Business environment of auditing

There are factors within the scope of the audit firms discussed in the study as factors that affect the business environment of auditors. Evaluation of external factors influencing the auditing profession market indicates that the audit firms have less competitive power in the governmental economy. With the expansion of government body and increase in its tenure, job referral to the audit firms reduces. Audit firms in Iran, which have a government with large economic size, lack a good economic position, because in such circumstances, the auditor is imposed and agreed and the audit firms are competitive in a small part where an open economy is ruled and where they are under the pressure of crises and also do not have adequate protection. So, a difficult working condition prevails on them. Poor implementation of laws in the country is one of the most important problems of the audit firms that have affected services market. Nevertheless, issues related to the internal control structure of audit firms also contributed to their problems in optimum implementation of audit.

In previous studies, branding was considered as a factor that can be reasonably attributed as a logical step for the business development based on the theory of action. Regarding branding in the audit firms, Caragber (2013) suggests that branding is possible with investment on money and time. He believes that branding leads to positive differentiation when compared to other auditor institutions. He also believes that marketing plan, workforce development, and survival efforts are consequences of branding. Therefore, explaining tenured accountants’ attitudes on the audit issue from the perspective of brand can be an instrument for a more positive look to other important related issues like marketing. This will not be achieved unless one obtains some information about their attitude to topics like audit business environment and corporate governance structure. Finally, awareness of the above items can lay the ground to take the necessary steps to define the logical relationship based on maintaining independence - important factor of the quality of audits - between auditor and clients. Identification of the recipients’ model of audit services can have a positive impact on the relationship between the auditor firms and the client.

Corporate governance and auditing marketing

The purpose of many corporate governance mechanisms is to achieve responsible and responsiveness companies, value creating managers and ultimately controlling the companies. In other words, rules of corporate governance have developed owing to possible conflict resolution between the interests of shareholders, employees and managers in the international market (Malekian & Daryaei, 2012, p. 123). By explaining their relationship with the company by raising audit quality, while maintaining their independence with specific marketing activities, auditors as a part of external mechanisms of corporate governance can be effective in enhancing corporate governance mechanisms by decreasing their cost of actions and by indirectly decreasing agency costs and increasing stock price of the client company. This implies that the attitude of auditors to audit activities and marketing can be influenced by their perspective to corporate governance regulations. To decrease client costs, the auditors agree on not implementing a part of the corporate governance mechanisms, so that in this way, they convince their client on the audit costs. This threatens the interests of other stakeholders. Therefore, there can be a significant relationship between the attitude of auditors to audit activities in general and marketing activities in particular and their attitude toward the implementation of corporate governance.

According to “actor-network theory”, Marketization of Accountancy is concerned with the necessity emanating from a system of tools and experience sharing and partnerships. Marketization of accountancy may be considered as a natural process in marketing science in the first place. Nevertheless, the audit market as a two-sided fraud can be defined in two ways: the first is “union of heterogeneous actors” around an awareness which results in a doubt. The second is the legitimacy of a natural process where marketing researchers initially have concluded and described it via documentation (introduction and integration of specialized marketing) (Picard, 2016, p. 3). So, marketing and marketization are a necessity, and before answering the question that “whether marketing is necessary or not?” One must seek answer to the question “how to carry out marketing for audit process?”

Given the importance of the marketization and marketing, the academics should ask themselves about their participation in the process of marketization. This cultural change does not only affect the auditors employed in audit firms. Audit students also will tend more toward neo-liberal discourse, a discourse that promotes individualism and individual economic interests. Since universities have become a form of entrepreneurial business company, students idealism for activities in line with the public interest have fallen sharply (Picard, 2016, p. 17). When universities are evidently and increasingly moving toward commercializing, the trend toward personal economic interests finds a high legitimacy and is reinforced. Therefore, instead of training professionals committed to public interest, universities train specialists that have commercial concerns (Hanlon, 2004, p. 190). Based on what was discussed earlier, Picard (2016) quite extremely believes that for academics to foster the values of public interest among the students, they should try to avoid market discourse in classrooms and commercialization auditing (and marketing) (Picard, 2016, p. 17). This is while the audit market and consequently marketing is a complex and multifaceted phenomenon, where different factors and stimuli within the audit profession and the entire community affect it. Nevertheless, explaining social theories help to further understand the social role of auditors and determination of the narrow lanes between the auditors and the marketing and even marketization.

Social theories

Parsons’ social action theory

Previous studies on the balance between the interests of all stakeholders have revealed that a lack of clear conceptual framework is one of the main issues regarding the attitude and consequently the behavior of auditors (Broberg et al., 2013). Nevertheless, in other areas of the social sciences like sociology, many people are seeking to provide a conceptual framework for relationship between the people. One of these men was Parsons. According to Parsons, social action is the subject of all human science studies and since in the view of Parsons, the concept of system is very important for the scientific knowledge, he believes in the ability of systems analysis for human action (Roche, 1998, p. 53).

Marketing near consumer needs and characteristics of the product or service provided by the seller plays a significant role that is entwined with issues like advertising and pricing. These two factors, i.e., the seller and the buyer are related together in economic structure with functions like marketing. The basic question is whether the auditor and the client are closed together with the marketing process, or due to disruption of some inherent properties of auditor such as independence, the parties are damaged. According to Parsons's theory of social action, the auditors should be able to create a balance between their needs and that of others. The role of personality traits of auditors or even their gender can affect their performance (Alavi Tabari, Mojtahed Zadeh, & Bakhtyari, 2012; Tremblay & Malsch, 2016).

Parsons separates family roles based on gender and believes that the acquisition of skills and expertise in family roles should inevitably vary according to the natural and potential talents of members, and its difference is driven from specific physical and mental structures of both sexes (Roche, 1998). First the family, society in general and the economic community in particular is affected by attitudes of women. Women, owing to substantial differences with men may have different attitudes and behaviors when compared to men in the same situation. Conducting audit as economic performance as part of the society is no exception to this general rule. Therefore, asking about the gender respondents to assess their attitudes in this study was also based on these concepts.

What happens when the company loses its whole property? Who do shareholders believe to be responsible for the cause of this incident? What is the role of auditors in preventing the occurrence of such an incident? These are the questions all stakeholders of a company are seeking answer for. Based on the writings of Parsons, there is only one convincing answer and that is the formation of an improper structure and consequently a poor performance. In response to this poor performance and structure, and strengthening the relationship between the company and other stakeholders, corporate governance has received a lot of attention in recent years (Black, Love, & Rachinsky, 2006; Cornett, Marcus, & Tehranian, 2008). Positive attitude toward corporate governance will lead to facilitation of relationships between stakeholders of a company and thus proper performance. Nevertheless, investigating research on attitudes to corporate governance, responsibility and social accountability audit market can help in explaining the unexplored dimensions of the above problem. According to Parsons's theory of social action, it is important to determine the optimal relationship between the auditor and the client. This is carried out by investigating the attitude of auditors toward professional activities.

Auditor industry specialization, experience and entrepreneurship

Sarwoko and Agoes (2014) have demonstrated that auditor specialization in industry is effective on the audit procedures to detect fraud in financial audit and high quality audit. This is because the deep understanding and long experience in a particular industry of client on business process, business risk and the risk of material misstatement play a crucial role in the financial statements. The ability of the auditor in such specific areas of the client enables him to choose and implement effective audit procedures to detect important fraud cases that lead to an increase in audit quality (Sarwoko & Agoes, 2014, p. 280). Dao and Pham (2014) sought to answer the question whether the auditor tenure has any effect on the delay of audit report and whether the auditors specialized in this respect, have a modulatory role or not. In addition, there has been a special emphasis on timely financial information. They based their theoretical basis discussions on rotation of auditors and increasing demand for high quality auditors. The results demonstrated that there is a significant negative relationship between auditor tenure and audit report delays. The specialized auditors also confirmed the moderating role of the relationship between auditor tenure and audit report delays (Dao & Pham, 2014, p. 490). In addition, Yuan, Cheng, and Ye (2016) examined the relationship between business strategy of the clients and audit quality resulting from the work of specialized auditors in the industry. Their sample was Chinese companies for the years 2000 to 2010. The results demonstrated that there is a significant negative relationship between industry professionals and discretionary accruals of the client. In other words, the expertise of auditors in a specific industry will enhance financial performance of the clients and greater transparency of financial statements. Nevertheless, the present study has emphasized the interference of the client's overall strategy with audit procedures of the expert that may affect audit quality.

Because younger auditors are replaced by experienced auditors, tendency toward marketing will change and this is obvious in the performance of auditors. Conflict between auditors as professional services and marketing is not so evident. Research findings indicate that auditors create a balance between audit responsibilities and imposed marketing activities. Other studies deal with ways of improving the auditing profession, which requires accepting marketing as an important part of professional services. Furthermore, previous research has pointed to the fact that the notion of different activities among the auditing profession depends on the age of auditors (Clow et al., 2009). Alissa, Capkun, Jeanjean, & Suca (2014) concluded that there is a significant positive relationship between auditor characteristics and their performance. They studied 15,392 tax auditors in their study. Their research demonstrated that the auditor's experience as one of the auditors’ acquired characteristics can decrease the complexities of the audit work. This implies that in dealing with audit activity problems, the auditors’ choose the lowest-cost solution based on their experience. In addition, the efforts of auditors has a direct and significant relationship with the performance of auditors, and this relationship is under the influence of intervening variables related to the characteristics of the auditor.

Another important feature of auditors which may be related to their performance is entrepreneurship. Entrepreneurship and audit activities will result to the development of humanity over a long period. Audit plays a significant role in improving and increasing the transparency of the business environment, especially since ancient times when ways to better manage assets has been known. Today, accounting and auditing are basically proposed as a science that is undergoing evolution even after thousands of years. The term “audit” originates from the word listening in Latin, nevertheless, audit was widespread in the Assyrian and Egypt times. Homocianu and Airinei (2014) in a study titled “Facilities of the intelligence business and its application at audit and financial reporting” demonstrated that the dynamics and responsibility of financial auditors in the role of experienced and professionals entrepreneurs can meet the essential need of each company to provide fair financial reporting and commenting in line with regulatory frameworks that investors, creditors, government and people can take advantage. The results of their study demonstrated that the need to provide services that should have a high level of objectivity, will force audit firms to benefit from entrepreneur auditors. In line with the professional and ethical requirements, entrepreneurial auditors will design and implement the audit work in order to further increase trust to the content of reports (Homocianu & Airinei, 2014, p. 4).

Financial audit is the real meaning of an entrepreneur. His own fate and that of his client is in his hands. Owing to the independence needed for his work, the professional and ethics codes requires that he differ from company employees for whom one audits. Their results demonstrated that with an increase in competing auditors, the marketing process to introduce the capabilities and advantages of auditors in Romania is based on this topic that by attracting auditor entrepreneurs, one can obtain a good share of audit market. Entrepreneur auditors were determined based on questionnaires and interviews (Popescu et al., 2015, p. 230).

Given the theoretical and empirical evidence, our hypotheses regarding balance time and nature of the relationship between the auditors and clients are specified as follows:

1. H1: There is a significant difference between the attitude of younger auditors and others toward marketing activities in the balance time between auditing and marketing.
2. H2: There is a significant relationship between business environment and balance time between auditing and marketing.
3. H3: There is a significant relationship between perceived balance time between marketing activities and the inherent tasks of auditing and attitude toward corporate governance mechanism.
4. H4: Attitude toward business environment has effects on attitude toward balance between auditing and marketing via attitude toward corporate governance mechanism.

Sample and design

The sample comprised Iranian Association of Certified Public Accountants (IACPA) that was calculated by Cochran's sample size formula. Thus, the analysis is based on survey data from 257 respondents. Although there's no standard rate of questionnaire return for research but return rate less than 70% increases the risk of acceptance and generalization of results and if the rate of return was on the risk range, then more questionnaires can be distributed to move out of this range (Dillman, Smyth, & Christian, 2009). The number of questionnaires distributed, received and returned is presented in Table 1.

The present study is one of the types of survey research. Surveys represent one of the most common types of quantitative, social science research. In survey research, the researcher selects a sample of respondents from a population and administers a standardized questionnaire to them. In building the questionnaire, we relied as far as possible on instruments validated in previous studies. In addition, we pre-tested the survey instrument by asking many experts to complete the questionnaire and to discuss their experiences with us. This led to some minor adjustments in the original survey design. The relevant parts of the questionnaire are reproduced in Appendix A. To collect data for hypotheses testing, this study used a questionnaire adapted from the studies of Broberg et al. (2013), Biech (2007), in addition to literature review and document analysis.

Our observations include data from individual independent auditors (4%), auditor's partner of audit firms (43%), auditors working at Iran audit organization (11%), auditors working at audit firms (12%), and inactive members (30%). The respondents marked their opinion on a 7-point Likert scale ranging from “strongly disagree/not at all important/no time at all” (1) to “strongly agree/very important/a lot of time” (7) for each of the activity. Cronbach's Alpha is a tool for the assessment of the reliability of scales. Cronbach's Alpha is an index of reliability associated with the variation accounted for by the true score of the “underlying construct.” Construct is the hypothetical variable that is being measured (Hatcher, 1994). Alpha coefficient ranges in value from 0 to 1 and may be employed to describe the reliability of factors extracted from dichotomous (that is, questions with two possible answers) and/or multi-point formatted questionnaires or scales (i.e., rating scale: 1 = poor, 7 = excellent). Nunnaly (1978) has indicated 0.7 to be an acceptable reliability coefficient but lower thresholds are sometimes employed in the literature.

We performed our analysis by applying a binary Probit regression. Furthermore, given that in the comparison of two samples’ coefficients such as Fisher (1921), it was necessary to determine Z-statistic. In the present study to compare the relationship between dependent and independent variables in a community with other independent community, Z-statistic was used as follows:

Finally, we hypothesize that the manner in which attitude toward business environment are being used affects perceived balance between marketing activities and the inherent tasks of auditing, and that attitude toward business environment depends on attitude toward corporate governance mechanism.

Variables

Bt: was created by subtracting the average scores for all auditing activities from the average scores for all marketing activities. We employed a dummy variable coded one if the balance time was higher than average scores and zero if otherwise.

CG: was created by questionnaire. We utilized a dummy variable coded one if the CG was higher than average scores and zero if otherwise.

Attitutem: Auditor's attitude toward marketing, utilized as an independent variable, was operationalized as an index of the average scores for all the marketing activities in the attitude section of the questionnaire. The scores were added for each of the respondents, and the sum was divided by the total number of activities.

Attitutea: Auditor's attitude toward auditing, employed as an independent variable, was operationalized as an index of the average scores for all the auditing activities in the attitude section of the questionnaire. The scores were added for each of the respondents, and the sum was divided by the total number of activities.

Importanta: Auditor's view on the importance of auditing, utilized as an independent variable, was operationalized as an index of the average scores for all the auditing activities in the important section of the questionnaire. The scores were added for each of the respondents, and the sum was divided by the total number of activities.

Importantm: Auditor's view on the importance of marketing, applied as an independent variable, was operationalized as an index of the average scores for all the marketing activities in the important section of the questionnaire. The scores were added for each of the respondents, and the sum was divided by the total number of activities.

Speciality: Speciality was measured as a dummy variable and was coded 1 if auditors were specialist and 0 if otherwise.

Entrepreneurship: The entrepreneurship was constructed based on 22 questions relating to different entrepreneurship practices.

Ex: It was created by questionnaire. We employed a dummy variable coded one if the balance time was higher than average scores and zero if otherwise.

Gen: We classified respondents into male or female and we coded female as 0 and male as 1.

Edu: We classified respondents into BA or upper and we coded BA as 0 and upper as 1.

Business: The business was constructed based on 9 questions relating to business environment practices.

In this study, Cronbach's α was calculated for auditing, marketing, corporate governance, and business environment components. The results are presented in Table 2.

Descriptive statistics

Table 3 shows summary statistics for each variable, and Table 4 presents the correlation matrix. From these tables, the numbers given in Table 3 indicate that there is no high deviation among subjects’ opinions. The equal attitude toward corporate governance and business environment shows that as one of them improves, so does the other. The mean binary variable of time balance between marketing and auditing activities that is equal to 0.49 shows that there is a balanced attitude toward auditing and marketing activities. The mean gender variable, which equals 0.13, demonstrates that there is no desirable balance between subjects’ gender. Further investigation clarifies that the number of male subjects is higher than that of females.

Empirical results

To test the first hypothesis, the sample was first divided into two samples of young and experienced auditors. To do so, just like the criteria of Broberg et al. (2013), the average work experience was calculated, thereafter, auditors with experience of more than the average were considered as experienced while others were considered as young. Thereafter, the logistic regression equation was specified for both samples. The results are provided in Table 5.

Given that to compare the coefficients of the two samples we need to determine Z-statistics such as Fisher (1921), in order to compare the relationship between dependent and independent variables in a community with another independent community, in the present study, Z-statistic was used as demonstrated below.

Given that in multivariate regression analysis, the coefficient of determination (r ² ) demonstrates the changes in the dependent variable due to the independent variable, in this study, binary logistic regression was used. The Cox-Snell coefficient of determination plays the same role as r ² in multivariate regression, i.e., Cox-Snell coefficient of determination indicates the dependency between dependent and independent variables. Information on young auditors (less experienced) is as follows:

Information on experienced auditors is as follows:

So

Then considering that Z-statistic is equal to 1.128, the fourth hypothesis could not be verified. The results of this research are contrary to the findings of Broberg et al. (2013) and these findings are in line with the findings of Basioudis and Fifi (2004).

To test the second hypothesis, model (1) is used as follows:

The results of the model test are given in Table 6 panel A. As shown in Table 6 panel A, there is a positive and significant relationship between the business environment, with the time balance between marketing activities and auditing at 95%. Moreover, there is a negative and significant relationship between the entrepreneurial characteristic at 99%, with the time balance of marketing activities and auditing. One of the items that is of great importance in the business environment is corporate governance. The philosophy of corporate governance in a firm is to guarantee the interests of the relevant stakeholders of that firm. Therefore, compliance with laws and regulations, adherence to professional ethics, and the information transparency are the most important cases proposed in discussion of corporate governance. In corporate governance, in particular, the sector for the implementation of regulations monitors the compliance with laws and regulations in the Institute and in the case of any violations of the laws and regulations, besides guiding the executive department of law violation, offers guidelines for the strict observance of rules and regulations to executive departments. In this context, the development of corporate governance can affect the independence of auditors who are part of the corporate governance mechanisms. Marketing activities can threaten auditor independence, but the balance between them may be attributed to improvements in the business environment. Therefore, developing and improving the business environment can help to create balance between marketing and audit activities. As noted earlier in the previous hypotheses on the time balance between marketing and audit activities, in testing this hypothesis, there has been a negative and significant relationship between entrepreneurs with time balance of marketing and audit activities. This is because in the face of the client, before thinking about the time balance between audit and marketing activities, the entrepreneur auditors think about entrepreneurial and creative strategies to promote the objectives of the organization.

To test the third hypothesis, model 2 is used as follows:

After constructing the variables of the model, the least squares method was employed to test the model specified, but because of the proximity of the attitude score to corporate governance, the above model could not be statistically explained. Consequently, the dependent variable of time balance was defined as binary (zero-one). Therefore, the average of this change variable was calculated and responses above the mean were assigned one and the other were assigned zero. Thereafter, using zero and one probit, the model was tested. The results of the model are presented in Table 6 panel B. As shown in Table 6 panel B, entrepreneurship has a significant positive relationship, with attitude to corporate governance at 99%. The education also has a negative and significant relationship with attitude to corporate governance at 99%. Entrepreneur auditors believe that corporate governance is a favorable environment for the prosperity and creativity of auditing firm forces.

Consequently, entrepreneur auditors are very effective in the implementation and development of corporate governance mechanisms. By employing auditors, or training auditors to learn entrepreneurial skills, audit firms lead to improvement of the mechanisms of corporate governance in the company of the client. This is because the belief and attitude to a particular subject is the first step toward practical implementation of that issue. However, what is achieved in this research is remarkable, which is the negative and significant relationship of education and attitude to corporate governance. What is evident is the importance of education, but considering the attitude to corporate governance mechanisms, it must be stated that attitude toward corporate governance can only be in accordance with the formed objectives of the companies that are in the business environment of company and developed as a results of its needs. Auditors, who have higher education levels, are less willing to accept latent corporate governance of the client companies. Because in their mental background they have shaped certain conditions and presumptions of attitudes to corporate governance, which may not necessarily be in line with the benefits of their client.

To test the fourth hypothesis, models 3, 4 and 5 and Fig. 1 are used as follows:

Results are shown in Table 7 panels A, B and C. The fourth hypothesis aims to estimate the direct impact of attitude to business environment on the balance of time spent on marketing and auditing activities, as well as its indirect impact through the attitude toward corporate governance. So, the general impact of attitude toward business environment on the balance of time spent on marketing and auditing activities is computed in this part based on the estimation of other direct relationships related to the impacts of attitude to business environment. The following equivalent shows how the general impact of attitude toward business environment on the balance of time spent on marketing and auditing activities is calculated according to the simplified variable relations:

The above equation shows the general impacts of attitude toward business environment on the balance of time spent on marketing and auditing activities.

According to estimated equations, ∂BT/∂CG that shows the impact of attitude toward corporate governance on the balance of time spent on marketing and auditing activities is equal to 0.347, ∂CG/∂BUSINESS that shows the impact of attitude to business environment on the attitude to corporate governance is equal to 0.269 and dBT/dBUSINESS showing the direct impact of attitude to business environment on the balance of time spent on marketing and auditing activities is equal to 0.396. Hence, the general impact of attitude toward business environment on the balance of time spent on marketing and auditing activities according to these estimated coefficients is equal to:

The results show that an increase by a unit for the attitude toward business environment results in 0.489 units increase in attitude toward balance of time spent on marketing and auditing activities, of which 0.396 is direct impact and 0.093 is indirect impact. So, the fourth hypothesis is confirmed.