of the work given, distance and value the work carried ( Hall, 2002 ) . Malayan Institute of Accountant ( MIA ) By-law B1-6 has defined the degree of audit fees as any sum of fees charged to client every bit long as it does non jeopardized hearer ‘s professionalism ( By-Law, pp 30-39 ) .The degree of fees in this survey is defined as client satisfaction on the service received from their hearer.
B-6.1 Professional fees charged by members in public pattern shall be a just contemplation of the value of the work performed for the client, and shall take into history inter alia –
( a ) the accomplishment and cognition required for the type of work involved ;
( B ) the degree of preparation and experience of the individuals needfully engaged on the work ;
( degree Celsius ) the clip needfully occupied by each individual engaged on the work ; and
( vitamin D ) the grade of duty and urgency that the work entails
B-6.2 ( 1 ) No member shall bear down an unrealistically low professional fee.
Fees were charged at different degree based on the size of the client ‘s company ( Palmrose, 1986 ) , companies ‘ concern sector ( Besacier & A ; Schatt, 2007 ) and type of hazard to be handle ( Simunic, 1980 ) . In Malayan audit market, MIA By-Law has stated a benchmark of fees to be charged as a guideline hearer on the degree of audit fees to be charged. However there is no specific guideline given for non-audit service. As a decision, we know that mensurating the right degree of fees to be charged is really subjective particularly in non-audit service where there is no specific guideline to be followed. Based on the old research done by Ismail, Haron, Ibrahim and Mohd. Isa ( 2006 ) on public listed companies in Malaysia found that 98 % of the respondents feel that paying high revenue enhancement fees is sensible with the current service provided to them.
Non-audit service and Audit Fee
Simunic ( 1984 ) as cited by Chien, Chen ( 2005 ) states that the consequence of the proviso of non-audit by accounting houses on audit fee is determined by “ demand elastic that the client petitions to scrutinize service. In add-on, Abdel-khalik ( 1990 ) found in his survey that audit fee and non-audit fee are positively related. Furthermore, Barkess & A ; Simnett ( 1994 ) , and Firth ( 1997a ) show a important correlativity between audit fee and non-audit services fee.
2.2.6 Quality Control and Services Quality
Many surveies have proven that the success of quality control was driven by high service quality ( DeAngelo, 1981 ; Ridley, 1994 ; Bij & A ; Ekert, 1999 ) . Low control on production procedure or service will do low service quality which means the sensing of misstatement or merchandise defect increased ( Lian, 2001 ) . Lian ( 2001 ) once more in his study stated that the success of service quality and its impact is mostly within the control of leading. Harmonizing to Ridley ( 1994 ) quality control and quality service interact with each other. The success of quality control on merchandise or service in the market was driven by the high quality of service.
Harmonizing to above literature, quality control can present sludge services quality as it ensures the services provided to be added value. Hence, the quality control has effects on service quality.
Quality service and degree of the fees
Zeithaml and Bitner, ( 2000 ) defined that satisfied client would stay loyal, needed service more frequently, fewer monetary value medium and shall speak favourable things about the company. Furthermore, De Angelo ( 1981 ) and Palmrose ( 1986 ) have stated that client willingness to pay high sum of fees in order to have a high quality of service.
Quality Service and Satisfaction
Service quality is produced at the same clip as the service supply and ingestion. Bolton and Drew ( 1991 ) , and Boulding et Al ( 1993 ) , and Sohail ( 2003 ) stated that service quality has a important relationship to client satisfaction. Formell et Al, ( 1996 ) states the satisfaction of client is depended to the manner of client valued the quality bringing. De Angelo ( 1981 ) and Palmrose ( 1986 ) have stated that client willingness to pay high sum of fees in order to have a high quality of service.
In other contexts, by utilizing SERVQUAL theoretical account, Sewell ( 1997 ) found that patients emphasize greater importance on dependability dimension. Angelopoulou et Al ( 1998 ) found that quality perceptual experience in services has important influence on client satisfaction. It is confirmed by Manaf ( 2006 ) who concluded service quality perceptual experience has consequence on client satisfaction.
In accounting context, Behn et Al ( 1997 ) investigated the relationship between audit service quality and client satisfaction. They found that reactivity, effectivity, ongoing interaction and the appropriate behavior of audit field influence the clients ‘ satisfaction significantly. This confirmed by Gao ( 2003 ) who found that audit service quality has positive and important relationship to clients ‘ satisfaction.
Satisfaction and Level of Fee
The issue of relationship between satisfaction and degree of fee extensively investigated in service selling field. Kotler and Keller ( 2006 ) besides found that if client is satisfied with the service received, they would non mind to pay at any monetary value for the services.
For case, Anthanassopoulos ( 1999 ) found the direct nexus between satisfaction and degree of price/fee. It is confirmed by several surveies such as Fornell et Al ( 1996 ) , Hallowell ( 1996 ) , and Ennew and Binks ( 1999 ) . It clearly describes how satisfaction degree has important association with the degree of fee.
In researching the chance to heighten the support provided by the SMPs to the SMEs, it is of import to understand the concern demands of the SMEs and place countries where comptrollers in public pattern could concentrate on in add-on to the countries presently serviced. At the same clip, the barriers forestalling the SMPs in run intoing the demands of the SMEs need to be understood.
One of the barriers could be the deficiency of quality in bringing services. Although SMPs could value can and scrutinize bring to SMEs. This is because SMEs ‘ internal control systems are normally non that strong, and they are frequently led individuals who lack in direction and proficient accomplishments. Internal controls of the SMEs are non every bit extended as those of big companies, where hearers can non trust on the system to do their audits more efficient. The deficiency of formal internal control systems and the application of cosmopolitan scrutinizing criterions hold given rise to the usage of a particular “ little company audit making “ in the UK ( Keasey et al. , 1988 )
In add-on to that, SMEs lack in resources. In Malaysia, although there is no determination made to day of the month, however there is an disposition to give an “ audit freedom ” to SME. What it means is that SMEs should non be subjected to compulsory audit as there are excessively many failings in sentiment there is a chance that he will no long be appointed as an hearer for following twelvemonth. In drumhead, audit of SME would be most likely to impair hearer ‘s independency. For that affair even if the hearer was to give a qualified sentiment, SMEs would non be able to rectify the affair due to miss of resources.
An interview with several little practicians indicated that the non-assurance services that they normally supply or offer to SMEs are the internal audit reappraisal, fixing histories, puting up of an accounting system, rede to travel for listing, using for funding, using for fabrication licence, fixing for imposts declaration, fixing revenue enhancement returns, revenue enhancement planning, secretarial patterns. These services can be loosely categorixed into four countries: ( 1 ) secretarial pattern, ( 2 ) audience – applying for funding, making accounting work, ( 3 ) tax-preparing revenue enhancement return and revenue enhancement planning, ( 4 ) internal audit review.According to Carcello ( 2002 ) the houses that demand s higher quality audit willing to pay a higher fees.
As stated in MIA By-Law 240.1, hearers may cite whatever fee that they feel appropriate to them even though the fee is lower so other hearers. But at the same clip will make a menace to their professional competency even though the jurisprudence agrees that the hearer may bear down whatever sum to their client but they must protect their lower the audit fee received, the lower will be the quality of audit given.
This subdivision describes the hypotheses of the research that strengthen by old empirical consequences. As can be seen in conceptual model, there are 5 major hypotheses that tested in this research. To do it more robust, we add 2 more hypotheses in respects of proving the mediating consequence. The first mediating consequence is the consequence of quality bringing services in the relationship between quality control and satisfaction degree. The 2nd and last mediating consequence is the consequence of satisfaction degree in the relationship between quality bringing services and degree of non-audit fee. The inside informations are described below:
2.4.2 Quality Deliver Services and Satisfaction Level
Formell et Al ( 1996 ) states that client satisfaction is really a perceived of quality. It means that the satisfaction of client is depended to the manner of client valued the quality bringing. It is confirmed by Cronin et Al ( 2000 ) . They address that there is relationship between quality of bringing and satisfaction. Cronin et al suggest the behavioural purpose as the back land theory that can assist scholar to turn out the relationship. In other words, it can be surmised that the higher is the quality bringing, the higher is the satisfaction. Therefore, this research hypothesize:
H2: The higher the Quality Delivery, the higher the satisfaction degree
2.4.3 Satisfaction Level and Level of Non-Audit Fee
The issue of relationship between satisfaction and degree of fee extensively investigated in service selling field. For case, Anthanassopoulos ( 1999 ) found the direct nexus between satisfaction and degree of price/fee. It is confirmed by several surveies such as Fornell et Al ( 1996 ) , Hallowell ( 1996 ) , and Ennew and Binks ( 1999 ) . It clearly describes how satisfaction degree has important association with the degree of fee. Therefore, this research surmises the theory by speculating:
H3: The higher the satisfaction degree, the higher the non-audit fees
2.4.6 Quality of Delivery Services and Level of Non Audit Fee
Zeithaml and Bitner, ( 2000 ) defined that satisfied client would stay loyal, needed service more frequently, fewer monetary value medium and shall speak favourable things about the company.
Furthermore, De Angelo ( 1981 ) and Palmrose ( 1986 ) have stated that client willingness to pay high sum of fees in order to have a high quality of service. Therefore, this research concludes that:
H6: The higher the Quality service, the higher the non-audit fee paid
2.4.8 The Mediating consequence of satisfaction degree on the relationship between quality bringing service and Level of non audit Fee
In an add-on to measurement issue, developing the conceptual relationship between quality bringing services and degree of fee can be mediated by the satisfaction degree. The aim is non merely to uncover the power of direct relationship but besides the power of the interceding consequence that could be strengthen the association between quality of bringing services and degree of Fee. Most known research that constructed the interceding consequence of satisfaction on the association between quality of bringing and degree of fee is Hallowell ( 1996 ) . Hallowell ( 1996 ) delivers this predication by utilizing behavioural purpose position. Hallowell states that as satisfaction is a value perceptual experience. It perceptual experience is based on the quality of bringing. Meanwhile, the satisfaction is really comparatively close to monetary value. So, it reveals the interceding consequence of satisfaction on the relationship between quality of bringing and degree of fee. It is confirmed by Athanassoupoulos ( 2000 ) . He/She states that client satisfaction is extremely associated as the ascription of monetary value. Therefore, this research can surmise that:
H8: The mediating of satisfaction degree has consequence on the positive and important relationship between quality of bringing and fee degree.