Audit Quality in Asean Countries

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The International Journal of Accounting

Audit Quality in ASEAN
Michael Favere-Marchesi
Simon Fraser University, Burnaby, B.C., Canada

Key Words: ASEAN; Audit quality; International auditing standards; Statutory auditors

Abstract: This study explores audit quality in ASEAN from an analysis of the legal environment faced by statutory auditors. First, it provides an overview of the national laws, regulations, professional codes and standards defining the legal environment. Second, it provides an economic analysis of the main differences among countries and relates those differences to the functioning of the audit markets, with a potential for uneven audit quality in the region. Data were collected with questionnaires from national representatives of four ``Big Five'' firms, and accuracy of the information was reviewed by 15 governmental and professional bodies responsible for regulating the auditing profession in ASEAN. Analysis of the data revealed a diverse legal environment among the ASEAN countries possibly creating a climate of differential audit quality. Many differences were observed in the competence requirements of auditors, the requirements regarding the conduct of statutory audits, and the reporting obligations. Further, audit quality in some countries is seriously compromised due to a lack of rules ensuring auditors' independence. Finally, some of the liability regimes in ASEAN do not provide an incentive for statutory auditors to provide quality audit services. Several recommendations are made to improve the legal environment by bringing the national laws and regulations in line with international standards of auditing which would result in a more uniform audit quality throughout ASEAN.

This article reports the result of a study on audit quality in the member states of the Association of Southeast Asian Nations (ASEAN). Laws, regulations, professional codes and standards1 regarding statutory audits define the role and position of auditors, and affect the functioning of audit markets in the region. Currently, the legal environment in which auditors operate differs between the ASEAN countries. Thus, the role and position of statutory auditors are not uniform in the region and this heterogeneity could result in dissimilar audit quality within the ASEAN community. The objective of this study is to provide an overview of the legal environment affecting the role and position of statutory auditors in the ASEAN region. More

Direct all correspondence to: Michael Favere-Marchesi, Associate Professor of Accounting, Faculty of Business Administration, Simon Fraser University, 8888 University Drive, Burnaby, B.C., Canada, V5A 156; E-mail: favere@yahoo.com The International Journal of Accounting, Vol. 35, No. 1, pp. 121±149 ISSN: 0020-7063. All rights of reproduction in any form reserved. Copyright # 2000 University of Illinois

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THE INTERNATIONAL JOURNAL OF ACCOUNTING

Vol. 35, No. 1, 2000

specifically, it examines the national laws and regulations affecting (1) the appointment and termination of statutory auditors, (2) the independence and incompatibilities issues faced by auditors, (3) audit reporting, and (4) the liability of statutory auditors. This overview thus provides a basis to analyze the main differences between the national laws and regulations and their impact on the functioning of the audit market in ASEAN. This study offers several benefits. First, it gives a better understanding of the nature of the audit function within the ASEAN community and of the reliability that can be placed on audited financial information. As the ASEAN securities markets play an increasing role in global investment strategy, this assessment should help to evaluate the risk factors of investing in the region. Further, as ASEAN becomes more involved in global trading, companies wishing to invest or conduct business in the region should benefit from understanding the present state of audit services. Second,...
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