DOES AUDITOR QUALITY CHARACTERISTICS MATTER TO INVESTOR? THE TESTING OF DUAL ROLES AUDITOR ON BOND MARKET IN INDONESIA

Sri, Wahyuni and Zaki, Baridwan and Setiyono, Miharjo and Supriyadi, Supriyadi (2013) DOES AUDITOR QUALITY CHARACTERISTICS MATTER TO INVESTOR? THE TESTING OF DUAL ROLES AUDITOR ON BOND MARKET IN INDONESIA. ARTIKEL PROSIDING.

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Abstract

This study aims to examine the influence of auditor quality characteristics, which are proxied by the auditor size and spesialization as well as auditor tenure toward the cost of debt financing. The focus of the study was to test the dual roles of auditors in the bond market in Indonesia. Samples that used in this study were 554 observations during 2006-2010 period. The results showed that investors in Indonesia evaluate the dual roles of auditors (information role and insurance role) included in auditor size and specialization, although in different magnitude (the insurance role is more evaluated by the investor compare to the information role). These results imply that investors are not only assessing the reputation of "brand name" of the big auditors (Big-4), but also the expertise of auditor specialization. Overall, the results of this study provide empirical evidences that the auditor quality characteristics, namely auditor size and specialization are matter for bond market participants in Indonesia. Auditor tenure has negative impact on cost of debt financing, implying that the results are in line with government regulations concerning the obligation of rotation for Public Accounting Firms and Public Accountants. The results provide an evidence of the validity of agency theory. Through its dual roles, auditor size and specialization can reduce agency conflicts between management and investors. These results have methodological implications that medium auditors should also be considered in auditor size measurement instead of big and small auditors. The results are useful for regulators to draft Financial Reporting Act and to reinforce rules on rotation auditor in Indonesia.

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