Impact of Auditor Reputation on Sukuk Rating
Fury Khristianty Fitriyah, Wildan Wildan and Sofik Handoyo
Departement of Accounting, University of Padjadjaran, Jalan Dipati Ukur 35, Bandung, Indonesia
Keywords: Auditor reputation, sukuk rating, auditor.
Abstract: This study aims to analyse the growth of Islamic banking and finance has obtained momentum over the last
decade, especially in the field of sukuk and securitization, whether among sukuk business entities gaining
popularity as an alternative source of funding. One of the factors that support the development of sukuk is
the rating. An investor who will invest in sukuk will definitely pay attention to the rating of the sukuk.
Sukuk rating is very helpful to investors who want to invest in bonds, so investors will know the return
earned with the risk borned. This research aimed to examine the influence of auditor reputation on sukuk
rating in Indonesia. The population of this research was all companies issuing sukuk from 2013-September
2016. The sampling method used in this research was purposive sampling. There were 8 companies as
samples. Analysis technique used in this research was an ordinal logistic regression. The result of this
research showed that auditor reputation did not have a significant effect on sukuk rating.
1 INTRODUCTION
The growth of Islamic banking and finance has
gained momentum in the last decade, particularly in
sukuk and securitization, in that sukuk has
increasingly earned its popularity as an alternative
source of funding for both entrepreneurs and
enterprises (Ayub, 2007:389). At international and
national level, this instrument has swiftly flourished
along with the growth and development of other
more conventional financial instruments (Datuk,
2014). The sukuk market indicated strong growth
from USD 45 billion in 2011 to nearly threefold at
USD 118.8 billion in the first trimester of 2014. This
development was spurred by primary sharia stock
markets, namely Malaysia, Saudi Arabia and the
United Arab Emirates, and new ones such as Turkey
and Indonesia. Indonesia attained 4th place (14.1%)
after Malaysia (42.3%), United Arab Emirates
(18.2%) and Bahrain (14.2%), a highly gratifying
development for the sharia financial market in
Indonesia. Sukuk first emerged in Indonesia in early
September 2002 with the issuance of the sharia
bonds of PT Indosat Tbk, the first sharia bonds with
a mudharabah contract (Arisanti et al., 2013). A
factor that propels the development of sukuk is its
rating (Sudaryanti et al., 2011). A sukuk rating
significantly helps investors who intend to invest in
a bond, so that they can determine the returns they
receive and the risks they take (Purwaningsih, 2013).
A credit rating is a formal opinion given by a rating
agency on the loan default risk faced when investing
in a particular bond (Fabozzi and Drake, 2009:697).
However, it must be understood that this rating is
only intended to measure the default risk level of a
debt security emission, not the external (market) risk
(Hadi, 2013:108). The credit rating mainly functions
as information distributed in the stock market
(Arundina, 2009), and to support public policies in
limiting speculative investments by institutional
investors such as banks, insurance companies and
pension funds (Arisanti et al., 2013). Satriani (2012)
noted that from 2012, every enterprise listed in the
stock market or emitter issuing sukuk is required to
obtain a credit rating from a credit rating agency, as
sanctioned by the Bapepam-LK Rule Number
IX.C.11 concerning the Rating of Debt Securities
and Sukuk and the Financial Services Authority
Regulation Number 18/POJK.04/2015 regarding the
Issuance and Requirements of Sukuk.
The Financial Services Authority (OJK) in its
Regulation Number 59/POJK.04/2015 pertaining to
Publication by a Credit Rating Agency defines a
credit rating agency as an investment adviser in the
form of a limited liability company which conducts
rating and rating assignment activities. Prasetyo
(2015) mentioned that Indonesia has six rating
agencies approved by Bank Indonesia (BI) and OJK,
Fitriyah, F., Wildan, W. and Handoyo, S.
Impact of Auditor Reputation on Sukuk Rating.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 359-363
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
359

namely Fitch Ratings, Moody’s Investor Service,
Standard and Poor’s, PT Fitch Ratings Indonesia, PT
Pemeringkat Efek Indonesia (PEFINDO), and PT
ICRA Indonesia (Investment Information and Credit
Rating Agency of India). The credit rating scale,
symbols and definitions vary between the rating
agencies. A credit rating is commonly expressed on
an alphabetical or numerical scale and the symbols
are defined differently by each agency. The credit
rating scale typically ranges from AAA as the top
rating to D as the lowest, indicating default (U.S
Securities and Exchange Committee, 2013). In
theory, a credit rating is used to assess a debt
obligation, but in practice it is often assumed as an
attribute of the issuer (Hull, 2012:18).
A higher rating implies that the emitter does not
have any problem in fulfilling its payment obligation
(Cecchetti and Schoenholtz, 2015:163). The quality
of a bond can be monitored from its rating
information (Arisanti et al., 2013). Once a rating is
assigned to the issued bond, the credit rating agency
will monitor the quality of the issuer’s credit and
may alter the given rating (Fabozzi, 2013:19-20). An
example of rating change, as cited from the online
news site okezone.com dated 20 April 2016,
occurred to the bonds rating of a company with the
emitter code ADHI for Revolving Sukuk
Mudharabah Tranche I Year 2012 and Tranche II
Year 2013 from A to A-, and, as reported by the
online news site beritasatu.com on 29 February
2012, PT PEFINDO degraded the rating of Sukuk
Ijarah II/2009 of PT Berlian Laju Tanker Tbk
(BLTA) to idD(sy) from idCCC(sy). Another factor
that may affect a sukuk rating is the auditor’s
reputation. Widowati et al. (2013) concluded that a
debt security issued by a company audited by a Big-
Four public accounting firm possesses a higher
chance of obtaining an investment-grade bonds
rating than from a company not audited by one of
the Big Four. PT Pemeringkat Efek Indonesia or
better known as PEFINDO is the oldest rating
agency in Indonesia. Until now PEFINDO has
assigned ratings to over 500 enterprises and local
governments. Stock market instruments such as
bonds, sukuk, and medium-term notes have also
been rated by PEFINDO, which is the rating agency
market leader in Indonesia (Melis, 2015).
2 LITERATURE REVIEW
2.1 Public Accountant Firm
According to Law Number 5 Year 2011 on Public
Accountants, Public Accounting Firm (KAP) is a
business entity established under the provisions of
legislation and obtaining a business license under the
Act. The public accounting firm is managed as a
sole proprietorship service, general or limited
partnership, or company. Public accounting firms
usually offer a variety of professional services in
addition to financial statement audits.
2.2 Reputation Auditor
The reputation of an audit firm is not determined
primarily by the quality of its audit work, but rather
how the firm is viewed more generally, i.e. by its
reputation in the financial community. Reputation
has been defined as follows: Reputation is the
estimation of the consistency over time of an
attribute of an entity. This estimation is based upon
the entity’s willingness and ability to repeatedly
perform an activity in a similar fashion. Reputation
is an aggregate composite of all previous
transactions over the life of the entity, a historical
notion, and requires consistency of an entity’s
actions over a prolonged time for its formation.
(Herbig et al., 1994, p. 23).
Reputation is a multidimensional construct and
so an accounting firm will have a composite
reputation reflecting its reputation for quality work
in the numerous services that it offers, e.g. auditing,
accountancy, taxation, management consultancy,
computer systems advice, personnel selection etc.
Its reputation for quality work in one area is
quite likely to affect its reputation in another, as
shown by Jacoby and Mazursky (1984), who
investigated the effects of selling products with
either favourable or unfavourable images in stores,
which themselves had either a favourable or an
unfavourable image. They found that a retailer with
a relatively low image could improve this image by
associating it with a more favourable product image.
Similarly, a very favourable retailer image was
likely to be damaged if it became connected with
brands having less positive images. Consequently, it
is reasonable to suppose that the various reputations
for each of the services offered by an accounting
firm will tend to influence each other. In addition, an
audit firm is likely to benefit if it has prestigious
clients with good reputations, as has been observed
for Price Waterhouse in the 1980s (Stevens, 1981).
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
360

2.3 Sukuk
Sukuk is a new term introduced to replace the term
Islamic bonds. Sukuk is the plural form of the word
“sakk” in Arabic, which means a certificate or proof
of ownership (Hidayat, 2011:112). The Indonesian
Ulama Council through the fatwa of the National
Sharia Board number 32/DSN-MUI/IX/2002 defines
a sharia bond (sukuk) as a long-term security based
on sharia principles issued by an emitter to a sharia
bondholder who obliges the emitter to pay revenues
to the sharia bondholder in the form of
dividends/margins/fees and to repay the original
amount at maturity. The Accounting and Auditing
Organization for Islamic Financial Institutions
(AAOIFI, 2008) by Shari’ah Standard No. (17) on
Investment Sukuk defines sukuk as “certificates of
equal value representing undivided shares in
ownership of tangible assets, usufruct and services
or (in the ownership of) the assets of particular
projects.” OJK in the Financial Services Authority
Regulation Number 18/POJK.04/2015 concerning
Issuance and Requirements of Sukuk defines sukuk
as credits in the form of certificates or proofs of
ownership issued in accordance to sharia principles
with equal value and representing undivided shares
of the underlying assets.
Table 1: Sukuk rating.
3 METHODS
Research by Widowati et al. (2013) revealed that
auditor reputation influences sukuk rating, but this
result contradicts findings of a study by
Kusbandiyah and Wahyuni (2014). The argument
underpinning the inclusion of auditor reputation is
that an auditor with a better reputation would be able
to detect material errors in financial reports and
report such findings. The higher expertise of the
Big-4 firms not only stems from their superior
resources but also from their trained experts, better
knowledge, and investment in information
technology, as compared to accounting firms outside
the Big 4 (DeAngelo, 1981). Higher auditor
reputation results in reliable audit outcomes, thus
reducing the possibility of company failure. Big-4
firms warrant better auditing quality than non-Big-4
ones, hence audits by the Big 4 are expected to
produce higher ratings than audits by non-Big 4
firms. Big-4 accounting firms have international
procedural standards presumed to yield independent
opinions, decreasing agency risk and lowering
default risk which eventually raise the sukuk rating
(Melis, 2015). Based on those studies, the
hypothesis formed is: Auditor reputation influences
sukuk rating.
The method utilized in this study was an
explanatory survey with secondary data from
trimester financial report publications by sukuk-
issuing companies per PT PEFINDO ratings. The
research object was the reputation of auditors of
companies that issued sukuk and the financial
statements. The subjects of this study were company
sukuk ratings released by PT PEFINDO between
2013 and 30 September 2016.
4 RESULTS
Table 1 shows that the most frequent rating given by
PT PEFINDO to the sample companies was idAA-
at 25.6% and the least was idAA+ at 3.5%. The
highest rating of idAAA at 7.0% was granted to PT
Indosat Tbk from period III (July-September) year
2014 until period III year 2016, while the lowest in
this study, idA- at 16.3%, was assigned to just 2
companies, namely PT Tiga Pilar Sejahtera Food
between period II (April-June) year 2013 and period
I (January-March) year 2016 and PT Adhi Karya in
period II and III year 2016.
This points out that overall the sukuk issued by
the sample companies had reasonably high ratings of
idAAA, idAA and idA which can be classified as
superior to strong, denoting that PT PEFINDO
deemed the sample companies to have the capacity
to fulfil their commitment over their sharia financial
contracts.
Sukuk Rating
Frequency
Percentage
(%)
idA-
14
16.3
idA
15
17.4
idA+
19
22.1
idAA-
22
25.6
idAA
7
8.1
idAA+
3
3.5
idAAA
6
7.0
Impact of Auditor Reputation on Sukuk Rating
361

Table 2: Auditor reputation frequency distribution.
Auditor
reputation
Frequency
Percentage
(%)
Not affiliated
with the Big 4
49
57
Affiliated with
the Big 4
37
43
Table 2 displays the frequency distribution of the
auditor reputation variable. The proportion of
companies audited by firms unaffiliated with the Big
4 was 57%, quite similar to that of companies
audited by firms affiliated with the Big 4 at 43%.
Those data suggest that auditor reputation was
not a term of preference for companies in selecting
their external auditor. There were other factors that
companies took into account, including expertise in
particular industries, applied service fees, and past
experiences with public accounting firms.
Data analysis produced a significance value of
0.065, greater than the alpha value 0.05 (>0.05),
indicating that auditor reputation does not affect
sukuk rating. This result is consistent with that of
research by Melis (2015) and Kusbandiyah and
Wahyuni (2014) which stated that auditor reputation
does not influence sukuk rating. However, this study
contrasts that of Widowati et al. (2013) which found
evidence of auditor reputation’s impact on sukuk
rating. The outcome also disproves the initial
hypothesis that companies audited by highly
reputable public accounting firms (the Big 4 or
affiliated with them) would have low default risk, as
many accounting firms with high repute have been
involved in financial scandals, such as in the case of
Enron which colluded with Arthur Andersen, KPMG
Siddharta and Harsono which bribed tax officers to
lower taxes imposed on PT Eastman Christensen,
the Prasetio, Sarwoko and Sandjaja accounting firm
which manipulated financial reports by making two
different reports for Bank Lippo, and the Haryanto,
Sahari and Rekan (PwC) accounting firm which did
not disclose material affiliation with PT Indofarma.
Meanwhile, the general purpose of financial
reporting by an independent auditor is to express
opinion regarding reasonability in all material
aspects, financial position, operational results and
cashflow in line with applied accounting principles
(Hery, 2011:30). Nevertheless, this objective does
not necessarily make financial reports free from
deviance, which may emerge from audit outcomes.
Such possibility largely depends on current
materiality since materiality levels generate diverse
opinions. Materiality level determination greatly
relies on the auditor’s subjectivity in assessing risk,
whereas the subjectivity itself is influenced by
independence. According to Fahmi (2013:174-175),
the problem of low auditor independence occurs
when the auditor is assigned to audit a company
whose top management includes someone who has
contributed to the development of the accounting
firm or a former senior auditor of a public
accounting firm with a high standing among other
auditors. Another condition that may lead to auditor
partiality is when the auditor has received payment
as compensation for a settlement.
As a rating agency does not consider auditor
reputation in analyzing a company’s credit, the
reputation of the accounting firm auditing the
company does not guarantee that the firm will
employ an auditor with integrity who is capable of
performing a good quality audit and protecting the
interest of investors and other stakeholders.
5 CONCLUSIONS
A sukuk rating is an important piece of information
for investors who intend to invest their capital in the
stock market, particularly sukuk as an investment
instrument. This study analyzed a factor that may
affect sukuk rating, namely auditor reputation. The
research involved 8 (eight) sample companies in
2013-2016, resulting in 86 units of analysis. Data
analysis and discussion of its results led to the
conclusion that auditor reputation does not impact
sukuk rating, evidenced by a greater significance
value than the alpha (0.065> 0.05). Therefore,
whether an emitter is assessed by an auditor
affiliated with the Big 4 or not does not exert any
influence on the obtained sukuk rating.
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