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Professor Nonna Martinov-Bennie and associate professor Alan Kilgore of Macquarie University describe Australian CFOs' perceptions of audit quality

This article was first published in Edition 8 (January 2014) of Accountancy Futures, ACCA's research and insight journal.

The reputation of the audit profession has suffered over the past decade. Maintaining audit quality and restoring trust after the global financial crisis and corporate collapses has thus become a priority, with regulators introducing reforms aimed at re-establishing confidence in the financial reporting system. 

Policymakers have sought to improve the effectiveness – and perceived effectiveness – of audit (and auditors) with the introduction of regulatory changes such as the Sarbanes-Oxley Act (SOX) in the US, the UK Corporate Governance Code and CLERP 9 in Australia, as well as reports such as the International Auditing and Assurance Standards Board’s (IAASB) A Framework for Audit Quality (2013); the Financial Reporting Council’s (FRC) The Audit Quality Framework (2008) in the UK;  and Audit Quality in Australia – A Strategic Review (2010) from the Australian treasury.

Research has shown that stakeholders’ perceptions of audit quality are critical to maintaining effective and efficient capital markets, and to building confidence and trust in financial reports which, in turn, is crucial for the economic success of both established and emerging companies. It is also important for firms to deliver high-quality audit; it protects brand name, reputation and, importantly, the ability to attract new clients and retain existing ones. 

CFOs’ perceptions of audit quality are particularly important as recent research suggests that management continues to be the driving force behind auditor appointments and terminations. This makes the views of key members of the management team, particularly CFOs’ perceptions, very important.

Purpose and methodology

To examine what drives audit quality from the perspective of CFOs we conducted an online survey focusing on 10 audit quality attributes identified in prior research. These are summarised overleaf. 

The survey was conducted between May and June 2013 with Australian CFOs sourced from ACCA’s database. This interactive survey was designed to elicit CFOs’ ranking of the relative importance of each attribute in their assessment of audit quality.

The relative importance of each audit quality attribute is measured by a relative importance score (RIS). RIS is a ratio indicating that an attribute with a score of 10 is twice as important as an attribute with a score of 5, so the higher the RIS, the more influential, or ‘valued’, the attribute. 

Key findings

Audit firm size

This attribute is perceived by CFOs to be the most important driver of audit quality (RIS 15.13). A number of different explanations have been offered for the strong association between audit firm size and audit quality,  namely that large firms:

  • have a greater reputation at stake, which gives them an incentive to be more independent
  • are able to give their clients’ financial statements a higher degree of credibility 
  • have greater resources at their disposal and so can attract employees with superior skills and experience, hence are better able to detect errors and generally provide a better service.

Partner/manager attention to audit

This attribute (RIS 12.50) concerns the level of control exercised over the audit process by the responsible partner. It was perceived by CFOs to be second only to firm size regarding its importance as a driver of audit quality. These results demonstrate that the majority of CFOs believe that close monitoring of the audit process by the audit partner has a beneficial effect on the audit team and hence on the quality it delivers.

Provision of non-audit services (NAS)

NAS is commonly regarded, at least by regulators, as a potential threat to audit quality because of its perceived effect on auditor independence. This attribute scored the third highest RIS (12.19), indicating that CFOs  regard it as having the potential to influence audit quality significantly, and believe that when a higher percentage of fees are derived from non-audit services, a threat is posed to audit quality.

Audit partner knowledge about client industry

CFOs also attached importance to this attribute (RIS 10.21), ranking it fourth among the 10 attributes investigated. The positive association between this attribute and audit quality is consistent with the FRC’s Audit Quality Framework, which identifies the skills and personal qualities of audit partners as an important driver of audit quality.

Communication between audit team and client management

CFOs ranked this attribute fifth in importance (RIS 10.03) suggesting that CFOs perceive it to be of some significance for audit quality. Since the audit process frequently involves negotiation between auditor and client it is not surprising to find communication between audit team and client management being accorded some significance by CFOs as a driver of audit quality.

Audit firm industry experience

With an RIS of 9.98, this attribute received a middle-order ranking of its perceived importance. This result, to some extent, reinforces the results of prior research that industry experience enhances audit quality. The proposition here is that industry experience gives an auditor a better knowledge of the relevant industry, with consequent beneficial effects on their judgment and hence on the audit quality that they are able to provide.

Audit manager knowledgeable about client industry

This attribute (RIS 9.64) was perceived by CFOs to be less important for audit quality than the attribute ‘Audit partner knowledgeable about client industry’ (RIS 10.21). An explanation may derive from CFOs’ greater proximity to, and awareness of, the audit process, and the fact that they have direct dealings with both the audit manager and the audit partner.

Very knowledgeable audit team

CFOs ranked this attribute only eighth (RIS 9.13) among the 10 attributes investigated. These results indicate that CFOs in general attach only modest importance to this attribute and again reinforces the notion that this may be because of CFOs’ greater proximity to, and awareness of, the audit process and more direct dealings with the senior members of the audit team, namely the manager and the partner.

Audit partner tenure

This attribute has the second-lowest RIS (5.96) – a clear indication that this is perceived by CFOs as relatively less important for audit quality. This is an interesting and significant result given the recent changes introduced by regulators and standard- setters in numerous jurisdictions. For example, the International Ethics Standards Board for Accountants Code requires that audit partners be rotated after a prescribed number of years, usually restricting a partner’s association with a particular client to seven years. This is an important finding, since CFOs are close and astute observers of their firms’ audit arrangements.

Audit quality assurance review

This refers to the perceived effect on audit quality of mandatory regular inspections by bodies such as the Australian Securities and Investments Commission and the Public Company Accounting Oversight Board in the US. The intent behind these external inspections is to reinforce public confidence in audit quality. Since these inspections are costly to audit firms, it is important to establish whether they are effective. This attribute received the lowest RIS, which suggests that initiatives of this kind are perceived by CFOs to be of relatively limited value. 


The CFOs’ perceptions of the importance of the surveyed attributes have significant implications for regulatory and professional bodies engaged in policymaking and should prove useful in informing regulatory and professional bodies when formulating future policies for promoting audit quality. 

First, audit quality assurance reviews are generally emphasised in regulatory frameworks as an attribute with significant consequences for audit quality. However, the CFOs surveyed perceived ‘Audit quality assurance review’ as the least important of the 10 attributes examined. The emphasis on this attribute by regulatory bodies may be misplaced, and should be reconsidered given the associated significant cost to audit firms. 

Second, regulators usually place the length of the audit partner’s tenure high on the list of attributes with a significant impact on independence and audit quality, but ‘Audit partner tenure’ received the second lowest RIS score, suggesting that CFOs perceive restricting tenure length to have relatively little importance.

Third, the finding that, while the surveyed CFOs perceive both firm and team attributes to be significant drivers of audit quality, they place more importance on team attributes than firm attributes. The team attributes ranked in the top five are ‘Partner/manager attention to audit’, ‘Partner knowledgeable about client industry’ and ‘Communication between audit team and client management’. 

Finally, the findings of this study may also be of interest to firms wishing to promote themselves to potential clients. Despite the fact that audit market participants tend to rely on their assessment of quality attributes they can observe (for example, firm size), this study suggests that making other attributes, and especially audit partner attributes, more publicly visible to existing and prospective clients may be a highly effective means of demonstrating and signalling audit quality. By emphasising these attributes, audit firms may be better able to differentiate themselves in the eyes of audit market participants.

Professor Nonna Martinov-Bennie is director of the International Governance and Performance (IGAP) Research Centre at Macquarie University. She is a member of the Auditing and Assurance Standards Board (AUASB). Martinov-Bennie is also joint editor of Managerial Auditing Journal and associate editor (assurance and governance) of Australian Accounting Review.

Associate professor Alan Kilgore is deputy head, department of accounting and corporate governance and deputy director, International Governance and Performance (IGAP) Research Centre, at Macquarie University. He is a member of the editorial advisory board and a guest editor of a special issue of Managerial Auditing Journal.

Last updated: 30 Jun 2016