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The Impact of Firm Attributes on Selecting the Auditor Evidence from Sri Lanka

  • Mr. Kasun Dissanayake ,Senior Lecturer ,Department of Economics and Decision Sciences ,Faculty of Business
Abstract

This study examines the effects of firm attributes on choice of auditor among companies incorporated in Sri Lanka. As the regulatory environment mandate, all incorporated entities are required to appoint independent auditors to audit the financial statements of the company. This offers an exclusive opportunity to examine the differentiation in demand for auditors when there are two types of potential auditors in place of selection for the organisations based on the audit quality; which is either a “big three firm” ( PWC, KPMG or EY ) or a non-big three. Therefore, researcher will emphasis to accomplish the objectives of assessing the status quo of organisational attributes and identify the relationship between organisational attributes and auditor choice among companies in Sri Lanka. This paper takes a quantitative approach into consideration with stratified sample of data obtained from companies incorporated and operating under the companies act no.7 of 2007. Custom-built binary logistic regression model examines the influence of organisational attributes such as profitability, company’s age, complexity, leverage, operating industry against auditor choice proxy into two choices reliant on audit quality (Big three Vs Non-big three auditors).

Correlation analysis indicate significant correlation between auditor choice and several organisational attributes. Whereas the binary logistic regression model results show that organisation complexity has a positive relationship with the choice of big three auditor being appointed. While leverage of the company has a negative relationship with engaging a big three firm. Overall, three of the organisation characteristics were found consistent to the developed hypotheses in the research design. Given the importance of audit, this study delivers insights regarding determinants of choice of auditor which is an important matter to the regulators, enforcement agencies and investors. The findings imply different organisational attributes have different effects on auditor choice; some structures strengthen it while others weaken it. The diverging relationship between the organisational factors and audit choice raises the question of its significance to the appointment regardless of the mandatory requirements. The research extends the literature by extending the determinants of the choice of auditor in an emerging market where there is mandatory audit requirement. The work is based on empirical data obtained directly from company financial statements. Thus, utilizes the audited financial statements and make objective analysis of auditor choice dynamics to highlights the important role played by organisational characteristics in shaping demand for audit quality.

Keywords—Auditor choice, Audit quality, Big three firm, Firm attributes

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