Audit Fee and Multiple Large Shareholder on Audit Quality
R. Nelly Nur Apandi and Alfira Sofia
Universitas Pendidikan Indonesia, Jl. Dr Setiabudi 229, Bandung, Indonesia
Keywords: Audit Fee, Multiple Large Shareholder and Audit Quality.
Abstract: Auditor is demanded for always being professional in his/her job, but it is undeniable that business side of
audit service has also been an important consideration for auditors in making contract with auditee. This
business side of audit service can trigger abnormal audit pricing. The higher of audit fee can cause
decreasing or increasing of audit quality. This study aims to observe the influence of audit fee on the audit
quality and to observe whether Multiple Large Shareholder is able to moderate the influence of audit fee on
the audit quality. Method used was descriptive quantitative method. The study was conducted to all non-
financial industrial companies registered in Indonesia stock exchange from 2014 to 2015. Result of the
study succeeds in indicating that audit fee has influence on audit quality and that Multiple Large
Shareholder does moderate the effect of audit fee on the audit quality.
1 INTRODUCTION
The increasing needs of audit service happens along
with the structural change of company’s ownership
that separate authority and responsibility between
the owner (stakeholder) and the management
(agent). The owner of company faces the possibility
of gaining inaccurate information from the
management due to conflict of interest in it, thus the
information cannot be used for making economic
decision appropriately (Jensen and Meckling, 1976).
In order to reduce the risk of information, it is
necessary to have quality audit service (Arens,
2014). To achieve high quality audit service, it is
necessary to have good planning, including
appropriate audit pricing (De Angelo, 1981a;
1981b). Auditor is demanded for always being
professional in his/her job, but it is undeniable that
business side of audit service has also been an
important consideration for auditors in making
contract with auditee (Tuanakotta, 2011; Apandi,
2016). Dominant consideration on business side and
ignoring the professionalism can encourage
abnormal audit pricing, and eventually will cause the
low audit quality.
Fitriany (2016) states that the abnormal fee audit
is the difference between the audit fee paid by the
client and the normal estimate of the audit fee.
Abnormal audit fee may occur under several
conditions; first, audit fee received by auditor is
lower than proper payment for the service in order to
achieve good audit quality (Blankley, 2012). This
occurs due to excessive discount of audit fee and it
may cause doubt on auditor’s capability in applying
accepted professional standard. Second, audit fee
received by the auditor is higher than proper
payment for the service by giving opinion warrant
according to auditee’s expectation (Choi, 2010;
Fitriany, 2016). Thus, the auditor will gain premium
audit fee by sacrificing his/her independency.
Economic dependence of auditor on client, so that
the audit contract on the next year will not be signed
over to other auditor, causes the auditor willing to
give opinion warrant more than what is expected by
auditee.
Previous researches regarding audit fee and audit
quality show different results. Researches conducted
by Hoitash (2007); Ettredge (2014) suggest that
abnormal audit fee or fee pressure can decrease the
audit quality. Kraub (2015); Fitriany (2016) suggest
that positive abnormal fee has negative effect on the
audit quality. Rahmina and Agoes (2014) by using
primary data in Indonesia proves that high audit fee
can increase audit quality because high audit fee is,
instead, considered to encourage the auditor to
provide more efforts in order to increase his/her
audit quality.
Upon the companies registered in Indonesia
stock exchange, demand the user of information on
audit report is getting higher, thus it encourages
Apandi, R. and Sofia, A.
Audit Fee and Multiple Large Shareholder on Audit Quality.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 375-379
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved
375

auditor to improve his/her audit quality. This
increasing demand is an audit risk that must be faced
by auditors, and as compensation for the higher audit
risk, the audit fee determined will also increase. The
increasing of audit fee is considered to be able to
increase the audit quality. Audit quality will be
higher if there is strict control on operational
activities carried out by companies (Apandi, 2016).
Conflict of interest happening in the company does
not only occur between management and owner of
the company, but also there is conflict of interest
between majority owner of company and minority
owner of company. Company with multiple large
shareholder has greater control compared to
company without multiple large shareholder (Attig
et al., 2008).
Based on explanation above, it is necessary to
conduct a study to observe the influence of audit fee
on audit quality moderated by multiple large
shareholder. This research has contribution in
studying the effect of moderating by large
shareholders that has never been conducted by
previous researchers.
2 LITERATURE REVIEW
2.1 Influence of Audit Fee on Audit
Quality
Low audit fee causes auditor apt to shorten the
important audit procedure that can make auditor
giving wrong and misleading opinion to the reader
of financial report (Tuanakotta, 2011), whereas high
audit fee encourages auditor to improve his/her audit
quality (Rahmina and Agoes, 2014). This occurs
because of high audit fee reflects high audit risk and,
therefore, in order to decrease the audit risk,
allocation of more time and effort of the auditor is
needed. Thus, the increasing of audit fee can directly
affect better audit quality
The quality of the audit will largely depend on
the auditing process performed by the auditor. Audit
quality according to DeAngelo (1981b) is defined as
the auditor's ability to find any errors in the
accounting process undertaken by the audited
company. Various studies that correlate audit fees
with audit quality using audit quality proxies are
based on the level of earnings management
performed by companies reflected from
discretionary accruals as in the research undertaken
by Hoitash (2007); Kraub (2015); Fitriany (2016). A
high discretionary accrual will show the auditor's
willingness to accept accounting policies chosen by
management that are favorable to management so as
to produce unfair financial statements and mislead
readers of financial statements. The conclusion, the
higher value of discretionary accrual is lower the
audit quality
Researches by Rahmina and Agoes (2014) prove
that high audit fee can increase audit quality since
high audit fee is, instead, considered able to
encourage the auditor to provide more efforts in
order to improve his/her audit quality.
H1 = Audit Fee Has Positive Effect on Audit
Quality
2.2 Influence of Audit Fee on Audit
Quality Moderated by Multiple
Large Shareholder
Information asymmetry occurs not only between
management and owner of company, but the ability
for appropriation by majority shareholder upon
minority shareholder can cause information
asymmetry. Information asymmetry type one causes
management to be likely to carry out actions that
bring benefit for their own at the loss of owner of
company. In contrast, information asymmetry type
two causes majority shareholder to be likely to carry
out actions that bring benefit for their own at the loss
of minority shareholder.
In its practice, company is often owned by more
than one majority shareholder (Claessens, 2000).
This condition causes second and subsequent
majority shareholders having control right upon the
company equal to the first majority shareholder.
Control upon management actions is even greater
because there are two parties having strict control
upon the company. This condition will be different if
the ownership is only in the hand of one majority
shareholder, so that control function upon
management will be less strict (Gutierrez and Tribó,
2004; Amdouni and Boubaker, 2015).The existence
of second majority shareholder minimizes the
possibility of appropriation by the first majority
shareholder upon minority shareholder because,
indirectly, the second majority shareholder will also
have control upon operation of the company (Attig
et al., 2008).
The increasing control function can encourage
better quality of information in audit report due to
the increasing demand of accuracy in the financial
report faced by auditor in such condition. High audit
fee causes lower audit quality and the existence of
second majority shareholder can intensify the effect
of high audit fee on high audit quality.
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
376

H2 = Multiple Large Shareholder Intensifies
Effect of Audit Fee on Audit Quality
3 METHODOLOGIES
This research uses descriptive quantitative method.
Population in this research is all non-financial
industrial companies registered in Indonesia stock
exchange. Sampling technique used is purposive
sampling with number of sample was 88 companies.
Data collected concerning audit quality derived from
financial report of the companies from 2014 to 2015
as available in the website of Indonesia capital
market. Whereas, data concerning audit fee and
multiple large shareholder is obtained from annual
report of the companies of the same period.
Data analysis technique used is Ordinary Least
Square (OLS).
Explanation:
QUALITY = Discressionary accrual jones
modified
FEE = Natural Logarithm of Audit
Fee
MLS = If the company has multiple
lar
g
e shareholder, value
g
iven
is 1, otherwise value given is
0
ASSET = Natural logarithm of total
asse
t
LIABILITIES = Natural logarithm of total
liabilities
LOSS = If the company hass loss,
value given is 1, otherwise
value
g
iven is 0
Figure 1: Paradigm of research.
4 RESULTS AND DISCUSSION
This study aims to examine the influence of audit fee
on audit quality moderated by multiple large
shareholder. Below is result of statistic description
of each variable.
Table 1: Variables descriptive analysis.
Based on table 1, it is obtained that min and max
values of audit fee are 1,437,739 and
4,047,622,999,999,990 respectively, with Mean
1.852.432. Whereas, min and max values of audit
quality are -201,249 and 14,485 respectively, with
Mean is 384. And, min and max values of multiple
large shareholder are 0 and 1 respectively, with
Modus is 0. The results above describe that the audit
fee in Indonesia is quite high, indicated by average
values of audit fee by which 60% (not tabulated) of
audit assignment is dominated by big four public
accountant firms. Companies in Indonesia are
generally concentrated in only one large shareholder.
Audit Fee and Multiple Large Shareholder on Audit Quality
377

Table 2: Results of regression model.
**α (0.05); ***α (0.01)
Based on table 2, from regression 1 (without
moderation variable) it is found that audit fee has
influence on audit quality. This can be seen from the
coefficient and prob value of less than 0.05, namely
-1719.346 (0.0085) ***each. This result of
regression shows that the higher the audit fee, the
lower the discretionary accrual. So, it can be
concluded that the higher of audit quality. Whereas,
from regression 2 (With control variables & without
moderating variable) it is found that audit fees have
an effect on audit quality. This can be seen from the
coefficient and prob value of less than 0.05, namely
-2569.821 (0.0001) ***each. The regression results
in model 3 (With moderating variable & without
control variables) also show consistent results that
audit fees have an effect on audit quality. This can
be seen from the coefficient and prob value of less
than 0.05, namely 3299.791 (0.0002) ***each.
The effect of moderation variable can be seen in
regression 4 (regression with moderation), that
multiple large shareholder can intensify the
influence of audit fee on audit quality with
significance level at *1%. This can be seen from the
coefficient and prob value of less than 0.01, namely
4079.491 (0.0004) ** each. Other variable with
influence on audit quality is Asset, with coefficient
and prob value of 15311.39 (0.0030) **, Liabilities
with coefficient and prob value -8946.297 (0.0422)
**, and Loss with coefficient and prob value -
24259.33 (0.0002) ***.
Result of this research is in line with previous
researches that associate audit fee and audit quality,
such as researches by Rahmina and Agoes (2014).
That proves a high audit fee can increase audit
quality. It can be seen from the lower discressionary
accrual values. This research also provides other
empirical evidence that multiple large shareholder
intensifies the influence of audit fee on audit quality.
Result of this study verifies that multiple large
shareholder can act as control in making quality
financial report. This control function by the
multiple large shareholder is equal to the control
function as described in the research concerning
influence of institutional ownership that can
moderate the effect of audit fee on audit quality such
as research by Kasai (2014).
5 CONCLUSIONS
Higher audit fee has effect on reduce discretionary
accrual. It seems that the higher audit fee has effect
on better audit quality. Improvement of audit quality
requires more commitment of auditing time and
resources from the auditors so that the audit fee
needed to be spent by the company is higher. This
research also verifies that the existence of multiple
large shareholder in a company can function as
control for management and other majority
shareholders. Thus, the multiple large shareholder
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
378

can intensify the positive effect of audit fee on audit
quality.
Result of this research can act as a reference
regarding literature that associate audit fee, multiple
large shareholder, and audit quality, which has never
been conducted before. This research is also
expected able to encourage companies to be more
transparent in disclosing the expenditure of audit fee
to prevent the occurrence of abnormal audit fee,
since there is relatively small number of company in
Indonesia willing to disclose it.
Using of secondary data concerning audit quality
measured by accrual discretionary model has several
weaknesses since the data obtained is the proxy of
financial report from companies audited and not
from auditor. Therefore, if there is secondary data
concerning auditor from the perspective of the
auditor itself, subsequent researches in the future can
exploit data regarding management of public
accountant firm or quality management of public
accountant firm.
REFERENCES
Arens, A., 2014. Auditing and Assurance Services an
Integrated Approach, Pearson.
Amdouni, S., Boubaker, S., 2015. Multiple Large
Shareholders and Owner-Manager Compensation:
Evidence from French Listed Firms. The Journal of
Applied Business Research, 31(3), 1119–1130.
Apandi, A., 2016. The Effect of Corporate Tax
Governance, Audit Quality and Tax Exposure on
Audit Fee for Companies Enlisted in Indonesia Stock
Exchange. Advances in Economics, Business and
Management Research, 15.
Attig, N., Guedhami, O., Mishra, D., 2008. Multiple large
shareholders, control contests, and implied cost of
equity. Journal of Corporate Finance, 14(5), 721–737.
DeAngelo, D. 1981a. Auditor Independent, Low Balling
and Disclosure Regulation. Journal of Accounting and
Economics 3, 113-127.
DeAngelo, D., 1981b. Auditor size and audit quality.
Journal of Accounting and Economics 3, 183-199.
Blankley, B., 2012. Abnormal Audit Fees and
Restatement. Auditing: A Journal of Practice &
Theory 31(1) 79-96.
Choi, C., 2010. Audit Office Size, Audit Quality and Audit
Pricing. Working Paper. Singapore Management
University
Claessens, C., 2000. The separation of ownership and
control in East Asian Corporations. Journal of
Financial Economics 58, 81-112.
Ettredge, E., 2014. Fee pressure and audit quality.
Accounting, Organizations and Society 39, 247–263.
Fitriany, F., 2016. Impact of Abnormal Audit Fee to Audit
Quality: Indonesian Case Study. American Journal of
Economic 6(1) 72-78.
Gutiérrez, M., Tribó, J. A., 2004. Private benefits
extraction in closely-held corporations: The case for
multiple large shareholders. Business Economics
Series 15, Working Paper 04-43, 126.
Hoitash, H., 2007. Auditor fees and audit quality.
Managerial Auditing Journal, 22(8) 761 – 786.
Jensen, J., Meckling, M., 1976. Theory of the Firm:
Managerial Behavior, Agency Costs and Ownership
Structure. Journal of Financial Economics V. 3, 4,
305-360.
Kraub, K., 2015. Abnormal Audit Fees and Audit Quality:
Initial Evidence from the German Audit Market.
Journal of Business Economics (JBE), 85(1) 45-84.
Kasai, K., 2014. Ownership Structure, Audit Fees, and
Audit Quality in Japan. Faculty of Economics. Shiga
University.
Tuanakotta, T., 2011. Berpikir Kritis Dalam Audit,
Salemba Empat.
Rahmina, R., Agoes, A., 2014. Influence of auditor
independence, audit tenure, and audit fee on audit
quality of members of capital market accountant
forum in Indonesia. Procedia - Social and Behavioral
Sciences 164, 324 – 331.
Audit Fee and Multiple Large Shareholder on Audit Quality
379