Determinants of audit quality: The moderating role of audit committee effectiveness
Keywords:
audit quality, audit tenure, auditor rotation, audit fees, managerial entrenchment, audit committee effectivenessAbstract
This study examines the effects of audit tenure, auditor rotation, audit fees, and managerial entrenchment on audit quality and investigates whether audit committee effectiveness moderates these relationships. The study focuses on Consumer Non-Cyclicals firms listed on the Indonesia Stock Exchange during 2020–2024. Using purposive sampling, 21 firms were selected, resulting in 105 firm-year observations. Secondary data were collected from annual reports, audited financial statements, and corporate governance reports. Audit quality was proxied by discretionary accruals estimated using the Modified Jones Model and transformed using −ln(|DA|), whereby higher values indicate higher audit quality. The hypotheses were tested using Moderated Regression Analysis on panel data with the Correlated Random Effects/Mundlak approach in STATA 19. The results show that audit tenure and managerial entrenchment have no significant effect on audit quality, whereas auditor rotation and audit fees have significant negative effects. Audit committee effectiveness weakens the negative association between auditor rotation and audit quality, suggesting that effective audit committees may mitigate the potential disruption associated with auditor changes. In contrast, audit committee effectiveness strengthens the negative association between audit fees and audit quality. No significant moderating effects are found for audit tenure or managerial entrenchment. These findings demonstrate that the governance role of audit committees is contingent on the specific determinant of audit quality rather than uniformly beneficial across audit-related conditions. The study contributes to the audit quality and corporate governance literature by providing evidence from an emerging-market setting that audit committee effectiveness may generate asymmetric moderating effects. The findings highlight the importance of substantive audit committee oversight, particularly in auditor rotation decisions and the assessment of professional audit fees.
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