Questioning the Big 4 Audit Quality Assumption: New Evidence from Malaysia

MGSM Working Paper No. 2008-9

27 Pages Posted: 11 Oct 2008 Last revised: 15 Oct 2008

See all articles by Tyrone M. Carlin

Tyrone M. Carlin

Southern Cross University; The University of Sydney Business School

Nigel Finch

Saki Partners

Nur Hidayah Laili

Macquarie Graduate School of Management

Date Written: October 8, 2008

Abstract

Audit quality can be defined as relating to the probability that financial statements contain no material omissions or misstatements. Previous research on the subject of audit quality relies on the assumption that large audit firms (Big 4) are homogenous in providing higher audit quality than small audit firms (non-Big 4). However, there is little evidence in extant literature supportive of quality differentials between Big 4 firms, except that the collapse of Arthur Anderson certainly undermines this assertion that large auditors are associated with higher audit quality.

In this study, we develop a methodology to distinguish audit quality among Big 4 audit firms and attempt to question the homogenous audit quality assumption. In exploring this theme, this paper examines the audited disclosures made during the transition period under FRS 136 - Impairment of Assets (the Malaysian equivalent to IAS 36) of a sample of large Malaysian listed corporations who each have engaged Big 4 auditors. The results of this study are alarming, finding systemic failure on the part of Big 4 auditors in Malaysia to comply with even the most basic elements of the FRS 136 disclosure framework in relation to goodwill impairment testing.

Keywords: Audit Quality, Goodwill Accounting, FRS 136, Impairment testing, Malaysia

JEL Classification: M40, M41

Suggested Citation

Carlin, Tyrone M. and Finch, Nigel and Laili, Nur Hidayah, Questioning the Big 4 Audit Quality Assumption: New Evidence from Malaysia (October 8, 2008). MGSM Working Paper No. 2008-9. Available at SSRN: https://ssrn.com/abstract=1280790 or http://dx.doi.org/10.2139/ssrn.1280790

Tyrone M. Carlin

Southern Cross University ( email )

Lismore, New South Wales 2480
Australia

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Nigel Finch (Contact Author)

Saki Partners ( email )

Australia

Nur Hidayah Laili

Macquarie Graduate School of Management ( email )

99 Talavera Road
Sydney, NSW 2113
Australia

HOME PAGE: http://www.mq.edu.au

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