شرکت حسابرسی، اداره امور شرکت ها، و کیفیت حسابرسی : مدارک و شواهد از بحرین

The aim of this research is to document the perceptions of credit and financial analysts with regard to the relationship between the effectiveness of audit committee, size of the auditing firm and audit quality in the context of Bahrain, which is characterized by a developed financial sector, low-liquidity stock market, low turnover in board of directors of listed firms, an inactive merger and acquisitions market and almost non-extent litigation. A survey of 300 credit and financial analysts shows that analysts considered auditors' opinion useful. Both credit and financial analysts see the credibility of financial statements to be a function of the size of the auditing firm. Both groups assume that the characteristics of Big-Four firms allow them to produce better-quality reports than non-Big firms. Non-audit services were found to affect auditor's independence and hence impair audit quality. Both the groups of analysts believe that effective audit committee enhances the quality of audit reports. Financial analysts perceive financial statements to be more credible than do credit analysts.

Audit service is perceived to play an important role in reducing information asymmetry (Beatty, 1989 and Willenborg, 1999) as well as in mitigating agency problems between managers and shareholders and between shareholders and creditors (Jensen & Meckling, 1976). Therefore, owners hire auditors to produce information used in contracting with managers (Antle, 1982 and Watts and Zimmerman, 1986). Meeting these two roles depend on audit quality. While audit quality is considered an important element of corporate governance, it is unclear whether audit quality and other aspects of corporate governance (such as director knowledge and independence) are fundamentally complements or substitutes, according to Defond and Francis (2005). Audit quality is a concept that has different definitions for different people. DeAngelo (1981a) hypothesizes a two-dimensional definition of audit quality that has set the standard for addressing the issue. First, a material misstatement must be detected, and second, the material misstatement must be reported. Audit quality as such is the increasing function of the ability of an auditor to detect accounting misstatements and is related to the degree of auditor independence. Titman and Trueman (1986) propose that a good auditor provides precise information regarding the firm's value. Because the purpose of an audit is to provide assurance as regards the financial statements, audit quality is defined by Palmrose (1988) as the probability that financial statements contain no material misstatements. Davidson and Neu (1993) define audit quality as the ability of the auditor to detect and eliminate material misstatements and manipulations in the net income reported. Users of financial statements perceived audit reports to provide absolute assurance that company financial statements have no material misstatements and do not perpetrate fraud (Epstein & Geiger, 1994). However, auditors perceive audit quality in terms of strict adherence to GAAS/ISA requirements. Auditors working with a company also strive to reduce their business risk by minimizing auditees' dissatisfaction, avoiding litigation, and limiting the damage to their reputation, which could result from audit failure. The demise of Arthur Andersen in 2002 is an example of the ultimate results of audit failure. Regardless of any differences in the definition of audit quality, and even when users and providers of audit services question the quality of audit service, they agree on its importance. I acknowledge that measuring audit quality is problematic. The quality of an audit is not directly or immediately obvious, especially to creditors and investors. Audit quality-control procedures are intended to maintain high standards of control over the process of an audit, but an audit failure usually becomes known only in the case of a business failure; witness Enron. An auditor's role is to assuage agency problems resulting from the separation of ownership and control (management). This role can be successful only if an audit opinion reflects the true findings of the audit engagement. According to the Statement of Financial Accounting Concepts No. 1 (SFAC No. 1, Paragraph No. 8, p. 9), “financial statements are often audited by independent accountants for the purpose of enhancing confidence in their reliability.” American Institute of Certified Public Accountants (AICPA) (1994) also acknowledges the importance of considering perceptions of investors on auditor independence. A former chairman of the AICPA, Elliott (2000) says “[The AICPA] believe[s] that appearances are very important and capital markets require confidence in financial statements and audit reports, and the member firms of the AICPA are basing their business of auditing on their reputations, and that is heavily affected by appearance.” Despite considerable research on audit quality, studies on audit quality in Bahrain are scarce. This might be due to the relatively low number of audit failures. Since the establishment of the first shareholding companies until 2008, there were only three reported cases of audit failure. These cases involve the General Trading and Food Processing Company (1994), the Bahrain Islamic Investment Company (2002), and the Bahrain Saudi Bank (2002). The fraud involved in the first case was carried out by the company's accountant, and the court ruled against the accountant. As for the second company, the case was settled out-of-court, and the partner involved in the case was asked to leave the firm, whereas the third instance resulted in replacement of the auditors without the auditors being taken to court. The low number of reported cases of audit failures does not ensure that audits of Bahraini listed firms are of good quality and should not mean that users of company reports should be complacent as to the quality of an audit. Therefore, this study investigates the way users of financial statements determine the quality of audit reports. Accordingly, a survey of the major users of financial statements (investors and lenders) with respect to their perceptions of the factors that determine audit quality, particularly with respect to the impact of corporate governance and size of audit firms on the quality of an audit report, is carried out. This research makes three contributions to the literature. First, although most of the research in the area uses different methodologies to investigate the determinants and the role of audit quality on integrity and quality of accounting information, studies on markets such as Bahrain, which is characterized by dominance of few accounting firms; largely uncommon cases of switching audit firms; weak enforcement of regulation reverent to audit industry, with exception of those related to financial institutions; low-liquidity stock market; and considerably less number of different institutional setup. Hence, this research provides additional insights to audit quality. Second, it responds to calls for empirical testing of the relationship between corporate governance and audit quality, according to Defond and Francis (2005). Third, Defond and Francis (2005) argue that research on the effectiveness of audit committee suffer from a number of problems such as weak statistical explanatory power and multi-colinearity problem. A survey method that asks respondents to state their perception of the effect of effective audit committee on audit quality overcomes these problems. The remaining part of the article is organized into four sections. The following section provides brief accounts of the audit market in Bahrain. Section 3 offers brief literature review on the relationship between effectiveness of audit committee, firm's size, and audit quality. Section 4 describes the data collection and research methodology. Section 5 presents the research findings of questionnaire survey. The final section provides conclusions of the study, its implications, and suggestions for future research.

The author has reported the results of a survey of credit and financial analysts on perceptions of audit quality and the factors that determine that quality. Consistent with the evidence in developed markets, the bigger auditing firms are perceived to provide better quality audits and to be more independent of the management of companies they audit compared with smaller firms. Findings are similar in both the questionnaires and personal interviews. The conclusion is that the Big Four auditing firms have characteristics that place them in a better position to produce better quality audits than smaller firms. A review of the 2007 annual reports of 41 companies listed on the Bahrain Stock Exchange shows that 82.5% of the companies are audited by one of the Big Four. The author's interviews indicate that the Big Four auditors are better able to resist management pressure in cases of conflict. Their greater resources, technical knowledge, and global reach allow them to deal with clients more objectively without a fear of termination. Financial analysts rely more on the audited financial statements than credit analysts. This is likely because a bank–client relationship allows credit analysts to obtain more information from their clients; they are also in a better position to evaluate the financial position of their borrowers than financial analysts. Both groups of analysts think that provision of non-audit services will negatively affect auditor's independence and ultimately impair the quality of an audit. An effective audit committee is seen as one factor that should improve the credibility of financial statements. Regression results indicate that both groups of analysts perceive financial statements audited by Big-Four firms to be of better quality than those audited by non-Big firms. This is because of the characteristic of Big Four firms, which are not matched by other audit firms. This is an evidence supporting CBB's current policy that audit of retail and wholesale banks and large investment companies should be performed by Big-Four firms. Furthermore, credit analysts have found that the creditability of an audit report by one of the Big Four is determined by professional audit expertise, wide range of skills, reputation, and accounting-and-auditing knowledge. However, for financial analysts, the credibility of these reports is a function of professional audit expertise, real value for fees, wide range of skills, ethical standards, and accounting-and-auditing knowledge. Future research may be directed toward determining the effect of the actual role of an audit committee on audit quality. This can be carried out when companies start establishing such committees and ensure that they act in an independent and effective manner. This is likely to take place when Bahrain issues its corporate governance code.