Abstract
The study has an objective of examining the impacts of corporate governance among listed Australian companies using their audit quality as the baseline. Corporate governance is a broad topic. Thus the study focuses on the effect of ownership structure on the quality of auditing across Australia. While a widely accepted definition of audit quality has not been formulated nor has a widely accepted measure been generated, the research will employ different aspects of corporate governance to establish its relationship with the quality of the audit. Various data and information will be gathered from at least ten different companies in Australia.
Introduction
There is a logical relationship between the type of corporate governance and the auditing quality. The study seeks to determine the relationship between the ownership structures- as one of the aspects of corporate governance- on the quality of auditing. It attempts to establish whether ownership structures have any impact on the amount and revealing the pertinent independent auditors and the quality of the audit (Kang, Cheng & Gray, 2007).
Mining and Petroleum industry produce some of the biggest companies in Australia. This research will focus on at least ten companies in the Mining and Petroleum industry in Australia. BHP Billiton, Rio Tinto and Coal India Limited are some of the top companies in Australia Mining and Petroleum industry generating the largest revenue. More data pertinent to the relationship between corporate governance and audit quality will be collected.
Big corporations play a significant role in the economy of a country. The controlling needs have been created by the development of information technology, the ever-growing development of economic bodies and the existence of challenging benefits (Mitton, 2002). Apart from contradicting benefits, other factors such as the inadequacy of the user’s direct access to information have generated the need for independent auditing services across the country According to Marginson & Considine, it is apparent that corporate governance creates various incentives to oversee the financial reporting and affects the independent auditor (2000).
Farrar notes points out that one of the incentives presented by corporate governance is demonstrated in the fact that the audited financial reports are a significant resource for information and data about the organization (2008). Also, it is imperative to note that the investors and shareholders of the organizations value the financial reports significantly. It is utilized in financial decision making and analyzing the accounting information concerning the auditing quality and the kind of auditor’s report.
Ownership and capital structures, as well as the structure of the board of directors, are regarded as the efficient factors on the economic growth and development of various companies and organizations (Collett & Hrasky, 2005). Various compositions of ownership structures can impact the organization’s strategic and financial policies. Some of the different compositions of ownership structures include main stockholders and institutional stakeholders.
Hypothesis development
Lin & Hwang (2010) holds that the aspects of corporate governance are not bound by internal regulations. As a matter of fact, external auditor symbolizes the most significant external control aspect. As a consequence, this study emphasizes the impacts of corporate governance aspects on the demand for more elevated auditor by organizations (Collett & Hrasky, 2005). The study focuses on the board composition and the ownership structure, director’s size and the size of the board.
According to DeAngelo, numerous factors affecting the quality of auditing in different forms have been researched and reported across the country (1981). However, the relationship between corporate governance and auditing quality has not been allocated much attention. Also, a tremendous amount of research has been conducted to determine the relationship between the various financial variables and organization’s accounting and their impacts on the quality of auditing performed (Larcker, Richardson & Tuna, 2007). Since corporate governance is a broad topic with numerous aspects, it is imperative to investigate one aspect that affects the quality of auditing. As a consequence, this study focuses on the effects of ownership structures, as one of the aspects of corporate governance, on the quality of auditing (Carey & Simnett, 2006).
Audit quality
There is still inadequacy in the measure of audit quality. Various studies always employ the use of dichotomy as a proxy for assessing the quality of auditing. The use of this variable has proven to be inconvenient in correctly assessing the quality of auditing. Krishnan (2003) asserts that the main reason as to the inconvenience of dichotomy is because it relies on numerous factors like the size of the audit firm, auditor's experience, auditor's reputation, auditor’s specialization and the extent to which computer and information technology are employed in the audit process. PCA can be run so as to examine the quality of audit with improved precision.
The quality of audit highly relies on the combined probability of an auditor determining and exposing a problem in an accounting system (Deis Jr & Giroux, 1992). Audit quality is the eagerness to report any material misstatement or exploitation that will augment the material uncertainties and go apprehension problems (Mitton, 2002). Another definition of audit quality demonstrates that it is the possibility that an auditor will not present an unqualified testimony for statements holding material errors. It is imperative to note that; while there are numerous definitions of audit quality, there is no single accepted definition of audit quality nor has any single widely accepted measure be formulated (Deis Jr & Giroux, 1992).
Methodology
This study will gather different empirical data and information form ten different Mining and Petroleum companies in Australia regarding the relationship between corporate governance and the quality of the audit. It will employ both qualitative and quantitative methods of data collection and analysis. The research will focus on testing the quality of the audit and the ownership concentration (Carey & Simnett, 2006). It will also gather data on the relationship between institutional ownership and the quality of auditing, the size of the board and the quality of auditing, the size of the out directors and the quality of auditing, and the relationship between the per out director and the audit quality (DeZoort & Salterio, 2001).
The study will collect information about the audit quality and use it as the dependent variable in the research (Imhoff, 2003). It will employ various aspects of corporate governance as the independent variable to analyze the relationship between the quality of audit and the different aspects of corporate governance.
The collected data will be analyzed through the use of regression analysis. The analysis will be employed to determine the significance level of each of the independent variables. The significance level will be used to evaluate the level of effect different aspects of corporate governance have on the quality of financial reporting in these companies.
Conclusion
According to the literature in agency theory as well as the rise of agency contradictions, the tendency of the economic bodies to choose independent auditing organizations increase According to Francis & Yu (2009), the predicaments from ownership of isolations from the administration are increased by the deficient and improper revealing of the financial report in addition to inadequacy in information lucidity in organizations (De Villiers, Naiker and van Staden, 2011). The lack of revealing and presenting the pertinent and reliable financial reports leads to economic losses not only to stockholders but also to external beneficiaries (Francis & Yu, 2009).
Ownership and capital structures, as well as the structure of the board of directors, are regarded as the efficient factors on the economic growth and development of various companies and organizations. Various compositions of ownership structures can impact the organization’s strategic and financial policies. Some of the different compositions of ownership structures include main stockholders and institutional stakeholders (Francis & Yu, 2009).
On the other hand, the independent auditing supports the rights all stakeholders via crediting financial reports, approving the quality of financial information and guaranteeing the reliability of the financial information (Larcker, Richardson & Tuna, 2007). Also, creditors and investor depend on the outcome of the audit report performed by external auditing organizations to examine the financial performance of various business bodies about different investments opportunities. The quality of auditing which is linked to different aspects of corporate governance demonstrates multi-dimensional structure.
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