MGT330 UM Factors Affecting the Profit Loss of Engineering Contractors Here are two files. One is the requirement. Another one is the example. This is the

MGT330 UM Factors Affecting the Profit Loss of Engineering Contractors Here are two files. One is the requirement. Another one is the example. This is the title: Factors affecting the profit loss of engineering contractors.The written report should not more than 5000 words(at least 4500 words) or 20 pages maximum. Make sure its by own work, cannot copy from website. The similarity no more than 15%. Can not Plagiarism. Individual Assignment – Written Report
The guidelines for the written report are as follows:
• You are required to identify and critically discuss a current issue in financial management.
• It is advisable to choose a topic of discussion which is relevant to your industry or your
career path.(I already have a topic: Factors affecting the profit loss of engineering
contractors)
• You are expected to critically discuss the topic of your choice by referring to academic
literatures and industry practices. At minimum, you are required to refer to 5 relevant
journal articles and 5 relevant industrial updates i.e. books, magazine, industrial based
conference proceeding, newspaper and professional write up.
• The written report should not more than 5000 words(at least 4500 words) or 20 pages
maximum.
• Appropriate APA referencing system will be employed where applicable.
• Your report should be type written, 1 ½ line spaced, font 12 Times New Roman and justify
aligned. Please comb bind.
• Use the provided cover page.
• Please attach a copy of the grading scheme at the front of your coursework (after the Cover
Page) during submission.
Your written report should include:
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Cover Page
Student Particulars
Assignment Report Allocation of Marks
Background
Issues and problem statement
Significant of review
Literature review
Appendices (if relevant)
Turnitin Report
GRADING
Written report will be graded according to the following distribution:
•
•
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Content (thoroughness of preparation, information, and content)
Style (grammar, writing quality, clarity of writing at the sentence level)
Presentation (organization, clarity of writing at the paper level)
What this means in practice is that if you do the work, but don’t organize your thoughts or write
clearly, you will end with at most a C. However, you will not be given full credit for content if the
lecturer cannot understand what you’re saying, so if you don’t write clearly, you will probably end
up losing points on content as well.
CHAPTER 1
INTRODUCTION
1.1 Research Background
The auditor’s roles are to provide an opinion on financial statement and to ensure that the
statements are based on true and fair image of company performance to the stakeholders. They are
authorized in checking the accuracy of business records. Opinions given by the auditor gives an
added credibility to the financial statements (Maqableh, 2014). Commonly, investors often rely on
financial statements provided by auditor in making investment judgement and increase the
productivity of financial markets. Financial statements provided by the auditors are often reviewed
as credible, unbiased opinion that truly reflects the company financial positions.
There’s no doubt that auditor independence is the core of auditing profession when establishing
its objectivity and integrity. Auditor independence, in particular, indicates the ability of an auditor
to disregard any influence or control when conducting an opinion (AAA, 1973). Therefore, auditor
must be, and must be seen to be independent of company management. Lack of independence
causes audits to be considered to have little value (Johnstone, Sutton, & Warfield, 2001). This is
further supported by Elliott and Jacobson (1998) that a particular interest may trigger a risk that
could weaken the outcome of the audit which in turn impairs the auditor independence. Hence,
independence is fundamental to the purpose served by auditors (Moore et al., 2002).
This study is limited to only four variables as to keep the task manageable. Prior years, various
studies are being carried out by scholars in examining the effect and significance of the concerns.
For instance, Abu Bakar, Abdul Rahman, and Abdul Rashid (2005) studied the factors that
influence auditor independence in Malaysian-owned commercial banks loan officer’s perceptions.
Furthermore, Abu Bakar and Ahmad (2009) also investigates auditor independence on the size of
audit fees, audit firms, tenure, provision of management advisory services and audit committee. A
study in Barbados by Alleyne, Devonish, and Alleyne (2006) also discusses about perceived
auditor independence between auditors and users following the fall of Enron. Moorthy et al. (2010)
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confers that auditor independence is crucial in improving the ability to present an independent
audit decisions.
The importance of auditor independence is highly relevant in Malaysia. Changes were being
proposed to preserve the independence of auditors and investors interest by regulating code of
ethics that serves as a guideline for auditors’ competency and independence (Shafie, Hussin,
Yusof, & Hussain, 2009). In Malaysia, a number of modifications are being made by the regulatory
and legislative authorities such as Malaysian Institute of Accountants (MIA) following the recent
financial scandal. In assumption, auditor independence is significant for the existence of auditing
itself (Abu Bakar, 2006).
1.2 Problem Statement
Audit independence is the cornerstone of the audit profession. Auditors play a significant role in
public life as its purpose is to serve the stakeholders. The impairment of auditor independence will
jeopardize the entire community. For instance, when the top management is behind the
wrongdoings and the auditor is having conflict of interest, they might want to conceal up the fraud.
This questions the auditors’ objectivity as they are considered to be ‘watchdog’ for the
stakeholders. The cumulative fraud made by the management which was covered up by the
auditors might in turn put an end to the corporation itself sooner or later. This causes the investors
to lose their money and thousands of employees losing their job (Chaabane, 2002).
In recent years, the collapse of multimillion corporations such as Enron, Parmalat and WorldCom
to name a few has raised concerns on the auditor’s independence. These financial scandals and
corporate failures have weighed auditors down as the public often viewed it as audit failures. The
increase in accounting scandals over the years has raised uncertainties that auditors’ professional
judgments are doubtful. Although there was no evidence that the auditors were behind the
wrongdoings, it still raises negative publicity towards the auditing professions. Failure in
independence is enough to cause loss of confidence in audit and financial reporting (Fearnley &
Beattie, 2004). More disturbingly, the issue related to independence has threatened the accounting
profession as whole (Sutton, 1997). This is further agreed by O’Malley (1993) as the profession
relies hugely on public trust.
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1.3 Research Questions
1.3.1 General Question
What are the factors that would affect the auditor independence in Malaysia?
1.3.2 Specific Questions
The following research questions being recognized are:
1. What is the effect of provision of non-audit services to auditor independence in Malaysia?
2. What is the effect of audit fees on auditor independence in Malaysia?
3. What is the effect of tenure of audit services on auditor independence in Malaysia?
4. What is the effect of client’s audit committee on auditor independence in Malaysia?
1.4 Research Objectives
1.4.1 General Objective
The main objective of this research is to determine the factors influencing auditor independence
in Malaysia.
1.4.2 Specific Objectives
1. To investigate the relationship between the provision of non-audit services and auditor
independence in Malaysia.
2. To investigate the relationship between audit fees and auditor independence in Malaysia.
3. To investigate the relationship between audit service tenure and auditor independence in
Malaysia.
4. To investigate the relationship between client’s audit committee and auditor independence in
Malaysia.
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1.5 Significance of Study
There are numerous researches on auditor independence being supported in developed countries
such as United States and United Kingdom. The area of auditor independence are extensive and
its potential factors are likely already been investigated. However, the studies concerning the effect
of important factors on auditor independence in Malaysia is limited. The policy makers and
officials had to generally evaluate and examine the audit legislation of developed countries and
this reduces the effectiveness of policies implemented as the regulatory audit environment in
Malaysia is different from other countries particularly on developed country.
This study aims to examine the significant issues that could affect the auditor independence in
Malaysia. The result of this study can contribute to a better understanding and may help to improve
Malaysian auditor’s profession practices. In addition, the study may assist policy makers and
regulatory bodies in pertinent policy making as it the paper serves as a strong basis particularly in
Malaysian context as the empirical evidence concerning this issue have been reasonably
inadequate. This study will also help applicable international accounting agencies towards the
international harmonization of auditing standards around the world.
1.6 Scope of Study
These research only emphases on the practices of auditors in public listed companies. The practices
of auditors of non-public companies, government organizations and agencies, cooperatives and
citizens are not subject to the requirements that is being studied here therefore, the outcome and
thoughts in this paper may have little impact and significance on their practices. The target
respondents of this research will be the auditors auditing public listed companies. The respondents
will be the auditors who live or work around Klang Valley as the survey is conducted in Klang
Valley. Klang Valley is chosen as this is where most of the audit firms are situated and companies
ranging from medium to large. This research will mainly focus in Malaysia due to time and
limitation constraints.
1.7 Dissertation Outline
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Overall, this project is divided into three main chapters consisting of chapter one, chapter two, and
chapter three. Chapter one presents the background, problem statement, research questions,
objectives, significance of the study, scope of the study and research framework in achieving the
research objectives.
In the chapter two, literature reviews, framework element and theoretical foundation will be
presented. Four factors that affecting auditor independence are presented here.
Lastly, in chapter three consists of the research methodology being applied in the study which
includes research design, research hypotheses, research equation, measurement, data collection
method and data analysis.
1.8 Summary
Generally, chapter 1 presents a general overview on the construction of the research. It serves as a
guideline and provides a better understanding for readers before continuing to the next chapter
which will further discuss the core of study based on literature review. This chapter also presents
the significance contributions of the study. The final part of the chapter outlines the scope of the
study and content of each chapter.
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CHAPTER 2
LITERATURE REVIEW
2.1 Introduction
The objective of this chapter is to present an outline of the literature regarding auditor
independence. The review of relevant theoretical model clarified the basis of research theories.
The chapter also discusses about the needs for an auditor by applying the ‘agency theory’ and ‘role
conflict theory’. This current study is based on literature review of previous research. Theoretical
framework is suggested to show a stronger picture on the important variables relationship. At the
end of the chapter, four research hypotheses are developed for quantitative analysis.
2.2 Auditor Independence
Independence can be defined as averting situations that would harm objectivity or allowing
personal interest to influence judgement (Carey & Doherty, 1966). Auditor independence is
described as the heart of auditing profession (Mautz & Sharaf, 1961). This is further agreed by
Gramling and Karapanos (2008). Preserving the independence in audit function is compulsory and
are required by the standard of profession itself (Chen, Elder, & Liu, 2005). Pany and Reckers
(1983) indicated that the existence of auditor independence concept is originated from the birth of
auditing where the needs for reliable financial statement are significant. However, the term
‘independence’ is hard to quantify. Many academics have concluded with various definitions that
best fits the term auditor independence. For instance, DeAngelo (1981) stated that independence
is when there is conditional likelihood that the auditor will report discovered errors. Pany and
Reckers (1988) further define independence as the capacity to act with integrity and objectivity.
Bartlett (1993) states that independence is when the auditor has an unbiased mental attitude in
doing audit work. According to Gwilliam (1987), the concept of independence is wide-ranging
making it difficult to define in single terms and may change over time. The absence of strong
definition of independence in many previous studies has contributed an inconsistencies in the result
achieved (Bartlett, 1993).
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Auditor independence can be divided into two, which are fact and appearance (Beattie, Fearnley,
& Brandt, 1999). This is proven by the Malaysian Institute of Accountants (MIA) that
independence requires both; a) independence of mind and b) independence in appearance
according to By-Law B-1.4(1) (Nur Barizah, 2009). Independence in fact (actual independence) is
the capacity to maintaining a appropriate attitude while preserving the objectives in auditing their
client. Whereas independence in appearance (perceived independence) is the perception by a third
party that the auditor and client are not having a relationship which could suggests conflict of
interest (Alleyne, Devonish, & Alleyne, 2006). Simply said, it is the public observations on the
relationship between auditor and its client in making sure they are not having a conflict of interest.
Both types of independence are critical elements in maintaining confidence on the auditing
profession. However, it is difficult to measure independence in fact as it cannot be observed
(Beattie, Fearnley, & Brandt, 1999) plus the thoughts of auditor’s mind itself adds up to the fact
that’s making it nearly impossible to measure (Nieschwietz & Woolley, 2009). Therefore, this
research only focuses on independence in appearance since the independence in fact is cannot be
measured.
Various interpretations of auditor independence by scholars indeed shows that the understanding
of the concept is important as the fall of corporate firms and high profile accounting scandals are
often linked with impairment of auditor independence. In the recent years, there is an increase in
number of studies regarding auditor independence over the globe. For example, there are quite a
number of research done in Malaysia such as Gul and Teoh (1984), Teoh and Lim (1996), and;
Abu Bakar, Abdul Rahman and Abdul Rashid (2005). Most of the studies investigate the effect of
audit firms providing non-audit services that could lead to impairment of auditor independence.
While some of it agrees that combining audit and consultancy services could affect auditor
independence, some on the other hand believed that independent could still be preserved. It can be
said that there are no definite conclusions on this matter considering all the points has been taken.
To recapitulate it can be said that auditors’ independence represents a situation where auditors are
having no conflict of interest with the clients when giving their opinion. Having defined what is
auditors’ independence, the next section will then discuss the factors that influence auditors
independence.
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2.3 Mandatory Audit Rotation
Credibility of financial statements is determined by the auditor reporting quality. Without
independence, the audit task performed can be questioned to the extent that the auditors are giving
bias opinion in order to safeguard their client. According to DeAngelo (1981), audit quality is
divided into two parts. They are i) to detect any misleading in the financial statement and ii) to
report the misleading actions made by the client to the authority. This quality requires the auditors
to have the competence and skills to be able to detect any fraud without impairing its auditor
independence.
Brody and Moscove (1998) cited that the way to increase audit quality is by mandatory audit
rotation. This is further accepted in Geiger and Raghunandan (2002) that by rotating audit partner,
it could reduce the client’s capability to adversely influence the auditor judgment and subsequently
minimize auditor independence threat. Moreover, according to Teoh and Lim (1996), perceived
audit firm rotation would improve auditor independence. In a study made by Dopuch, King, and
Schwartz (2001), an auditor is less likely to produce a prejudiced report if audit rotation are
implemented thus increasing public confidence and upturn in degree of investment due to
perceived financial reporting quality. Big auditing firm are able to provide better auditing quality
due to vast experience in specific firm characteristics (Thomas, Davis, & Seaman, 1998).
In the United States, under the Sarbanes-Oxley Act, the lead audit and the reviewing partner are
rotated every five years. Similarly, in Malaysia, the MIA states that merely the lead partner
auditing public listed companies are to be rotated every five years (Malaysian Institute of
Accountants, 2000). Findings found that economically troubled companies are more probable to
change auditors than non-troubled companies as they needed to hire a new quality of auditors
(Krishnan & Stephens, 1995). Likewise, Krishnan and Stephens (1995) also found that switching
auditors does not likely to have their modified report to be removed in comparison with companies
that does not switch their auditors. Therefore, if financially distressed companies maintaining the
same auditors’ issues an unqualified report can be perceived that there is impairment in the auditor
independence.
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In the case of Malaysia, the auditors are mostly appointed for company affairs unlike what is stated
under Section 9(6) of Malaysian Companies Act 1965 that states auditors as regulators (Malaysian
Institute of Accountants, 2000). This makes the Malaysian companies are less attractive among
foreign direct investments compared to its neighboring country, Singapore. As an example, our
neighboring country, Singapore under Monetary Authority of Singapore (MAS) has demanded a
change of audit firms every five years to all banks incorporated in Singapore under a new ruling.
This is to prevent auditors from having excessive focus which in turn draws familiarity threats.
However, there are no regulations binding banks and companies in changing audit firms after a
certain period in Malaysia (Rohami, Wan Nordin, Mohd ‘Atef, & Md Hairi, 2009).
Nevertheless, there are certain drawbacks in implementing mandatory audit rotation. the expense
of setting up compulsory audit rotation will be greater in arrears to the high start-up cost. Upon
auditing a new firm, the auditors will have to study about the client’s business. This increases the
cost of auditing as they have to focus more on understanding the company backgrounds, cultures
and industries. This may restrain the audit firms in enhancing certain information and expertise in
niche industries (Petty & Cuganesan, 1996). Petty and Cuganesan (1996) also stresses that the
regulation of mandatory audit rotation will result in lower quality service from auditors.
Lowensohn, Johnson, Elder, R, and Davies (2007) establish that audit quality is positively
interrelated to specialization. Carcello and Nagy (2004) also approved the theory. A specialized
auditor will more like…
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