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Managerial Auditing Journal

An empirical comparison of non-Big 4 and Big 4 auditors' perceptions of auditor
independence
Philip Law

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Philip Law, (2008),"An empirical comparison of non-Big 4 and Big 4 auditors' perceptions of auditor
independence", Managerial Auditing Journal, Vol. 23 Iss 9 pp. 917 - 934
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An empirical comparison of
non-Big 4 and Big 4 auditors
perceptions of auditor
independence

Non-Big 4 and
Big 4 auditors
perceptions
917

Philip Law
Department of Accounting, Faculty of Business Administration,
University of Macau, Taipa, Macau
Abstract
Purpose Perceived independence is one of the corner-stones in auditing theory. Despite prior
research on auditor independence, the results are inconclusive. The lack of research in the Hong Kong
auditing environment motivates this study, particularly following the Enron debacle. The purpose of
this paper is to examine the non-audit services (NASs), competition, rank and types of auditors, in
respect of the independence problem as it relates to the practices of Hong Kong auditors in the
post-Enron environment.
Design/methodology/approach Four independent variables identified from literature gaps are
examined, namely NASs, levels of competition, auditors of different ranks and types of auditors. Mixed
ANOVA are employed to analyze survey responses from 207 Big 4 and 185 non-Big 4 auditors.
Findings Results of the study show that the provisions of NASs and high competition could have a
negative influence on auditors perceptions of independence. Second, auditors perceptions that the
influence of NASs on independence depends on an individual auditors rank are supported. Senior
managers have the highest mean rating on perceptions, while partners have the lowest mean rating.
Results support the agency theory that the agent (senior manager) may not always act in the best
interests for the principal. Finally, there is no difference between Big 4 and non-Big 4 auditors
perceptions of the influence of NASs and competition on independence.
Originality/value The study revokes earlier US research that indicates that NASs provisions
favorably influence auditors perceptions of independence. It would be advantageous for a regulatory
body to reconsider professional reforms such as prohibitions of NASs and the repercussions of non
compliance of independence.
Keywords Auditors, Auditing, Competitive strategy, Hong Kong
Paper type Research paper

Introduction
Independence is regarded as an important attribute of external auditors. The relatively
recent corporate collapses, such as the Enron, has raised important questions about the
independence of the auditor. Independence has been the focus of almost constant
controversy, debate and analysis. In spite of these efforts, there are a number of crucial
issues which remain unsolved in the research and literature. There is much debate
whether the provision of non-audit services (NASs) should be prohibited (Shockley,
1981; Gendron and Suddaby, 2004; Alleyne et al., 2006; Carey et al., 2006; Gul et al.,
2007) and some researchers argue that the provision of NASs would positively enhance
independence (Bartlett, 1993; Emby and Davidson, 1998; Jenkins, 1999; Windmoller,
2000; Kinney et al., 2004). Other researchers indicate NASs provisions have no

Managerial Auditing Journal

Vol. 23 No. 9, 2008
pp. 917-934
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900810908454

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influence on the perceptions of independence (Corless and Parker, 1987; Sucher and
Bychkova, 2001; DeFond et al., 2002; Quick and Rasmussen, 2005).
The NASs literature on auditor independence is clearly controversial, especially in
the post-Enron period (Kinney et al., 2004). The inconsistency of the results produced
by these studies suggests opportunities for future research (Larcker and Richardson,
2004). There is lack of research into this issue in the Hong Kong auditing environment
and this motivates to conduct a study to examine the perceptions of auditor
independence in the Hong Kong context by examining four independent variables
identified from the literature gaps. These include NASs, competition, the auditors rank
and types of auditors (Big 4 and non-Big 4). Agency theory (Jensen and Meckling, 1976)
is employed in analyzing the perceptions of auditors of different ranks. Second,
extensive surveys are then followed. The survey consists of eight scenarios given to
Big 4 and non-Big 4 auditors, based on the different degrees of NASs provisions and
levels of competition. Auditors are asked to assess how much independence has been
affected. A mixed ANOVA and post hoc analysis are performed to examine if there is
different between the responses of Big 4 and non-Big 4 auditors, and between auditors
of different ranks.
In Hong Kong, there are currently no mandatory Auditing Standards to prohibit the
provision of NASs to the clients or to monitor other perceived familiarity risks to
independence. Though prior studies have been conducted in the USA (Bartlett, 1993;
Jenkins and Krawczyk, 2001; DeFond et al., 2002; Gul et al., 2007), the national cultural
differences in Hong Kong may not conform to that pattern. Investigation of the
independence problem in the local setting was suggested by Beattie et al. (1999). In this
respect, the views of Hong Kong auditors are likely to provide invaluable insights.
Besides, after the 1997 sovereignty changeover from the British to the Chinese
Government, Hong Kong has already become a Special Administrative Region of
China. Hong Kong is currently adopting the One Country Two System operation,
under the rule of Basic Law enacted by the Chinese Government since 1997. Whether
this study under the current legal and political background would differ from the US
and other studies, is unknown. The claimed impact of cultural differences on
commercial behavior and perceived national cultural differences between Hong Kong
in the Asia-Pacific region and the Anglo-American commercial environments also
justifies this research (Patel and Psaros, 2000; Majid et al., 2001). Hence, this study will
be the first research examining the NASs, competition, rank of auditors and types of
auditors, in respect of the independence problem as it relates to the practices of Hong
Kong auditors in the post-Enron environment. This study makes a contribution to the
literature in the Asia-Pacific region and can assist regulators and professional bodies to
develop policy and guidelines on independence issues.
The results of this study show that the provisions of NASs and high competition
could have a negative influence on auditors perceptions of independence. Second,
auditors perceptions that the influence of NASs on independence depends upon an
auditors rank, are supported. Senior managers have the highest mean rating on
perceptions while partners have the lowest mean rating. Results support the agency
theory that the agent (senior manager) may not always act in the best interests for the
principal (Jensen and Meckling, 1976). Finally, there is no difference between Big 4 and
non-Big 4 auditors perceptions of the influence of NASs and competition on
independence.

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Importance of audit independence

It is generally accepted that there are two types of auditor independence, actual and
perceived independence (Firth, 1980; Shockley, 1981; Beattie et al., 1999). The notion of
perceived independence is one of the cornerstones in auditing theory and in auditing practice
(Bakar et al., 2005; Gul et al., 2007). Since the collapse of Enron in the USA, the profession and
regulatory bodies such as the SEC have placed more attention to this controversial topic.
The problems associated with auditor independence and the provision of NASs have
increasingly come under scrutiny in the public media and by the auditing profession. The
lack of auditor independence is an alleged factor underpinning the relatively recent
corporate collapses and corporate scandals across the world, such as Enron, WorldCom, and
Sunbeam in the USA; HIH and OneTel in Australia; and Parmalat in Italy.
However, Hong Kong Big 4 and non-Big 4 accounting firms have been expanding
their practices to include a wide array of NASs in their businesses. The buoyant markets
in Hong Kong and China have led to the accounting firms employing more auditors to
work in these NASs areas. The SEC in the USA often questions whether the provision of
NASs would lead to a decrease of perceived independence (DeFond et al., 2002). An audit
report is only beneficial if it contains reliable and unbiased information audited by
independent auditors. Once an auditor is perceived to lack independence, the audit work
loses credibility and the value of the auditing function is severely impaired, if not lost
(Firth, 1980). As a result, users will have less confidence in the financial statements.
Therefore, the future of the auditing profession is argued to be dependent upon the
perceptions of auditor independence (Koh and Mahathevan, 1993; DeFond et al., 2002).
Justification of selecting Big 4 and non-Big auditors
Jenkins and Krawczyk (2001) comment that the perceptions of professional CPAs from Big
4 and non-Big 4 auditors are important since they are the only audit practitioners who audit
the financial statements of companies. Johnson and Pany (1984) note that as it is the auditors
who finally sign off their audit reports on their clients financial statements, the study of
the auditors perceptions of their own independence can provide constructive feedback to the
regulators and accounting bodies to assist in accounting and audit policy decisions. Big
4 auditors audit most of the large companies (Shafer et al., 2001) while non-Big 4 auditors
audit the medium and small firms, and the selection of both types of auditors can fully
capture a comprehensive picture of the auditing profession in Hong Kong. Moreover,
auditors are commercially sophisticated people (Canning and Gwilliam, 1999) and generally
possess good accounting knowledge with which to interpret the independence concept
rather than users (McKinley et al., 1985).
NASs literature and hypothesis development
Audit firms providing NASs to their audit clients are a contentious issue. NASs are
generally classified as bookkeeping, internal audit services, various modes of
management consulting, financial information system design services, taxation
services and legal advice (Arens et al., 2008). In the competitive audit market, there is
evidence that the auditors have tended to undercut prices in order to get a foot in the
door and obtain the subsequent lucrative NASs (Hussey and Lan, 2001). The concerns
about NASs are based on the assumption that auditors are willing, or at least strongly
tempted, to sacrifice their independence in exchange for retaining the audit clients from
which they might accrue large NASs revenues (DeFond et al., 2002). It is therefore no

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surprise that the majority of the empirical studies have found that the provision of
NASs have had a negative influence on auditors perceptions of independence
(Shockley, 1981; Hillison and Kennelley, 1988; Teoh and Lim, 1996; Beattie et al., 1999;
Gendron and Suddaby, 2004; Lindberg and Beck, 2004; Chien and Chen, 2005; Alleyne
et al., 2006; Carey et al., 2006; Richard, 2006). Some studies show that provision of NASs
positively enhances independence (Bartlett, 1993; Emby and Davidson, 1998; Jenkins,
1999; Windmoller, 2000) while some researchers have found that NASs have no
influence on perceptions of independence (Corless and Parker, 1987; Sucher and
Bychkova, 2001; DeFond et al., 2002; Quick and Rasmussen, 2005).
The inconsistency of the results produced by these studies suggests opportunities
for future research (Larcker and Richardson (2004). Since the majority the NASs
literature and the regulatory bodies in the US appear to conclude that the provision of
NASs has a negative influence on auditors perceptions of independence, alternative
H1 are:
H1. The provision of NASs has a negative influence on auditors perceptions of
independence.
Agency theory model
Agency theory proposes that the relationship between an employer (principal) and an
employee (the agent) is represented by an employment contract (Eisenhardt, 1989).
Agency theory presents a simplified view of the relationship where parties to the
contract are assumed to be self-interested (Jensen and Meckling, 1976). Either party has
the ability to exit the employment contract by incurring exit costs as a result of
perceived imbalance or unfairness (Almer et al., 2005). Viewed through the lens of
agency theory, the extent of professional contribution by the agent (manager) is
affected by his/her effort, expertise, shrinking and bounded rationality. According to
Almer et al. (2005), shrinking is conventionally defined to include any action by a
member of a production team that diverges from the interests of the team as a whole.
Shrinking includes negligence, oversight and self-interest and is the inevitable
consequence of bounded rationality within agency relationships. Therefore, if the agent
(manager) perceives imbalance between the work performed and the compensation
packages received, the agent would choose to exit the contract under agency theory
(Jensen and Meckling, 1976; Harrell and Harrison, 1994). Using the agency theory,
Miller (1992) suggests information asymmetry arises when the principal (partner)
cannot observe the behavior of audit managers. Agency losses occur when managers
maximize their self-interest at the expense of the principal (partner) (Jensen and
Meckling, 1976). In an audit, partners are the only auditors that have the responsibility
to sign off their audit reports on their clients financial statements. Therefore,
Lindberg and Beck (2004) suggest that in the post-Enron environment, partners would
try avoiding risks to the audit firms reputation by exercising more prudent audit
judgment to avoid recurrence of corporate collapse and litigation. Auditors especially
partners, are more careful and concerned with the audit assurance level for the reason
of reputation protection and litigation avoidance (Asare et al., 2005). Therefore, the
following hypothesis on auditors of different ranks under agency theory can be
proposed as:
H2. Higher ranked auditors have a more negative view of auditor independence.

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Besides, empirical studies have been conducted on auditors of different ranks and
produced inconsistent results. The focus has been on whether auditors of different
ranks within firms entertain different perceptions in identical circumstances.
The results are also inconclusive and frequently inconsistent. Several studies have
indicated that auditors of different ranks have different perceptions of independence
(Shockley, 1981; Farmer et al., 1987; Dijk, 2000; Elias, 2004); and others show that
auditors of different ranks do not have different perceptions of independence (Iyer and
Raghunandan, 2002; Desira and Baldacchino, 2005). In view of the mixed results on
auditors of different ranks, alternative H2a is formed as:
H2a. Auditors perceptions of the influence of NASs on independence depend upon
auditors of different ranks.
Competition literature and hypothesis development
Competition within the audit market has been identified consistently to be a factor
threatening auditor independence (Shockley, 1981; Farmer et al., 1987; Beattie et al.,
1999; Sucher and Bychkova, 2001; Umar and Anandarajan, 2004; MacLullich and
Sucher, 2005). Shockley (1981) had found that audit firms operating in an environment
characterized by a high level of competition for audit clients would have a greater risk
of decreasing their audit independence than where audit firms operated in a
low-competition environment. The sample was drawn from the (at that time) Big 8
auditors. The overall analysis ranked competition as the most important factor in the
study.
In a UK study (Beattie et al., 1999), the competition variable was found to be a factor
influencing auditor independence. The sample comprised audit partners. Within a
single country, Beattie et al. (1999) argued that the factors affecting the perceptions of
auditor independence were likely to change over time due to changes in the local
economic, political, cultural and regulatory environment. These also varied across
countries and investigation of these issues in their own particular national settings was
suggested, implying the likely importance of national cultural differences. However,
some researchers found that competition has a positive influence on independence (Gul,
1989; Windmoller, 2000; Reynolds and Francis, 2001). Whether working in the
competitive audit market environment could lead to pressures, inducing an economic
dependency for the auditor to report favorably for the client, was argued by Reynolds
and Francis (2001). The larger clients have the greater litigation risk and they found
the auditors reported more conservatively for the larger clients for the reason of
reputation protection and litigation avoidance. In addition to adverse reputation
effects, the litigation costs would be greater, especially for large clients. It has also been
suggested that reputation protection dominates the auditor behavior. Reynolds and
Francis (2001) concluded that the economic dependency does not compromise auditor
independence, the implications for regulators such as the SEC being that there is no
obvious need to inject fee or scope regulations in auditor-client contracts. Competition
in the audit market makes the auditor more careful and concerned with the audit
assurance level in their services (Lindberg and Beck, 2004; Asare et al., 2005).
Interestingly, interviews with some auditors in a qualitative study in Poland,
MacLullich and Sucher (2005) revealed that in the younger generation top
management may be more forward thinking, arguably less conservative, believe in
brand creation if the firm is to be sustainable in the very competitive market. They

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Big 4 auditors
perceptions
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stressed the importance of investing time in building client trust and relationships.
Although these attitudes are still rare in Poland amongst the auditors, competition in
the audit market influencing the perceived independence issue seems undamaged, but
to have been enhanced amongst some auditors.
In view of these conflicting results in prior literature, there is clearly room for more
research in this area (Gul, 1989; Beattie et al., 1999; Umar and Anandarajan, 2004;
Bloom and Schirm, 2005). Thus, in this study, Shockleys two levels of competition,
high and low competition, are adopted. A study of the competition variable is thus
included in this Hong Kong study as the second independent variable. Since the
majority prior studies on the high competition variable support a negative influence
on auditors perceptions of independence, an alternative H3 is:
H3. High competition in the audit market has a negative influence on auditors
perceptions of independence.
Alternative H3a is formed as:
H3a. Auditors perceptions of the influence of competition on independence depend
upon auditors of different ranks.
Types of auditors
In the Hong Kong auditing environment, Big 4 auditors audit most of the large
companies, while non-Big 4 auditors audit the medium and small firms and thus the
selection of both auditors in the sample can fully capture a comprehensive picture of
the auditing profession. Reynolds and Francis (2001) comment that larger clients
have the greater litigation risk and they found the auditors reported more
conservatively for the larger clients for the reason of reputation protection and
litigation avoidance. In addition to adverse reputation effects, the litigation costs would
be greater, especially for large clients. As a result, H4 and H5 are proposed as:
H4. Big 4 auditors perceptions of the influence of NASs on independence are more
negative than non-Big 4 auditors.
H5. Big 4 auditors perceptions of the influence of competition on independence
are more negative than non-Big 4 auditors.
Methodology
300 Big 4 auditors and 300 Non-Big 4 auditors were randomly selected from the
publicly accessible Directory of CPAs booklet in Hong Kong (Tsui, 1996; Umar and
Anandarajan, 2004). There was no matching of an individuals name with their
organization. Dijk (2000) suggests the potential respondents could be contacted first by
telephone to see whether they agree to complete the questionnaire to increase the
response rate (Shafer et al., 2001). Were they to agree to participate, the questionnaire
would be sent to the auditors who are agreed to participate. Prior studies in Australia
and Netherlands resulted in a response rate of 76 and 80 percent, respectively, (Roberts,
1999; Dijk, 2000) by contacting the respondents first before sending off the
questionnaires. Thus, similar techniques were used in this Hong Kong study in the
expectation of a satisfactory response rate (Dijk, 2000; Desira and Baldacchino, 2005).
Were the response rate unsatisfactory, a follow up procedure was planned a second

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request, approximately three weeks after the initial mailing to the entire sample (Frank
et al., 2001).
Data were gathered using questionnaires in English versions with a five-point
Likert scale adapted from the previous scenarios questions (Shockley, 1981; Knapp,
1985; Pany and Reckers, 1987) and the pre-tests were found to be satisfactory.
Likert scale 1 represent seriously undermines independence while score 5 represent
strongly enhances independence. Moreover, in order to minimize the demand effect
or learning effect by the auditors in these scenarios questions (Knapp, 1985; Gul,
1989), a randomized order of the scenarios questioning was undertaken so that the
respondents answers would not be affected by the demand effect or their familiarity
with the flow of the questions (Knapp, 1985; Gul, 1989; Dijk, 2000; Chung and Monroe,
2000). For example, each questionnaire would have different orders of the scenarios
questions, such as 60, 25, 90 and 0 percent of NASs. Auditors were instructed in the
letter to rate their perceptions of independence under the eight different scenarios
situations. The mixed ANOVA design used in this study is similar to the ANOVA
design adopted by prior researchers (Knapp, 1985; Gul, 1989; Choo and Trotman, 1991;
Dijk, 2000; Fuller and Kaplan, 2004).

Results
There were 207 and 185 responses received from the Big 4 auditors and the Non-Big 4
auditors, respectively. There were 177 from the first mail out and 30 responses from the
second for the Big 4, returning an overall response rate of 69 percent. There were 155
from the first mail out and 30 responses from the second for the Non-Big 4, returning an
overall response rate of 62 percent. The items in the survey showed satisfactory levels of
reliability with a Cronbachs a of 0.79 and normal distribution of the data has been met.
The values of the skewness or kurtosis after dividing with their respective standard error
are within the upper threshold of 3.29 except for two data sets (Field, 2005). Field (2005)
mentioned that because of the large sample (in this case 392), this is not surprising with
some significance values. Instead, it is important to look at the shape of the distribution
visually and the values of the skewness and kurtosis statistic rather than calculate their
significance. Therefore, from the histograms of the eight respective scenarios, the shapes
of the data are reasonably normally distributed. Besides, reference is made to the normal
Q-Q plots of the values expected where the distribution is normal (expected values) against
the values actually seen in the data set (observed values). The eight normal Q-Q plots (the
expected values were a straight diagonal line, whereas the observed values are plotted as
individual points) show that all the eight lines dots have reasonably fallen on the straight
diagonal line. As a result, it can be concluded that the data set reasonably met the
assumption of normal distribution (Field, 2005).
A t-test for non responses bias has been carried out for comparing first 30 responses
and second request 30 responses for the Big 4 and Non-Big 4 samples, respectively;
however there were no significant differences in perceptions about the independence
scores. The notion of variance is at the heart of ANOVA (Green and Salkind, 2003) and
the assumptions of homogeneity of variance have been met in this study. The Box test
of equality of covariance has been achieved since it is not significant, p 0.184. The
descriptive statistics is shown in Table I.

Non-Big 4 and
Big 4 auditors
perceptions
923

Table I.
Descriptive statistics

392
3.1964
1.17
1.00
5.00

392
2.9872
1.21
1.00
5.00

High comp
(NAS-25
percent)
392
2.5765
1.06
1.00
5.00

High
comp(NAS-60
percent)
392
2.2857
1.03
1.00
5.00

High comp
(NAS-90
percent)
392
3.5434
1.14
1.00
5.00

Low comp
(NAS-0
percent)

392
3.3189
1.08
1.00
5.00

Low comp
(NAS-25
percent)

392
3.0102
1.11
1.00
5.00

Low comp
(NAS-60
percent)

924

Number
Mean
SD
Minimum
Maximum

High comp
(NAS-0 percent)

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392
2.701
1.11
1.00
5.00

Low
comp(NAS-90
percent)

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Hypothesis 1
From the multivariate test in Table II, the first within subject independent variable
NASs has an F-value 90.13, p , 0.05. Green and Salkind (2003) recommend
reporting the familiar Wilks l value. The result is statistically significant. H1 is thus
supported. Since NASs is significant and has four levels, pairwise comparisons are
undertaken, using the Bonferroni comparison (Green and Salkind, 2003) to reveal where
the difference exists. Field (2005) mentions that the Bonferronis test controls the Type 1
error rate very well, but is conservative. The pairwise comparisons (Table III) show all
the four levels are significantly different from each other, with p-value , 0.05.
Level 1 NASs mean 3.46, Level 2 NASs mean 3.24, Level 3 NASs
mean 2.73, and Level 4 NASs mean 2.36. This indicates higher level NASs
provisions have a lower mean score for the perceptions of auditor independence rating.

Variables
COMP

Pillais trace
Wilks l
Pillais trace
Wilks l
Pillais trace
Wilks l
Pillais trace
Wilks l
Pillais trace
Wilks l
Pillais trace
Wilks l

COMP* TYPESAUD
COMP* SUBPOSIT
NAS
NAS* SUBPOSIT
NAS* TYPESAUD

Sig.

23.694(a)
23.694(a)
0.000(a)
0.000(a)
0.926(a)
0.926(a)
90.135(a)
90.135(a)
4.551
4.641
0.500(a)
0.500(a)

0.000
0.000
0.989
0.989
0.428
0.428
0.000
0.000
0.000
0.000
0.683
0.683

Notes: (a) exact statistic; Design: Intercept SUBPOSIT TYPESAUD SUBPOSIT

TYPESAUD; within subjects design: COMP NAS COMP NAS

(I) NAS
1
2
3
4

(J) NAS

Mean difference (I 2 J)

SE

Sig. (a)

2
3
4
1
3
4
1
2
4
1
2
3

0.225( *)
0.736( *)
1.102( *)
20.225( *)
0.512( *)
0.877( *)
20.736( *)
20.512( *)
0.366( *)
21.102( *)
20.877( *)
20.366( *)

0.046
0.064
0.068
0.046
0.055
0.063
0.064
0.055
0.045
0.068
0.063
0.045

0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000

Notes: Based on estimated marginal means. *The mean difference is significant at the 0.05 level.
(a) adjustment for multiple comparisons: Bonferroni

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Table II.
Multivariate test

Table III.
Pairwise comparisons

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H2 and H2a
Results from the multivariate test of the first within subject independent variable
(NASs), and the first between subject independent variable (SUBPOSIT) are shown
in Table II. NAS *SUBPOSIT interaction has an F-value 4.64, p , 0.05. The result
is statistically significant. Thus, auditors of different ranks within their firms have
different perceptions of the influence of NASs on the perceptions of auditor
independence. H2a is supported.
Between subject ANOVA reveals that the sub-position of auditors has an
F-value 3.32, p-value , 0.05, (Table IV). The result is statistically significant. This
confirms the result in the above-multivariate test (Table II) and there are differences in
the mean scores among the ranks of the auditors. Univariate tests of within subject
ANOVA contrasts also show that Levels 2 and 3 of the NAS *SUBPOSIT are
significantly different from each other, with F 6.86, p-value , 0.05. So, pairwise
comparisons and post hoc tests are performed to diagnose the differences.
The Bonferroni pairwise comparisons in Table V show that the perceptions held by
those at the senior manager rank and those at the staff and senior rank are
significantly different, with p-value , 0.05, staff and senior mean 2.89, manager
mean 2.93, senior manager mean 3.18, partner mean 2.76, (Table VI). This
indicates the senior manager having a significantly higher rating than the staff and
senior auditor, of the influence of NAS on auditors perceptions of independence.

Variables
Table IV.
Between subjects
ANOVA

Sig.

1,940.254
4.977
0.193
0.061

3,889.977
3.326
0.388
0.040

0.000
0.020
0.534
0.989

Intercept
SUBPOSIT
TYPESAUD
SUBPOSIT * TYPESAUD

(I) Sub-position

(J) Sub-position

Mean difference (I 2 J)

Sig. (a)

Staff and senior

Manager
Senior manager
Partner
Staff and senior
Senior manager
Partner
Staff and senior
Manager
Partner
Staff and senior
Manager
Senior manager

2 0.045
2 0.293( *)
0.126
0.045
2 0.247
0.171
0.293( *)
0.247
0.418
2 0.126
2 0.171
2 0.418

1.000
0.028
1.000
1.000
0.125
1.000
0.028
0.125
0.087
1.000
1.000
0.087

Manager
Senior manager
Partner

Table V.
Pairwise comparisons

Type III sum of squares

Notes: Based on estimated marginal means. *The mean difference is significant at the 0.05 level.
(a) adjustment for multiple comparisons: Bonferroni

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Partners have the lowest mean score ratings on the perceptions of independence. H2 is
thus supported. Post hoc analysis is a necessary follow-up as the interactions between
the NAS *SUBPOSIT is significant (Green and Salkind, 2003). As a result, post hoc
testing with Bonferroni, Hochberg, and Games-Howell reveals that senior manager vs
the staff and senior pair has a significant p-value of , 0.05. The post hoc results
provide additional support to the above results in the pairwise comparisons and
between subject ANOVA.

Non-Big 4 and
Big 4 auditors
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927

H3 and H3a
Table II shows that from the multivariate test, the competition (COMP) variable has an
F-value 23.69, p , 0.05. Since competition is significant and has two levels,
pairwise comparisons are performed to reveal where the difference exists (Green and
Salkind, 2003). The pairwise comparisons (Table VII) show each of the two levels is
significantly different from one another, with p-value , 0.05. With high-competition
mean 2.78 while low-competition mean 3.11. That indicates high level of
competition has a lower mean score for the perceptions of auditor independence rating.
H3 is supported. For the COMP *SUBPOSIT variable in Table II, the F-value 0.93
and is not significant, with p . 0.05. Hence, H3a is rejected.
H4 and H5
From the multivariate test in Table II, it shows that both the NAS *TYPESAUD and
the COMP *TYPESAUD variables are not significant, with p-values . 0.05. Besides,
between subject ANOVA in Table IV also shows the TYPESAUD has an F-value of
0.388, with p-value 0.53. Hence, H4 and H5 are both rejected.
Discussion and implications
Auditor independence has becoming a critical issue in recent years. The overriding
objective of this study has been to obtain broader and more in-depth examinations of
the phenomenon of perceived independence. The concomitant focus on corporate

Sub-position

Mean

Staff and senior

Manager
Senior manager
Partner

2.893
2.939
3.186
2.768

(I) COMP
1
2

(J) COMP

Mean difference (I 2 J)

SE

Sig. (a)

2
1

20.323( *)
0.323( *)

0.066
0.066

0.000
0.000

Notes: Based on estimated marginal means. *The mean difference is significant at the 0.05 level.
(a) adjustment for multiple comparisons: Bonferroni

Table VI.
Mean

Table VII.
Pairwise comparisons

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governance mechanisms and increases in audit activities in respect of multinational

companies, have magnified the importance of understanding the perceptions of
independence in different socio-economic environments. This empirical study reveals a
number of issues contributing to the controversies surrounding the audit profession
and to the myriad claims against the auditors alleging impropriety. Unquestionably,
the perceptions underpinning the rhetorical allegations from the SEC in the USA
proclaiming that auditors providing NASs to their audit clients would impair auditor
independence, is corroborated in this Hong Kong study.
The controversy that providing NASs to audit clients has a negative influence on
auditors perceptions of independence, is supported in H1. The result is consistent with
research findings in respect of the US, UK and European samples of auditors
(Shockley, 1981; Hillison and Kennelley, 1988; Beattie et al., 1999; Lindberg and Beck,
2004; Gendron and Suddaby, 2004; Alleyne et al., 2006; Iyer and Reckers, 2007). The
implication of H1 is that Hong Kong Big 4 auditors agree that providing NASs
compromises their independence. As expected, the candor of their perceptions could
imply an admonitory signal to the regulatory authorities for immediate audit reforms
and contemplation for future policy directions. The result in H1 corroborates the view
that provision of NASs might be an insidious element within an audit. Since the Enron
debacle, Hong Kong auditors are more conscientious about the NASs provisions on
independence issues (Lindberg and Beck, 2004). Unequivocally, this Hong Kong study
confirms prior research results in the UK and the USA. Noticeably, though Hong Kong
is predominantly Chinese, with the inheritance from a previous UK jurisdiction, the
different culture does not appear to be a factor for inducing Hong Kong auditors to rate
the influence of the NASs on positive independence. Interestingly, this Hong Kong
study revokes the contradicting results from Jenkins and Krawczyk (2001) in the USA,
that provision of NASs favorably influenced auditors perceptions of independence.
However, it would be beneficial to conduct a longitudinal study to validate the results
in the long run (Lawrence and Shaub, 1997).
Auditors perceptions of the influence of NASs on independence depending upon an
auditors rank, are supported in H2a. Interestingly, there is a peculiar finding in this
Hong Kong study and it could bring another opportunity for further research in a new
issue and dimension. The NAS *SUBPOSIT rating depicts that the senior managers
perception ratings are significantly higher than the staff and senior group. The senior
manager ratings are the highest amongst the four groups of auditors. That atypical
phenomenon might reasonably be ascribed to the fact that this study was conducted in
2007 when the Hong Kong economy was extremely robust and the employment market
exceptionally active. Those senior managers working in audit firms with eight to ten
years audit experience are the most highly sought auditors in the market. From the
employment advertisements in newspapers by recruitment agencies, there are
considerable vacancies in the commercial sector in Hong Kong and projects relating to
the Initial Public Offerings (IPO) in China (SCMP, 2006).
Using the agency theory, Miller (1992) suggests information asymmetry arises
when the principal (partner) cannot observe the behavior of audit managers. Agency
losses arise when managers maximize their self-interests at the expenses of the
principal (partner) (Jensen and Meckling, 1976; Almer et al., 2005). Since those senior
managers could easily change jobs in the market, they might not be acting in the best
interest of the principal (partner) (Jensen and Meckling, 1976), and this might indirectly

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affect their work commitments. Given that promotions to partnership level are limited,
as compared to the alluring outside commercial employment prospects, senior
managers are the most highly demanded by the recruitment agencies (SCMP, 2006).
As the final sign off of the audited financial statements rests with the partners,
senior managers might have a loose threshold in their perceptions of independence.
According to Almer et al. (2005), shrinking is conventionally defined to include any
action by a member of a production team that diverges from the interests of the team as
a whole. Shrinking includes negligence, oversight and maximizing self-interests
(Jensen and Meckling, 1976) and is the inevitable consequence under the agency theory.
Hence, this may be attributed to the highest ratings by the senior managers group to a
certain extent. Future research is suggested to validate the result. However, in this
Hong Kong study, it is encouraging to note that partners have the lowest mean score
for the perceptions of independence. In the post-Enron environment, the result
indicates that partners would try avoiding risks to the audit firms reputation by
exercising more prudent audit judgment to avoid risks of litigation.
The result of the COMP variable in H3 is supported, consistent with the majority
of findings in the US, UK and European samples of auditors (Shockley, 1981;
Farmer et al., 1987; Beattie et al., 1999; Shafer et al., 2001; Sucher and Bychkova,
2001; Umar and Anandarajan, 2004; MacLullich and Sucher, 2005). This finding
revokes the prior claims in Windmoller (2000). In this study, Hong Kong Big 4
auditors perceive there would be pressures for trying to accommodate the needs of
their clients and simultaneously avoid losing their clientele. The high-competitive
environment leads to increasing competition for audit clients. Displeased clients
might exert pressures on auditors, giving clients greater bargaining power on the
treatment of accounting issues. However, auditors tend to keep their advice
objective under the pressure of retaining the clients. As a result, auditors
independence might be compromised. Were the current auditors to disagree with the
clients requests, it is suspected that dismissal of the current auditors would most
likely occur in a high-competitive audit environment. Against that background,
Hong Kong auditors perceptions that the high-competitive environment might
impose threats to their audit independence, are explicable. The audit profession
should thus prudently scrutinize this factor when setting future auditing standards
and ethical guidelines.
It is encouraging that the result in H3a demonstrates that the two independent
variables are not influencing each other on auditors perceptions of independence. It is
also pleasing to note that Hong Kong auditors do not perceive the influence of
competition on independence depends upon the rank of the auditor. The Hong Kong
audit profession can consider these issues to restructure the existing auditing
standards and formulate future policy developments.
H4 and H5 are both rejected. The perceptions of the Big 4 auditors and non-Big
4 auditors are not significantly different, as shown in the Multivariate analysis and
the Between subject ANOVA in Tables II and IV, respectively. It is imperative to
contemplate the reasons underpinning the Hong Kong Big 4 auditors holding the
same perceptions as the non-Big 4 auditors. First, auditors working in the Big 4
accounting firms might be recruited from the outside non-Big 4 firms. Similarly,
those auditors who are working in non-Big 4 firms may also have been recruited
from Big 4 firms. Since the employment market in Hong Kong is buoyant,

Non-Big 4 and
Big 4 auditors
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the mobility of professional auditors is expected at all levels of rank. As a result,

the perceptions from the Big 4 and non-Big 4 auditors may be the same, are
explicable. Second, Hong Kong auditors are normally trained and educated under the
international accounting qualifications such as ACCA (UK), CPA(Aust) or CPA (USA)
that generally bear the same technical requirements as with the International Auditing
Standards. Given that the vast majority of Hong Kong Big 4 and non-Big 4 auditors
are ACCA (UK) or CPA(USA) qualified (HKICPA, 2005), it is to be expected that their
perceptions of this matter might be alike. Finally, assuming the working and quality
assurance practices in the Hong Kong non-Big 4 firms conform to standards
equivalent to those of the Big 4 firms, similar perceptions reached by the Hong Kong
auditors might be explicable.
Limitations
Although the response rate is satisfactory, the non-respondent auditors perceptions
cannot be captured. Koh and Mahathevan (1993) suggest future research can cover the
perceptions of a wider group of users such as financial analysts, the public or
accountants in industry (Firth, 1980; Beattie et al., 1999), so as to examine any
similarities or differences between the perceptions of a wider groups of people. It
is recommended a longitudinal study would be valuable to understand the
auditor independence in various points in time (Lawrence and Shaub, 1997; Gendron
et al., 2006).
Conclusion
On the basis of the results of this study, professional reforms such as prohibition of
NASs would be advantageous. The Hong Kong regulatory body and the Hong Kong
Institute of CPAs, who have the ultimate responsibility for assuring auditors
independence through ethical principles and regulatory restrictions, should consider
the results of this Hong Kong study as a catalyst for professional reforms in the Hong
Kong audit profession. The virtue of auditor independence is conducive and
indispensable to the rigorous scrutiny of an audit. Given the current environment of
regulatory regimes and the critical element of public confidence required by the
accounting profession and government, it is of paramount importance for auditors to
maintain an appearance of and actual independence.
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934

Further reading
Marchesi, M. and Emby, C. (2005), The impact of continuity on concurring partner reviews:
an exploratory study, Accounting Horizons, Vol. 19 No. 1, pp. 1-10.
Corresponding author
Philip Law can be contacted at: PLaw@umac.mo

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