The Effect of Audit Quality on Fraud Reduction: A Moderating Role of International Financial Reporting Standards (IFRS) Adoption in Malaysia and Indonesia

Abstract

Purpose: This study examines the relationship between audit quality and fraud reduction as well as investigates the adoption of IFRS in developing countries which is Malaysia and Indonesia to provide a comparison between IFRS adopter (Malaysia) and non-adopter (Indonesia) countries in the relationship between audit quality and fraud reduction.   Theoretical framework: This study applies two main theories; Policeman Theory and Institutional Theory.   Design/methodology/approach: The research data covers listed companies in Malaysia and Indonesia. The total number of firms is 643 from the year 2015 to 2020 with 2502 total observations. Findings: The findings indicate that audit tenure, return on assets (ROA) and size have a significant and positive relationship in the reduction of fraud in Malaysia but audit fee, leverage and size have a significant and negative relationship in the reduction of fraud in Malaysia. Similarly, this study found that audit fee, leverage, return on assets (ROA) and audit tenure has a positive and significant relationship in the reduction of fraud in Indonesia. Besides, size have a negative and significant relationship in the reduction of fraud in Indonesia. This study also found that IFRS has a moderate effect on the relationship between audit fees and audit tenure towards fraud reduction in Malaysia and Indonesia.   Research, Practical & Social implications: Future studies are encouraged to examine the effects of Sharia Compliance on the quality of audit processes and the reduction of fraud, especially in areas where Islamic finance is common. It is also suggested that future research should expand the statistical methods used beyond the Ordinary Least Squares (OLS) model to potentially include Logistic Regression Models (LRM). This could lead to a significant improvement in the accuracy and dependability of the research outcomes.   Originality/value: The study provides valuable insights into the relationship between audit quality and fraud reduction, as well as the moderating effect of IFRS in Malaysia and Indonesia. The findings have significant practical implications for policymakers, companies, and auditors looking to improve the regulation of auditing practices and reduce the occurrence of fraud.