Service quality, client satisfaction and loyalty towards audit firms Perceptions of Malaysian public listed companies

Transcription

1 The current issue and full text archive of this journal is available at MAJ 738 Service quality, client satisfaction and loyalty towards audit firms Perceptions of Malaysian public listed companies Ishak Ismail, Hasnah Haron, Daing Nasir Ibrahim and Salmi Mohd Isa School of Management, Universiti Sains Malaysia, Penang, Malaysia Abstract Purpose The purpose of this paper is to explore the relationship between audit service quality, client satisfaction and loyalty to the audit firms. SERVQUAL model was used to measure the perceptions and expectations of public listed companies on the services received from audit firms. Design/methodology/approach The five dimensions of SERVQUAL, i.e. reliability, assurance, tangibility, empathy and responsiveness was used to measure the service quality of audit firms. The research was conducted using primary data. Questionnaires were sent to 500 public listed companies listed in Bursa Saham Malaysia for year Findings The public listed companies were satisfied with the tangible dimension but were dissatisfied with the other four dimensions. The most dissatisfied dimension was empathy. Customer satisfaction was found to partially mediate the relationship of reliability and customer loyalty. Research limitations/implications The small sample size is a limitation of the study. Also, the study examined all services offered by audit firms. A larger sample size and focusing on a particular service would be better as the respondents would then be able to give a more focused answer. Also, the public listed companies were not analysed further into various industry types, size of firm and other corporate attributes to understand their different needs. Practical implications The study defines the attributes of quality services from the clients perspective. Once the needs are more clearly known and understood, the audit firms will be in a better position to anticipate clients requirement rather than to react to clients dissatisfactions. Originality/value The paper uses a marketing model, SERVQUAL, to measure the service quality of audit firms. Keywords SERVQUAL, Customer services quality, Auditors, Customer satisfaction, Customer loyalty, Malaysia Paper type Research paper Managerial Auditing Journal Vol. 21 No. 7, 2006 pp q Emerald Group Publishing Limited DOI / Introduction Service quality is the major driving force for business sustainability (Carlzon, 1987) and in today s competitive global marketplace, it is recognized that high quality service is essential for the success of the firm (Rust and Oliver, 1994). When other factors have been considered, it leads to customer loyalty (Lewis, 1994) and higher profitability (Gundersen et al., 1996). Therefore, a key strategy for customer-focused firms is to measure and monitor customer satisfaction and service quality. In the marketing literature, service quality, customer satisfaction and customer loyalty are three The authors would like to thank CPA Australia for the research funding given to enable them to conduct this research.

2 distinctive elements that firms offering services should strive for. Customer satisfaction or dissatisfaction results from experiencing a service and comparing that experience with the kind of quality of service that was expected (Oliver, 1980). Many customer satisfaction studies have concluded that there is a significant relationship between customer satisfaction and loyalty. Hence, the primary objective of service providers and marketers is identical; i.e. to develop and provide services that satisfy customer needs and expectations. In short, in the service industry, the goal of the service marketer is to close or narrow the gap between expectations and perceptions of customers. In the context of auditing, the quality of service provided by audit firms is a very important issue when signs of dissatisfaction with the services arise (Sutton, 1993). In a recent survey by the US General Accounting Office (GAO) in September 2003, it was found that half of the public companies reporting that they were satisfied with the audit service stated that they had used the services of their current auditor for 10 years or more. GAO also found service quality to be a very important consideration for public listed companies when choosing or looking for a new audit firm to act as their auditor. Usually, when the public listed companies are satisfied with the quality of service received from a particular audit firm, there is a strong probability that they will also use the same audit firm for other non-audit services such as taxation, secretarial practice, review engagement or other related non-assurance engagement. In addition, GAO also found a positive association between audit tenure and client satisfaction. Audit quality is important in the rendering of audit services. Prior research has examined the attributes of audit quality (Carcello et al., 1992; Sutton, 1993). However, the majority of previous research on auditing measured audit quality by the proxy of size, i.e. big 6 and non big 6 audit firms. Behn et al. (1997) introduced a new proxy for measuring audit quality by examining the attributes of audit quality that will determine client satisfaction. Some of the qualities of audit services found to influence client s satisfaction were responsiveness to client s need, effectiveness and on-going interaction with the audit committee, industry expertise and the appropriate conduct of audit field work. Since, no empirical study has specifically examined the mediating effect of customer satisfaction on the relationships of service quality and customer loyalty in the auditing context, the objective of this study is to examine such relationships from the perceptions of Malaysian public listed companies, where the audit process is undertaken by both the big 4 (Price Water House Coopers, Ernst and Young, KPMG and Kassim Chan Deloitte) and non big 4 audit firms. Specifically, this paper will examine the relationship between audit service quality and client satisfaction and the relationship between client satisfaction and client loyalty. Utilising a quality of service instrument initiated in the marketing area and applying marketing theory to examine audit service quality and client satisfaction and loyalty, this paper contributes to both the marketing and auditing literature. The paper proceeds as follows. The next section reviews the relevant literature, followed by presentation of the theoretical framework and development of the hypotheses, the research method, the results, and finally the conclusions and implications of the study. Service quality, satisfaction and loyalty 739

3 MAJ 740 Literature review Service quality, customer satisfaction and customer loyalty Service quality is a critical component of customers perception because it is an antecedent to customer satisfaction. Research suggests that customers do not perceive quality as a one-dimensional concept. Parasuraman et al. (1998) have found that customers consider five dimensions in their assessments of service quality (viz. reliability, responsiveness, assurance, empathy, and tangibles). Reliability is the ability to perform the promised service dependably and accurately while responsiveness is the willingness to help customers and to provide prompt service. Assurance refers to employees knowledge and courtesy, and their ability to inspire trust and confidence. Empathy is the caring, individualized attention given to customers and tangibles are appearance of physical facilities, equipment, personnel and written materials. Based on exploratory and quantitative research, these five dimensions were found to be relevant for the banking, insurance, appliance repair and maintenance, securities, brokerage, long-distance telephone service and automobile repair industries. Although researchers have studied the concept of service for several decades, there is no consensus about the conceptualization of service quality (Cronin and Taylor, 1992) as different researchers focused on different aspects of service quality. Reeves and Bednar (1994) noted there is no universal, parsimonious, or all-encompassing definition or model of quality. The most common definition is the traditional notion that views quality as the customer s perception of service excellence, i.e. quality is defined by the customer s impression of the service provided (Parasuraman et al., 1985). The assumption behind this definition is that customers form the perception of service quality according to the service performance they experienced. It is therefore the customer s perception that rates the service quality of an entity. Many researchers accept this approach of service quality. For example, Bitner and Hubbert (1994) defined quality as the consumer s overall impression of the relative inferiority/superiority of the organization and its services. Researchers have measured service quality of a firm by comparing the service users expectations with actual performance (Groonroos, 1984; Lewis and Booms, 1983). Customer expectations are beliefs about service delivery that function as standard or reference points against which performance is judged (Zeithaml and Bitner, 2003). To satisfy the customers, it is essential to know what the customer expects. According to previous studies, service quality and satisfaction are distinct constructs (Bitner, 1990). Yi (1990) mentioned that customer s satisfaction is influenced by two factors viz. experience and expectations with service performance. Crosby et al. (1990) demonstrated that customer s past satisfaction affects their decisions to have a continuing relationship with the service provider. Similarly, Fornel (1992) found that a satisfied customer tends to maintain their consumption pattern and will consume similar products or services. Thus, customer satisfaction has become an important indicator of quality and future revenue (Andreassen, 1994). Oliver (1980) identified satisfaction and dissatisfaction in terms of the disconfirmation of consumers expectation. A positive disconfirmation leads to customer satisfaction and a negative disconfirmation leads to customer dissatisfaction. He contends that satisfaction is said to have occurred when the product positively disconfirms consumers expectation by performing better than expected and when the product confirms consumers favorable pre-purchase expectations.

4 Similarly, Andreassen and Lindestad (1998) claimed that customer satisfaction is the accumulated experience of a customer s purchase and consumption experiences. Peter and Olson (1994) argued that the amount of dissatisfaction is dependent on the extent of disconfirmation and the consumer s level of involvement with the product and the problem solving process. Some of the models that have been used by researchers to assess service quality include SERVQUAL (Parasuraman et al., 1991), SERVPERF (Cronin and Taylor, 1992), and Non-Difference (Brown, 1993). There is consensus among researchers that loyalty is a complex construct, evident in the variety of perspectives that have been used to study it (Javalgi and Moberg, 1997). These perspectives include behavioral, attitudinal and cognitive processes. Early customer loyalty studies focused mainly on the behavioral perspective but later shifted to an attitudinal approach (De Ruyter et al., 1998). The latter approach to customer loyalty can be studied via dimensions such as word of mouth, complaining behavior and purchase intention. Service quality, satisfaction and loyalty 741 Quality of services offered by audit firms Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria (Arens et al., 2003). Financial statement audit is the determination by auditors of whether the financial statements of a company show a true and fair view. The end-product of an audit is the issuance of an audit opinion, i.e. qualified or an unqualified, on the financial statements of the public listed companies. Besides audit service, audit firms also offer other types of services: taxation, secretarial and consultation work. Taxation involves amongst others, assisting clients to prepare the tax returns and in planning their tax. Secretarial service involves assisting clients in preparing the submission of documents to the Companies Commission. Consultation services include expressing views on whether a certain exercise by the client would be detrimental to the company as well as offering alternative solutions to business problems. Audit firms also offer other non-assurance related services such as review engagement. Most previous research pertaining to quality of services offered by audit firms revolves around audit work. Audit quality is the probability that the auditor will both discover and report a breach in the client s accounting system, and this depends on the auditor s technical capabilities and auditor s independence. Two explanations for variation in audit quality vis-à-vis the independence issue found in the literature are auditor reputation and power conflict. Faced with competitive pricing pressure, an incumbent auditor can choose to lower both audit quality and audit price contemporaneously to retain the client and preserve quasi-rents. Two proxies of audit firm size thought to affect audit quality are the number of clients and the percentage of audit fees dependent on retaining any client (Moizer, 1997; Fuerman, 2003). It is argued that large audit firms can mitigate against such opportunistic behaviour because they have more audit clients and have more to lose from loss of reputation. An auditor with many clients will also be more concerned with maintaining their reputation; hence is less likely to lower audit quality. The number of clients served reflects industry expertise and variations in technical capabilities. Thus, audit quality increases with the number of audit clients. On the other hand, over a long association with a client, the auditor may become less challenged and less likely to use

5 MAJ 742 innovative audit procedures, and may fail to maintain an attitude of professional scepticism. Hence, audit quality will decrease as audit tenure increases. The customer gap Quality service is a measure of how well the service level delivered matches customer expectations (Lewis and Boom, 1983). The central focus of the study of service quality is the customer gap, the difference between customers expectations and perceptions of the service(s) received. Expectations are the reference point customers have before experiencing the service whereas perceptions reflect their experience of the service that they have actually received. Hence, firms will strive to close or narrow this gap, i.e. between what is expected and what is received to satisfy their customers and to build long-term relationships with them. Quality of services offered by audit firms is best determined by the clients of the audit firms, as they would be able to give unbiased opinions on these matters. Bongsu (2004) in her studies on small medium enterprises (SME s), focused on quality of audit service and equated it with customer satisfaction. She found the SMEs were not satisfied with all five dimensions (reliability, responsiveness, assurance, empathy and tangibles) but were most dissatisfied with the reliability dimension. In addition, she also found that service quality had a significant and positive relationship with customer loyalty. The present study uses public listed companies as respondents and examines all types of services offered by audit firms including tax, secretarial and audit services. Unlike Bongsu (2004), the present study considers customer satisfaction as another variable of interest. Theoretical framework and hypothesis development We postulate a relationship between audit service quality, client satisfaction and client loyalty. We contend that client satisfaction mediates the dependent variable, client loyalty. To assess the current audit service quality, we adopted the service quality dimensions of Parasuraman et al. (1991). Figure 1 shows the conceptual structure of the study. The framework illustrates the following basic sequence: audit service quality leads to client satisfaction, which in turn leads to client loyalty. Expectancy disconfirmation theory is the dominant model for measuring customer satisfaction (Brookes, 1995) which is determined by the confirmation or disconfirmation of expectations with perceptions of the perceived performance on various service items (Danaher and Haddrell, 1996). Since, previous studies provide evidence of differences between expectation and perceptions of service quality (Parasuraman et al., 1994; Behn et al., 1997; Bongsu, 2004; Brookes, 1995; Danaher and Haddrell, 1996), our first hypothesis is as follows: INDEPENDENT VARIABLES MEDIATING VARIABLES DEPENDENT VARIABLES Figure 1. Schematic diagram of the research model AUDIT SERVICE QUALITY Tangible Reliability Responsiveness Assurance CLIENT SATISFACTION CLIENT LOYALTY

6 H1. There is a significant difference between client expectation and their perceptions of service quality offered by audit firms. Specifically, our hypotheses are: H1a. There is a significant difference between clients expectations and their perception of service quality based on the dimension of tangibles. H1b. There is a significant difference between clients expectations and their perception of service quality based on the dimension of reliability. H1c. There is a significant difference between clients expectations and their perception of service quality based on the dimension of responsiveness. H1d. There is a significant difference between clients expectations and their perception of service quality based on the dimension of assurance. H1e. There is a significant difference between clients expectations and their perception of service quality based on the dimension of empathy. DeRuyter et al. (1998) found that poorly perceived service quality may also result in high service satisfaction for those customers who may not necessarily buy the highest quality service. Such customers may view convenience, price and availability as more important variables affecting overall service quality. However, Behn et al. (1997) and GAO (2003) found that attributes of audit quality are positively associated with client satisfaction. Therefore, our next hypothesis is as follows: H2. There is a significant relationship between service quality provided by audit firms and client satisfaction. Specifically, our hypotheses are: H2a. There is a significant relationship between tangibility and client satisfaction. H2b. There is a significant relationship between reliability and client satisfaction. H2c. There is a significant relationship between responsiveness and client satisfaction. H2d. There is a significant relationship between assurance and client satisfaction. H2e. There is a significant relationship between empathy and client satisfaction. Cronin and Taylor (1992) in their study found service quality to have no significant effect on repurchase intentions. However, Boulding et al. (1993) found a positive relationship between service qualities and repurchase intentions and willingness to commend. Bloemer et al. (1998) found a positive relationship between perceived service quality and preference loyalty and price indifference loyalty. With consistent findings across different industries that service quality and satisfaction are different constructs, and that service quality leads to customer satisfaction, the research interest moved to studying the link between service quality, customer satisfaction and customer loyalty. Stauss and Neuhaus (1997) in their study found a significant positive relationship between customer satisfaction and customer loyalty. Although there is no empirical evidence on the relationship between client satisfaction and client loyalty in the Service quality, satisfaction and loyalty 743

7 MAJ 744 auditing industry, it can be implied that respondents who were satisfied with their auditor will use their services for longer periods and will also use them to provide other non-audit services. Therefore, our next hypothesis is: H3. There is a positive relationship between client satisfaction and client loyalty. Rust and Zahorik (1993) and Storbacka et al. (1994) studied the impact of service quality on satisfaction, and satisfaction on customer loyalty. They found service quality to be positively correlated with satisfaction that will lead to increased purchase (loyalty). In short, they argued that a satisfied customer tends to be more loyal to the firm than a dissatisfied customer. Thus, the study hypothesizes that: H4. Client satisfaction mediates the relationship of service quality of audit firms and client loyalty. More specifically, our hypotheses are as follows: H4a. Client satisfaction mediates the relationship between tangibility and client loyalty. H4b. Client satisfaction mediates the relationship between reliability and client loyalty. H4c. Client satisfaction mediates the relationship between responsiveness and client loyalty. H4d. Client satisfaction mediates the relationship between assurance and client loyalty. H4e. Client satisfaction mediates the relationship between empathy and client loyalty. Research method Sample The population of this research comprised of public listed companies who patronized and received the audit services from audit firms in Malaysia. The respondents consisted of managers who act as agent of their companies and play an important role in engaging auditors for the audit and non-audit services required viz. the head of audit and account department, financial controller, head of finance department or finance director. There were 900 public listed companies in the list of Research and Information Center, BURSA Malaysia for the year About 500 companies were randomly selected from the list and this sample size was deemed appropriate (Roscoe, 1975, as cited in Sekaran (2000)). Questionnaires were sent to 500 respondents and 115 responses were received, a response rate of 23 percent. Most of the respondents are either the head of finance department (63 respondents or 54.8 percent) or the head of audit and account department (34 respondents or 29.6 percent). Questionnaire design Service quality measurement. There are various models used by researchers to assess service quality, i.e. SERVQUAL (Parasuraman et al., 1991), SERVPERF

8 (Cronin and Taylor, 1992) and Non-Difference (Brown, 1993). This study will use the SERVQUAL model to measure the desired (perceived) and adequate (expected) service levels of audit firms due to its high reliability and validity in previous studies. Our research instrument design is based on the five dimensions of service quality and the 22 service items of the SERVQUAL model. Some modifications were made to the items in order to suit the context of audit firms. The questionnaire was divided into three sections: part one contained items on demographic details of respondents and organizational profiles, part two comprised the modified standard SERVQUAL questions that examined each of the audit service elements and tried to measure the service dimensions within each element of EXPECTATION and PERCEPTION, and part three contained items for respondents to provide feedbacks on customer satisfaction and loyalty. Table I shows the five dimensions of service quality of audit firms considered in this study. To capture audit service quality, we adopt the seven-point Likert scale (1-strongly disagree to 7-strongly agree) perspective questions from Parasuraman et al. (1988). The questions were then divided into client perception and expectation. Client expectation refers to services that the client feels the audit firm should offer, while client perception is related to the performance of the audit firm in delivering its services. Details of items in all the dimensions are shown in the Appendix. Studies on customer satisfaction with services have traditionally measured the construct with single item measures (Bitner, 1990; Bolton and Drew, 1991). In this study, clients satisfaction is measured using one item that captured overall satisfaction of clients on an audit firm and clients satisfaction on the service offered by the audit firm. It was also measured using a seven-point Likert scale (1-strongly disagree to 7-strongly agree). Client loyalty comprised four items adapted from Zeithaml et al. (1996) and Ndubisi (2003). Table II presents the items of client loyalty based on the seven-point Likert scale. Service quality, satisfaction and loyalty 745 Dimensions Tangibles Reliability Responsiveness Assurance Empathy Definition The physical appearance of the audit firm, inclusive of the available facilities The ability of the employees of the audit firm staff to perform the promised service timely and accurately The willingness of the employees of the audit firm staff to assist clients and provide prompt service The ability to convey trust and confidence The caring, individualized attention that the employees of the audit firm staff provides to clients Table I. Service quality dimensions Items to measure client loyalty 1 I say positive things about audit firm to other people 2 I intended to continue being a client of the audit firm for a long time to come 3 I will encourage friends and relatives to use the services offered by the audit firm 4 To me, the audit firm clearly is able to provide the best service Table II. Client loyalty items

9 MAJ 746 Analysis The internal consistencies of the five dimensions in the research instrument were analyzed using Cronbach s a scores for each dimension as shown in Table III. The reliability scores for the four variables extracted were high. Thus, the SERVQUAL instrument is reasonably satisfactory to be used for audit firm services, as Nunally (1967) suggested that a modest reliability range of between 0.5 and 0.6 would suffice. The result of Cronbach s a values ranging from 0.6 to 0.93 fulfills the minimum requirement level of reliability. The values of Cronbach s a show that these measures are reliable. Although these findings are not entirely surprising (Spreng and Mackoy, 1996), the services literature suggests that the quality and satisfaction constructs (variables) are distinct (Taylor and Baker, 1994). Hence, we further conduct test for satisfactory level of discriminant validity. The correlation results of less than 1.00 between audit service quality and the overall variables suggest the measures and constructs demonstrate satisfactory validity (Bagozzi and Yi, 1991). These findings provide additional evidence of acceptable reliability. Following Parasuraman et al. (1991), the 22 items of SERVQUAL in both the expectation and perception scores have been grouped according to the five basic dimensions as shown in Table IV. The hypotheses were tested using multiple regressions as the study attempts to find the effect of the independent variables on the dependent variable, which was measured on a continuous scale. Diagnostic tests were performed prior to the use of multiple regressions and all the five assumptions, i.e. normality, linearity, multicollinerity, autocorrelation and heteroscedasticity, were met. Variables Dimensions Number of items Cronbach a Table III. Cronbach s a scores Expectation Tangibility Reliability 5 Responsiveness 4 Assurance 5 Empathy 5 Perception Tangibility Reliability 5 Responsiveness 4 Assurance 5 Empathy 5 Customer satisfaction Customer loyalty Dimensions Statements Table IV. Classification of items Tangibles Items 1 to 3 Reliability Items 4 to 7 and 22 Responsiveness Items 8 to 10 and 20 Assurance Items 11 to 15 Empathy Items 16 to 19 and 21

10 Results Importance of the five dimensions on overall service quality The SERVQUAL scores on each of the five dimensions are all negative, suggesting that there exists a gap between the respondents expectations of what the services of an audit firm should be and their perceptions of the service quality actually offered by audit firms. The results of service quality serve as benchmark to the management regarding the importance of the audit service quality dimensions that influence quality perceptions of customers. Table V presents the relative importance of the SERVQUAL dimensions to public listed companies based on the mean scores of their expectations. The reliability dimension mean score of 6.70 was ranked the most important dimension, a result similar to findings of Bongsu (2004). This was followed by the assurance dimension at The least important dimension was tangibles with a mean score of 5.5. The results are consistent with the findings by Parasuraman et al. (1991) in their studies on other service firm. Service quality, satisfaction and loyalty 747 The difference of SERVQUAL gap Paired t-test was used to compare the means of expectations and perceptions for the SERVQUAL dimensions. These service quality gaps could be calculated by subtracting respondents expectations from their perceptions (P-E). A negative service quality gap indicates respondents expectations are greater than their perceptions while a positive service quality gap indicates respondents perceptions exceed their expectations. Table VI presents the results. As can be seen in Table VI, the overall SERVQUAL score for the audit firms rated by public listed companies was The negative value indicates that the performance of the audit firms was not meeting the expectations of the public listed companies. The results in the table further indicate that the empathy dimension has the greatest service gap of 21.9, followed by the reliability dimension. The smallest service gap was the responsiveness dimension. However, the positive service gap score of Dimension Perception (P) Expectation (E) Ranking (P) Ranking (E) Tangibles Reliability Responsiveness Assurance Empathy Table V. Mean scores of expectations and perceptions and their relative importance Dimension Perception (P) Expectation (E) SERVQUAL Gap t-value Result Tangibles * Satisfied Reliability * Dissatisfied Responsiveness Dissatisfied Assurance * Dissatisfied Empathy * Dissatisfied Overall Notes: Gap ¼ perceptions 2 expectations, * significant at 0.05 level Table VI. Comparison of mean result of SERVQUAL gap

11 MAJ 748 for the tangibles dimension suggest that audit firms met the expectations of the public listed companies on this dimension. The negative sign of the t-values for all variables except tangibles indicate expectations to be higher than perceptions, i.e. respondents dissatisfaction on all the four dimensions except tangibles. Hence, hypotheses H1b-H1e are accepted and H1a, rejected. In other words, there is no significant difference between customer expectations and their perceptions on the tangibility dimension. Service quality of audit firms and client satisfaction Table VII presents the regression results. The adjusted R 2 of indicates 11.3 percent of variance in client satisfaction can be predicted by the service quality dimensions of audit firms. The positive coefficient for the dimensions tangibility, reliability and empathy were found to be statistically significant, suggesting increasing level of satisfaction. However, the responsiveness and assurance dimensions both had negative coefficient, meaning decreasing level of satisfaction, especially in the case of the latter. In other words, higher assurance results in decreasing client satisfaction. Hence, hypotheses H2a, H2b, H2d and H2e are supported and hypothesis H2c, rejected. Overall, this study concluded that audit service quality affects client satisfaction. Client satisfaction and client loyalty Table VIII shows the regression results for client satisfaction and client loyalty. The adjusted R 2 of 0.09 indicates that 9 percent of client satisfaction is associated with Independent variable Coefficient Standard error t Significant VIF Table VII. Regression results of service quality of audit firms and client satisfaction (N ¼ 115) Constant *** Tangibility ** Reliability *** Responsiveness Assurance *** Empathy ** R Adjusted R F-statistic: Prob. F-Statistic: Notes: ** Significant at 0.05 level; *** significant at 0.01 level Independent variable Coefficient Standard error t Significant Table VIII. Regression results of customer satisfaction and customer loyalty (N ¼ 115) Constant *** Client satisfaction *** R 2 : Adjusted R F-statistic: ; prob. F-statistic: Note: *** Significant at 0.01 level

12 client loyalty. The positive significant coefficient suggests higher client satisfaction on audit service quality, and the higher the client loyalty to the auditor. Therefore, H3 is supported. Service quality of audit firms, client satisfaction and client loyalty Client satisfaction may be considered as a mediator to the extent to which it carries the influences of audit service quality to client loyalty. Baron and Kenny (1986) argued that mediating effect exists under the following conditions:. The independent variable (service quality of audit firms) is significantly associated with the mediator (client satisfaction).. The independent variable (service quality of audit firms) is significantly associated with the dependent variable (client loyalty) in the absence of the mediator (client satisfaction).. The mediator variable (client satisfaction) is significantly associated with the dependent variable (client loyalty).. When the independent variable (service quality of audit firms) and the mediator variable (client satisfaction) are controlled, a previously significant relationship between the independent variable and dependent variable is no longer significant or it is significantly decreased. Service quality, satisfaction and loyalty 749 For example, if Z, dependent variable; X, independent variable; and Y, intervening variable (Figure 2). X Z Y Figure 2.

13 MAJ 750 To test the mediating effect of client satisfaction on the relationship between audit service quality and client loyalty, we utilized the hierarchical regression model. Four regression models were tested in this study. The first model treats client satisfaction as the dependent variable and the five audit quality dimensions as the independent variables. The second model treats client loyalty as the dependent variable and client satisfaction as the independent variable. The third model treats client loyalty as the dependent variable and the five audit service qualities as the independent variables. The fourth model treats client loyalty as the dependent variable and both audit service quality dimensions and client satisfaction as the independent variables. Table IX demonstrate the mediating effect of client satisfaction on the relationship between audit service quality and client loyalty. Applying Baron and Kenny s (1986) interpretation, it can be seen that client satisfaction only partially mediate the relationship between reliability and client loyalty and not the other dimensions. Discussion and conclusion The reliability dimension was ranked the most important dimension for expectation, followed by the assurance dimension, with the least important being the dimension tangibles. Such results are consistent with the findings by Parasuraman et al. (1991) in their studies on other service firms. The high ranking of the reliability and assurance dimensions suggest public listed companies expect audit firms to perform the services as promised independently and accurately. To them, the appearance of audit firm s physical facilities is not as important when delivering the audit tasks. This could be due to the fact that most clients use the services of big 4 audit firms and the latter are already equipped with the latest technology. Therefore, in order to fulfill the needs of audit clients, audit firms must make sure that services delivered are reliable at all times. The overall SERVQUAL score for the audit firms were 20.69, indicating that the performance of the audit firms do not meet the expectation of audit clients. The findings further indicate that the empathy dimension has the greatest service gap of 21.9, followed by the reliability dimension with a service gap of The tangibles dimension showed a positive gap. The results were consistent with what respondents had ranked earlier. Although audit clients were relatively willing to continue their business relationship with the audit firm, their expectations are higher than their perceptions for reliability, responsiveness, assurance and empathy dimensions, thus indicating some level of dissatisfaction. Findings revealed audit clients expect their auditors to be more caring, able to give individualized attention and more reliable service, more willing to deliver prompt service, more knowledgeable and also able to inspire more trust and confidence in their clients. In this study, the empathy dimension seemed to be the critical unsatisfactory dimension as it has the largest gap score. Respondents have indicated through the findings that they would like to see an improvement in this dimension. Findings in this study also indicate that tangibility, reliability and empathy dimensions have significant effects on customer satisfaction. Responsiveness was found to be not significant. It was also found that client satisfaction plays an important role in enhancing client loyalty. Thus, satisfied audit client is important in developing a loyal client. Client satisfaction was also found to mediate the relationship of audit service quality (via reliability dimension) and client loyalty.

14 Dependent variable (client satisfaction and client loyalty) Model 1 Model 2 Model 3 Model 4 Independent variable Coeff t Coeff t Coeff t Coeff t Constant *** *** *** *** Tangibility ** *** *** Reliability *** *** * Responsiveness Assurance *** *** Empathy *** *** *** Client satisfaction *** *** R Adjusted R F-statistic Prob. F-Stat Notes: *** Significant at 0.01 level; ** significant at 0.05 level; * significant at 0.10 level Service quality, satisfaction and loyalty 751 Table IX. Hierarchical regression results of services quality of audit firms, client satisfaction and client loyalty (N ¼ 115)

15 MAJ 752 Overall, findings show that reliability is the most important dimension of the service quality yet to be fulfilled by the audit firms. Implications and future research The findings of this study have important implications on the management of quality services provided by audit firms as perceived by public listed companies. This study demonstrates the usefulness of the SERVQUAL approach as a good measure of service quality in audit firms. Once the attributes of quality services from the clients perspective are more clearly known and understood, the service providers will be in a better position to anticipate clients requirement rather than to react to clients dissatisfactions. The attribute of reliability has been expected by respondents to be the most important dimension of service quality, followed by assurance. These two dimensions were also highest in terms of gaps. We can deduce from the findings that audit firms were not able to fulfill the needs of the clients. Thus, audit firms should strive to improve on these two dimensions. Training staff on a continuous basis would be a likely solution. Training will upgrade staff professionalism and consciousness of the task at hand. Issues of courtesy, knowledge and confidence should also be part of the training agenda. To increase the level of satisfaction, audit firms should also allocate resources in the most effective and efficient manner to ensure that services rendered meet clients expectation. For future research, it would be beneficial if users could be categorized into various segments based on the individual SERVQUAL scores. These segments could then be analyzed by the relative importance of the five dimensions in influencing service quality. In this manner, the audit firms would be able to target specific quality programs of these segments and monitor the success or failure of the program by surveying these respondents again. In addition, future studies can examine only one aspect of the services that is offered by audit firms; for example, only the audit work instead of generalizing to all the services offered by the audit firm. References Andreassen, T.W. and Lindestad, B. (1998), Customer loyalty and complex services: the impact of corporate image on quality, customer satisfaction and loyalty for customers with varying degrees of service expertise, International Journal of Service Industry Management, Vol. 9 No. 1, pp Andreassen, T.W. (1994), Satisfaction, loyalty and reputation as indicators of customer orientation in the public sector, International Journal of Public Sector Management, Vol. 7 No. 2, pp Arens, A.A., Elder, R.J. and Beasley, M.S. (2003), Auditing and Assurance Services: An Integrated Approach, 9th ed., Prentice-Hall, Upper Saddle River, NJ. Baron, R.M. and Kenny, D.A. (1986), The moderator-mediator variable distinction in social psychological research: conceptual, strategic, and statistical consideration, Journal of Personality and Social Psychology, Vol. 51, pp Bagozzi, R.P. and Yi, Y. (1991), Multitrait-multimethod matrices in consumer research, Journal of Consumer Research, Vol. 17, pp

16 Behn, K.B., Carcello, J.V., Hermanson, D.R. and Hermanson, R.H. (1997), The determinants of audit client satisfaction among clients of big 6 firms, Accounting Horizons, Vol. 11 No. 1, pp Bitner, M.J. (1990), Evaluating service encounters: the effects of physical surroundings and employee responses, Journal of Marketing, Vol. 54, pp Bitner, M.J. and Hubbert, A.R. (1994), Encounter satisfaction versus overall satisfaction versus quality, in Rust, R.T. and Oliver, R.L. (Eds), Service Quality: New Directions in Theory and Practice, Sage, Thousand Oaks, CA, pp Bloemer, J., Ruyter, K. and Wetzels, M. (1998), Linking perceived service quality and service loyalty: a multi-dimensional perspective, European Journal of Marketing, Vol. 33 Nos 11/12, pp Bolton, R. and Drew, J.H. (1991), A multistage model of customers easements of service quality and value, Journal of Consumer Research, Vol. 17 No. 4, pp Bongsu, H. (2004), Quality of services and its relationship with customer loyalty: perceptions of audit clients, MBA thesis, School of Management, University Sains Malaysia, Penang. Brookes, R. (1995), Recent changes in the retailing of fresh produce: strategic implications for fresh produce suppliers, Journal of Business Research, Vol. 32, pp Brown, R. (1993), Market Focus Achieving and Sustaining Marketing Effectiveness, Butterworth Heinemann, Oxford. Carcello, J.V., Hermanson, R.H. and McGratb, N.T. (1992), Audit quality attributes: the perceptions of audit partners, preparers, and financial statement users, Auditing: A Journal of Practice & Theory, Vol. 11, pp Carlzon, J. (1987), Moments of Truth, Ballinger Publishing, Cambridge, MA. Crosby, L.A., Evans, K. and Cowles, D. (1990), Relationship quality in services selling: an interpersonal influence perspective, Journal of Marketing, Vol. 54, pp Cronin, J.J. and Taylor, S.A. (1992), Measuring service quality: a re-examination and extension, Journal of Marketing, Vol. 56 No. 7, pp Danaher, P.J. and Haddrell, V. (1996), A comparison of question scales for measuring customer satisfaction, International Journal of Service Industry Management, Vol. 7 No. 4, pp DeRuyter, K., Martin, W. and Bloemer, J. (1998), On the relationship between perceived service quality, service loyalty and switching costs, International Journal of Service Industry Management, Vol. 9, pp Fornel, C. (1992), A national customer satisfaction barometer: the Swedish experience, Journal of Marketing, Vol. 56 No. 1, pp Fuerman, R.D. (2003), Audit quality examined one large CPA firm at a time: empirical evidence of a precursor of Arthur Andersen s collapse, paper presented at American Accounting Association 2004 Mid-Atlantic Region Meeting, September. GAO (2003), Accounting firm consolidation: selected large public company views on audit fees, quality, independence, and choice, report to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, September. Groonroos, C. (1984), A service quality model and its market implications, European Journal of Marketing, Vol. 18 No. 4, pp Service quality, satisfaction and loyalty 753

17 MAJ 754 Gundersen, M.G., Heide, M. and Olsson, U.H. (1996), Hotel guest satisfaction among business travelers: what are the important factors?, Cornell Hotel & Restaurant Administration Quarterly, Vol. 37, pp Javalgi, R.R. and Moberg, C.R. (1997), Service loyalty: implications for service providers, Journal of Services Marketing, No. 3, pp Lewis, B.R. (1994) in Meidan, A., Lewis, B.R. and Moutinho, L. (Eds), Service Quality: Recent Developments in Financial Services; Financial Services Marketing: A Reader, The Dryden Press, London. Lewis, R. and Booms, B. (1983) in Berry, L.L., Shostack, G. and Upah, G.D. (Eds), The Marketing Aspects of Service Quality in Emerging Perspective on Services Marketing, American Marketing Association, Chicago, IL. Moizer, P. (1997), Auditor reputation: the international empirical evidence, International Journal of Auditing, Vol. 1 No. 1, pp Ndubisi, N.O. (2003), Can current customer loyalty predict future loyalty?, paper presented at the 5th Asian Academy of Management Conference Challenges of Globalized Business: The Asian Perspective, pp Nunally, J.C. (1967), Psychometric Theory, 1st ed., McGraw-Hill, New York, NY. Oliver, R.L. (1980), A cognitive model of the antecedents and consequences of satisfaction decisions, Journal of Marketing Research, Vol. XVII No. 11, pp Parasuraman, A., Berry, L.L. and Zeithml, V.A. (1985), A conceptual model of service quality and its implication for future research, Journal of Marketing, Vol. 49 No. 4, pp Parasuraman, A., Berry, L.L. and Zeithml, V.A. (1991), Refinement and reassessment of the SERVQUAL scale, Journal of retailing, Vol. 67 No. 4, pp Parasuraman, A., Berry, L.L. and Zeithml, V.A. (1994), Alternative scales for measuring service quality: a comparative assessment based on pscychometric and diagnostic critetia, Journal of marketing, Vol. 70 No. 3, pp Parasuraman, A., Berry, L.L. and Zeithml, V.A. (1998), SERVQUAL: a multiple-item scale for measuring customer perceptions of service quality, Journal of Retailing, Vol. 64 No. 1, pp Peter, P. and Olson, J. (1994), Consumer Behavior, 4th ed., Irwin Professional, Burr Ridge, IL. Reeves, C.A. and Bednar, D.A. (1994), Defining quality: alternatives and implications, Academy of Management Review, Vol. 19, pp Roscoe, J.T. (1975), Fundamental Research Statistics for the Behavioral Science, 2nd ed., Holt, Rinehart and Wilson, New York, NY. Rust, R.T. and Oliver, R.L. (1994), Service quality: insights and managerial implications from the frontier, in Rust, R.T. and Oliver, R.L. (Eds), Service Quality: New Directions in Theory and Practice, pp Rust, R.T. and Zahorik, A.J. (1993), Customer satisfaction, customer retention and market share, Journal of Retailing, Vol. 69 No. 2, pp Sekaran, U. (2000), Research Methodology for Business: A Skill Building Approach, Wiley, New York, NY. Spreng, R.A. and Mackoy, R.D. (1996), An empirical examination of a model of perceived service quality and satisfaction, Journal of Retailing, Vol. 72, pp Stauss, B. and Neuhaus, P. (1997), The qualitative satisfaction model, International Journal of Service Management, Vol. 8, pp

18 Storbacka, K., Strandvik, T. and Gronroos, C. (1994), Managing customer relationships for profit: the dynamics of relationship quality, International Journal of Service Industry Management, Vol. 5, pp Sutton, S.G. (1993), Toward an understanding of the factors affecting the quality of the audit process, Decision Sciences, Vol. 24, pp Taylor, S.A. and Baker, T.L. (1994), An assessment of the relationship between service quality and customer satisfaction in the formation of consumers purchase intentions, Journal of Retailing, Vol. 70 No. 2, pp Yi, Y. (1990), A critical review of consumer satisfaction, in Zeithaml, V.A. (Ed.), Review of Marketing, American Marketing Association, Chicago, IL. Zeithaml, V.A. and Bitner, M.J. (2003), Service Marketing Integrating Customer Focus across the Firm, McGraw-Hill, New York, NY. Zeithaml, V.A., Berry, L.L. and Parasuraman, A. (1996), The behavioral consequences of service quality, Journal of Marketing, Vol. 60, pp Service quality, satisfaction and loyalty 755 Further reading Bloemer, J.M.M. and Kasper, J.D. (1995), The complex relationship between consumer satisfaction and brand loyalty, Journal of Economic Psychology, Vol. 16, pp Caruana, A. (2002), Service loyalty: the effect of service quality and the mediating role of customer satisfaction, European Journal of Marketing, Vol. 34 Nos 11/12, pp Day, G.S. (1969), A two-dimensional concept of brand loyalty, Journal of Advertising Research, Vol. 9, pp Dick, A. and Basu, K. (1994), Customer loyalty: toward an integrated conceptual framework, Journal of the Academy of Marketing Science, Vol. 22, pp Groonroos, C. (1990), Service Management and Marketing, D.C. Health, Lexington, MA. Hair, J.F., Anderson, R.E., Tatham, R.L. and Black, W.C. (1998), Multivariate Data Analysis, Prentice-Hall, Englewood Cliffs, NJ. Kotler, P. (1996), Marketing Management, 9th ed., Prentice-Hall, Englewood Cliffs, NJ. Kotler, P. (2000), Marketing Management, the Millenium Edition, Prentice-Hall, Upper Saddle River, NJ. Mittal, B. and Lassar, W.M. (1998), Why customers switch? The dynamics of satisfaction versus loyalty, Journal of Services Marketing, Vol. 12 No. 3, pp Oliver, R.L. (1993), A conceptual model of service quality and service satisfaction: compatible goals, different concepts, in Swartz, T.A., Bowen, D.E. and Brown, S.W. (Eds), Advances in Services Marketing and Management: Research and Practice, 2nd ed., JAI Press, Greenwich, CT, pp Oliver, R.L. (1999), Whence consumer loyalty, Journal of Marketing, Vol. 63, pp Parasuraman, A., Berry, L.L. and Zeithml, V.A. (1990), An empirical examination of relationships in extended service quality model, MSI Report, Marketing Science Institute, Cambridge, pp Shemwell, D., Yavas, U. and Bilgin, Z. (1998), Customer-service provider relationships: an empirical test of a model of service quality, satisfaction and relationship-oriented outcomes, International Journal of Service Industry Management, Vol. 9 No. 2, pp