The impact of cultural differences on the new auditor’s
report: Australia, France, Germany, Hong Kong, the
Netherlands, Spain and the UK.
Research Proposal, Msc, Specialisation: Controlling University of Groningen, Faculty of Economics and Business
January 21, 2019 JOOST WEVERS Studentnumber: 2017083 Verlengde Grachtstraat 7 9717 GD Groningen Tel: +31 (0)6-15158840 E-mail: J.Wevers.1@student.rug.nl Supervisors University Prof. dr. D.A. de Waard and
R.S. Tuinsma Word count: 7643
Abstract
This paper examines what information differences in the new auditor’s reports, which follow ISA 701, differ significantly across cultures. Since the auditor’s report began providing more
information to stakeholders, following ISA 701, key audit matters (KAM) made the most significant difference in the new auditor’s report. Results from 575 auditor’s reports of companies across seven countries were categorised into three cultural dimensions through the model of Schwartz. The findings show that (1) a higher degree of hierarchism leads to a lower level of detail in the auditor’s report and (2) a higher degree of mastery leads to a higher level
of detail in the auditor’s report. No significant relationship was found between degree of egalitarianism and level of detail inthe auditor’s report.
2 TABLE OF CONTENT
1. INTRODUCTION ...3
2. THEORETICAL FRAMEWORK ...5
2.1 Stakeholder theory ...5
2.2 Stakeholders’ interest in auditor’s reports ...6
2.3 New auditor’s report ...7
2.4 Culture impact ...8 2.4.1 Hierarchy...8 2.4.2 Egalitarianism ...9 2.4.3 Mastery ...9 3. HYPOTHESES ...9 4. RESEARCH METHODOLOGY ... 10
4.1 Sample and Data ... 10
4.2 Dependent variable ... 11
4.2.1 Number of key audit matters ... 11
4.2.2 Number of total words key audit matters ... 12
4.3 Independent variable ... 12 4.3.1 Degree of hierarchy ... 12 4.3.2 Degree of egalitarianism ... 12 4.3.3 Degree of mastery ... 12 4.4 Control variables ... 12 4.4.1 Company size ... 12 4.4.2 National wealth... 13
4.5 Linear regression analysis ... 13
5. RESULTS ... 13
5.1 Descriptive statistics ... 13
5.2 Pearson Correlation Analysis ... 14
5.3 Linear regression model ... 16
6. CONCLUSION ... 21
7. DISCUSSION ... 21
7.1 Limitations... 22
7.2 Future research ... 22
3 1. INTRODUCTION
The last twenty years have been seen many accounting scandals that have resulted in bankruptcies. For example, the fraud at Enron, causing the bankruptcy of the auditors’ firm Arthur Andersen in the United States, Parmalat in Italy, Lernout & Hauspie in Belgium, Ahold in the Netherlands and the Lehman Brothers in the United States (Pheijffer, 2018). Since the financial crisis of 2007 (Blom, 2010) investors, politicians and supervisory
authorities have paid more attention to the role of auditors. Additionally, the expectation gap between auditors and society, whereby the public expects more from auditors, has moved more in the spotlight since the financial crises (Bos & Strating, 2014).
Stakeholders require more understanding of auditors’ works. To operate successfully as an organisation, the auditor must obtain approval from society. More information is an important component in the public accepting an organisation’s products (Sagiv & Schwartz, 2007). Stakeholders want to collaborate and work directly with their organisation and, the auditors provide more specific information compared to the standard text. Stakeholders expect more information from auditors. Auditors have to manage their own reputation. Therefore, auditors have to deal with similar interest as stakeholders (Desai, 2018). The limited understanding of auditors’ work leads to dissatisfaction in society and result in an expectation gap. One way for auditors to communicate with stakeholders is the auditor’s report.
The first auditor’s report dates back to 1311, and was not written and does not belong in a standard model. For the last decade, the auditor’s report was considered a standard document with limited information (Litjens & Vergoossen, 2012). The International Auditing and Assurance Standards Board (IAASB) was already aware in 2011 that the expectation gap could be reduced by increased, and better quality, reporting.
In July 2013, the IAASB launched an exposure draft with new requirements of auditor’s reports (Bos & Strating, 2014). That exposure draft was transformed to a new standard of IAASB in 2014. The International Standard on Auditing (ISA) 701 is new legislation regarding auditor’s reports that applies for audits of financial statements. The new auditor’s report is extended, which means, for a significant part, reporting the KAM. KAM provide the reader a better understanding and new insights into critical estimates and risk judgements regarding the organisation that was audited. The critical estimates and risk judgements relate to the estimates that require management’s most difficult, subjective or complex judgements (Brouwer, Eimers & Langendijk, 2016). The aim of the international standard is to compose
4 KAM in the auditor’s report and to communicate those matters by mentioning them in the auditor’s report.
The Netherlands and the United Kingdom were the first adopters of the new ISA 701. The Netherlands began a pilot in 2013, in which 38% of listed Dutch companies participated. The United Kingdom as first adopter also rapidly coming up and became stricter than the
Netherlands, because of earlier mandatory legislation (Bos & Strating, 2014). Soon after, many other countries around the world adopted the ISA 701.
Different ways of applying the ISA 701 is expected across different cultures, as culture plays an important role in disclosure. Shared norms and perceptions combined with the culture of management influence behaviour around reporting (Nyahas, Munene, Orobia & Kaawaasa, 2017). Other influences from a cultural perspective on reporting are environmental
characteristics of investors, consumers and regulators (Adams, 1997; Brouwer et al., 2016; Nyahas et al., 2017).
Organisations from various countries have to deal with other cultures, as they must respond to globalisation and the role that culture plays (Crane, Kawashima & Kawasaki, 2016).
Organisations must respond to other organizations. Institutional isomorphism of organisations following institutional rules and beliefs creates more structural similarities. Two
isomorphisms are important in the new auditor’s report. Coercive isomorphism occurs when organisations are forced to adopt to external influences, like the expectation gap or ISA 701. Mimetic isomorphism occurs if organisations imitate other organisations with best practices that are successful. Because ISA 701 launched recently, best practices regarding it are not yet well-known (Martínez-Ferrero & García-Sánchez, 2017; Tsamenyi, Cullen & González, 2006). Despite that, Bos and Starting (2014) mentioned Rolls-Royce Holding as best practice in the new auditor’s report of KPMG.
The literature contains little research about the new auditor’s report, because of recent changes in ISA 701. The limited research is focused on the difference between the period before and after adopting ISA 701. The contribution in this study is to examine the effect of different cultures on the new auditor’s report. Differences between cultures should lead into new auditor’s reports from various countries differing in terms of different forms and amounts of information. Prior to organisations start learning from each other, different cultures can creates differences between early adopters (Zayim, Yildirim & Sake, 2006). Mimetic
5 isomorphism between organisations could lead organisations in the direction of best practices and gives politicians insight on whether to create more or less regulation.
This research examines the differences in the new auditor’s report between three cultures: hierarchism, egalitarianism and mastery. The new auditor’s report also contributes to reduce the expectation gap between organisations and society. Therefore, the research question is: What information differences in the new auditor’s reports (that follow ISA 701) are
significant across different cultures?
The following section II discuss the information asymmetry for stakeholders regarding the new auditor’s reports that follow ISA 701 and the cultural values that could lead to different outcomes in the new auditor’s reports. The next section III develops the hypotheses. Section IV presents the research methods and section V provides the results. Section VI describes the conclusion and section VII discusses the results and limitations and provide suggestions for future research.
2. THEORETICAL FRAMEWORK 2.1 Stakeholder theory
The success of an organisation depends on how well management fits with their stakeholders. Stakeholders are the key groups that can affect the realisation of an organisation’s purpose (Aβgioglu, Eroglu & Ulker, 2015) and who could influence choices made by the management (Brenner & Cochran, 1991). Examples of stakeholders are the state, customers, employees, managers, suppliers, communities, financiers, politicians, investors, lenders, creditors, clients, students and society (Brouwer, 2015; Freeman & Phillips, 2002; NBA, 2014; Etzioni, 1998; Camara, Chamorro & Moreno, 2009, Wieringa, 2015). Stakeholder theory also describes how firms respond to those influences (Rowley, 1997). Stakeholder theory pays attention to behaviour, structure and practices, factors that Donaldson and Preston (1995) have named stakeholder management.
Collaborating with external stakeholders gives firms advantage for multiple reasons (Desai, 2018). These collaborations decrease operational costs and can enhance an organisation’s efficiency (Martinez & Dacin, 1999). Value is created for the organisation when stakeholders and the organisation fit with each other (Freeman & Phillips, 2002). Firms can create value through three streams: the immediate achievement of the firm’s strategy, its policies, practices and process, and through the influence of its products and services. It is important to protect
6 all stakeholders and minimise the conflicts between the organisation’s and stakeholder’s interests (Westermann-Behaylo, Van Buren & Berman, 2016).
2.2 Stakeholders’ interest in auditor’s reports
The auditor’s report that belongs to the financial statement has an important function. It gives a true and fair overview of the firm’s results and financial position (NBA, 2014). Despite this, many auditor’s reports do not meet the stakeholders’ expectations (Aβgioglu et al., 2015).
Bik (2017) argues that stakeholders have to work together. Four perspectives are important regarding the auditor’s report in relationship to the interested parties: public interest, added value, alignment with compliance and mentioning important auditing processes.
First, it is important to take public interest into account and consider information that is relevant to society (Bik, 2017). A well-written report ensures that more information is available for stakeholders (Aβgioglu et al., 2015). There is an information asymmetry within objectives and transparency between management and several stakeholders, such as investors (Archambeault, DeZoort & Holt, 2008; Buuren, 2015). Auditors have to make the auditor’s report specific to the situation of the company, so the information value is higher for
stakeholders (Bos & Strating, 2014). This is not only relevant for society’s trust in auditors, but also for the society’s trust in the company itself. Other stakeholders, like the media, can break down society’s perception of auditors through few bad news items, despite a lot of good examples. Therefore, auditors should avoid any incidents (Wieringa, 2015).
Second, auditors should add value to the process. An auditor’s report can help investors choose whether to invest in the company. The auditor’s report provided less information than needed during the financial crisis and companies still went bankrupt after an unqualified independent auditor’s report. The auditor’s report could give more information to help investors make better investing choices (Brouwer, 2015; Buuren, 2015) and provide more certainty to lenders (Weerdt, Rijsenbilt, Volberda, & van Wegen, 2017). Auditor can help companies and boards improve operations and give them expertise (Bik, 2017). Auditors who add more value to the auditor’s report could have a lead in attracting new clients compared to other auditors (Brouwer, 2015).
Third, auditor’s reports have to comply with regulations and voluntary disclosure, which is important to stakeholders (Bik, 2017). Bos and Starting (2014) recommended that auditor’s reports not differ significantly between countries. To arrange that, it is important for countries to enact similar regulations. The best way is to improve the auditor’s report in the
7 expectations of stakeholders to avoid critics from, for example, financial markets or
disciplinary tribunals (Boot & Wallage, 2015; Wieringa, 2015).
Lastly, auditor’s reports have to name the most important auditing processes for stakeholders (Bik, 2017). According to Wieringa (2015), this prevents stakeholders from committing fraud. Additionally, auditor’s reports can communicate the future health of companies. It is also important to balance between the influence of the management with other stakeholders (Gortemaker, 1997).
2.3 New auditor’s report
According to NBA (2014), the old external auditor’s report version had a standard text, and nowadays different countries and cultures are discussing the new auditor’s report. The
auditor’s report is in a new process of legitimation. Legitimacy refers to a common perception of standards, beliefs, values and processes (Suchman, 1995). Stakeholders are not only
interested in the auditor’s opinion, but also in more information from the external auditor and redesigning the expected content of the new auditor’s report (NBA, 2014).
In 2013, the IAASB introduced a new auditor’s report. The most important change was the
addition of KAM,which was intended for listed companies(Bos & Strating, 2014).
According to Jermakowicz, Epstein and Ramamoorti (2018), KAM are defined as those matters that most significantly make difference in the auditor’s professional assessment of the annual report. Using KAM provide more substantive assessments of the financial reports than
before (Jermakowicz et al., 2018).
ISA 701 includes clear instructions to help the auditor provide useful information to the stakeholders. First, the auditor must pay more attention in their new auditor’s report to areas with more potential materiality assessed risk, like investment portfolio that can differs over time through market circumstances. Second, auditors have to mention estimates that are uncertain. For example, this could include impairments of goodwill or other items where the valuation is complex and highly subjective. Third, the auditor will be able to say more about the effects of the significant risks and uncertain estimates (Jermakowicz et al., 2018). Fourth, the IAASB expected the auditor to describe the special problems or circumstances that arose during the auditing process, for example as a consequence of weaknesses in internal control (Bos & Strating, 2014). Fifth, the auditor has to describe how the KAM were addressed (Jermakowicz et al., 2018). Finally, the auditor should make a going concern announcement (Bos & Strating, 2014). The going concern is the fact that an organisation has no liquidation
8 risk in the (short-term) future. It implies that the organisation can continue its activities. Following the ISA 701, the auditor should make a going concern announcement (Bos & Strating, 2014).
2.4 Culture impact
According to Nyhas et al. (2017), ISA 701 provides various ways to implement new auditor’s reports, which creates the potential for differing outcomes across cultures. Cultural values are important in terms of how institutions and organisations operate. Worldwide reflects culture several norms, practices and values (Sagiv and Schwartz, 2000). Hofstede conducted research to assess how values in the workplace are impacted by culture. Hofstede’s model explains patterns regarding nations as a whole, not individuals. Hofstede’s model of national culture identified four dimensions: Power distance, uncertainty avoidance, individualism versus collectivism and masculinity versus feminity (Koleśnik, 2013; Minkov, 2018).
The impact of cultural values leads to various possible outcomes. From that perspective, the auditor’s report can take various forms. From the organisation’s point of view, businesses have to deal with two main challenges. First, organisations fit to their external environment through adjusting conditions such as people and other resources. Second, organisations integrate these external conditions within their own businesses (Sagiv & Schwartz, 2007).
The cultural model of Schwartz(Sagiv & Schwartz, 2007) supplements Hofstede’s cultural
dimension theory (Koleśnik, 2013). Schwartz divided culture into seven dimensions, using 38 countries. The seven cultural dimensions are conservatism, intellectual autonomy, affective autonomy, mastery, hierarchy, egalitarian commitment and harmony. This research uses three of these cultural dimensions. These dimensions were chosen because of the expected effect of information differences in the new auditor’s report caused through cultural dimensions that adopted ISA.
2.4.1 Hierarchy
People have to work efficiently and effectively in order to be productive. Hierarchy perspective is based on an unequal distribution of social power in a system with different authorities. Some people have more power than others and personal wellbeing is at different levels. Within an organisation, everyone has different levels of authority, and power roles. Roles are well defined. There is also a clear distinction between employees and management. (Sagiv & Schwartz, 2007; Koleśnik, 2013).
9 2.4.2 Egalitarianism
Egalitarianism is the principal of equality that is embedded in practice of the organisations. Employees recognise each other as equals within groups and cooperate and act responsibly. The employee-management structure is less hierarchical. Their relationship is built on cooperation. It is important to better inform and involve people in activities of the
organisation and establish common interest goals (Sagiv & Schwartz, 2007; Koleśnik, 2013).
2.4.3 Mastery
Ambition is a key component of culture, alongside other personal goals including
achievements and capability. Self-recognition is central in this culture and helps develop the above components (Sagiv & Schwartz, 2007; Koleśnik, 2013).
The cultural dimensions model showed seven cultural regions: Western Europe, Eastern Europe, English-speaking countries, Confucian regions, Africa and the Middle East, South Asia and Latin America (Sagiv & Schwartz, 2007; Koleśnik, 2013).
3. HYPOTHESES
Schwartz focused on three culture levels: autonomy versus conservatism, mastery versus harmony and hierarchy versus egalitarian commitment (Sagiv & Schwartz, 2007; Koleśnik, 2013). Hierarchy creates a stable environment with predictable actions. People are under control and follow standardized rules and procedures with stable mechanisms (Fralinger & Olson, 2007). Hierarchical roles reflect a high level in social power and authority. The social power is distributed unequally, which people take as a given. In a hierarchical culture, everyone is expected to accept their roles and level of authorisation (Koleśnik, 2013). Moreover, people who are in charge are not inspired by others.
Stakeholders’ interest is low in a higher hierarchical culture and their views are not perceived as valuable. Reporting and explaining to stakeholders regarding decisions, actions and
performance is rare. Highly hierarchal organisations generally do not identify, understand and respond to associated concerns, which are taken for granted (Dal Maso, Liberatore & Mazzi, 2017; Siegel, Licht, Schwartz, 2011). This leads to the first hypothesis:
Hypothesis 1: The degree of hierarchy is negatively related to the level of detail of the auditor's report.
Hierarchism is the opposite of egalitarian commitment (Sagiv & Schwarz, 2007; Koleśnik, 2013). In this culture, everyone is equal and shares basic interests. People are socialized and
10 are concerned for everyone’s welfare through cooperation. In business, everyone is more informed and involved than in other cultures. Stakeholder interest is more valuable in this culture because of the lower level of hierarchy. Information asymmetry can be reduced in this culture, which is an incentive to provide detailed reports (Del Maso et al., 2017; Siegel et al., 2011). This leads to the second hypothesis:
Hypothesis 2: The degree of egalitarianism is positively related to the level of detail of the auditor's report.
Another dimension of the model of Schwartz (Sagiv & Schwartz, 2007) is mastery. In this culture, people continue their efforts. People have a strong impulse to control the environment such as control the stakeholders. People in mastery culture knows how to modify and adjust to others, which seems usable in adapting the stakeholders view (Koleśnik, 2013).
According to Del Maso et al. (2017), organisations in cultures with a high level of mastery have an active role in stakeholders’ interest and are dynamic, competitive and prefer being more successful. Other key components of the mastery dimension are ambition, achievements and capability (Sagiv & Schwartz, 2007; Koleśnik, 2013). Ambition is a desire to achieve a certain goal and to improve and be better than others. Some of the elements of ambition are being first adopters, more quality and more quantity (King, 2013). Due ambition to improve better than others, it is expected that higher mastery is related to a more detailed auditor’s report.
Hypothesis 3: The degree of mastery is positively related to the level of detail of the auditor's report.
4. RESEARCH METHODOLOGY 4.1 Sample and Data
This quantitative research consists of 575 listed companies and uses data from 2017, which was recent data when starting this research. Using the last known data is important because of recent changes in regulations for auditor’s reports. The companies included in the dataset are listed in the Australia, France, Germany, Hong Kong, the Netherlands, Spain and the UK. The database included companies from Australia- ASX 100, Paris- CAC 40, CAC next 20, CAC mid 60, Frankfurt DAX 30, Hang Seng composite large cap index (HSLI), Amsterdam- AEX index, AMX index, AScX index, Madrid- IBEX 35 Index, IBEX medium, IBEX small cap and London FTSE 100.
11 The database included 95 companies where the auditor comes from Australia, 110 from France, 30 from Germany, 102 from Hong Kong, 65 from the Netherlands, 68 from Spain, and 105 from the UK. Companies from where the auditor comes from France, Germany, the Netherlands and Spain are considered Western European countries, Australia and the UK are English-speaking countries and Hong Kong is a South Asian country, all with sufficient available data. Data were collected from annual reports, which listed companies have to publish and are publicly available.
This study is a quantitative research. The KAM is needed for the dependent variables and the country of the auditor is needed for the independent variable. These countries are related to cultural dimensions (Sagiv & Schwarts, 2007). The control variable total asset is also
available in the annual report. Control variable national wealth is available in a database from the International Monetary Fund (IMF). Several students from the University of Groningen collected the data. To avoid differences in data collection between data collectors, the students reviewed each other’s first five companies in alphabetical order.
Several companies are listed in two or three countries included in this study. For example, RIO Tinto Limited is listed in Australia and Hong Kong. The listed company in Hong Kong referred to an ISIN number in United Kingdom. RIO Tinto Limited listed in Australia was removed from the dataset. Several other companies were removed for similar reasons. Unibail Rodamco Westfield was removed from Australia and the Netherlands, KLM from the
Netherlands, ArcelorMittal from Spain and the Netherlands, Gemalto from France and Standard Chartered from HSLI. Several other companies were removed because the auditor’s country was outside the cultural dimensions of Sagiv and Schwartz (2007). Finally,
companies that did not mentioned KAM in their auditor’s report mostly did not have an auditor and had no auditor report. These were usually Spanish companies and were removed from the dataset.
4.2 Dependent variable
The detailed report variable is defined by the number of words about KAM in an auditor’s report (Zeghal & Ahmed, 1990) and by the number of KAM (Brouwer et al., 2016).
4.2.1 Number of key audit matters
A new auditor’s report consists of information about materiality, audit scope and KAM. Following Brouwer et al. (2018), KAM are the most significant difference in the new auditor’s report. KAM are provided in the auditor’s report that is publicly available together
12 with the annual report of listed companies (Bos & Strating, 2014). The number of KAM mentioned in each auditor’s report were measured.
4.2.2 Number of total words key audit matters
Number of words are available data that is measurable for research. Number of words has a high robustness for analysing disclosures (Zeghal & Ahmed, 1990). Word count is assumed to be indicative, therefore the higher the number of words in a disclosure, the higher the
emphasis on information given by the auditor (Krippendorff, 1980). This research measures the total number of words about KAM in the auditor’s report. Numbers are counted as one word (Sirois, Bédard & Bera, 2018).
4.3 Independent variable
The world is divided into seven regions. Dummies were used for hypotheses 1, 2 and 3. The role of dummies is to divide the data between two groups (Blankmeyer, 2006). Regressions apply dummy variables to estimate variables of dropping out one of the categories (Suits, 1984).
4.3.1 Degree of hierarchy
The South Asian region has a high degree of hierarchy (Sagiv & Schwartz, 2007; Koleśnik, 2013). Therefore, South Asian auditors were indicated by dummy 1 and auditors from other countries by dummy 0.
4.3.2 Degree of egalitarianism
Western Europe has a high degree of egalitarianism (Sagiv & Schwartz, 2007; Koleśnik, 2013). Therefore, Western European auditors were indicated by dummy 1 and other auditors from other countries by 0.
4.3.3 Degree of mastery
English-speaking countries have a high degree of mastery (Sagiv & Schwartz, 2007;
Koleśnik, 2013). Therefore, English-speaking country auditors were indicated by a dummy 1 and auditors from other countries by 0.
4.4 Control variables 4.4.1 Company size
Bos and Strating (2014) suggest smaller companies have fewer KAM. Therefore, company size is included as control variable. Company size is measured by total assets in US dollars to avoid currency differences. Next, these data were winsorized and afterwards the LOG is taken (Gul & Leung, 2004). Winsorizing means reducing the influence of outliers for continuous variables. All values that are lower than the mean less three times standard deviation are set at
13 a value of the mean less three times standard deviation. The same applies for values that are higher than mean plus three times standard deviation. Taking the LOG to reduces the impact of skewed distribution and prevents heteroscedasticity issues. This applies to continuous variables that deal with firm size, like total assets. Total assets were computed to similar currency in euros. Euros were chosen since that was the currency of most companies out of the dataset. This study used a currency rate at 31-12-2017 from Oanda, an expert in currency data and exchange rates.
4.4.2 National wealth
According to Hofstede (2011), national wealth should always be taken into account, as its influence can explain the correlation instead of differences in culture. National wealth is defined by gross national product per capita. Differences in power distance, a major aspect in hierarchism and egalitarianism (Del Maso et al., 2017; Koleśnik, 2013; Siegel et al., 2011), is significantly correlated with wealth.
4.5 Linear regression analysis
This research used a linear regression analysis, as it predicts a linear relationship between the values of a culture dimension and the level of detail of the auditor’s report. SPSS is the statistic software that is used to perform the regression.
The dependent variable is measured in two ways. Therefore Hypotheses 1, 2 and 3 has two formulas that are as follows :
Higher level of detail of the auditor’s report (number KAM) = constant + β1* degree of hierarchism dimension + β2* degree of egalitarian dimension + β3* degree of mastery dimension + β4* company size + β5* national wealth + ε.
Higher level of detail of the auditor’s report (total words of KAM) = constant + β1* degree of hierarchism dimension + β2* degree of egalitarian dimension + β3* degree of mastery
dimension + β4* company size + β5* national wealth + ε.
5. RESULTS 5.1 Descriptive statistics
There are 575 listed company data included in this study using data from 2017 in indexes from Australia, France, Germany, Hong Kong, the Netherlands, Spain and the UK from which the outcome was known for the dependent variables “numbers of KAM” and “total words of KAM”. The cultural dimensions “degree of hierarchism”, “degree of egalitarianism” and “degree of mastery” were known for all 575 listed companies.
14 Table 2 shows the variables with the minimum, maximum, average and standard deviation. The number of KAM ranges between 1 and 10. The total words of KAM are between 157 and 7445. Rolls-Royce Holding mentioned ten KAM with 7445 words. That is in line with Bos and Starting (2014), who mentioned Rolls-Royce Holding as a best practice in their new auditor’s report of KPMG.
The possible score for the degree of all cultural dimension is 0 or 1, because these are dummy variables. The average of 0,475 in degree of egalitarianism means that almost the same
number of companies are indicated as degree of Egalitarianism compared to companies which are not indicated as degree of Egalitarianism. The lower average of 0,177 for degree of
hierarchism provide that most of companies are low on hierarchy. That makes senses, because there are fewer south Asian companies (Hong Kong) in the dataset compared to Western European companies (France, the Netherlands and Spain) and English-speaking companies (Australia and the UK).
Table 2
5.2 Pearson Correlation Analysis
This correlation analysis shows the relationship between the dependent variable and the other variables, including independent variables “degree of hierarchism”, “degree of
egalitarianism”, degree of mastery”, the control variables “total assets” and the “common law dummy”. Table 3 shows the relationship to the dependent variable number of KAM and Table 4 shows the relationship to the dependent variable total words of KAM.
N Minimum Maximum Average Standard
deviation Number of KAM 575 1 10 3,367 1,444 Total words of KAM 575 157 7445 1354,666 743,0581 Degree of hierarchism 575 0 1 0,177 0,3823 Degree of egalitarianism 575 0 1 0,475 0,4998 Degree of mastery 575 0 1 0,348 0,4767
15 The first correlation shows that number of KAM is negatively related to degree of
hierarchism. That is consistent with hypothesis 1. The second correlation shows no significant relationship between number of KAM and degree of egalitarianism. The chance that a
correlation coefficient of a minimum -0,027 between number of KAM and degree of egalitarianism will be found, when there is no linear relationship, is 51,9 percent. The third correlation shows a positive relationship between number of KAM and degree of mastery which is consistent with hypothesis 3.
The Pearson correlation are relate both variables in a straight line. The correlation should be interpreted with caution, since the correlation does not influence by other control variables. The significance is two tailed to determine whether there is difference that uses both negative and positive outcomes. Number of KAM has a positive relationship with winsorized LOG total assets and a negative relationship to national wealth.
Table 3
*Significant at the 0,01 level
Table 4 shows correlation with the dependent variable total words of KAM. The results of the Pearson correlation are approximately equal to the dependent variable number Key Audit Matters.
This correlation shows that total words of KAM is negatively related to degree of hierarchism. This is again consistent with hypothesis 1. The correlation between total words KAM and
Pearson correlation Significance (2-tailed) N Number of KAM 1 575 Degree of hierarchism -0,210 0,000* 575 Degree of egalitarianism -0,027 ,519 575 Degree of mastery 0,196 0,000* 575 Winsorized LOG total assets in € (company size) 0,368 0,000* 575 National wealth -0.110 0.008* 575
16 degree of egalitarianism is not significant. The chance that a correlation coefficient of a minimum -0,027 between number of KAM and degree of egalitarianism will be found, when there is no linear relation, is 78,9 percent. The Pearson correlation shows a positive
relationship between total words of KAM and degree of mastery, what is again consistent with hypothesis 3.
The pearson correlation shows that total words of KAM has a strong positive relationship to winsorized LOG total assets and a negative relationship to national wealth with two tailed significance.
Table 4
*Significant at the 0,01 level
5.3 Linear regression model
Table 5 shows the linear regression results regarding the relationship of constant variable number of KAM and the independent variables to test hypotheses 1, 2 and 3. The first
regression shows a negative relationship between number of KAM and degree of hierarchism with p < 0,01. The P value is the probability under the hypothesis that there is no significant effect. The second regression shows a negative relationship between number KAM and degree of egalitarianism, which contradicts hypothesis 2. The t-statistic however, is not
significant, with p > 0,10. The lager the p-value, the weaker the evidence. The third regression Pearson correlation Significanc e (2-tailed) N Total words of KAM 1 575 Degree of hierarchism -0,210 0,000* 575 Degree of egalitarianism -0,011 0,789 575 Degree of mastery 0,180 0,000* 575 Winsorized LOG total assets € (Company size) 0,419 0,000* 575 National wealth -0,143 0,001* 575
17 shows a positive relationship between the number of KAM and degree of mastery, with p < 0.01.
The control variables winsorized LOG total assets and national wealth remain stable in these regressions, with p < 0,05.
The adjusted square shows how well the regression predictions fit the data. Adjusted R-square is the proportion of the variance in the number of KAM that is predictable from the independent variables, such as degree of hierarchism (model 2), degree of egalitarianism (model 3) and degree of mastery (model 4). The adjusted R-square in models 1,2,3 and 4 are
between 0,139 and 0,195. There is a slightly linear relation This means there is a 19,5 percent
chance that degree of hierarchism can be explained by the dependent variable number of KAM.
The F-test determines for all coefficients whether they have a different value than zero at the same time. The F-value in all models is high, which means that the F-value is significant. The variance inflation factors (VIF) measure whether the variances of the estimated regression coefficients are affected by the predictor’s variables when variables are not linearly related. The VIF values in this study are between 1,007 and 1,351 (table 6).
18 Table 5
(Constant): number of KAM *Significant at the 0,01 level **Significant at the 0,05 level
Table 6
Model 1 Model 2 Model 3 Model 4
(Constant) Winsorized LOG total
assets in € (company size) 0,612* 0,657* 0,602* 0,599* National wealth -0,000019 ** -0,000007 * -0,000025 ** -0,000040* Degree of hierarchism (H1a) -0,904* Degree of egalitarianism (H2a) -0,162 Degree of mastery (H3a) 0,777* Adj. R-square 0,139 0,192 0,140 0,195 F-value 47,254 46,336 32,049 47,399 Highest VIF 1,006 1,060 1,351 1,149
Model 2 (VIF) Model 3 (VIF) Model 4 (VIF)
(Constant)
Winsorized LOG total assets in € (company size)
1,019 1,023 1,007
National wealth 1,057 1,351 1,149
Degree of hierarchism (H1a) 1,060
Degree of egalitarianism (H2a) 1,349
19 Table 7 shows the linear regression results regarding the relationship of constant variable total words of KAM and the independent variables to test hypotheses 1, 2 and 3 again. The results show a negative relationship between total words of KAM and degree of hierarchism, with p < 0.01. The linear regression results show a negative relationship between total words of KAM and degree of egalitarianism, with p > 0,10. The third result show that the total words of KAM has a positive relationship with degree of mastery, with p < 0.01.
The control variables Winsorized LOG total assets and national wealth remain stable in these findings, with p < 0,01. Nevertheless, national wealth has almost no impact.
The adjusted R-square in models 1, 2, 3 and 4 are between 0,185 and 0,238. These adjusted R-squares mean that 23,8 percent of change through degree of hierarchism can explained by the dependent variable total words of KAM.
The F-values are substantial, which means that the F-values are significant and the results that are provided are reliable. The VIF values are again between 1,007 and 1,351 (Table 8). This means that they are moderately correlated, which indicates no multicollinearity given a lower VIF than 10.
20 Table 7
(Constant): total words of KAM *Significant at the 0,01 level
Table 8
Model 1 Model 2 Model 3 Model 4
(Constant) Winsorized LOG total
assets in € (company size) 357,907* 380,685* 353,089* 351,463* National wealth -0,013* -0,007 -0,016* -0,024* Degree of hierarchism (H1b) -462,863* Degree of egalitarianism (H2b) -73,260 Degree of mastery (H3b) 389,188* Adj. R-square 0,185 0,237 0,185 0,238 F-value 66,149 60,559 44,542 60,903 Highest VIF 1,006 1,060 1,351 1,149
Model 2 (VIF) Model 3 (VIF) Model 4 (VIF)
(Constant)
Winsorized LOG total assets in € (company size)
1,019 1,023 1,007
National wealth 1,057 1,351 1,149
Degree of hierarchism (H1a) 1,060
Degree of egalitarianism (H2a) 1,349
21 6. CONCLUSION
This paper examined the research question: What information differences in the new auditor’s reports (that follow ISA 701) are significant across different cultures?
The literature shows that people in a hierarchical culture accept that level of authority exist (Koleśnik, 2013) and that reporting and explaining is of very little concern (Dal Maso et al., 2017; Siegel et al., 2011). Expecting a significant negative relationship between hierarchy and reporting more information in new auditor’s report. This led to hypothesis 1: The degree of hierarchism is negatively related to the level of detail of the auditor's report.
The level of detail in auditor’s report was measured by the number of KAM and by the total words of KAM. The results show a significant negative relationship for both variables. This means that a higher degree of hierarchism leads to a lower level of detail of the auditor’s report and confirms hypothesis 1.
In an egalitarian culture (Sagiv & Schwartz, 2007; Koleśnik, 2013), everyone is more
informed and involvedthan in other cultures. Stakeholder interest is more valuable in this
culture with a lower level of hierarchy (Del Maso et al., 2017; Siegel et al., 2011) whereby an expected significant relation can exist between egalitarianism and reporting more information in new auditor’s report. This led to hypothesis 2: The degree of egalitarianism is positively related to the level of detail of the auditor's report. No significant relationship was found between these variables and reject hypothesis 2.
In a high mastery culture, people know how to modify (Sagiv & Schwartz, 2007; Koleśnik, 2013), what is important in place of a new auditor’s report, are driven by ambition (King, 2013), and prefer being competitive and successful (Del Maso et al., 2017). This led to hypothesis 3: The degree of mastery is positively related to the level of detail of the auditor's report. The results show a significant positive relationship, so hypothesis 3 is accepted.
7. DISCUSSION
The differences between cultures and their influence on the impact of the auditor’s report has practical implications. Auditors should provide more information and reduce the expectation gap between auditors and stakeholders (Bos & Starting, 2014). Little prior research is done because the recent changes in new auditor’s report. When more study is known, the
implication to practice is for instance the importance of learning effect between companies of different cultures. Auditor’s report changes since ISA 701 is adopted. The mimetic
22 isomorphism, one of the institutional isomorphism, gives insight into the learning effect to imitate other organisations with different variants of new auditor’s report (Tsamenyi et al., 2006).
Further discussing the limitations of this study and after that provides the suggestions for future research.
7.1 Limitations
There are a several limitations in this study. The dataset included only one country with a hierarchism culture. Another limitation is the small sample of 575 companies.
Furthermore, this study used of a lot of dummies, which could make the results less reliable. Finally, the sample consisted mostly of big four auditors. Only seven companies used an independent auditor from outside the big four. Therefore, the results are not generalisable beyond the big four auditors.
7.2 Future research
To overcome the limitations, this research should be repeated using other countries. Due to the small sample of hierarchism countries, the relationship between degree of mastery and level of detail in auditor’s report needs more research to increase the reliability of these results. Additionally, the dataset should be expanded with more companies that use a non-big four auditor.
Future research could examine the other four dimensions of Schwartz so that more culture dimensions provide insight in new auditor’s report differences. This should be done in future, because little research has been performed on them (Koleśnik, 2013). Also, this study could be repeated with more indices within the regions that fit the dimensions of hierarchism, egalitarianism and mastery, following Sagiv and Schwartz (2007). More data shows a more reliable outcome without limitation of a sample which is small. Moreover, current research in 2017 can be expanded to future years to determine the development of the new auditor’s reportacross time.
Finally, the difference between mandatory laws, such as in the United Kingdom, and voluntary legislation, like some other countries, is not included in this study and should be used a variable in future research.
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