Posted on February 9th, 2012 at 10:45 AM by Bambang Purnomosidhi

This research aims to examine the effect of the agency costs on the differentiation of the audit quality, which can be seen through the firm’s decision-making to choose the quality of new auditor when the firm switches the auditor. The audit quality is represented by a “brand-name” model in which the Big Four group of auditors  defined as higher quality suppliers. Agency costs are proxied by managerial ownership, diffusion of ownership, leverage, and new issues. The effect of each proxies is examined on one year before (“levels” model) and several years before auditor switch (“changes” model). The examination was done to 76 public companies in Indonesia Stock Exchange that has switched the auditor during 2002-2008.

The finding shows that managerial ownership is a agency costs proxy that effects on firm’s decision-making in switching to the higher-quality auditor. The result proves that the greater the managerial ownership in a firm, the more  possible the firms tend to switch to higher quality audit firms, then conversely. This research also proves that “levels” model is better than “changes” model in predicting the effect of agency cost to the firm’s decision making in switching to higher-quality auditor firm. (Baca fulltext: Auditor changes)

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