International Journal of Innovation, Creativity and Change. www.ijicc.

net
Volume 9, Issue 7, 2019

The Effect of Audit Committee

Financial Expertise, Auditor
Specialists Experience, and Audit
Rotation on Audit Quality
a,b
Julianaa, Agus Widodob*, Department of Accountancy, Faculty of
Economics and Business, Universitas Airlangga, Email: b*agus-w-
[email protected]

This study aims to determine the effect of financial expertise of audit

committee, specialist expertise of auditor, and audit rotation on audit
quality. The method of determining the sample used is purposive
sampling so that the sample obtained as many as 255 companies in the
year 2014-2016. Independent variables in this research are financial
expertise of audit committee, auditor specialist expertise, and audit
rotation. The dependent variable in this research is audit quality which
has a proxy with earnings management. The hypothesis in this study
was tested by ordinary least square regression. The study found that
audit committee financial expertise has no significant effect on audit
quality. The specialist expertise of auditors has a positive and significant
impact on audit quality. Audit rotation of both public accounting firms
and public accountants has no significant effect on audit quality.

Key words: Audit quality, earnings management, financial expertise, audit committee,
audit rotation.

Introduction

Financial statements are used as a guide in making decisions by management and investment
decisions by investors in a company. As such, people need reliable information in financial
statements to not make wrong decisions as it discloses all facts of a firm during one period
(Simamora & Hendarjatno, 2019). Therefore, an audit of the financial statements is needed.
According to Arens (2010), auditing is an examination conducted by an independent party on
financial statements which have been prepared by the client's management to accumulate or
collect evidence as well as evaluating the evidence to assess the reasonableness of the financial
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statements. The general purpose of an audit is to express an opinion on the reasonableness of

the financial statements, in all material respects, the financial position as well as results of
operations, and cash flows in accordance with generally accepted accounting principles.

However, even though the financial statements have been audited, information in the financial
statements which are not in accordance with the regulation are still found due to low audit
quality. This is indicated from many cases of financial scandals both in Indonesia and abroad
that show the low quality of audits. In a recent case in 2017, the PWC public accounting firm
was unable to detect fraud committed by British Telecom, which is a giant British company, in
one of its lines of business in Italy. PWC's relationship with British Telecom has lasted for 33
years. British Telecom was raising the firm's revenue through fake contract extensions and
invoices as well as fraudulent transactions with vendors. Ironically, this practice of fraud has
occurred since 20131.

Based on the financial scandal case above which is due to the low quality of audits, quality
audits is an important matter to increase the credibility of financial statements. Audit quality in
this study is proxied by earnings management. The lower the level of earnings management,
the better the audit quality is. High earnings management reflects the failure of auditors to find
fraud and as such, the audit quality worsens. Some factors that influence audit quality in this
study are the audit committee's financial expertise, auditor specialist expertise, and audit
rotation which include the rotation of the public accounting firm and the rotation of the public
accountant's partner.

Audit quality can be associated with audit committee. Audit committee that has financial
expertise is able to find any discrepancies between the information in financial statements and
the actual financial condition of the firm. As such, they can detect fraud committed by
management in reporting firm’s information in the financial statements. According to Badolato
(2014), audit committee's financial expertise can be associated with earnings management, and
the results of his research suggest that audit committee's financial expertise in accounting,
supervisors, and finance can inhibit earnings management in the firm and thus audit quality
increases.

In addition to audit committee's financial expertise, specialist expertise of auditor also

influences audit quality. A specialist auditor is defined as auditor who has a considerable
experience in auditing clients in the same industry. Auditor who has many clients in the same
industry will have better knowledge and understanding of firms’ internal controls, business
risks, and audit risks in the industry. This experience has an impact on the increasing

1www.wartaekonomi.co.id

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understanding of auditor on specific audit risks in the industry (Fitriany, 2015). According to
Jaggi (2014), specialist auditor expertise is crucial and has an impact on audit quality.
Audit quality is also closely associated with audit rotation. According to Ishak (2015),
regulations about auditor rotation were made to improve audit quality based on the assumption
that the longer the relationship between the auditor, both Audit Partner (AP) and Public
Accounting Firm (KAP), with their client, the reduced the auditor independence. According to
Nadia (2015), KAP rotation has a positive and significant effect on discretionary accruals.
Arthur (2017) also states that audit partner rotation can improve audit quality when the audit
firm is an industry specialist.

Specifically, this study intends to determine the effect of audit committee’s financial expertise,
auditor’s specialist expertise, and audit rotation on audit quality. The sample determination
method used in this study is purposive sampling and we obtained a sample of 255 companies
in year 2014-2016. This study finds that an audit committee's financial expertise does not
significantly influence audit quality while auditor’s specialist expertise has a positive and
significant effect on audit quality. Lastly, audit rotation of both public accounting firms and
public accountants do not significantly influence audit quality.

This research paper will continue with the following arrangement: literature review; description
of variables and sample as well as research models; the results of empirical analysis and
hypothesis testing; and summary or conclusion of the study, including suggestions for further
research.

Literature Review

Agency theory exhibits that separation of agent (management) from the principal (owner) leads
to a problem of moral danger because the agent (management) may pursue their own interests
at the expense of the principal (owner) (Jensen & Meckling, 1976). Agents and principals are
two or more who work together for the management of firm, which both of whom have their
own motivation to perform their respective duties. The moral hazard problem is reinforced by
information asymmetry between the two parties: the manager, who runs the company, knows
more about the firm and its future prospects than the shareholders. Information asymmetry is a
situation where one party has more information about financial transactions than another party
(Alzoubi, 2016). The presence of information asymmetry between managers and shareholders
will lead to earnings management practices because shareholders have little resources, motives,
or access to related information to monitor and control manager's activities. One way to reduce
the consequences and costs associated with moral hazard is to hire an external third party,
which is an auditor, to audit the firm’s books, records and financial statements, and thereby
reduce information errors between firm’s agents and principals (Corbella, 2015).

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Audit quality includes all possibilities when an auditor who is auditing the client's financial
statements find violations that occurred in the client's accounting system and reports them in
the form of audited financial statements in which auditor's responsibilities are based on auditing
standards and the relevant public accountant code of ethics (Pertiwi, 2016). Audit quality is the
probability or likelihood that auditor discover and report on violation in their client's
accounting system.

Arthur (2017) and Kim (2015) use discretionary accrual as proxy for audit quality in their
research. High discretionary accruals indicate fraud accounting or earnings management
(Nadia, 2015). High-quality auditors prefer to inhibit and detect dubious accounting practices,
and report material errors as well as those that are not in accord with the rules more than low-
quality auditors do. As high-quality auditors have the experiences, resources, and incentives to
separate information component from errors, they can enhance information of discretionary
accruals by reducing management’s aggressive and opportunistic accrual reporting.

The Effect of Financial Expertise of Audit Committee on Audit Quality

The existence of an audit committee in a firm provides more oversight to the firm's
management performance as well as providing accurate and correct information and lastly,
helps assist the board of commissioners in analyzing the firm's financial statements (Pertiwi,
2016). One of the responsibilities of an audit committee is to identify, assess, and manage risk
of financial uncertainty as well as continuously improving the financial system, the integrity
of financial statements, and financial disclosures (Moeller, 2016). According to Amar (2014),
there is no significant relationship between financial expertise of audit committee and earnings
management practices, which are proxied by discretionary accruals. This indicates that there is
no significant relationship between audit committee financial expertise with audit quality.
Meanwhile, according to Badolato (2014) and Khamoussi (2016), financial expertise of audit
committee has a significant negative relationship with earnings management, which means it
has significant positive relationship with audit quality. Audit committee's expertise impedes or
inhibits earnings management. Thus, audit committee's financial expertise is associated with a
low level of earnings management. Based on the description above, the research hypothesis of
this study can be stated as follow:

H1: The financial expertise of audit committee has positive effect on audit quality.

The Effect of Specialist Expertise of Auditor on Audit Quality

Fitriany (2015) posits that the specialist expertise of auditor in certain industries ensures that
an auditor has adequate ability and knowledge compared to an auditor who doesn’t have
specialist expertise. According to Khamoussi (2016), auditor specialization has an insignificant

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negative relationship with earnings management. According to Pertiwi (2016), auditor’s

industry specialization has no effect on audit quality. Meanwhile, according to Jaggi (2014),
auditor’s industry specialization is crucial and has an impact on audit quality which is proxied
by discretionary accruals. Zhou and Elder (204) posit that industry specialist of auditors is
associated with lower earnings management only in the year of SEO (seasoned equity offering
firms). Industry specialization can preserve audit quality when the auditor accepts new clients
and there is a decrease in audit quality for new clients if the auditor is not an industry specialist.
Based on the description above, the following hypothesis can be posed:

H2: The specialist expertise of auditor has positive effect on audit quality.

The Effect of Rotation of Public Accounting Firm on Audit Quality

The debate over whether auditors should be rotated during a specific tenure with a client
(mandatory auditor rotation) has its proponents and opponents (Nasution & Östermark, 2013;
Nawangsari & Iswajuni, 2019) as its effect on audit quality. According to Corbella (2015),
there is a significant negative relationship between audit partner changes and audit quality in
sample of public companies audited by non Big4 public accounting firm and no significant
relationship between audit firm rotation and audit quality in the full sample and in the sub
sample of firms audited by public accounting firm Big4. According to Nurhayati (2015), the
rotation of public accounting firm has no effect on audit quality, which means that the rotation
of public accounting firm is not the cause of improved audit quality. Nadia (2015) also states
that KAP rotation has a significant positive effect on discretionary accruals. Firms that have
KAP rotations have high discretionary accruals. Ishak (2015) states that the industry
specialization of public accounting firm has a positive effect on audit quality. Based on the
description above, the hypothesis can be stated as follow:

H3: Rotation of public accounting firm has positive effect on audit quality.

The Effect of Rotation of Public Accountant Partner on Audit Quality

According to Ishak (2013), regulations about auditor rotation were made with to improve audit
quality based on the assumption that the longer the relationship between auditor (both the
public accountant (AP) and the Public Accountant Office (KAP) with his client, the less the
auditor independence. The existence of rotation of public accounting can preserve
independence between auditors and their client and thereby, the auditor will report any errors
or fraud which exist in the financial statements. As such, the opportunity for earnings
management will be reduced and the audit results are more qualified. According to Corbella
(2015), changes in the partner of public accountants are significant negatively related with audit
quality. Meanwhile, according to Arthur (2017), rotation of audit partners can improve audit

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quality when the audit firm is an industry specialist auditor. Kurniasih (2014) also states that
audit rotation has significant positive effect on audit quality which indicates that audit rotation
has a big influence on the quality of independent auditing results. Based on the description
above, the hypothesis can be stated as follows:
H4: Rotation of public accountant has positive effect on audit quality

Research Methodology
Sample and Data Source

The population in this study are manufacturing firms listed on the Indonesia Stock Exchange
during the years 2014-2016. The appropriate selection sample was obtained by using purposive
sampling, which is the sampling technique with certain considerations (Anshori & Iswati,
2009) as presented in Table 1 below.

Table 1: Sample Criteria

No Sampling Criteria Year Total
2014 2015 2016
1 Listed manufacturing firms in 2014 142 142 142 426
2 Firms which don’t publish financial (24) (24) (24) (72)
statements and annual reports for a
continuous period of year 2014-2016
on the IDX
3 Delisted firms during year 2015- (2) (2) (2) (6)
2016
4 Firms use non-IDR currency (25) (25) (25) (75)
5 Incomplete data of firms (6) (6) (6) (18)
Total samples 85 85 85 255

Definition of Operational Variables

Audit Quality

Audit quality is the probability that auditor find and report on violation in their client's
accounting system. Audit quality is measured by discretionary accruals (Arthur, 2017 and Kim,
2015). In this study, discretionary accruals are calculated annually, which are year 2014, 2015
and 2016, in the following steps:
1. Calculating total accruals
𝑇𝐴𝐶𝑖𝑡 = 𝑁𝐼𝑖𝑡 − 𝐶𝐹𝑂𝑖𝑡
Notes:
TACit : Total accruals of firm i in period t
NIit : Net income of firm i in period t
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CFOit : Operational cash flow of firm i in period t

2. Total accruals are estimated with the following regression equation:

𝑇𝐴𝐶𝑖𝑡 1 ΔREV𝑖𝑡 − ΔAR 𝑖𝑡 PPE𝑖𝑡
= ∝1 ( ) +∝2 ( ) + ∝3 ( ) +∝4 𝑅𝑂𝐴 + 𝑒
𝑇𝐴𝑖𝑡−1 𝑇𝐴𝑖𝑡−1 𝑇𝐴𝑖𝑡−1 𝑇𝐴𝑖𝑡−1
TAit-1 : Total assets of firm i in period t-1
ΔREVit : Change in revenue of firm i from period t to period t-1
ΔARit : Change in revenue of firm i from period t -1 to period t
PPEit : Gross value of fixed assets of firm i in period t
ROA : Return on asset of firm i in period t

3. Calculating discretionary non-accruals

By using total accrual regression results, we acquire the coefficients α1, α2, α3, α4 to
estimate the value of non-discretionary accruals:

1 ΔREV𝑖𝑡 − ΔAR 𝑖𝑡 PPE𝑖𝑡

𝑁𝐷𝐴𝐶𝑖𝑡 = ∝1 ( ) +∝2 ( ) + ∝3 ( ) +∝4 𝑅𝑂𝐴 + 𝑒
𝑇𝐴𝑖𝑡−1 𝑇𝐴𝑖𝑡−1 𝑇𝐴𝑖𝑡−1

4. Calculating discretionary accruals

Discretionary accruals can be calculated after obtaining the total value of the firm's accruals
(TAC) and the value of non-discretionary accruals (NDAC). The formula for calculating
company discretionary accruals is on follow:
𝐷𝐴𝐶𝑖𝑡 = 𝑇𝐴𝐶𝑖𝑡 − 𝑁𝐷𝐴𝐶𝑖𝑡
5. Earnings management is the absolute value of discretionary accruals.
6. Audit quality is the negative value of the discretionary accruals’ absolute value.

The Financial Expertise of Audit Committee

The criteria for audit committee to have financial expertise was that it obtained the attributes
through one of the following methods: Education and experience 1) in the position as financial
or accounting officer, controller, public accountant, or auditor, or 2) in the position that have
similar function; Experience in overseeing financial or accounting officials, controllers, public
accountants, or auditors (or individuals who perform similar functions) actively; Experience in
supervising or evaluating firms or public accountants in preparing, auditing, or evaluating
financial statements; or other relevant experience (Badalato, 2014). The audit committee's
financial expertise is a dummy variable, 1 for the audit committee which has financial
expertise, and 0 for the audit committee which have non-financial expertise (Amar, 2014).

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The Specialist Expertise of Auditor

Specialist auditor represents an auditor's expertise and audit experience in a particular industry
(Pertiwi, 2016). Specialist expertise of auditor is measured by calculating the percentage of
KAP market share in the industry (Zhou & Elder, 2004; Ishak, 2013, & Andreas, 2012). The
auditor is categorized as a specialist if the KAP client's market share is greater than 15%. This
variable is measured by a dummy variable, 1 for auditor who has specialist expertise, and 0 for
auditor who isn’t a specialist.

The Rotation of Public Accountant Firm

In Fitriany's (2015) research, the rotation of a public accounting firm is measured by a dummy
variable, 1 if a firm changes the public accounting firm in the financial year, and 0 if the public
accounting firm is the same as previous year.

The Rotation of Public Accountant Partner

The rotation of public accountant partners is measured by a dummy variable, 1 if a firm changes
its public accountant partner in the financial year, and 0 if the public accountant partner is the
same as previous year.

Control Variables

Based on previous research conducted by Amar (2014), Camerana (2014), Corbella (2015),
Kim (2015), Choi (2017), Jaggi (2014), the control variables used in this study are the size of
a public accounting firm which is measured by KAP Big4 or Non Big4, company size (SIZE)
which is measured by Ln of total company assets, leverage ratio (LEV) which is calculated by
dividing total debt with total assets. The ratio of return on assets (ROA) is calculated by
dividing total net income with total assets, the ratio of return on equity (ROE) is calculated by
dividing total net income with total equity, the changes in total sales from book at year end to
previous year (GROWTH), total cash flow from operations (CFO), firms which suffered losses
(LOSS), size of KAP (BIG4) and total property, plant, and equipment (PPE).

Analysis Technique and Research Model

The analysis technique used in this study is a ordinary least square (OLS) regression analysis
(OLS). The purpose is to determine the trend of relationship between two or more independent
variables on dependent variable in which each independent variable has positive or negative

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relationship with dependent variable. This model has the ability to explicitly and
simultaneously control several factors of the relationship with dependent variable (Wooldridge,
2015).

To test the relationship between independent and dependent variables, we use Ordinary Least
Square regression which is as follow:

𝐴𝑄𝑖𝑡 = β0 + β1 𝐹𝐸𝐾𝐴𝑖𝑡 + β2 𝐹𝐸𝐴𝐾𝐴𝑖𝑡 + β3 𝐾𝑆𝐴𝑖𝑡 + β4 𝑅𝐾𝐴𝑃𝑖𝑡 + β5 𝑅𝐴𝑃𝑖𝑡 + β6 𝑆𝐼𝑍𝐸𝑖𝑡

+ β7 𝐿𝐸𝑉𝑖𝑡 + β8 𝑅𝑂𝐴𝑖𝑡 + β9 𝑅𝑂𝐸𝑖𝑡 + β10 𝐺𝑅𝑂𝑊𝑇𝐻𝑖𝑡 + β11 𝐶𝐹𝑂𝑖𝑡
+ β12 𝐿𝑂𝑆𝑆𝑖𝑡 + β13 𝐵𝐼𝐺4𝑖𝑡 + β14 𝑃𝑃𝐸𝑖𝑡 + 𝑒
Notes:
β0 : Constant
β1 – β14 : Regression Coefficient
AQ : Audit Quality of firm i in period t
FEKA : Financial expertise of the chairman of audit committee of firm i in
period t
FEAKA : Financial expertise of the members of audit committee of firm i in
period t
SIA : Specialist expertise of auditor of of firm i in period t
RKAP : Rotation of public accountant firm of firm i in period t
RAP : Rotation of public accountant partner of firm i in period t
SIZE : Size of firm i in period t
LEV : Leverage ratio of firm i in period t
ROA : Return on asset ratio of firm i in period t
ROE : Return on equity ratio of firm i in period t
CFO : Cash flow from operation of firm i in period t
GROWTH : Total sales of firm i in period t
LOSS : Dummy variable of net income of firm i in period t
BIG4 : Size of public accountant of firm i in period t
PPE : Total prperty, plant, and equipment of firm i in period t

Results and Discussion

Overview of Subjects and Research Objects

The subjects used in this study are manufacturing firms listed on Indonesia Stock Exchange
during the years 2014-2016. In this study, there are 255 firms which meet the criteria of
purposive sampling. The object used in this study is earnings management conducted by
management which is measured by the estimate of discretionary accruals, audit committees,
and auditors of manufacturing firms. Descriptive Statistic are presented in Table 2 below

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Table 2: Results of Descriptive Statistics Analysis

Mean Median StandarDeviation Minimum Maximum
AQ -0.059 -0.042 0.058 -0.281 -0.000
FEKA 0.510 1.000 0.501 0.000 1.000
FEAKA 1.678 2.000 0.546 0.000 3.000
KSA 0.188 0.000 0.392 0.000 1.000
RKAP 0.153 0.000 0.361 0.000 1.000
RAP 0.529 1.000 0.500 0.000 1.000
SIZE 21.397 21.167 1.614 18.424 26.187
LEV 0.499 0.461 0.380 0.071 2.661
ROA 0.057 0.041 0.095 -0.208 0.382
ROE 0.107 0.086 0.240 -0.569 1.358
GROWTH 0.059 0.057 0.196 -0.500 0.810
CFO 8.709e+08 87280998.000 2.402e+09 -1.084e+09 1.496e+10
LOSS 0.192 0.000 0.395 0.000 1.000
BIG4 0.369 0.000 0.483 0.000 1.000
PPE 3.195e+09 5.579e+08 7.736e+09 8253324.000 5.325e+10

The statistical description in this study includes the maximum value, minimum value, mean
value, median value, and standard deviation of each variable, which are audit quality (AQ), the
financial expertise of audit committee consisting of the chairman of audit committee (FEKA)
and the members of audit committee (FEAKA), the specialist expertise of auditor (SIA), the
rotation of public accounting firm (RKAP), the rotation of public accountant (RAP), firm size
(SIZE), leverage ratio (LEV), ratio of return on assets (ROA), ratio of return on equity (ROE),
firm’s growth (GROWTH), total sales (sales), cash flow from operations (CFO), loss, size of
public accounting firm (BIG4), as well as total property, plant, and equipment (PPE). Before
processing descriptive statistics, winsorize was performed on all variables except dummy
variables.

Audit quality is proxied by earnings management which is measured by the value of

discretionary accruals. Based on Table 1 above, the audit quality (AQ) has average value of -
0,059, mean value of -0,042, and standard deviation of 0.058. The minimum value of audit
quality of -0,281 is generated from Dwi Aneka Jaya Kemasindo Tbk (DAJK) in 2014 and the
maximum value of audit quality of -0,000 is generated from Martina Berto Tbk (MBTO) in
2014.

The financial expertise of audit committee is measured by a dummy variable of the chairman
of audit committee (FEKA) and the number of members of audit committee (FEAKA). Based
on Table 1 above, the minimum value of audit committee chairman who has financial expertise
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in a firm is 0 while the maximum value is 1, with average value of 0.510, middle value of 1,
and standard deviation of 0.501. The minimum value of audit committee’s members who have
financial expertise is 0 while the maximum value is 3, with average value of 1.678, middle
value of 2, and standard deviation of 0.546.

The specialist expertise of auditor (KSA), the rotation of public accounting firm (RKAP), and
the rotation of public accountant (RAP) are dummy variables with a minimum value of 0 and
a maximum value of 1. Based on Table 1 above, the auditor’s specialist expertise has average
value of 0.188, middle value of 0, and standard deviation of 0.392. The rotation of public
accounting firm has average value of 0.153, middle value of 0, and standard deviation of 0.361.
Lastly, the rotation of public accountant has average value of 0.529, mean value of 1, and
standard deviation of 0.5.

Pearson Correlation

Pearson Corrrelation was conducted to test the strength and trend of relationship between two
variables (Acock, 2008: 180). Based on the Pearson correlation table below, the financial
expertise of audit committee’s chairman (FEKA), which coefficient is -0.017, has insignificant
negative relationship with audit quality, which indicates that the financial expertise of chairman
of audit committee has no effect on audit quality. Meanwhile, the financial expertise of audit
committee’s members (FEAKA), which coefficient is 0.029, has insignificant positive
relationship with audit quality, which indicates that the magnitude of audit committee with
financial expertise has no effect on audit quality.

The correlation between audit quality and rotation of public accountant (RAP), which
coefficient is -0.079, is insignificant negative which indicate that the rotation of public
accounting firm and the rotation of public accountant do not affect audit quality. The
correlation between audit quality and specialist expertise of auditor (SIA), which coefficient is
0.117, is significant positive at significance level of 10%. These results indicate that auditors
who have specialist expertise have better audit quality. Meanwhile, the rotation of public
accounting firm (RKAP), which coefficient is -0.105, has significant negative relationship with
audit quality at significance level of 10%.

Audit quality variables also have a significant correlation with some control variables, namely
leverage (LEV), sales growth (GROWTH), the amount of operating cash flow (CFO), the firm
which have loss (LOSS), as well as the number of property, plants, and equipment (PPE) owned
by firm. Leverage with a coefficient of -0.134 has significant negative relationship with audit
quality at significance level of 5%. GROWTH with a coefficient of -0.121 has significant
negative relationship with audit quality at significance level of 10%.

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CFO (operating cash flow) with a coefficient of 0.120 and PPE with a coefficient of 0.119 have
significant positive effect on audit quality at significance level of 10%. Meanwhile, LOSS with
a coefficient of -0.182 has significant negative effect on audit quality at a significance level of
1%. This indicates that firms which suffered losses tend to avoid earnings management. Lastly,
the SIZE variable (firm size), ROA (return on assets) with a coefficient of 0.078, ROE (return
on equity) with a coefficient of 0.027, and BIG4 (firm size) with a coefficient of 0.035 do not
have significant relationship with audit quality.

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Table 3: Pearson Correlation

AQ FEKA FEAKA SIA RKAP RAP SIZE LEV ROA ROE GROWTH CFO LOSS BIG4 PPE
AQ 1.000

FEKA -0.017 1.000

(0.782)
FEAKA 0.029 0.141** 1.000
(0.646) (0.024)
KSA 0.117* 0.011 0.008 1.000
(0.061) (0.866) (0.899)
RKAP -0.105* 0.024 -0.009 - 1.000
0.205***
(0.093) (0.699) (0.884) (0.001)
RAP -0.079 0.018 -0.037 0.112* 0.401*** 1.000
(0.209) (0.769) (0.553) (0.073) (0.000)
SIZE 0.083 -0.117* -0.057 0.300*** -0.105* 0.093 1.000
(0.189) (0.063) (0.368) (0.000) (0.096) (0.139)
LEV - -0.070 -0.012 -0.108* 0.157** 0.012 - 1.000
0.134** 0.124**
(0.032) (0.267) (0.848) (0.086) (0.012) (0.852) (0.049)
ROA 0.078 - - 0.137** -0.110* -0.023 0.223*** - 1.000
0.138** 0.172*** 0.233***
(0.213) (0.028) (0.006) (0.028) (0.079) (0.712) (0.000) (0.000)
ROE 0.027 -0.052 -0.118* 0.050 -0.060 -0.023 0.240*** -0.042 0.732*** 1.000
(0.665) (0.409) (0.059) (0.431) (0.336) (0.714) (0.000) (0.507) (0.000)
GROWTH -0.121* -0.027 -0.034 0.029 0.031 -0.004 0.042 0.158** 0.030 0.072 1.000
(0.053) (0.673) (0.588) (0.643) (0.620) (0.949) (0.508) (0.011) (0.634) (0.251)
CFO 0.120* 0.068 0.097 0.120* -0.090 0.047 0.649*** -0.075 0.368*** 0.294*** -0.022 1.000
(0.055) (0.280) (0.122) (0.056) (0.150) (0.450) (0.000) (0.235) (0.000) (0.000) (0.732)
LOSS - 0.020 0.014 - 0.180*** 0.021 -0.101 0.313*** - - -0.051 - 1.000
0.182*** 0.133** 0.586*** 0.388*** 0.169***
(0.004) (0.747) (0.826) (0.034) (0.004) (0.737) (0.109) (0.000) (0.000) (0.000) (0.418) (0.007)

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BIG4 0.035 -0.031 -0.012 0.630*** - 0.069 0.572*** - 0.390*** 0.376*** -0.000 0.406*** - 1.000
0.234*** 0.143** 0.166***
(0.576) (0.619) (0.855) (0.000) (0.000) (0.272) (0.000) (0.023) (0.000) (0.000) (0.996) (0.000) (0.008)
PPE 0.119* 0.068 0.187*** 0.171*** -0.099 0.064 0.711*** -0.040 0.116* 0.107* -0.033 0.829*** -0.093 0.417*** 1.000
(0.057) (0.282) (0.003) (0.006) (0.116) (0.311) (0.000) (0.526) (0.064) (0.089) (0.603) (0.000) (0.137) (0.000)

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The Financial Expertise of Chairman of Audit Committee (FEKA)

The chairman of audit committee in this t test is categorized into 2 groups, which are the
chairman of audit committee (FEKA) who has financial expertise and the chairman of audit
committee who has non-financial expertise. Based on Table 4 below, the chairman of audit
committee who has financial expertise are found in 130 firms.

Table 4: T test (The Financial Expertise of Chairman of Audit Committee)

Have financial Have non-financial
Variables expertise expertise Coef t-value
N = 130 N = 125
AQ -0.060 -0.058 -0.002 -0.277
FEAKA 1.754 1.600 0.154** 2.269
KSA 0.192 0.184 0.008 0.169
RKAP 0.162 0.144 0.018 0.388
RAP 0.538 0.520 0.018 0.294
SIZE 21.213 21.588 -0.376* -1.866
LEV 0.473 0.526 -0.053 -1.113
ROA 0.044 0.070 -0.026** -2.209
ROE 0.095 0.120 -0.025 -0.827
GROWTH 0.054 0.064 -0.010 -0.422
CFO 1.030e+09 7.049e+08 3.255e+08 1.082
LOSS 0.200 0.184 0.016 0.323
BIG4 0.354 0.384 -0.030 -0.497
PPE 3.707e+09 2.663e+09 1.044e+09 1.078
Significance level at * 10%, ** 5%, *** 1%

The average audit quality (AQ) in firms which audit committee’s chairman has financial
expertise is -0.06 while the average audit quality (AQ) in firms which audit committee’s
chairman has non-financial expertise is -0.58 with a coefficient of -0.002 and is insignificant.
This indicates that the audit committee's financial expertise does not have significant difference
on audit quality. The average financial expertise of audit committee members is higher for
firms in which the audit committee’s chairman has financial expertise. These results are
indicated by the average financial expertise of 1,754 while non-financial expertise is 1,600 and
a coefficient of 0,154 at significance level of 5 %. There is no significant difference of effect
of KSA, RKAP, RAP, leverage, ROE, growth, CFO, Loss, Big4, and PPE on audit quality
between firms in which audit committee’s chairman has financial expertise and firms in which
audit committee’s chairman does not have financial expertise.

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The average firm’s size (SIZE) for firms which audit committee’s chairman have financial
expertise is 21,213 and those with non-financial expertise is 21,588 with a coefficient of -0.376
at significance level of 10%. Furthermore, there is a significant difference on the average return
on assets (ROA), which is 0.044 for firms which audit committee has financial expertise and
0.07 for those with non-financial expertise with coefficient of -0.026 at significance level of
5%.

The Specialist Expertise of Auditor (KSA)

Table r: T Test (Variables of the Specialist Expertise of Auditor)

Variables Specialist Auditors Non-Specialist Auditors Coef t-value
N = 48 N = 207
AQ -0.045 -0.062 0.017** 1.879
FEKA 0.521 0.507 0.014 0.169
FEAKA 1.688 1.676 0.021 0.276
RKAP 0.000 0.188 -0.188*** -3.325
RAP 0.646 0.502 0.143* 1.798
SIZE 22.401 21.164 1.237*** 5.006
LEV 0.414 0.519 -0.105* -1.724
ROA 0.084 0.050 0.033** 2.205
ROE 0.132 0.102 0.03 0.788
GROWTH 0.071 0.056 0.015 0.464
CFO 1.468e+09 7.324e+08 7.358e+08* 1.922
LOSS 0.083 0.217 -0.134** -2.135
BIG4 1.000 0.222 0.778*** 12.911
PPE 5.936e+09 2.560e+09 3.376e+09*** 2.759
Significance level at * 10%, ** 5%, *** 1%

Based on Table 5 above, total sample audited by specialist auditors was 48 firms and those that
are not audited by specialists, 207 companies. There is a significant difference of average audit
quality (AQ) between firms audited by specialist auditors, which is -0.045, and firms audited
by non-specialist auditors, which is -0.062 with a coefficient of 0.017 at significance level of
5% and is positively related. This indicates that auditors with industry specialisation are
associated with better audit quality. There is insignificant difference of audit committee’s
financial expertise (FEKA and FEAKA) between firms audited by specialist and firms audited
by non-specialist auditors.

Rotation of KAP (RKAP), firm’s size (SIZE), KAP size (BIG4), and PPE have significant
difference between firms audited by specialist and firms audited by non-specialist auditors at
significance level of 1%. Return on assets (ROA) and firm’s losses (LOSS) also have
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significant difference between firms audited by specialist auditors and firms audited by non-
specialists at significance level of 5%. Rotation of public accountants (RAP), leverage (LEV),
and CFO have significant difference between firms audited by specialist auditors and firms
audited by non-specialists at significance level of 10%. Meanwhile, return on equity (ROE)
and sales growth (GROWTH) have insignificant difference.

Rotation of Public Accounting Firm (RKAP)

Table 6: T Test (Variables of Rotation of Public Accounting Firm)

Do not have KAP
Variables Have KAP Rotation Rotation Coef t-value
N = 39 N = 216
AQ -0.073 -0.056 -0.017* -1.254
FEKA 0.538 0.505 0.034 0.388
FEAKA 1.667 1.681 -0.014 -0.146
KSA 0.000 0.222 -0.222*** -3.325
RAP 1.000 0.444 0.556*** 6.955
SIZE 21.000 21.468 -0.468* -1.672
LEV 0.639 0.474 0.166** 2.527
ROA 0.032 0.061 -0.029* -1.765
ROE 0.073 0.114 -0.04 -0.963
GROWTH 0.073 0.056 1.70E-02 0.497
CFO 3.612e+08 9.629e+08 -6.02E+08 -1.443
LOSS 0.359 0.162 0.197*** 2.909
BIG4 0.103 0.417 -0.314*** -3.834
PPE 1.401e+09 3.519e+09 -2.12E+09 -1.579
Significance level at * 10%, ** 5%, *** 1%

Based on Table 6 above, the total of sample that have rotation of public accounting firm is 39
firms while those that do not have rotation of public accounting firm is 216 firms. The average
audit quality (AQ) in firms that have rotation of public accounting firms is -0.073 and those
who do not have rotation is -0.056 with a coefficient of -0.017 and significant at significance
level of 10%. There is a significant difference of expertise of specialist auditors (KSA), public
accountant rotation (RAP), loss, and KAP size (BIG4) at significance level of 1%.

Average leverage (LEV) has a significant difference at the 5% level with a coefficient of 0.166,
which is 0.639 for firms that have rotation of public accounting firm and 0.474 firms that do
not have rotation of public accounting firm. The average return on assets (ROA) has a
significant difference at the 10% level with an average value of 0.032 in firms that have rotation
and 0.061 in firms that have rotation.
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The Rotation of Public Accountant Partners (RAP)

Table 7: T Test (Variables of Rotation of Public Accountant)

Have KAP Do Not Have KAP
Variable Rotation Rotation Coef t-value
N = 135 N = 120
AQ -0.063 -0.054 -0.009 -1.260
FEKA 0.519 0.500 0.019 0.294
FEAKA 1.659 1.700 -0.041 -0.597
KSA 0.230 0.142 0.088* 1.798
RKAP 0.289 0.000 0.289*** 6.955
SIZE 21.538 21.238 0.299 1.482
LEV 0.503 0.494 0.009 0.186
ROA 0.055 0.059 -0.004 -0.369
ROE 0.102 0.113 -0.011 -0.366
GROWTH 5.80E-02 6.00E-02 -2.00E-03 -0.063
CFO 9.78E+08 7.50E+08 2.28E+08 0.756
LOSS 0.200 0.183 0.017 0.336
BIG4 4.00E-01 3.33E-01 6.70E-02 1.100
PPE 3.66E+09 2.67E+09 9.86E+08 1.016
Significance level at * 10%, ** 5%, *** 1%

Based on Table 7 above, total sample that have rotation of public accountants is 135 firms, and
those that do not have rotation of public accountants, 120 firms. The average audit quality (AQ)
in firms that rotate public accountants is -0,063 and those who do not rotate is -0,054 with a
coefficient of -0.009 and insignificant. This indicates that there is no significant difference of
effect of rotation of public accountants on audit quality. However there is a significant
difference in the case of the specialist expertise of auditors at a significance level of 10%. The
average KAP rotation (RKAP) also has a significant difference at significance level of 1%.
This is due to firms that have KAP rotation also having rotation of public accountant. Audit
committee’s financial expertise, firm’s size (SIZE), leverage (LEV), ROA, ROE, GROWTH,
CFO, LOSS, BIG4, and PPE do not have significant average differences.

Ordinary Least Square Regression (OLS)

Based on Table 8 below, the coefficient of financial expertise of chairman of audit committee
(FEKA) in table (1) and (2) is -0.006, with t value of -0.79 in table (1) and t value of -0.70 in
table (2) and insignificant. The coefficient of financial expertise of audit committee’s members
(FEAKA) in table (1) and (2) is -0.001 with t value of -0.08 and is insignificant. These results

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indicate that audit committee that has financial expertise does not affect audit quality (AQ).

Table 8: The Results of Regression Analysis of Ordinary Least Square and Robust Regression
Variables Trend Prediction Audit Quality (AQ)
AQ AQ
FEKA + -0.006 -0.006
(-0.79) (-0.70)
FEAKA + -0.001 -0.001
(-0.08) (-0.08)
**
KSA + 0.029 0.029**
(2.38) (2.41)
RKAP + -0.006 -0.006
(-0.55) (-0.51)
RAP + -0.011 -0.011
(-1.36) (-1.37)
SIZE + -0.000 -0.000
(-0.02) (-0.02)
LEV - -0.011 -0.011
(-1.02) (-0.76)
ROA + -0.043 -0.043
(-0.59) (-0.55)
ROE + 0.012 0.012
(0.51) (0.61)
**
GROWTH + -0.037 -0.037
(-2.00) (-1.52)
CFO - 0.000 0.000
(0.62) (0.68)
*
LOSS - -0.022 -0.022
(-1.81) (-1.65)
*
BIG4 + -0.023 -0.023*
(-1.83) (-1.82)
PPE + 0.000 0.000
(0.62) (0.89)
Year Included Included
r2 0.121 0.121
N 255 255
Significance level at * 10%, ** 5%, *** 1%

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The coefficient of auditor’s specialist expertise (KSA) in table (1) and (2) is 0.029, with t value
of 2.38 for table (1) and 2.41 for table (2) and significant at significance level of 5%. These
results indicate that specialized auditors are more capable in delivering better audit quality
(AQ).

The coefficient of public accounting firm’s rotation (RKAP) in table (1) and (2) is 0.006, which
indicates a direct relationship, with t value of -0.55 in table (1) and -0.51 in table (2) and
insignificant. These results indicate that the rotation of public accounting firm does not affect
audit quality.

The coefficient of public accountant’s rotation (RAP) in table (1) and (2) is -0.011, with t value
of -1.36 in table (1) and -1.37 in table (2) and insignificant. These results indicate that the
rotation of public accountant has no effect on audit quality.

The Effect of Financial Expertise of Audit Committee on Audit Quality

Based on Table 7, the coefficient of financial expertise of chairman of audit committee (FEKA)
in table (1) and (2) is -0.006, with t value of -0.79 in table (1) and -0.70 in table (2) and
insignificant. The results indicate that firm which chairman and members of audit committee
have financial expertise, have no effect on audit quality, and thus, the hypothesis is rejected.
This result are consistent with Amar's (2014) study which posits that there is no significant
relationship between audit committee's financial expertise and earnings management practice
proxied by discretionary accruals. This suggests that earnings management can still be executed
even if the firm’s audit committee has financial expertise. Audit committee that has financial
expertise is not fully independent from the firm and thus, they cannot perform their roles
effectively (Amar, 2014).

The Effect of Specialist Expertise of Auditor on Audit Quality

Based on Table 7, the coefficient of specialist expertise of auditor (KSA) in table (1) and (2) is
0.029, with t value of 2.38 in table (1) and 2.41 in table (2) and significant at significance level
of 5%. The results show that firm audited by specialist auditors has significant positive effect
on audit quality in which the hypothesis is accepted. These results are consistent with the
research conducted by Jaggi (2014) which posits that specialist expertise of auditor is crucial
and has impact on audit quality which is proxied by discretionary accruals. These results
underline the role of industry specialization in increasing audit effectiveness in reporting issues.
Specialist auditor tends to detect better earnings management and as such, the delivered quality
of audit is better than non-industry specialist auditor. The specialist expertise of auditor
contributes positive effect in which the specialization of KAP improves the audit quality (Ishak,
2014; Venkat and Rajendra, 2017).

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The Effect of Rotation of Public Accountant Firm on Audit Quality

Based on Table 7, the coefficient of rotation of public accounting firm (RKAP) in table (1) and
(2) is 0.006, which indicates a direct relationship, with t value of -0.55 in table (1) and -0.51 in
table (2) and insignificant. The results of study indicate that firm which rotates its public
accounting firm cause no effect on audit quality and thus, the hypothesis is rejected. These
results are consistent with Corbella's (2015) study which states that there is no significant
relationship between audit firm rotation and audit quality in the full sample and in the sub-
sample of firms audited by Big 4 public accounting firm. In that study, audit quality is proxied
by abnormally working capital accruals and audit fees. According to Nurhayati (2015) and
Fitriany (2015), rotation of public accounting firm does not affect audit quality. This is perhaps
caused by a public accounting firm’s first time in auditing its client and as such there is limited
understanding of the characteristics of its client’s industry.

The Effect of Rotation of Public Accountant on Audit Quality

Based on Table 7, the coefficient of public accountant's rotation (RAP) in table (1) and (2) is -
0.011, with t value of -1.36 in table (1) and -1.37 in table (2) and insignificant. The results show
that when a firm rotates its public accountants does not affect the audit quality and thus, the
hypothesis is rejected. According to Arthur (2017), rotation of audit partner can improve audit
quality when the audit firm is an industry specialist. Meanwhile, rotation of audit partner has
no effect if the firm rotates with non-industry specialists audit firms. This might be due to a
new auditor’s first time in recognizing client's business industry and thus, they a lack of
understanding of client condition. Fitriany (2015) also states that there is no effect of rotation
of public accountants on audit quality in general.

Conclusion

Based on the results of this research about the influence of financial expertise of audit
committee, the expertise of the auditor specialist, the rotation of public accounting firm, and
the rotation of public accountant, the following are the conclusions of research results; the audit
committee's financial expertise has no significant effect on audit quality; the auditor’s specialist
expertise has a significant positive effect on audit quality; the rotation of public accounting
firm does not affect significantly on audit quality; and rotation of public accountant’s partners
does not affect significantly on audit quality.

Specialist auditors deliver better audit quality with lower level of earnings management.
Therefore, firms with high business complexity should choose specialist auditors to avoid
earnings management. The government should reconsider the regulations about audit rotation.

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There is a need to evaluate the new policy which only regulates the period of engagement of a
public accountant, and in which there is no regulation about a public accounting firm’s
engagement period. Furthermore, new policy is needed to improve audit quality. The auditor
should maintain their independence to improve audit quality as well as maintain their reputation
in the eyes of client.

The limitation of this study is the coefficient of determination, which is only 12.1%, and as
such, there are many other variables, besides the independent and control variables used in this
study, that are able to explain audit quality as high as 87.9%. Therefore, future research can
use other variables that affect audit quality. The focus of this research is only on manufacturing
firms listed on Indonesia Stock Exchange in the years 2014-2016 and it is suggested that further
research expand the scope of the research into other sectors.

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