The Role of External Audit in Improving Firm’s Value:
Case of Indonesia
Putu Agus Ardiana
Faculty of Economics and Business
Udayana University, Bali, Indonesia
Email: ardiana.idea@gmail.com

ABSTRACTThis paper investigates the effect of three characteristics of external audit on the value ofcompany. Audit characteristics comprise of audit tenure, audit firm size, and audit opinion
while firm’s value is measured by P/E, P/B, and Tobin’s Q. Using 2,240 company-year
observations, this paper finds that higher value of company is achieved by shorter audit
tenure, brand name audit firms, and unqualified audit opinion. This finding is consistent inall three measures of firm’s value and after controlling company’s asset size and age. These
research findings suggest that (1) mandatory rotation may become solution to ensure thatprofessional relationship between auditor and client can be maintained, (2) brand nameauditors seem to offer better quality of audit and increase the value of the company, and (3)financial service authority in Indonesia should encourage more companies to prepare
financial statements in accordance with accounting standards to receive unqualified opinion
from independent auditor.
Keywords: audit tenure, audit firm size, audit opinion, firm’s value

1. INTRODUCTION
Auditor is a unique as well as challenging profession, which differs from otherprofession, such as lawyer. A lawyer must be always in client’s side because client pays
lawyer to do so. In contrast, auditors must maintain their independence from client eventhough they are paid by client.
The independence of external auditor profession is questionable following theliquidation of a brand name audit firm of Arthur Andersen due to its involvement in Enron’s
collapse. Before the collapse of Enron, Arthur Andersen was one of big five audit firms andconsequently Enron’s stakeholders had high expectation on its quality of audit. However,long audit tenure between Arthur Andersen and Enron was suspected to become the root
cause of the failure of Arthur Andersen in maintaining its independence from its paying client,
the Enron. Enron’s stock price initially went up but it suddenly dropped following negative

market sentiment on Enron’s fraud and audit failure. Since then, Sarbanes-Oxley Act 2001
recommended audit rotation and auditors are not allowed to receive non-attestation services
at the same time as audit service provided to a client.
Long audit tenure is expected to negatively affect quality of audit because it tends toresult in family-like relationship between auditor and client and may end up with audit failure
or auditor ignorance to material misstatements. However, many academics and audit
practitioners disagree with audit rotation as a solution of maintaining auditor independence
and improve audit quality. Revitalization of internal auditors and effective communication
between internal and external auditors are suggested to become more effective tools forauditor independence and the quality of audit. In addition, audit rotation is arguably resulting
in audit inefficiency because the first audit period is the period of understanding client’s
business environment hence limitation to audit tenure would cause auditors harder to adjust
and understand new business environment of future new clients. Indeed, auditor’s selfadjustment in first period of audit is often not cheap.
After the liquidation of Arthur Andersen, there are four big audit firms. They are
Deloitte Touche Tohmatsu, Pricewaterhouse Coopers (PwC), Ernst and Young, dan Klynveld
Peat Marwick Goerdeler (KPMG). A number of researchers disclose that big audit firms offer
higher quality of audit because they have greater monitoring strength to result in higher
quality and credibility of financial information (DeAngelo, 1981; Dopuch and Simunic, 1982;
Titman and Trueman, 1986; and Beatty, 1986). However, Chang, Cheng, and Reichelt(2010) find that market responds more positively to auditor switch from big audit firms to
non-big audit firms.
Clients expect to receive unqualified audit opinion and stakeholders appreciateunqualified audit opinion because this audit opinion suggests that financial statements arefree from material misstatements and presented in accordance with accounting standards.
Market responds more positively to companies receiving unqualified opinion than other
opinion. Market response on announcements or corporate actions are reflected in stock pricechanges. Stock market prices continuously change, which indicates dynamic market reaction
until they reach new equilibrium. Multiples such as price to earnings ratio (P/E) and price tobook ratio (P/B) may become alternative measures of firm’s value other than Tobin’s Q.
Previous research found that firm’s characteristics such as company or firm size andcompany or firm age affect firm’s value. Boubaker, Mensi, and Nguyen (2008) show thatfirm size (natural logarithm of total asset) positively affects firm value while Loderer andWaelchli (2009) show that firm age negatively affects firm’s value. This research aims toinvestigate the effect of external audit characteristics (proxied by audit tenure, audit firm size,
and audit opinion) on firm’s value (proxied by P/E, P/B, and Tobin’s Q). This research uses
two control variables, firm size and age.

II. LITERATURE REVIEW
2.1 Agency Theory
Agency theory explains the relationship between principal (stockholders) and agent(management). At least there are two main problems in the relationship, managerial
compensation and asymmetry information (Jensen and Meckling, 1976). The first problem
appears because management desires higher managerial compensation in the form of bonus
while stockholders wants higher dividend. Second agency problem about asymmetry
information appears because management is an insider while stockholders are outsiders that
only know about company’s financial condition from the financial reports prepared bymanagement.
The first agency problem is possible to be solved by negotiation about managerial
compensation and executive stock ownership program. Meanwhile, the second agency
problem is expected to be solved by the role of independent (external) auditor. Independent(external) auditor should provide assurance services to stockholders that financial reports
prepared by management are free from bias and material misstatement and in accordancewith accounting standards.

2.2 Audit Tenure
Audit tenure refers to audit period in which external auditor have spent to provide
audit service to a client. A number of academics and practitioners argue that the longer theexternal auditor provides audit service to a client, the greater the independence threats (forinstance Geiger and Raghunandan, 2002). In contrast, opponents argue that shorter audit
tenure requires greater costs to apply complex audit procedures in a very limited time
therefore audit fee would be higher (Palmrose, 1986).
Chen et al. (2008) reveals that regulators (the government and standard setting body)are very concerned about long-term audit tenure because external auditor tends tocompromise with accounting policy in longer tenure. Long-term audit tenure may result inclose relationship between auditor and management (so called familiarity threat). Therefore,
long-term audit tenure potentially reduces auditor independence leading to a decline inquality of audit and client’s value. In contrast, Johnson, Khurana, and Reynolds (2002) findthat shorter audit tenure tends to result in worse financial report quality than longer audit
tenure.
2.3 Audit Firm Size
A number of studies in audit quality and auditor reputation (proxied by auditor size or
auditor brand name) show that brand name auditors tend to have higher monitoring strengththat enables them to produce higher information quality and credibility (Davidson and Neu,
1993; DeAngelo, 1981; Dopuch and Simunic, 1982; Titman and Trueman, 1986; and Beatty,1986). However, Chang, Cheng, and Reichelt (2010) found that investors positively respondcompany’s decision to change its auditor from big to small audit firm.
Khurana and Raman (2004) argue that ability to detect material misstatements infinancial reports is the function of auditor competence while the tendency to disclose material
misstatements is the function of auditor independence. Competency level of auditors tends tovary for every audit firm. Several audit firms spend more money and time for training andformal education for their auditors hence its auditors have greater capacity and capability.
Meanwhile, independency level also varies across audit firms. DeAngelo (1981) supports thisview and argues that nonbig audit firms have greater incentives not to disclose material
misstatements in order to retain clients and maintain good relationship to them. Big audit
firms have less incentive because reputation is too expensive to be sacrificed. Big audit firms
tend not to really depend on specific client.
Becker et al. (1998) tested hypothesis about big audit firm reputation. They tested
whether or not ex-clients of big audit firms involved in less earnings management practices.
Earnings management is measured by cross-sectional Jones model (1991). Using 10,379
samples of ex-client of big audit firms and 2,179 samples of ex-client of nonbig audit firms in
the Unites States, they found that the average of discretionary accruals is 1.5 to 2.1 per centlower for ex-client of big audit firms. The finding indicates that big audit firms are moreconservative. Francis and Krishnan (1999) support Becker et al. (1998) that an increase inaccrual revenue tend to lead to legal problems so that big audit firms tend to choose clientswith lower accrual revenue to avoid legal problems and bad reputation.
2.4 Audit Opinion
Audit opinion refers to (external) auditor opinion about fairness of financial
statements prepared by management. Unqualified opinion is the most expected opinion by all
clients because this opinion confirms and assures that financial statements prepared bymanagement do not contain material misstatements and are in the line with accounting

standards. In contrast, no opinion is stated by auditor when auditor judges that they are notindependent in the audit task, there is conflict of interest between auditor and client, there issignificant limitation in audit scope, there is significant uncertainty, and/or there is significant
doubt about client’s business continuity or going concern.
Wang (2005) discovers that market negatively responds the stock price of companies
with unqualified audit opinion with explanatory language and opinion other than unqualified
audit opinion. In contrast, market responds positively the stock price of those withunqualified opinion (Choi and Jeter, 1992; Chow and Rice, 1982). Czerney, Schmidt, andThompson (2013) shows that companies with unqualified audit opinion with explanatory

language more often restate their financial statements.
2.5 Firm’s Value
In agency relationship, principal establishes company and appoints agent with a hopethat agent works in the line with principal’s interest. Agent should be capable of increasing
principal’s wealth. For public companies, stock market price reflects firm’s value. If market
responds positively on company’s performance, stock market price will increase and firm’svalue increase, thus principal’s wealth also increases.
Prior research found that company’s characteristics such as company size and age
consistently affect firm’s value. Boubaker, Mensi, and Nguyen (2008) show that company
size positively affects firm’s value. Loderer and Waelchli (2009) show that firm age
negatively affects firm’s value. Firm’s value can be measured by price to earnings ratio (P/E),
price to book value (P/B) and Tobin’s Q (Brahmana and Hooy, 2011).

III. RESEARCH METHODThis research uses 2,240 company-year observations which were consistently listedon the Indonesian Stock Exchange from 2007 to 2013. Table 3.1 shows that the number ofcompany-year observations consistently listed were 2,240 observations, which are about
75,12 per cent of total company-year observations from 2007 to 2013 (2,982 observations).
This research uses multiple linear regression1 to investigate the effect of (external) audit
characteristics on firm’s value. Audit characteristics are measured by audit tenure, audit firmsize, and audit opinion while firm’s value is measured by P/E, P/B, and Tobin’s Q. In
addition to independent and dependent variables, this research introduces two control
variables, which is firm size and firm age.
___________________________
1

Regression model of VALUE = β0 + β1 TENURE + β2 DAUDITOR + β3 DOPINION + β4 CONTROLS + ε

Table 3.1
Number of Samples
2007
2008
2009 2010
Number of listed
383
396
398
420
companies
Number of companies
63
76
78
100
with incomplete data
Number of (sample)
companies consistently
320
320
320
320
listed from 2007 to2013
Source: Indonesian Financial Service Authority (2013)

2011

2012

2013

Total

440

462

483

2,982

120

142

163

742

320

320

320

2,240

Audit tenure (TENURE) is the period of audit provided by (external) auditor to aclient (company). Technically speaking, TENURE equals one for Company A in 2007 if its
auditor in 2007 is not the same as in 2006. However, TENURE for Company A in 2007
equals two, three, or greater if its auditor in 2007 is the same as in previous consecutive years.
Dummy variable of audit firm size (DAUDITOR) is a measurement of audit firm size.
DAUDITOR equals one if the company is audited by an audit firm which is affiliated with a
big four audit firm and equals zero if the company is not audited by an audit firm which isaffiliated with a big four audit firm. The list of Indonesian audit firms which have affiliation
with big four audit firms is presented on Table 3.2
Dummy variable of audit opinion (DOPINION) is the type of opinion stated byauditor following the financial statement audit task to a client (company). DOPINION equals
one if company receives unqualified opinion from auditor and it equals zero if the opinion isother than unqualified opinion.

IV. HYPOTHESES DEVELOPMENT
Myers et al. (2005) found that clients tend to report material misstatement leading
to higher reported earnings in longer audit tenure. Chen et al. (2008) shows that regulators(the government and accounting standard body) are concerned about long-term audit tenure
mbecause auditors tend to compromise with accounting methods and policies as a result of‘too close relationship’ between auditor and management. Therefore, many argue that longer
audit tenure may threat auditor independence leading to lower audit quality. The longer theaudit tenure, the lower the tendency of auditor to be independent. Market tends to react
negatively to this condition because market expects that auditor can provide independentassurance services to the users of financial statements. The hypothesis can then be formulated
as follows:

H1: Longer audit tenure negatively affects firm’s value
Table 3.2
The Big Four – Affiliated Audit Firms in Indonesia
Big Four Audit Firms

Indonesian Audit Firms

PricewaterhouseCoopers (PwC)

KAP Tanudiredja, Wibisana& RekanDeloitte

KAP Osman Bing Satrio

Ernst & Young

KAP Purwantono, Suherman& Surja

Klynveld, Peat, Marwick,Goerdeler (KPMG)

KAP Sidharta dan Widjaja

Address
Plaza 89 Jl. H.R. Rasuna
Said Kav. X-7 No. 6
Jakarta 12940 – Indonesia
P.O. Box 2473 JKP 10001
Phone: +62 21 5212901
Fax: +62 21 52905555 /52905050
The Plaza Office Tower
32nd Floor Jl. M.H.
Thamrin Kav 28-30 Jakarta
Indonesia. Phone number:+62 21 2992 3100.
Indonesia Stock Exchange
Building Tower 2, 7th
Floor Jl. Jend. Sudirman
Kav. 52-53 Jakarta 12190
Indonesia Phone: +62 21
5289 5000
33rd Floor Wisma GKBI
28, Jl Jend. Sudirman
Jakarta
10210
INDONESIA Tel: +62 21
574 2333

Source: Indonesian Institute of Certified Public Accountants (2013)
Brand name auditors tend to have greater monitoring strengththat can result in greater
information quality and credibility (DeAngelo, 1981; Dopuch and Simunic, 1982; Titman andTrueman, 1986; and Beatty, 1986). Market is expected to respond positively to the greater
information quality and credibility, therefore the hypothesis of the effect of audit firm size on
firm’s value can be formulated as follows:

H2: Companies whose financial statements are audited by big audit firms would have greatervalue

Wang (2005) discovers that market negatively responds the stock price of companies
with unqualified audit opinion with explanatory language and opinion other than unqualified
audit opinion. In contrast, market responds positively the stock price of those withunqualified opinion. Czerney, Schmidt, and Thompson (2013) shows that companies withunqualified audit opinion with explanatory language more often restate their financial
statements. Market is expected to respond more positively to unqualified opinion andtherefore the hypothesis of the effect of audit opinion on firm’s value can be formulated asfollows:

H3: Companies whose financial statements are given unqualified audit opinion have greater
value

V.

RESULT AND ANALYSIS

5.1 Descriptive Statistics
Descriptive statistics of all variables operated in this research is presented in Table
5.1. First of all, audit tenure (TENURE) has arithmetic mean of 2.85. This means that, on
average, auditors provided audit service to a client for about three consecutive periods
between 2007 and 2013. The longest and shortest audit tenures were six consecutive periods
and one period, respectively.
Move on to audit firm size (DAUDITOR), there are 1,356 observations out of 2,240
observations of companies which were audited by brand name auditors (audit firms inIndonesia that are affiliated with big four audit firms) and there are 884 observations out of
2,240 observations of companies which were audited by nonbrand name auditors (audit firms
in Indonesia that are not affiliated with big four audit firms). Meanwhile, there are 1,587
observations out of 2,240 observations of companies which received unqualified audit
opinion between 2007 and 2013 and the rest received opinion other than unqualified opinion.
Client size and age are operated as control variables. Client size is measured bynatural logarithm of client’s total assets. The arithmetic mean of this variable is 12.03(approximately 168 billion rupiahs). Meanwhile, client age has arithmetic mean of 32.42.
This means, on average, companies have established their business for about 32 years.

Table 5.1
Descriptive Statistics of All Variables

Statistics

TENUREbDAUDITORa

DOPINIONa

SIZEc

No. of Observations
No. of Observations D=1a
No. of Observations D=0a
Arithmetic Mean
Standard Deviation
MedianMaximum Value
Minimum Value

2,240
2.85
1.51
3.00
6.00
1.00

2,240
1,356
884
0.61
0.49
1.00
1.00
0.00

2,240
1,587
653
0.71
0.45
1.00
1.00
0.00

2,240
12.03
1.08
12.09
14.80
7.90

Statistics

P/Ee

P/Bf

TOBINSQg

AGEd

2,240
0.77
0.14
0.58
1.21
0.22

2,240
32.42
17.23
29.74
107.994.63

No. of Observations
2,240
2,240
No. of Observations D=1aaNo. of Observations D=0
Arithmetic Mean
17.80
15.39
Standard Deviation
105.73
98.78
Median9.14
9.92
Maximum Value
2,132.72
1,263.73
Minimum Value-482.37-313.21
Source: Descriptive Statistics Output from SPSS

Notes:
a) For DAUDITOR, D=1 if the company was audited by big audit firm while D=0 if the company was not
audited by big audit firm. For DOPINION, D=1 if audit opinion of company’s financial statements is
unqualified opinion while D=0 if audit opinion of company’s financial statements is other than unqualified
opinionb) TENURE is the number period of audit provided by auditor to a client or companyc) SIZE is the natural logarithm of company’s total assetsd) AGE is the company age from it was established to the date of observations (31 December 2007, 31
December 2008, 31 December 2009, 31 December 2010, 31 December 2011, 31 December 2012, and 31
December 2013)e) P/E is price to earnings ratio. The ratio was already calculated by the Indonesian Stock Exchange and freely
downloadable.
f) P/B is price to book value. The ratio was already calculated by the Indonesian Stock Exchange and freely
downloadable.
g) TOBINSQ is determined by the following formula:
TOBINSQi,t = (MVEi,t + MVPSi,t + DEBTi,t) / TAi,t (Chung, K.H., and Pruitt, S.W., 1994)
where:
MVE = Market value of equity in year t for firm i (the product of a firm’s share price and the number ofcommon stock shares outstanding)
MVPS = Liquidating (market) value of preferred stock in year t for firm i
DEBT = The value of the firm’s short-term liabilities net of its short-term assets + book value of the firm’s
long-term debts) in year t for firm i
TA= The book value of total assets in year t for firm i

5.2 Audit Tenure and Firm’s Value
The first hypothesis shows that audit tenure negatively affects firm’s value. Table 5.2
reveals that TENURE negatively affects P/E, P/B, and Tobin’s Q at different levels ofsignificance. The effect of audit tenure on P/E is significant at one per cent while on P/B andTobin’s Q is significant at five per cent. Goodness of fit (R2 and Adjusted R2) shows
significant improvement after controlling client size and age. The effect of client size (SIZE)
on P/E and P/B is consistently significant at five per cent while its effect on Tobin’s Q is only
significant at ten per cent. Meanwhile, the effect of client age (AGE) on P/E, P/B, andTobin’s Q is consistently significant at ten per cent. Both control variables show positiveeffect on firm’s value indicating that the firm’s value tends to be greater for companies whichhave greater assets and have established for many years.
Statistical analysis shows that the longer the external auditor provides audit services
to a client or company, the lower the company’s value as reflected by negative market
response. Long-term audit tenure potentially changes the relationship between auditor andclient from professional relationship to family-like relationship. The later would severely
threat auditor independence. Even though statistical analysis reveals that the longer the audit
tenure the lower the client’s value, it does not necessarily follow that auditor can only provide
audit service to a client at once. Regulation in Indonesia explicitly allows audit firms toprovide audit service to client for maximum of six consecutive years. This mandatory rotation
may become solution to ensure that professional relationship between auditor and client canbe maintained. Law enforcement is the key success to enable this regulation works properly.

5.3 Auditor Size and Firm’s Value
The second hypothesis shows that companies whose financial statements are audited
by big audit firms would have greater value. Table 5.2 reveals that DAUDITOR positively
affects P/E, P/B, and Tobin’s Q at constant levels of significance. The effect of audit tenure
on P/E, P/B, and Tobin’s Q is significant at one per cent. Goodness of fit (R2 and Adjusted
R2) shows significant improvement after controlling client size and age.
Companies audited by big audit firms tend to show greater value. Market views big
audit firms to have greater capacity and capability in increasing information reliability ofclient’s financial statements and consequently market responds this positively thus it
increases company’s value as proxied by P/E, P/B, and Tobin’s Q. Even though statisticalanalysis shows that companies audited by big audit firms tend to show greater value because
big audit firms tend to have greater capacity and capability in increasing information

reliability, it does not necessarily follow that nonbig audit firms are unable to produce
reliable information at all. However, it is a big challenge for nonbig audit firms to improvetheir image as well as capacity and capabilities in order to increase their competitive
advantages so that they can compete with brand name audit firms.

5.4 Audit Opinion and Firm’s Value
The last hypothesis shows that companies whose financial statements are given
unqualified audit opinion have greater value. Table 5.2 reveals that DOPINION positively
affects P/E, P/B, and Tobin’s Q at different levels of significance. The effect of audit opinion
on P/E is significant at one per cent while on P/B and Tobin’s Q is significant at five per cent.
Goodness of fit (R2 and Adjusted R2) shows significant improvement after controlling client
size and age.
Companies whose audited financial statements are with unqualified audit opinion tend
to have greater value. This is because unqualified audit opinion is the most positive andstrongest level of audit opinion that increases market response and confidence so thatcompany’s value is also positive. Up to this moment, it is possible for listed companies toreceive audit opinion other than unqualified opinion. This means that there is tolerance for
quality of financial statements prepared by managements of listed companies. In the future itis expected that there is strict and enforced regulation about audit opinion criteria for being
continuously listed on the stock exchange. In other words, there is no tolerance at all forcompanies with audit opinion other than unqualified opinion to be able to publicly trade theirstocks in the market. The main purpose of this proposed regulation is to promote good
governance that managements must prepare financial statements in accordance withaccounting standards.

Tabel 5.2
Summary of Regression Output

Independent Variables
and Control Variables
Intercept
TENUREDAUDITOR
DOPINION
SIZE
AGE
F-Statistic
Prob (F-Statistic)
R2
N

Model 1
Before Control
After Control
Variables
Variables
19.58**
93.07**(8.50)(4.35)-9.63***-9.67***(2.64)(2.66)
9.03***
9.27***(8.11)(8.31)
9.22***
9.17***(2.61)(2.26)
91.68**(3.73)
101.35*(13.96)19.72621.2710.000
0.000
0.44900.67282,240
2,240

Dependent Variables: P/E, P/B, and Tobin’s Q
Model 2
Before Control
After Control
Variables
Variables
19.71**
77,93**(5.09)(4.91)-21.22**-22.42**(4.12)(4.01)
9.43***
9.77***(8.08)(8.35)
21.92**
22.72**(4.92)(4.81)
71.61**(3.78)
103.33*(13.71)
16.39023.4940.000
0.000
0.48370.58362,240
2,240

Model 3
Before Control
After Control
Variables
Variables
16,87**
99,34**(7.35)(4.99)-20.92**-21.04**(4.18)(4.44)
9.44***
9.77***(8.99)(8.13)
20.82**
21.74**(4.88)(4.34)
109.55*(13.72)
107.79*(13.45)10.02322.2160.000
0.000
0.43710.55572,240
2,240

Source: Multiple Linear Regression Output from SPSS
Notes:a) Model 1 is multiple linear regression model of PE = β0 + β1 TENURE + β2 DAUDITOR + β3 DOPINION + β4 CONTROLS + ε
Model 2 is multiple linear regression model of PB = β0 + β1 TENURE + β2 DAUDITOR + β3 DOPINION + β4 CONTROLS + ε
Model 3 is multiple linear regression model of TOBINSQ = β0 + β1 TENURE + β2 DAUDITOR + β3 DOPINION + β4 CONTROLS + εb) Numbers in parentheses are standard errors.
c) *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.

VI. CONCLUSION
Audit tenure negatively affect firm’s value as proxied by P/E, P/B, and Tobin’s Q.
This indicates that the longer the external auditor provides audit services to a client orcompany, the lower the company’s value as reflected by negative market response. Longterm audit tenure potentially changes the relationship between auditor and client fromprofessional relationship to family-like relationship. The later would severely threat auditor
independence. Even though statistical analysis reveals that the longer the audit tenure thelower the client’s value, it does not necessarily follow that auditor can only provide audit
service to a client at once. Regulation in Indonesia explicitly allows audit firms to provide
audit service to client for maximum of six consecutive years. This mandatory rotation may
become solution to ensure that professional relationship between auditor and client can be
maintained. Law enforcement is the key success to enable this regulation works properly.
Companies audited by big audit firms tend to show greater value. Market views big
audit firms to have greater capacity and capability in increasing information reliability ofclient’s financial statements and consequently market responds this positively thus it
increases company’s value as proxied by P/E, P/B, and Tobin’s Q. Even though statisticalanalysis shows that companies audited by big audit firms tend to show greater value because
big audit firms tend to have greater capacity and capability in increasing information
reliability, it does not necessarily follow that nonbig audit firms are unable to produce
reliable information at all. However, it is a big challenge for nonbig audit firms to improvetheir image as well as capacity and capabilities in order to increase their competitive
advantages so that they can compete with brand name audit firms.
Companies whose audited financial statements are with unqualified audit opinion tend
to have greater value. This is because unqualified audit opinion is the most positive andstrongest level of audit opinion that increases market response and confidence so thatcompany’s value is also positive. Up to this moment, it is possible for listed companies toreceive audit opinion other than unqualified opinion. This means that there is tolerance for
quality of financial statements prepared by managements of listed companies. In the future itis expected that there is strict and enforced regulation about audit opinion criteria for being
continuously listed on the stock exchange. In other words, there is no tolerance at all forcompanies with audit opinion other than unqualified opinion to be able to publicly trade theirstocks in the market. The main purpose of this proposed regulation is to promote good
governance that managements must prepare financial statements in accordance withaccounting standards.

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