THE MEDIATION EFFECT OF CLIENTS’ SATISFACTION BETWEEN AUDIT QUALITY AND AUDITOR RETENTION OF SMALL AND MEDIUM ENTERPRISES (SMES)

Abstract

Audit quality has been widely researched and the literatures have proven the quality of auditor-sourced services is of paramount importance to client management in deciding whether to continue with auditor services. The audit firm should be concerned in delivering high quality services through competencies and independence, as these two factors are used as proxies for audit quality based on the social exchange theory. Besides that, client satisfaction on services plays vital roles for the client’s decision to retain or appoint new audit firm. Therefore, the purpose of this study is to explore the relationship between audit quality and auditor retention of Small and Medium Enterprises (SMEs) in Sabah. Additionally, the study also examined whether satisfaction has a role as mediator between the audit quality and auditor retention. The study applied a quantitative analysis of which at least 100 questionnaires were distributed to the SMEs and only 70 were useable and finalized. We deployed SPSS version 21 to conduct descriptive and regression analysis. Our findings indicated that clients’ decision to retain auditor services depended upon auditor’s competencies but less depended on auditors’ independence. Additionally, when the study put forward satisfaction to mediate the relationship between competence, independence and auditor retention, it is revealed that satisfaction has full mediation effect on clients’ satisfaction towards auditor retention but partially mediated independence and auditor retention. This study is significance as it is one of the earlier studies in Malaysia, particularly in Sabah, that has provided insight on the clients’ (SMEs) intention for auditor retention from the perspective of customer satisfaction towards audit service quality. Therefore, the findings could be relied upon by audit firms to enhance its’ audit services based on competencies and independence which leads towards clients’ satisfactions and auditor retention.