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Title: Audit quality in the small firm segment : quantitative and qualitative evidence from Thailand
Author: Chayasombat, Jaravee
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2010
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The aim of this study is to contribute to the literature on audit quality in the small firm segment from the context of one emerging market - Thailand. The study extends existing audit quality literature by concentrating on an emerging market rather than developed countries. Currently, there is scant evidence on how differences in countryspecific factors and cultural values affect audit quality and the economic role of an audit. The predominance of small firms in emerging markets makes a study of audit quality in this segment increasingly difficult to ignore. In Thailand, the country providing the empirical basis for this study, financial and legal systems are relatively less efficient than in developed countries. From one perspective, an independent audit may playa crucial role by serving as a substitute for weak country-level institutions. However, the payoff of the audit may be intrinsically low due to the inefficiency of these institutions. Given this dilemma, this study aims to contribute to an understanding of audit quality and the economic role of the audit in the small firm segment in an emerging market. Thailand provides an excellent setting in which to study the issue due to its two-tier system of auditors as well as its particular country-specific characteristics and cultural values. The mixed methods approach is adopted in this thesis to examine three dimensions of audit quality - (1) auditor quality choices, (2) audit pricing and (3) the value and relevance of financial reports. The first two dimensions are addressed through a five-year panel data set on financial and auditing information for 700 small Thai private firms. The auditor choice, auditor change and audit fee models are constructed in accordance with market-specific factors. For the third dimension, the analysis is based on 35 interviews with owner-managers, accountants, regulators and main users of accounts - lenders and tax authorities. The results of this study reveal a number of differences from findings of previous studies in developed markets. First, the investigation on auditor quality choice shows that agency factors neither motivate auditor change nor affect the choice of an auditor. This finding suggests that for small Thai private firms, auditors are not employed as monitoring or bonding mechanisms to alleviate agency problems. The loyalty to an incumbent auditor is highly associated with the auditor selection, consistent with characteristics of the market with collectivist cultures and a traditional society. Second, the audit fee analysis shows that small firms perceive first-tier auditors as superior in audit quality and pay a fee premium. As ~ypothesised for a country with bank-oriented financial systems, the agency cost resultmg from the firm-debtholder relationship is found to be one of the significant determinants of audit fees. Finally, evidence from interviews show that perceived audit quality (auditor reputation) does not align with actual audit quality (auditor monitoring strength). In this market, the accountant-client relationship is very prominent. Auditors tend to lack independence because accountants usually provide one-stop-services by preparing accounts and finding auditors for their clients. Due to low auditor competence and independence, the value and relevance of financial reports and of the external audit are diminished. Overall, this study highlights the influence of country-specific factors and cultural values on audit quality. The evidence obtained may be very instructive for other emerging markets in the South East Asia region and beyond.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available