Impairment of audit quality: An investigation of factors leading to dysfunctional audit behaviour

This thesis studies dysfunctional audit behaviour in the Malaysian context; to date, no previous study has examined this issue. Within this context, the thesis sets outto accomplish two main goals: (1) to investigate the factors contributing to dysfunctional audit behaviour, and (2) to examine whether audit firm, audit team and individual factors affect dysfunctional audit behaviour. This study was carried out to coincide with the Practice Review currently undertaken by the Malaysian Institute of Accountants (M.I.A.), while the current incidence of auditing and accounting scandals in Malaysia provide another factor that prompted this study. The study was conducted in two phases. The first phase, i.e. the pilot study, explored the incidence of dysfunctional audit behaviour; the second phase, i.e. the main survey, investigated and examined the factors contributing to dysfunctional audit behaviour. This study extends earlier studies on dysfunctional audit behaviour by examining three different factors, namely audit firm, audit team and individual factors. Dysfunctional audit behaviours investigated are: acceptance of weak client explanations; superficial review of documents; reduction of standards of work below levels considered reasonable; failure to research an accounting principle, and premature sign off. Results of the pilot study and main survey demonstrate the existence of dysfunctional audit behaviour in Malaysian practices. Unlike earlier studies of dysfunctional audit behaviour, this study involves the use of higher ranking audit personnel in its sample. The study shows that Audit Managers are resorting to some dysfunctional audit behaviour, and that, given their managerial and supervisory roles, the implications of their behaviour could be serious. Respective professional bodies such as the M.I.A. should react to these incidences, since this behaviour could affect audit quality in the long run. Stronger regulations and a greater emphasis on the ethical aspects of such behaviour are suggested. The results suggest that the M.I.A. might seek to have the law, especially the Accountants Act 1967, amended, so that it can investigate its members for suspected dysfunctional behaviour or wrongdoings, instead of waiting for complaints and referrals. In addition, since the incidence of dysfunctional behaviour relates to individual attitudes to formal controls, it is suggested that the management of audit firms should communicate matters relating to audit quality to their personnel at all levels. Implementation of programs to educate personnel at all levels can help the profession and firm to address the phenomenon of dysfunctional audit behaviour, while the introduction of mandatory minimum hours of Continuing Professional Education (CPE) could support this discussion. While such CPE programs can help prevent the occurrence of dysfunctional behaviours, the mechanism that will help most is adherence to audit field work standards together with appropriate supervision