Journal of Science and Today's World

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1 Scholar Journal Journal of Science and Today's World Journal home page: ISSN X 216, volume 5, issue 3, pages:795 Research Article Investigation of the relationship between concentration and management with independent auditor's opinion in the listed companies in Tehran Stock Exchange Adel Nikoozad *1, SeyyedHossein NaslMousavi 2 1 MSs.Student of Accounting, University College of Rouzbahan,Sari, Iran. 2. Department of Accounting, Qaemshahr Branch, Islamic Azad University,Qaemshahr, Iran. A R T I C L E I N F O Article history: Received 7 January216 Received in revised 29Januaryr 216 Accepted 25 February216 Published 2 February216 Keywords: concentration, management, independent auditor's opinion *correspondence should be addressed to Adel Nikoozad. MSs.Student of Accounting, University College of Rouzbahan,Sari, Iran. Tell: +9: Fax: +9 adel.nikoozad@gmail.com A B S T R A C T The impact of concentration on the type of independent auditor s opinion in Tehran Stock Exchange was investigated in this study. The statistical population of this research consisted of 61 companies during the years 2 to 213. Logistic regression was used to test the research hypothesis. The results show that there is significant relationship between concentration and independent auditors' unqualified opinion. Moreover, there is significant relationship between management and independent auditors' unqualified opinion. The relationship between firm size, return on assets and leverage ratio is significant with auditors' opinion. No significant relationship observed between the type of of the audit firm and independent auditors' opinion. Copyright 216 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. Introduction Dynamic capital markets depend on investors confidence to the quality of financial reporting. After financial scandals of companies such as Enron and WorldCom in the early year 2 and the financial crisis, the framers of the laws and regulations divert their attention to increasing the quality and more transparency of financial reporting.efficient capital markets that require highquality financial reporting, benefit investors by the optimal allocation and capital attraction.to ensure the quality and reliability of the information provided by the company, an independent character from company is required to comments about this information. Independent auditors have comment about the information utility and quality. For many years in past, economists assumed that, entire groups related to a corporation act for a common goal; but in the last thirty years, economists posed many cases of conflict of interest between groups and how to deal with these conflicts. Corporate governance is not only important for companies managers who want to be aware of the corporate governance structure and its compliance with procedures and regulations, but it is also attractive for the market participants who are interested in investment, for the purpose of applying corporate governance is a framework whereby it can provide a proper balance between Discretion of managers and interests of beneficiaries including shareholders [1]. A desirable system of corporate governance that can be created with concentrated, leads to confidence that the companies use their assets efficiently, also it will considers the interests of a wide range of stakeholders and community in which they operate. Concentrated structure can be considered as a desirable mechanism of corporate governance. Ownership concentration is considered as a mechanism for corporate governance in many studies. Corporate governance was introduced as a discussion that focused on the issue of firms strategy and shareholder rights and its role is reducing conflicts of interest between shareholders and managers. This conflict of interest is often associated with agency problems that is due to two main reasons: first, difference in the goals and preferences of the participants in the enterprise and second, Participants incomplete information of 79 P a g e

2 J. Sci. Today's World, 216, volume 5, issue 3, pages: 795 each other s performance, knowledge and preferences. Existence of different structures as corporate governance mechanisms can have different effects on companies [2]. Conflicts of interest between managers and shareholders gives special importance to the audit to resolve this conflict. Audit as an efficient mechanism ensures this confidence to the shareholders that whether managers in corporate management have acted in the interests of shareholders or not. Therefore, audit s work is ensure shareholders and other interested parties that face with company[3]. When the accounting information has good quality and reliability, auditors provide unqualified opinion on the financial statements. Factors that change the utility and quality of accounting information are effective in auditors opinion. Research literature In this study, the potential relation between the percentage of concentration and the percentage of management with the independent auditors' opinion was investigated. Previous researches investigated different things that may affect the quality of information and therefore independent auditors' opinion. The research of Szewczyk et al [4] showed that whatever the percentage of unbound managers in the board of directors and audit committee is lower, the likelihood of distortion occurrence in reports prepared by the company and therefore providing an implausible opinion for issued financial statements will increase. Yang et al [5] investigated the relationship between the concentration and informational asymmetry between aware and unaware investors and have discovered several mechanism that reduces this relationship. Using a large sample of Korean companies with highly concentrated structure, they found that the level of informational asymmetry increases with concentration. They also showed that the concentration has positive relation with informational asymmetry through an increase in the relative amount of informed transactions. Increasing informational asymmetry can increase the possibility of receiving implausible opinion by the auditors. Rahman Khan et al [6] investigated the effect of concentrated in corporations on audit fees in Bangladesh as an example of emerging economies. They examined the relationship between audit fees and concentration of the corporations. Their results showed a significant negative relationship between institutional concentration and audit fees. These findings indicate that in Bangladesh when companies are under the influence of institutional shareholders, they pay lower fees; but they found negative but nonsignificant relationship for public shareholders. The results suggest that the pattern of of the corporations may be an important factor in explaining lower audit fees in Bangladesh. Jabar Zadeh et al (213) investigated the relationship between independent auditors' opinion, corporate governance and quality of financial reporting in Tehran Stock Exchange (TSE). In their study, 9 business units during were analyzed. A questionnaire based on the TSE corporate governance guidelines was used to measure corporate governance. Dechow and Dichow model was used to measure the quality of information. The results indicated that in companies with strong corporate governance level as well as high quality accounting information, the ratio of unqualified opinion is not more than implausible opinion. However, in companies with low and medium quality of corporate governance and the quality of accounting information, implausible opinion is presented more than an unqualified opinion. The results also show strong and positive correlation between corporate governance and accounting information quality. Maria and Charalambos (214) investigated the relationship between the auditor's opinion and earnings management, which was measured by discretionary accruals. They divided qualified opinion into two parts including modified opinion due to unreliability of going concern and modified opinion for other reasons. The results indicate that the auditor's opinion is not associated with earnings management. Financial indices of customers, such as profitability and firm size are determinants of the decision about auditor's going concern opinion. The auditors' decision to provide the modified opinion for other reasons is explained by the type of opinion presented in the previous year. Ramezani et al [7] from another point of view investigated the relationship between the type and concentration and independent auditors' opinion. They studied the role of type and concentration on the reduction of condition paragraphs in audit report of private institutions. Their study period was from 26 to 212 and studied sample was 73 companies in the Tehran Stock Exchange. These business units were investigated by 4 private audit firms that were a member of certified Public Accountants. They tested the hypotheses using logistic regression. The results showed that for business units with larger major shareholders, there is more possibility to receive less condition paragraphs. Also for business units that its major shareholder are individuals, possibility to receive audit report with more condition paragraphs before comment paragraph will increase. Chen et al [] examined the relationship between the modified opinion (MAO) in private debt contracting. They used condition clauses to divide the opinion into nonuniformity opinion as a result of accounting changes or restatement and inadequacy opinion provided because of uncertainty or going concern (GC). Using debt contracts of business units with the modified opinion (MAO), compared to the debt issued in the year after receiving an unmodified opinion, they found that debt issued after receipt year of the modified opinion has a relation with the release of higher interest, less financial contracts, more public contracts, much less debt and more possibility to draw up contracts requiring collateral. They also found that the impact on debt issuance is different given to the type of modified opinion. Theoretical bases and development of research hypotheses Existence of an optimal corporate governance system assures that the firms use their assets effectively as well as they consider interests of a large number of stakeholders and community [9]. According to the research literature, a feature of corporate governance is concentration, which will enhance the quality of financial information by monitoring the activities of managers and limiting their opportunism. It is thought when the of the company is in the hands of major shareholders and a few force(concentrated ), major shareholders actively monitor management performance and have effect on the accounting policies P a g e

3 J. Sci. Today's World, 216, volume 5, issue 3, pages: 795 selection by management and also the strategy of providing information of financial statements [1,11]. Concentration in the corporate that arises from the absolute control of major shareholders on corporate governance can reduce agency issues, because major shareholders by having enough information can have better control over management performance [12]. So when is concentrated, information quality increase and there is more possibility that the company receive an unqualified opinion. From agency theory perspective, the presence of unbound and independent managers in the board of directors of companies who have the expertise, independence and necessary legal authority to monitor the company's performance can be a potential powerful mechanism of corporate governance [2]. Based on Jensen and Meckling theory (1976), managerial will reduce the agency problem between shareholders and managers since it aligns the interests of managers and shareholders. It seems that this issue motivates the managers to a better control and performance. In classification of organizations' structure, existence of high managerial reduces the gap between and management and information asymmetry will be lower than other organizations. In addition, compared to other managers, managers who have invested in the company under their management, avoid highrisk decisions; thus reducing information asymmetry and reducing highrisk decisions cause to produce more reliable and higher quality information; as a result, in the companies with managerial structure, there is more possibility that auditors present unqualified report[13]. Research literature indicates a positive role of concentrated, management in active monitoring on management performance of business unit. [4,14] so companies that have more concentrated, provide higher quality of accounting information; therefore the risk of fraud and infraction will decrease by increasing the quality of financial information. By enhancing the quality of financial information, presentation of unqualified opinion by auditors seems reasonable. Due to the mentioned cases, in this study the relationship between concentration and management was investigated as mechanisms for corporate governance and the type of independent auditors' opinion. The relationship between concentration, management, the quality of financial reporting and independent auditors' opinion is shown in Figure (1): Figure 1: The relationship between concentration, management and independent auditors' opinion Based on the theoretical foundations, existence of concentration in the company will cause active monitoring on management performance and also limits their opportunism; on the other hand concentration will reduce conflicts of interest between owners and managers (Jensen and Meckling, 1976). As a result, when the is concentrated, information quality will increase and the possibility that auditors toward financial statements present an unqualified opinion will increase. Thus, the first hypothesis is as follows: First hypothesis: There is significant relationship between concentration and independent auditors' opinion. As mentioned in the theoretical bases, management reduces information asymmetry, highrisk decisions, increases the quality of information and reduces the uncertainty [15] as a result, in the companies with managerial structure, there is more possibility that auditors present unqualified opinion. With regard to the above cases, second hypothesis is as follows: The second hypothesis: There is significant relationship between management concentration and independent auditors' opinion. Research methodology and data collection In this study, consolidated patterns have been used to estimate the coefficients and hypotheses testing. since keeping some variables from the structure of the models Leads to inefficiency in the estimations of econometric models, consolidated data method, which is formed using a combination of time series data and crosssectional data, shows the effect of this type of unconsidered or unmeasurable variables better than crosssectional data during a year or time series data for a period of time. Consolidated data include past trends and makes sure in terms of keeping the mobility of the variables. Statistical universe in this study is the listed companies in Tehran Stock Exchange and statistical sample was extracted among these companies. The systematic elimination method is used to select the sample. So that among all the companies listed in Tehran Stock Exchange, companies that have all the following conditions were selected: Given companies in the time range of research should be listed in Stock Exchange. The end of their fiscal year should be December 31. Over the span of research should have change. Their given data should be available. quality of financial reporting independent auditors' opinion concentration management Research variables and method of calculating them A:dependent variable In this study, the auditor's opinion has been selected as the dependent variable. The auditor should comment whether the financial statements in terms of all important aspects desirably prepared according to accounting standards or not. Auditor to determine the type of opinion should conclude whether he achieves reasonable assurance about lacking or not lacking financial statements from important distortions caused by 1 P a g e

4 J. Sci. Today's World, 216, volume 5, issue 3, pages: 795 fraud or error or not. In this assessment, qualitative aspects of the entity's accounting practices including possible signs of predilection in management's judgment should be noted (Auditing Standards, 212). If auditor's opinion is unqualified, the number is one and otherwise is zero. Explanatory variables There are two explanatory variables in this study included the concentration and managerial concentration which are defined and calculated as follows. Concentration of (OWNCON) It equals to the sum of institutional concentration and managerial concentration. OWNCON= I 2 + i 2 Equation(1) Managerial concentration In this type of, the largest stock is in the hands of managers and the board family. Ownership concentration in this model is measured using HerfindahlHirschman index. Thus, for calculating OWNTH in firm i at the end of year t, stock percentage of each managerial owners reached to exponent 2 and are summed together: OWNMTH= i 2 Equation (2) concentration and independent auditor's opinion" To test this hypothesis, the regression of equation (4) is used: Model (2): AO = β + β 1 OWNMMTH it + β 2 SIZE it+ β 3 LEV it+ β 4 ROA it+ β 5 BIG it+ e it Equation (4) Data Analysis and Results Descriptive statistics of independent variables are presented in table (1). Table (1): Descriptive statistics owner ship concen tration manag ement owner ship Me an /3 3 6 Med ian Maxi mum /96 /96 Mini mum stand ard devia tion 5 5 skew ness /3 19 Elong ation 2/31 2 2/31 2 In this equation OWN shows stock percentage of each managerial shareholder of firm i and n is the total number of managerial shareholders of firm i. firm size 5/6 43 5/5 99 7/276 4/265 /54 5 /54 2/5 1 C: control variables According to the past researches, variables that are likely to affect the auditor's opinion were considered as control variables. Company leverage (LEV) is measured using the debttoequity ratio. For firm size variable (SIZE) the natural logarithm of the company's assets is used. To measure the company's profitability (ROA) the ratio of net profit to the company's assets is used ; also to measure the type of audit firm (BIGN) dummy variable is used; if the audit organization performed the auditing of company, the number is one and otherwise is zero [11]. Because of using dependent variable in the form of one and zero to estimate and test hypotheses, logistic regression was used and based on the research background and theoretical bases; the dependent, explanatory and control variables were selected. The first hypothesis is stated as follows: "There is a significant relationship between concentration and independent auditor's opinion" To test this hypothesis, the regression of equation (3) is used: Model (1): Equation (3) AO = α + α 1 OWNCON it + α 2 SIZE it+ α 3 LEV it+ α 4 ROA it+ α 5 BIG it+ e it The second hypothesis is as follows: "There is a significant relationship between management Return on assets Financ ial levera ge 97 4 / 15 /397 /9 / /657 /3 34 To interpret the results obtained from regression model estimation, we must consider a violation of classical assumptions of the regression. There is often unequal variants problem in logistic regression model; therefore, regression is estimated by assumption of unequal variants existence so that obtained results be valid. To test existence of multicollinearity among explanatory variables, variance inflation factor (VIF) was used. A: The results of the first hypothesis The first hypothesis is stated as follows: There is no significant relationship between the percentage of concentration and independent auditors' opinion. The results of testing the first hypothesis are presented in Table (2). Table (2): The results of testing the first hypothesis 1/55 1 2/ P a g e

5 J. Sci. Today's World, 216, volume 5, issue 3, pages: 795 Variables Constant C Percentage of concentration OWNCON Audit firm BIGN Logarithm of total assets Size Return on assets ROA The ratio of longterm debt to the total assets LEV Coeffi cients 2/ /1 275 / / / pseudor 2 /15654 Stand ard devia tion 1/1 235 / / / / Z Stat istic Pro babi lity (Pr ob) 9 As seen in the table, coefficient amount of percentage of concentration (2/1275) indicates a positive relationship between the percentage of concentration and the auditor's opinion. Given that the probability of variable of concentrated is (6) thus the first hypothesis at a significance level of 1 is confirmed. The results also showed a positive and nonsignificant relationship between type of audit firm and the auditors' opinion. For the variable of firm size, relationship between firm size and auditor's opinion is negative and this relationship is significant at a significance level of 1. The relationship between returns on assets and auditor's opinion is positive and significant at 1 level. Moreover, the relationship between the ratio of longterm debt to assets and the auditor's opinion is negative and significant at 1 level. Statistics of pseudor 2 is (/1561). Low value of pseudor 2 in the logistic regression model which is a subset of limited dependent variable models is common (Brooks, 2, p. 54). As seen in the table, the value of variance inflation factor is less than 2 which shows that multicollinearity between independent variables is in the acceptable threshold (Gujarati, 2). Summaries of the research results are shown in Table 4. B: The results of the second hypothesis The second hypothesis is stated as follows: There is significant relationship between the percentage of management and independent auditors' opinion. 1/ / / / / / Prob (LR statistic) VIF 1/367 1/19 1/276 1/365 1/144 The results of the second hypothesis test are presented in Table 3. Table (3): The results of the third hypothesis test Variables Constant C Percentage of management OWNMTH Audit firm BIGN Logarithm of total assets Size Return on assets ROA The ratio of longterm debt to the total assets LEV Coeffici ents 2/6123 1/ pseudor 2 /15654 / / / Standa rd deviati on 1/ / /352 /3 13 1/ As seen in the table, coefficient amount of percentage of management (1/912965) indicates a positive relationship between the percentage of management and the auditor's opinion. Given that the probability of variable of management is (4) thus the first hypothesis at a significance level of 1 is confirmed. The results also showed a positive and nonsignificant relationship between type of audit firm and the auditors' opinion. For the variable of firm size, relationship between independent variables and the dependent variable is negative and this relationship is significant at a significance level of 1. The relationship between returns on assets and auditor's opinion is positive and significant at 1 level. Moreover, the relationship between the ratio of longterm debt to assets and the auditor's opinion is negative and significant at 1 level. Statistics of pseudor 2 is (/15654). As seen in the table, the value of variance inflation factor (VIF) is less than 2 which shows that multicollinearity between independent variables is in the acceptable threshold (Gujarati, 2). In addition, given that the probability of LR statistic in this model is (.), it can be said that this model was significant at 99% confidence level and have high validity. Summaries of the research results are shown in Table 4. Table (4): Summary of results Research hypothesis Coefficient There is a significant relationship between the percentage of 2/12 concentration and independent auditors' unqualified opinion Z Statis tic 1/ / / / / / 7914 Prob (LR statistic) Probability 6 Proba bility (Prob ) /125 4 / IF 1/ 1/12 5 1/33 1/35 9 1/13 5 Results Hypothesis approved 3 P a g e

6 J. Sci. Today's World, 216, volume 5, issue 3, pages: 795 There is a significant relationship between the Percentage of management and independent auditors' unqualified opinion 1/912 4 Hypothesis approved Discussion and conclusion A: The first hypothesis When corporate is in the hands of major shareholders and a few force (concentrated ), major shareholders actively monitor the performance of management and affect the accounting policies selection by management and also the strategy of providing information of financial statements [1,16]. The results of the second hypothesis confirms above theory. Generally, when corporate is in the hands of a few force, they cause to increase the quality of information and reliability of financial statements by active monitoring of the management performance and providing financial statements and as a result probability of receiving unqualified report by auditors increases. Given that high quality transparent and reliable information is essential component of accountability and informed economic decisionmaking and is the unique requirements of economic growth and development in the private and public sectors, certainly making economic decisions and optimal allocation of resources is not possible without reliable information. Existence of concentrated structure in companies as a corporate governance mechanism, with active monitoring on management and corporate performance cause to reduce information asymmetry and increase the quality and reliability of the information. As a result, investors use information with more confident and make more informed decisions that ultimately led to the growth and development of capital market and benefit to society. B: The second hypothesis The results of the second hypothesis suggest that increase in management enhances the probability of receiving an unqualified opinion by the auditors. In other words, existence of managers in the corporate structure increases the quality of information and increases the probability of receiving unqualified report. These results confirmed the Jensen and Meckling theory (1976). It seems that managerial will reduce agency problem between shareholders and managers since it aligns the interests of managers and shareholders and this issue is an incentive to lead the managers to better control and better performance. In classification of organizations' structure, existence of high managerial reduces the gap between and management and information asymmetry will be lower than other organizations. In addition, managers who have invested in the company under their management compared to other managers avoid highrisk decisions; thus reducing information asymmetry and reducing highrisk decisions cause to produce more reliable and higher quality information; by increasing the quality and reliability of information, increasing the likelihood of providing unqualified opinion by independent auditors is reasonable [15]. References [1].Ariff, A. M. Ibrahim. M. K. and Othman. R. (27). Determinants of firm level governance: Malaysian evidence: Emerland group publishing limited. Vol 7. No. 5. Pp [2].Byrd, John and Hickman, Kent (1992) «Do Outside Directors Monitor Managers?»Journal of Financial Economics, Vol. 32, pp [3].Walker, M. (23). Principal/agency theory when some agents are trustworthy, Accounting and Finance Working Paper, Manchester: Manchester Business School, Manchester University. [4].Szewczyk, S. H. and Varma, R. (24) Board composition and corporate fraud. 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