Scholar Journal
Journal of Science and Today's World Journal home page: http://www.journalsci.com
ISSN 2322-326X
2016, volume 5, issue 2, pages:74-78
Research Article
The relationship between institutional ownership and independent audit opinion in the listed companies in Tehran Stock Exchange
Adel Nikoozad *1, SeyedHossein Naslmosavi 2 1. MSs.Student of Accounting , University College of Rouzbahan , Sari , Iran. 2. Department of Accounting , Qaemshahr Branch , Islamic Azad University ,Qaemshahr , Iran. ARTICLE INFO Article history: Received 7 January 2016 Received in revised 26January 2016 Accepted 20February 2016 Published 24 February 2016
ABSTRACT The current study is designed to investigate the impact of percentage of institutional ownership on independent auditors’ opinion at Tehran Stock Exchange. Statistical population of the study consists of 61 firms from 2008 to 2013. Logistic regression was used to test the hypotheses. According to the obtained results, no significant relationship between the percentage of institutional ownership and independent audit opinions was observed. The relationship between firm size, return on assets and leverage ratio can be significant with audit’s opinion. No significant relationship was observed between the type of ownership of the audit firm and independent auditors’ report.
Keywords: institutional ownership, ownership structure, independent auditors’ opinion *correspondence should be addressed to Adel Nikoozad. MSs.Student of Accounting , University College of Rouzbahan , Sari , Iran. Tell: +98:911-14-8372 Fax: +98 Email:
© Copyright 2016 Adel Nikoozad et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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Introduction The main objective of financial reporting is to provide useful financial information for decision-makers in relation to investors, creditors, and other related requirements for the allocation of resources [1]. As an outcome, accounting information’s quality is a prerequisite for the proper functioning of capital markets and the economy and can be considered as a mean to reduce information asymmetry and representative’s conflicts. Since the financial scandals of the early 2000s, the researchers, editors and legislators paid considerable attention to the quality of their financial information to the public, and this role was particularly played by the auditors [2]. Since management is responsible for financial reporting, Users of accounting information like Market participants, expect a third party to ensure that the information reported is accurate. Audit reports, indicates auditor’s opinion whether the financial statements of a business unit is in accordance with generally accepted accounting principles (GAAP) or not. In other words, the independent auditor evaluates the validity and reliability of financial information provided to the public. This means that, Auditors through an unqualified au74 | P a g e
dit report, state that all accounting standards have been correctly observed by the company; Resulting in increased reliability of financial statements. In return, the qualified auditor opinion, is auditor’s way to connect with foreign investors about quality of the entity's financial statements or the expressing the inability to collect adequate information [3].Thus increasing the quality of information provided by business entities, the auditors provide their unqualified opinion. In this study the relationship between the percentage of institutional ownership and auditors opinions has been examined. The institutional shareholders in the ownership structure of companies with proactive monitoring can act as a regulatory mechanism to limit managerial opportunism and thereby increase the quality of financial reporting. Researches confirm the role of active monitoring of institutions and block owners [4]. Literature review
J. Sci. Today's World, 2016, volume 5, issue 2, pages: 74-78
The results from shin (2004) in Canada, Showed that the presence of a representative of active institutional investors, greatly reduces the income smoothing. The findings showed that, management duration of Non-executive members hadn’t much impact on the earnings management. The results of Pereira (2009) showed that, temple features of the companies that auditors used qualified opinion to express the Fairness of their financial statements, were as follows: They lack the financial expertise of the Board members, apart from the big four audit firm, independent auditors services were used, They reportedly had a negative net worth and generally were privately controlled and lacked institutional shareholders and most of them were involved in legal disputes. In another study Kooyal and Sue (2002) examined the relation between corporate ownership structure and earnings informativeness. Results showed that by increasing the share of major shareholders in the company's ownership, earnings informativeness will increase which is supported by the alignment of interests of the owner-management. They also examined the role of institutional investors and block shareholders. Results showed the role of earnings informativeness increases with holding of institutions and block shareholders. The results confirmed the role of active monitoring institutions and block shareholders. Mitra et al [5]. suggest that institutional and non-institutional blockholders are likely to have different abilities to monitor firm management because of differences in their analytical and information processing resources. Therefore, the authors argue that “the effect of their monitoring on a firm’s inherent risk or the effect of their demand for high-quality audit coverage may lead to differential relationships between the nature of the blockholder stock ownership and audit fees”. Ramezani et al [6] inspected the Relation between type and concentration of ownership with independent audit opinion from another point of view. They studied the role of the type and concentration of ownership on condition paragraphs decline in private audit institution’s audit report. Hypotheses were tested by Logistic regression method. The results indicate that for the firm with the larger major stockholder, the more likely to receive less qualification paragraphs. Also for the firm that the major stockholder is an individual, the likelihood of receiving an audit report with more qualification paragraphs before opinion paragraph will increase. Rahman Khan et al [7] investigated the effect of concentrated ownership in corporations on audit fees in the country of Bangladesh as an example of emerging economies. They examined the relationship between audit fees and concentration of ownership of the corporations. Their results indicated that audit fees have a significant negative relationship with sponsor and institutional ownership concentrations. This indicates that in Bangladesh, companies actually pay lower audit fees when these are dominated by sponsor and institutional shareholders. For the public shareholders, they found a negative, but statistically insignificant relationship. The results seem to suggest that corporate ownership pattern may be a major factor in explaining the low audit fees in Bangladesh. Theoretical Foundations and development of hypotheses: Previous studies indicated that institutional investors have above-average knowledge than the individual investors be75 | P a g e
cause they are more developed and tend to analyze the time and valuable properties information of the company. In addition, institutional investors in order to meet the responsibilities that have been entrusted with, become active monitors which consequently leads to reduced representative costs [8, 9, 10, 11]; also institutional shareholders demand high quality information to raise investments from other institutions [12]. Balsam et al (2002), Observed that institutional investors recognize earnings management more quickly than individual investors because they are able to distinguish between voluntary and involuntary accruals in earnings accuracy reevaluation. Mitra and Cready [11] found evidence that institutional shareholders limit the management's ability for opportunistic manipulation of abnormal accruals. . Business units with significant institutional shareholders compare units with lower levels of institutional shareholders, employ fewer accounting authority for the management of abnormal accruals. Recent research confirms this perspective. Chung et al [13] found that the presence of large institutional shareholdings deters management from the opportunistic earnings smoothing activities. They argued significant capital, urges the institutional investors to a better monitoring of accounting policies selected by management for financial reporting. Due to these reasons, institutional investors demand high-quality information. When institutional investors’ right to vote is high, they have the ability to encourage the management to provide ensuring high quality information; Therefor with the presence of institutional shareholders data quality increases and thus the chance to receive unqualified report by independent auditors increases. Consequently the Research hypothesis is formulated as follows: There is a significant relation between the percentage of institutional ownership and independent auditor's report. Given the past history and theoretical foundations of the study, Positive relation between the percentage of institutional ownership and independent auditors’ unqualified opinion is expected. Research methodology and data collection To estimate the coefficients and test the hypotheses in this study, logistic regression model was used. The statistical population of the study included listed companies in Tehran Stock Exchange and statistical sample was extracted from these companies. For sample selection, systematic elimination method was used. Therefor from all the companies listed in Tehran Stock Exchange, Companies that have all the following conditions were selected: -The companies should be a member of the stock exchange within the time span of the study. - The financial year end should be March 19. -Should have changed ownership within the research time. -Their required data should be available The Study’s variables and their calculation method A:Dependent variable In this study, the auditor's opinion has been selected as the dependent variable. The auditor should comment on whether from all aspect of importance, the financial statement is properly prepared in accordance of accounting standards. To
J. Sci. Today's World, 2016, volume 5, issue 2, pages: 74-78
determine the type of audit opinion, the auditor should conclude that he has reasonable assurance whether the financial statements contain important distortions due to fraud or error. In this assessment attention should be paid to qualitative aspects of the entity's accounting practices, including indicators of possible bias in management's judgment (auditing standards 2012). To measure this variable if auditor’s opinion is unqualified, the number is one and otherwise zero. B:Explanatory variables Institutional ownership concentration The major shareholders in the institutional ownership are usually insurance investment companies, banks, pension funds companies and so on. Herfindahl-Hirschman index is used for measuring concentration of ownership in this model in this model. Herfindahl-Hirschman index is an economic indicator that is used to measure monopoly in the market. So that the market share percentage of each supplier is squared and then added together. The result is between zero and one, the closer it gets to one, shows concentration and on the other hand the closer it gets to zero, it shows lack of concentration. Thus, for calculating the percentage of institutional ownership (INSTH) in the company i at the end of the year t percent share of each institutional owner is squared and the added together:
Equation (1) In this equation INST is the percent share of each company's institutional investors i and n is the total number of institutional shareholders. C:Control variables According to past researches variables that are likely to affect the auditor's opinion, were considered as control variables. Company lever (LEV) was measured using the debt-to-equity ratio. For variable firm size (SIZE) the natural logarithm of the company's assets was used. To measure the profitability of the company ( ROA) the ratio of net profit to the company's assets; and also to measure the Type of audit firm( BIGN) dummy variable was used; if the audit firm has done the auditing then the number is one otherwise it’s zero(Maria and Charalambos 2014). Due to use of zero and one dependent variable to test and estimate the hypothesis, logistic regression was used and Based on the research background and theoretical foundations, dependent, descriptive, and control variables were selected. The research hypothesis is as follows: "There is a significant relationship between the percentage of institutional ownership and independent auditor's report”
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To test this hypothesis, the regression equation (2) is used: The research model: Equation (2) F:Data Analysis and Results Descriptive statistics of the independent variables are presented in Table 1. Table 1: Descriptive statistics. Aver age
Mid dle
Maxi mum
minim um
Stand ard deviat ion
Skew ness
Institu tional owner ship
0/22
0/2 3
0/976
0/000
0/305
0/223
Compa ny size
/316
5/5 99
7/276
4/265
0/545
0/524
2/50 1
Retur n on assets
/090
0/0 80
0/397
0/124
0/094
0/657
1/55 1
Financ ial Levera ge
/21
0/ 15
0/98
0/00 0
0/2 2
0/33 4
2/6 51
5
0
0
Kurt osis
/154 2
The results of the research hypothesis The followings are the research hypothesis: There is no significant relationship between the percentage of institutional ownership and unqualified audit opinions: H0 There is a significant relationship between the percentage of institutional ownership and unqualified audit opinions: H1
The result of hypothesis test is presented in Table.2 Table.2 Hypothesis test results
J. Sci. Today's World, 2016, volume 5, issue 2, pages: 74-78
Variables
Coeffici ents
Constant C
3/284
Stand ard deviat ion
Z Statist ic
Pro V babilit y (Prob)
1/472
2/230
0/025
IF
Percentage of institutional ownership INSTH Audit firm ownership BIGN Size of business unit SIZE
-0/358
0/468
0/765
0/443
1/05 18
0/630
0/326
1/934
0/053
1/05 04
-0/897
0/266
3/367
0/000
1/06 70
Return on assets ROA
6/668
1/445
4/612
0/000
1/03 58
Leverage ratio LEV
-0/055
0/022
-2/32
0/015
1/0 135
0/421434pseudo-R2
Prob (LR statistic)
0/000
As can be seen in the table, the percentage of institutional ownership coefficient (0/358) indicates the negative relation between the percentage of institutional ownership and the auditor's unqualified opinion. Given that the probability variable of the percentage of institutional ownership is (0/443), therefore, the null hypothesis is confirmed; this means there is no significant relationship between the percentage of institutional ownership and unqualified audit opinions. The results also indicate a positive and insignificant relation between the type of audit firm’s ownership and auditor's opinion. The relationship between firm size and auditor's unqualified opinion is negative and on a significant level 0/01 this relation makes sense. The relationship between return on assets and the auditor's opinion is positive and is significant at 0/01. In addition the relation between the leverage and unqualified audit opinion is negative and is significant at the level of 0/05. The variance inflation factor (VIF) is less than two, which indicated that the Multicollinearity between independent variables is at acceptable threshold (Gujarati, 2008). In addition given that the LR statistical probability of this model is (0/000), it can be said that this model was significant at a confidence level of 99% and has high validity. Violation of the classical regression assumptions should be considered to interpret the results that were estimated by the regression model. In logistic regression model, there is the usual problem of unequal variants; therefor in order to obtain valid results, regression was estimated assuming the heterogeneity of variance. The summarized results are presented in table.3 Table3: Hypothesis test results
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Research Hypothesis
Coefficients
probability
Result
There is a significant relation between the percentage of institutional ownership and independent audit unqualified opinion There is a significant relation between auditing firm and independent audit unqualified opinion There is a significant relation between business unit size and independent audit unqualified opinion There is a significant relation between return on the assets and independent audit unqualified opinion There is a significant relation between leverage and independent audit unqualified opinion
-0/358
0/443
rejected
0/630
0/053
rejected
-0/897
0/000
approved
6/668
0/000
approved
-0/055
0/015
approved
Conclusion According to the results, the research hypothesis is rejected; that means there is no significant relationship between percentage of institutional ownership and independent auditor’s opinion. The results show the percentage of institutional ownership’s variable coefficient is negative; the negative coefficient of the percentage of institutional ownership could be interpreted this way that the presence of institutional shareholders can violate the rights of small shareholder and therefor can raise conflict between major and minor shareholders [14]. In other words, when the major shareholder through high percentage of ownership, have efficient control over the company, they have more motivation to seize small shareholders’ wealth [15],which leads to more inconsistencies and internal contradictions between major and minor shareholders. The conflict of interest between major and minor shareholders decrease the chance to gain the unqualified audit opinion; but as the results show that this effect is not significant. As an interpretation in connection with the results, short-term institutional shareholders’ perspectives on investors’ current income increase is focused along the earnings management and Long-term institutional shareholders perspectives as a mechanism of corporate governance emphasize on reducing the incentives to earnings management by investors. That's why there are different opinions about the role of institutional shareholders; Bushee [10] suggests that Institutional shareholders with respect to profitability, not only have no desire to control the company, but they are trustee to the members and their tasks is to invest stakeholders’ money in most profitable opportunities. Also institutional investors mostly focus on current income and won’t get involved in control issues and avoid accepting an active role in corporate governance. Institutional investors
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highly tend to have short-term profitability and put the company's management under pressure to achieve shortterm goals, while achieving short-term profitability goals cause damage to the rights value of shareholders in the longterm [16]. Putting the management under pressure may reduce the quality of information. The lack of active monitoring and control, increases the information asymmetry increases and decreases quality of information. Thereby reducing the quality of information increase the possibility of qualified auditors’ opinion. According to kooyul and soo (2002), on one hand institutions and block owners have the advantage of active monitoring on the boards. On the other hand, the institutions and block owners’ monitoring may not be effective, since they lack specialists, and they are suffering from the presence of free-riders or strategic alliance of managers. It is very like that both institutional and non-institutional shareholders have different abilities to monitor the company's management. The impact of their monitoring on company’s inherent risk may lead to different relations between the nature of block shareholders’ ownership and independent auditor's report [5]. References: [1].International Accountings Standards Board (IASB), 2011, The Conceptual Framework for Financial Reporting (IFRS Foundation, London). [2].David Abad, Juan P. S_anchez-Ballesta, Jos_e Yague (2015) "Audit opinions and information asymmetry in the stock market", Accounting and Finance, pp 1-31. [3].Choi, S. K., and D. C. Jeter, 1992, The effects of qualified audit opinions on earnings response coefficients, Journal of Accounting and Economics 15, 229–247. [4].Kooyul Junga,*, Soo Young Kwon, “ Ownership structure and earnings informativeness: Evidence from Korea” The International Journal of Accounting 37 (2002) 301–325. [5].Mitra, S. Hossain, M. Deis, D. (2007). "The empirical relationship between ownership characteristics and audit fees". Review of Quantitative Finance & Accounting 28 (3), 257–285. [6].Ramezani, Aliakbar, Banimahd, Bahman, Royaee, Ramezanali, "Audit Opinion Improvement and Firm Ownership: Evidence from Iranian Private Audit Market". J. Appl. Sci. & Agric. 9(16): 40-48, 2014”. [7].Rahman Khan, A. Mahboob Hossain, D.& Siddiqui, j. (2011). "Corporate Ownership Concentration and Audit Fees:The Case of An Emerging Economy". Advances in Accounting, incorporating Advances in International Account. [8]. McConnell, J.J. Servaes, H. (1990). Additional evidence on equity ownership and corporate value. Journal of Financial Economics 27 (2), 595–612.
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[9].Rajgopal, S. Venkatachalam, M. 1997. In: Working Papers (Faculty) – Stanford Graduate School of Business Stanford Business School, pp. 1–1. [10].Bushee B. J. The Influence of Institutional Investors on Myopic R&D Investment Behavior", Accounting Review 1998; 73(July): 305-334. [11].Mitra, S. Cready, W.M. 2005. Institutional stock ownership, accrual management, and information environment. Journal of Accounting, Auditing & Finance 20 (3), 257–286. [12]. El-Gazzar, S. M. (1998). “Predisclosure Information and Institutional Ownership: A Cross-Sectional Examination of Market Revaluations During Earnings Announcement Periods”. The Accounting Review (January): 119–129. [13].Chung R, Firth M, Kim J-B. Institutional monitoring and opportunistic earnings management. Journal of Corporate Finance 2002; 8: 29-48. [14]. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 1999. Corporate ownership around the world. Journal of Finance 54 (2), 471–517. [15]. Shleifer, A. Vishny, R.W. (1997). "A survey of corporate governance". Journal of Finance 52 (2), 737–783. [16]. Chiraz Ben Ali, Cedric Lesage. (2012). "Audit Pricing and Nature of Comtrolling Shareholders".China Journsl of Accounting Research. 6(2013) 21-34
