The Effect of Auditor Quality on the Follow-Up of Audit Recommendation

INTRODUCTION In several literature of auditing, audit quality is defined as the probability of discovering the breach and to report it to the users of financial statements (De Angelo, 1981). In this original definition, auditor’s competency is considered fixed and do not vary with each audit engagement. According to Watkins et al., (2004), audit quality component consists of auditor monitoring strength and auditor reputation. Audit monitoring strength represents auditor’s ability to provide information that minimizes the difference between a client’s reported economic circumstances and the “true” unobservable, economic circumstances of the client. The greater auditor monitoring strength the more closely financial report will reflect the true economic circumstances of the client and the higher information quality. Auditor reputations affect the credibility of the information or perception of the reliability of information. Auditor Vol. 6 | No. 2 ISSN: 2089-6271 The Effect of Auditor Quality on the Follow-Up of Audit Recommendation


INTRODUCTION
In several literature of auditing, audit quality is defined as the probability of discovering the breach and to report it to the users of financial statements (De Angelo, 1981).In this original definition, auditor's competency is considered fixed and do not vary with each audit engagement.
According to Watkins et al., (2004), audit quality component consists of auditor monitoring strength and auditor reputation.Audit monitoring strength represents auditor's ability to provide information that minimizes the difference between a client's reported economic circumstances and the "true" unobservable, economic circumstances of the client.The greater auditor monitoring strength the more closely financial report will reflect the true economic circumstances of the client and the higher information quality.Auditor reputations affect the credibility of the information or perception of the reliability of information.Auditor The Effect of Auditor Quality on the Follow-Up of Audit Recommendation reputation is viewed as a firm-wide characteristic that is consistent on all audit engagement, whereas the auditor monitoring strength can vary on each audit engagement.The case audit failure of Andersen LLP could be one of the example that high reputation auditor could provide weak monitoring strength in particular engagement.
Refer to Watkins et al., (2004), audit quality can be measured by the auditor quality; where the auditor quality represents competency of human capital.
Using principle component analysis, Cheng et al., (2013) extracts three major factors that form the auditor quality which is education, experience and training.In contrast with private sector audit, public sector audit generally monopolistic in nature (Clark, et al., 2007), meaning that the authority to conduct financial audits of the government entities can only be done by certain institutions.BPK is the only institutions that are given the authority to audit the management and financial responsibility of the government entities.Characteristics of private sector auditors and public sector auditors are also very different.Public sector auditors usually civil servants who earn fixed salary, very small risk of being laid off and do not suffer any loss of reputation.The lack of incentive to do a good job could be a threat that result to low audit quality.
According to Streim (1994), motivation becomes important aspects that affect the audit quality in the government sector, and will be used as one determinant of the auditor quality in this study.
Auditor quality as measure of audit quality has not been much explored in empirical research.
So, the first objective of this study is to measure auditor quality of BPK who performs audit of local governments' financial statements (LKPD).
High auditor quality is expected to consistently generate appropriate recommendations in suitable with auditee condition and correct cause of deficiency in order to improve financial management accountability.Based on BPK's performance management report (2012), it is mention that BPK's auditor are encouraged to formulate recommendations that can be acted upon by the auditee and then it will give impact on improvement of local government operational performance.As far as our concerns, empirical research on the effect of auditor quality on followup of audit recommendation is still limited.Lin and Liu (2012), use the number of team members as measurement of auditor competence as one of the variables that affect the audit rectification, but found no effect between these two variables.
The absence of influence of auditor competence on audit rectification could be due to the inappropriate measurement of competencies.
There should be more factors to be considered on measuring auditor competences not only number of team member, but also education, experience, and training as proposed by Cheng et al., (2013) as well as motivation as proposed by Streim (1994).Based on BPK's summary of audit report 2 nd semester 2012, number of recommendations followed-up by local government in Indonesia from period 2009-2013 in number (nominal) is 53.09%; and 26.96% respectively.The rest of the recommendation is categorized as: (1) has not been followed up, (2) has been followed up but not accordance with the recommendation, or

METHODS
Auditor Quality Cheng et al., (2013) shows that auditor quality is positively related to company's performance, where higher auditor quality result in superior performance.In several studies on audit quality, including De Angelo (1981), it is assumed that there is no variation in the auditors'competence.Cheng et al., (2013) relaxes this assumption and measure audit quality from the quality of human resources owned by public accounting firm.Auditor quality in Cheng et al., (2013)  There are two contradictory opinions between auditor tenure with audit quality.The first view says that there is a negative relationship between long audit engagements with the audit quality.The longer the time the auditor's doing an audit, the more familiar their relationship with the client.This leads to a chance to compromising audit opinion, so the client has greater reporting flexibility (Davis et al., 2002;Dopuch et al., 2001;Chi et al, 2005).
These results support the need for mandatory auditor rotation.The second view does not support the need for mandatory audit rotation and found that a short period of audit assignments related to low earnings quality and longer period assignment associated with higher earnings quality (Johnshon, et al., 2002 andMyers et al., 2003).This is might due to the shorter the period of assignment, the auditor's knowledge of the business, operations, accounting policies and internal control system of the client not yet comprehensive compared to the longer audit assignments.In addition, the shorter the period of assignments, the possibility of the auditor to accommodate client's need is higher because they are more focused on the fees rather than protect its reputation (Johnshon, et al., 2002;Carcello and Nagy, 2004).The existence of mixed evidence about the need for audit rotation shows that there is a trade off between independence and competence.The longer the auditor audits a company, it will increase the auditor competence, but at the same time, the client auditor relationship will become closer so that the level of independence decreased.However, increase in competence is not always accompanied by a decrease in independence.This is due to the lost of independency has greater losses than getting additional fees due to additional clients (Watts and Zimmerman, 1985).Because of this audit risk, several auditors have high competence without losing its independence.
Workload can be seen from the number of clients handled by the auditor in certain period of time or the limited time available to carry out the all audit process.Jones et al., (2010) found the association between the busy season with stress and fatigue, and it reduces auditor commitment, job satisfaction and individual performance.The limited time to finish the job causes the auditor to perform substandard work (Agoglia, et al., 2010).Lopez and Peters (2012) proved that the work pressure led to poor audit quality and improve management capabilities to manipulate reported earning.Hansen, et al., (2008) also found that audit capacity stress because of having many clients will result in decline of audit quality.In Indonesia, the Law No.17/2003 stated that the local government head are required to submit financial statements BPK, no later than six months after the fiscal year ends.December is the end of the fiscal year, so first quarter and the second quarter is a busy season for BPK's auditors.Van Linden & Willekens (2013) found a negative relationship between high staff workload and partner with audit quality, so the workload issue should become one of the main concerns for Human Resource Division of BPK.
State Finance Auditing Standard (SPKN) point 4.3 stated that the staff assigned to carry out the audit must have sufficient professional skills required for the task.Choo and Trotman (2001) found that experienced auditors find more atypical findings compare with less experienced auditors.This is consistent with Tubbs (1992) who found that the more experience the auditors, the more errors they can found.Cheng et al., (2013)  In order to get promoted, auditor must pass the certification for each level and also received good assessment from human resources division.
According to SPKN, continuing professional education (CPE) is intended to update auditors' knowledge with current developments in methodology and audit procedures.Through continuing education, auditor will obtain a deeper understanding of accounting issue and increase skills in conducting audit, so audit quality will improve.Cheng et al., (2013)  Two indicators used by Cheng et al., (2013) to measure education is the number of auditors with bachelor degree and post-graduate degree.
Using same measurement with Cheng et al., (2013), Setyaningrum (2011) shows no effect of educational level of BPK auditors to audit findings.Streim (1994) stated that motivation is important aspect that affects the audit quality in public sector.Characteristics of private and public sector auditors are very different.Public auditors usually civil servants who earn a fixed salary, small risk of being laid off, and do not suffer any loss of reputation (or could lose reputation without losing money).The lack of incentive to do a good job threatens audit quality.Therefore, motivation should be considered as a determinant of audit quality.Efendy (2010) shows positive relationship between motivation and the audit quality.This is in line with Bennis (2003)  High quality auditors are expected to generate appropriate recommendations suitable with auditee conditions that can correct deficiency and easily implemented by auditee, so the number of completely followed-up audit recommendations will be higher.ASOSAI (2009)

Regression Model
Regression model to test the hypothesis is as follows: Auditor quality (AQ) will be developed using principal component analysis (PCA) as used by Cheng et al., (2013).PCA procedure is basically aimed to simplify variables by reducing its dimensions.
From eleven auditor quality variables explained in previous part, then we reduce the variable into auditor quality component and will be grouped into factors that explain most variance in the data.This factor then will combine into a single index called Auditor Quality Index.Audit opinion (OPINI) is measured using an ordinal scale that can be sorted by ranking.In this study, the audit opinion is categorized from lowest to highest as follows: (1) Disclaimer Opinion (TMP), (2) Adverse Opinion (TW), (3) Qualified Opinion (WDP), and (4) Unqualified Opinion (WTP).This measurement is also used in Nuraeni (2011)

Descriptive Statitistics
Descriptive statistic on auditor quality variables is presented on table 1. Table 1 shows that in average, team leader perform financial audit to 1-2 auditee during a year and team leader never audit the same auditee more than twice.The frequency distribution shows that 67% of auditor has a functional position role as team leader (junior and senior).However, it is also found that 31% of the samples still have a role as team member.This fact should become BPK's concern to monitor adequacy of team leader especially in BPK's regional office because team leader was considered responsible of carrying out the audit field work, so that the ideal conditions can be fulfilled.In terms of educational background, as much as 88% auditor has accounting background, but only 27% were completed post graduate degree.In average, team leader has nine years experience as an auditor in BPK, and the average experience of being a team leader is 7.2 months.
To be a junior team leader, auditor must first pass through a role as a junior and senior team member where each role level increase requires at least  Description: WORKLOAD = Number of auditees assigned to audit team leader within a year; TENURE = The length of time (in years) audit the same entities; ROLE = The role of the team leader at the time of audit; 4 = Senior Team Leader; 3 = Junior Team Leader; 2 = Team Member; 1 = Other; EDUC_1 = Educational background audit team leader, 1 if the accounting and 0 if other; EDUC_2 = Qualification audit team leader, Level of education of audit team leader, 1 = post-graduate degree and 0 = others; EXP = The length of time (in years) as BPK's auditor; PROF = The length of time (in years) as audit team leader; TRAIN_1 = Number of training followed during a year; TRAIN_2 = Number of hours of training followed during a year; LTLRHP = Lag of number of recommendations completely followed-up plus that can not be followed-up divided by the total number of recommendations; LTLRHP_NOM = Lag of nominal value of recommendations completely followed-up plus that can not be followed-up divided by the total nominal value of recommendations  Agoglia, et al., (2010), Lopez andPeters (2012) and Hansen, et al., (2008)  From Table 3 it can be seen that the average Description: WORKLOAD = Number of auditees assigned to audit team leader within a year; TENURE = The length of time (in years) audit the same entities; ROLE = The role of the team leader at the time of audit; 4 = Senior Team Leader; 3 = Junior Team Leader; 2 = Team Member; 1 = Other; EDUC_1 = Educational background audit team leader, 1 if the accounting and 0 if other; EDUC_2 = Qualification audit team leader, Level of education of audit team leader, 1 = post-graduate degree and 0 = others; EXP = The length of time (in years) as BPK's auditor; PROF = The length of time (in years) as audit team leader; TRAIN_1 = Number of training followed during a year; TRAIN_2 = Number of hours of training followed during a year; LTLRHP = Lag of number of recommendations completely followed-up plus that can not be followed-up divided by the total number of recommendations; LTLRHP_NOM = Lag of nominal value of recommendations completely followed-up plus that can not be followed-up divided by the total nominal value of recommendations

Additional Analysis
Additional tests performed to see the effects of individual auditor quality variables on audit rectification.The results of the regression can be seen in Table 5.

CONCLUSION
The first purpose of this study is to measure shows that in average, auditor are regulary rotated, so he/she does not audit the same auditee more than two times in a row, so that the auditor independence is not threatened.However, further research can use primary data to measure more precisely the auditor independence and test the 1.
To further investigate the correlation between motivation and auditor quality, we made sub-sample data where the audit team leader perform audit for the same entities more than once, to ensure that the same team leader monitor follow up their previous recommendation.The results of the correlation test shows a significant positive correlation, effect on auditor quality.Second, numbers of audit findings use in this study do not classify findings according to type of audit finding and progress of audit findings.Further research can extend this research by focusing on type and progress of audit findings to see whether our main variable robust with different audit findings measurement.
Following up auditor recommendations is one of the efforts to improve the audit opinion.The greater the percentage of recommendations is acted upon, the better the accountability of financial managementand it gives impact on better audit opinion in the next period.Lin and Liu (2012) hypothesized that the government audit institution with competent and independent auditors should be able to better detect irregularities so that the number of findings reported are higher.Future studies are expected to examine the effect of the auditor quality on auditor's opinion and findings, either directly or indirectly through percentage of follow up on audit recommendation.
meaning the completion of the auditor's recommendations given in the previous period increase the motivation of auditors to do a better job on the next audit.

( 3 )
cannot be followed up.The low percentage of completely follow-up audit recommendation could probably due to failure of BPK's auditor to formulate appropriate recommendation or local governments have not been paying full attention for following-up audit recommendation.Followup of audit recommendation should not be the only responsibility of the local government as the preparer of financial statements, but auditor shall take the role for increasing implemented recommendations by formulating appropriate recommendations that can be easily acted upon by the local government.The second objective of this study is to examine the effect of auditor quality on follow-up of audit recommendation using a comprehensive measure of auditor quality.Auditor quality measurements in this study developed from several components that consist of tenure, workload, professional skills, continuing professional education, level of education and motivation.Using principle component analysis method, the result shows there are four components that form auditor quality namely experience, training, motivation, and education.All four components are then combined into a single auditor quality index that represents comprehensive measure of auditor quality.The empirical test result shows a positive effect between auditor quality and follow-up of audit recommendation.This indicates that high quality auditor is able to produce appropriate recommendations that can be easily followed up by the auditee.The more recommendations are acted upon, the better quality of local government financial statements.The remainder of this study proceeds as follows: section II briefly explain hypothesis development and research methodology.Section III discusses the empirical results followes by the managerial implication in section IV.Section V concludes the study.
is extracted from principle component analysis techniques and the result shows that there are three major factors that form auditor quality which is education, experience and training.To answer the first research question, auditor quality measurements will be developed from several auditor quality variable consist of tenure, workload, professional skills, continuing professional education, level of education and motivation.
divided auditors into three age categories (1) between 35-44 years, (2) 45-54 years and (3) above 55 years.Cheng et al., (2013) concludes that auditors with age above 35 years with more 10 years working experience considered as more experienced.Besides age, the professional certification is also another factor used by Cheng et al., (2013) to measure professionalism.Auditors who hold certified public accountant (CPA) assumed already equipped with adequate level of academic knowledge and practices and reflect the auditor professionalism.However, in the government audit, having CPA title is not considered highly necessary, because government audit requires specific expertise.Professional skill can be measured by role of auditor in conducting audit.BPK regulation 4/2010 art 19 states that every auditor has role in carrying out their duty.The role classifications from the lowest to the highest are junior team members; senior team members; junior team leader; senior team leader; technical control and quality control.
measures CPE by calculating the training cost of each public accounting firm.This measurement is difficult to apply for BPK's auditors, since all education and training activities of for auditors conducted centrally in BPK Training Centre, so that the cost of training is not classified by each local government; instead CPE can be measured using number of training hour followed by auditor.AICPA's task force reports that one of the factors that can improve the quality of the government auditor's work is level of auditors' education.
in which the motivation drive the person to have high morale to achieve the goals and meet the existing standards.Efendy (2010) also noted that the recommendation on audit results should be followed up in order not to lose auditors motivation.Increasing the effectiveness of the following up the recommendation is one of the strategic objectives outlined in the BPK's key performance indicators (KPI).This KPI is one indicator to assess the impact of BPK's key business processes.Each audit findings accompanied by recommendation and followup on audit recommendation is one key success factor of the duties implementation, functions and role of BPK to encourage state management and financial responsibility.Thus, follow-up on audit recommendation could be one of the auditor's motivations in improving audit quality.Auditor quality in this research is measured from the quality of the audit team leader.The audit team leader is in charge in conducting audit field to ensure all parties understand the audit process related to the overall planning and tasks assigned.Audit team leader should also ensure that the people involved in the audit engagement have the skills needed to perform a given task, and no conflict of interest or other factors that would hinder any team member in carrying out the tasks assigned by competent and objective manner (EUROSAI, 2004).Based on the above considerations, the quality of the audit team leader is considered reflects the quality of BPK's auditors.Hypothesis Development ASOSAI (2009) stated that the greater the percentage of recommendations accepted and implemented by the auditee, the higher the audit quality.Follow-up after the audit process is local government responsibility for improving public financial accountability.Without follow-up, the audit findings are useless in creating accountability in government auditing process.Empirical research on audit rectification is limited.In China, Huang dan Wang (2010) argue that the correction or rectification effort made by the audit institutions and related parties after problem are recognized is the most important factor in determining the extent to which government auditing can perform its duties and promote government transparency and accountability.Liu and Lin (2012) found that the China National Audit Office (CNAO) can detect irregularities and misbehavior in the management of public revenues and expenditures and provide recommendations to correct the irregularities.However, not all sanctions, penalties and recommendations made by the audit institution are fulfilled by the government.Empirical result shows that auditee and other stakeholder efforts in following up auditor recommendation can strengthen the effectiveness of government audit and help to reduce corruption in the future.The importance of high audit quality should be followed by the utilization of the audit results by the auditee.Lin and Liu (2012) stated that detection of irregularities in government auditing is only the first step and the second step is asking for responsibility and making correction.It is only through the complete and timely enforcement of audit decisions, the detterent effect of government auditing can be guaranteed.Otherwise, audit decisions will represent worthless piece of paper and violation will occur again and again.
stated that the greater the percentage of recommendations accepted and implemented by the auditee is one of the indicators of high audit quality.BPK's performance management report (2012) stated that the BPK's auditor is encouraged to formulate recommendations that can be acted upon by the auditee and enable to enhance operational performance.As illustrated in figure 1, followup audit recommendation in year (t) is the rectification process done by management during year (t) based on recommendation given by auditor in year (t-1); therefore follow-up of audit recommendation in year (t) is affected by auditor quality in year (t-1).Therefore, the hypothesis regarding the effect of auditor quality on the followup of audit recommendation is stated as follows: H1 (Lag) Auditor quality has positive effect on the follow-up of audit recommendation Data Population in this study is all form of local governments (province/districts/municipalities) in Indonesia for the period 2010-2012.The research period was chosen because since 2010 BPK established regulation No. 4/2010 that consists of detailed rules about BPK's auditor role in conducting audit that become one of our main variable.Furthermore, until this study is conducted, complete audited local government financial statement is available only up to 2012.Some variables (audit opinion and audit findings) uses lag; so several data need to be collected from year 2009.The purposive sampling method is used to obtain complete data.Data sources of this study are obtained from BPK which consists of: (1) audited local government financial statement, (2) semiannual summary of audit report and (3) human resources data related to audit team leader competence.Other data are taken from Statistical Bureau and the official website of local government and DPRD.
Figure 1.Illustration of Follow-up of Audit Recommendation

3
years, taking into account the adequacy of the number of credits and the assessment by human resources department.If the average experience as BPK's auditor is 9 years, the auditor should already reach role as senior team leader, but in fact majority role of auditor in this sample is still as junior team member, so it can be concluded it takes more than 3 years to get promoted.Within a year, in average, team leader followed 2 training with total training hours of 65 hours.Training rules in the BPK mentioned that each year the auditor must follow minimum 40 hours of training related with the functional roles as auditor and other relevant trainings.The result shows that the training requirements for auditor have been met.
figure 1, TLRHP_NOM in 2012 contains follow-up done by the management during the 2012 based on audit findings in 2011; thus the auditor quality used is from 2011.Because of the lag, number of observation of auditor quality reduced to only 902.Auditor quality in 2012 cannot be used because of the audited financial statements of year 2013 have not been published by the BPK.
auditor quality of BPK auditor who audits local governments' financial statements.According toWatkins et al., (2004), audit quality can be measured by the auditor quality; where the auditor quality represents competency of human capital.There are 11 (eleven) variables enter in this study expected to affect the auditor quality.Using principle component analysis method, the result shows that variable can be reduced into four components that form auditor quality namely experience, training, motivation, and education.All four components are then combined into a single auditor quality index that represents comprehensive measure of auditor quality.The second objective of this study is to examine the effect of auditor quality on follow-up of audit recommendation.High auditor quality reflects high auditor competence that can generate correct and appropriate recommendations that can correct basic cause of deficiency, so it could be effectively implemented by the auditee.Auditor should also monitor the follow-up because the more recommendations are acted upon, the better the quality of local government financial statements.These results prove that the auditor quality will have a positive effect on the follow-up of audit recommendation.In the additional test, we found that experience and motivation component shows positive effect on the follow-up of audit recommendation.Overall, it can be concluded auditor can take role on increasing follow-up of audit recommendation by formulating appropriate recommendation, and to do so auditor should continue improving their competencies.There are several limitations of this study.First, in this study, independence have been considered by including the tenure variable, and the results

Table 1 .
Descriptive Statitistics for Auditor Quality Variables it correlates significantly with the auditor quality.

Table 2 .
Correlation matrix of variable used to extract auditor quality age, the average age is 36 years with maximum age of 62 years.The average population is 894.113inhabitants.Descriptive statistics also shows that 73% of heads of regions in Indonesia does not have a background in economics/accounting/finance.

Table 3 .
Descriptive Statistics for Empirical Model

Table 5
It is found is this research that not all field work auditor in charge has a role as audit team leader, some of the auditors do not engage in compulsory training and less of them has post graduate degree.This is valuable input for BPK in quality assurance process to ensure all audit team leader has high competence as in this research shows positive effect on high quality of financial statements.