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MAJ 21,7

Service quality, client satisfaction and loyalty towards audit rms

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 rms. SERVQUAL model was used to measure the perceptions and expectations of public listed companies on the services received from audit rms. Design/methodology/approach The ve dimensions of SERVQUAL, i.e. reliability, assurance, tangibility, empathy and responsiveness was used to measure the service quality of audit rms. The research was conducted using primary data. Questionnaires were sent to 500 public listed companies listed in Bursa Saham Malaysia for year 2005. Findings The public listed companies were satised with the tangible dimension but were dissatised with the other four dimensions. The most dissatised 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 rms. 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 rm and other corporate attributes to understand their different needs. Practical implications The study denes the attributes of quality services from the clients perspective. Once the needs are more clearly known and understood, the audit rms 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 rms. Keywords SERVQUAL, Customer services quality, Auditors, Customer satisfaction, Customer loyalty, Malaysia Paper type Research paper

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Managerial Auditing Journal Vol. 21 No. 7, 2006 pp. 738-756 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900610680521

Introduction Service quality is the major driving force for business sustainability (Carlzon, 1987) and in todays competitive global marketplace, it is recognized that high quality service is essential for the success of the rm (Rust and Oliver, 1994). When other factors have been considered, it leads to customer loyalty (Lewis, 1994) and higher protability (Gundersen et al., 1996). Therefore, a key strategy for customer-focused rms 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.

distinctive elements that rms 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 signicant 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 rms is a very important issue when signs of dissatisfaction with the services arise (Sutton, 1993). In a recent survey by the US General Accounting Ofce (GAO) in September 2003, it was found that half of the public companies reporting that they were satised 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 rm to act as their auditor. Usually, when the public listed companies are satised with the quality of service received from a particular audit rm, there is a strong probability that they will also use the same audit rm 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 rms. 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 inuence clients satisfaction were responsiveness to clients need, effectiveness and on-going interaction with the audit committee, industry expertise and the appropriate conduct of audit eld work. Since, no empirical study has specically 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 rms. Specically, 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 nally the conclusions and implications of the study.

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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 ve 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 condence. 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 ve 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 denition or model of quality. The most common denition is the traditional notion that views quality as the customers perception of service excellence, i.e. quality is dened by the customers impression of the service provided (Parasuraman et al., 1985). The assumption behind this denition is that customers form the perception of service quality according to the service performance they experienced. It is therefore the customers perception that rates the service quality of an entity. Many researchers accept this approach of service quality. For example, Bitner and Hubbert (1994) dened quality as the consumers overall impression of the relative inferiority/superiority of the organization and its services. Researchers have measured service quality of a rm 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 customers satisfaction is inuenced by two factors viz. experience and expectations with service performance. Crosby et al. (1990) demonstrated that customers past satisfaction affects their decisions to have a continuing relationship with the service provider. Similarly, Fornel (1992) found that a satised 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) identied satisfaction and dissatisfaction in terms of the disconrmation of consumers expectation. A positive disconrmation leads to customer satisfaction and a negative disconrmation leads to customer dissatisfaction. He contends that satisfaction is said to have occurred when the product positively disconrms consumers expectation by performing better than expected and when the product conrms consumers favorable pre-purchase expectations.

Similarly, Andreassen and Lindestad (1998) claimed that customer satisfaction is the accumulated experience of a customers purchase and consumption experiences. Peter and Olson (1994) argued that the amount of dissatisfaction is dependent on the extent of disconrmation and the consumers 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. Quality of services offered by audit rms 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 nancial 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. qualied or an unqualied, on the nancial statements of the public listed companies. Besides audit service, audit rms 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 rms also offer other non-assurance related services such as review engagement. Most previous research pertaining to quality of services offered by audit rms revolves around audit work. Audit quality is the probability that the auditor will both discover and report a breach in the clients accounting system, and this depends on the auditors technical capabilities and auditors independence. Two explanations for ` -vis the independence issue found in the literature are variation in audit quality vis-a auditor reputation and power conict. 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 rm 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 rms 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 reects 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

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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 reect their experience of the service that they have actually received. Hence, rms 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 rms is best determined by the clients of the audit rms, as they would be able to give unbiased opinions on these matters. Bongsu (2004) in her studies on small medium enterprises (SMEs), focused on quality of audit service and equated it with customer satisfaction. She found the SMEs were not satised with all ve dimensions (reliability, responsiveness, assurance, empathy and tangibles) but were most dissatised with the reliability dimension. In addition, she also found that service quality had a signicant and positive relationship with customer loyalty. The present study uses public listed companies as respondents and examines all types of services offered by audit rms 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 disconrmation theory is the dominant model for measuring customer satisfaction (Brookes, 1995) which is determined by the conrmation or disconrmation 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 rst hypothesis is as follows:
INDEPENDENT VARIABLES
AUDIT SERVICE QUALITY Tangible Reliability Responsiveness Assurance

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MEDIATING VARIABLES

DEPENDENT VARIABLES

Figure 1. Schematic diagram of the research model

CLIENT SATISFACTION

CLIENT LOYALTY

H1. There is a signicant difference between client expectation and their perceptions of service quality offered by audit rms. Specically, our hypotheses are: H1a. There is a signicant difference between clients expectations and their perception of service quality based on the dimension of tangibles. H1b. There is a signicant difference between clients expectations and their perception of service quality based on the dimension of reliability. H1c. There is a signicant difference between clients expectations and their perception of service quality based on the dimension of responsiveness. H1d. There is a signicant difference between clients expectations and their perception of service quality based on the dimension of assurance. H1e. There is a signicant 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 signicant relationship between service quality provided by audit rms and client satisfaction. Specically, our hypotheses are: H2a. There is a signicant relationship between tangibility and client satisfaction. H2b. There is a signicant relationship between reliability and client satisfaction. H2c. There is a signicant relationship between responsiveness and client satisfaction. H2d. There is a signicant relationship between assurance and client satisfaction. H2e. There is a signicant relationship between empathy and client satisfaction. Cronin and Taylor (1992) in their study found service quality to have no signicant 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 ndings 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 signicant 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

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auditing industry, it can be implied that respondents who were satised 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 satised customer tends to be more loyal to the rm than a dissatised customer. Thus, the study hypothesizes that: H4. Client satisfaction mediates the relationship of service quality of audit rms and client loyalty. More specically, 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 rms 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, nancial controller, head of nance department or nance director. There were 900 public listed companies in the list of Research and Information Center, BURSA Malaysia for the year 2005. 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 nance 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

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(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 rms due to its high reliability and validity in previous studies. Our research instrument design is based on the ve dimensions of service quality and the 22 service items of the SERVQUAL model. Some modications were made to the items in order to suit the context of audit rms. The questionnaire was divided into three sections: part one contained items on demographic details of respondents and organizational proles, part two comprised the modied 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 ve dimensions of service quality of audit rms 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 rm should offer, while client perception is related to the performance of the audit rm 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 rm and clients satisfaction on the service offered by the audit rm. 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.

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Dimensions Tangibles Reliability Responsiveness Assurance Empathy

Denition The physical appearance of the audit rm, inclusive of the available facilities The ability of the employees of the audit rm staff to perform the promised service timely and accurately The willingness of the employees of the audit rm staff to assist clients and provide prompt service The ability to convey trust and condence The caring, individualized attention that the employees of the audit rm staff provides to clients

Table I. Service quality dimensions

Items to measure client loyalty 1 2 3 4 I say positive things about audit rm to other people I intended to continue being a client of the audit rm for a long time to come I will encourage friends and relatives to use the services offered by the audit rm To me, the audit rm clearly is able to provide the best service

Table II. Client loyalty items

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Analysis The internal consistencies of the ve dimensions in the research instrument were analyzed using Cronbachs 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 rm services, as Nunally (1967) suggested that a modest reliability range of between 0.5 and 0.6 would sufce. The result of Cronbachs a values ranging from 0.6 to 0.93 fullls the minimum requirement level of reliability. The values of Cronbachs a show that these measures are reliable. Although these ndings 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 ndings 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 ve basic dimensions as shown in Table IV. The hypotheses were tested using multiple regressions as the study attempts to nd 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 ve assumptions, i.e. normality, linearity, multicollinerity, autocorrelation and heteroscedasticity, were met.
Variables Expectation Dimensions Tangibility Reliability Responsiveness Assurance Empathy Tangibility Reliability Responsiveness Assurance Empathy Number of items 3 5 4 5 5 3 5 4 5 5 1 4 Cronbach a 0.76

Perception

0.63

Table III. Cronbachs a scores

Customer satisfaction Customer loyalty

0.83 0.96

Dimensions Tangibles Reliability Responsiveness Assurance Empathy

Statements Items Items Items Items Items 1 to 3 4 to 7 and 22 8 to 10 and 20 11 to 15 16 to 19 and 21

Table IV. Classication of items

Results Importance of the ve dimensions on overall service quality The SERVQUAL scores on each of the ve dimensions are all negative, suggesting that there exists a gap between the respondents expectations of what the services of an audit rm should be and their perceptions of the service quality actually offered by audit rms. The results of service quality serve as benchmark to the management regarding the importance of the audit service quality dimensions that inuence 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 ndings of Bongsu (2004). This was followed by the assurance dimension at 6.50. The least important dimension was tangibles with a mean score of 5.5. The results are consistent with the ndings by Parasuraman et al. (1991) in their studies on other service rm. 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 rms rated by public listed companies was 0.69. The negative value indicates that the performance of the audit rms 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 2 1.9, followed by the reliability dimension. The smallest service gap was the responsiveness dimension. However, the positive service gap score of 0.1391
Dimension Tangibles Reliability Responsiveness Assurance Empathy Perception (P) 5.70 5.82 5.60 5.83 3.80 Expectation (E) 5.50 6.70 5.80 6.50 5.70 Ranking (P) 3 2 4 1 5 Ranking (E) 5 1 3 2 4

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Table V. Mean scores of expectations and perceptions and their relative importance

Dimension Tangibles Reliability Responsiveness Assurance Empathy Overall

Perception (P) 5.6522 5.8209 5.5739 5.8296 3.7948 5.35

Expectation (E) 5.5130 6.7322 5.7652 6.5130 5.4400 6.04

SERVQUAL Gap 0.1391 2 0.9113 2 0.1913 2 0.68 2 1.9 2 0.69

t-value 1.705 * 2 11.427 * 2 1.153 2 10.248 * 2 26.346 *

Result Satised Dissatised Dissatised Dissatised Dissatised

Notes: Gap perceptions 2 expectations, *signicant at 0.05 level

Table VI. Comparison of mean result of SERVQUAL gap

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for the tangibles dimension suggest that audit rms 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 signicant difference between customer expectations and their perceptions on the tangibility dimension. Service quality of audit rms and client satisfaction Table VII presents the regression results. The adjusted R 2 of 0.113 indicates 11.3 percent of variance in client satisfaction can be predicted by the service quality dimensions of audit rms. The positive coefcient for the dimensions tangibility, reliability and empathy were found to be statistically signicant, suggesting increasing level of satisfaction. However, the responsiveness and assurance dimensions both had negative coefcient, 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 Constant Tangibility Reliability Responsiveness Assurance Empathy R 2 0.152 Adjusted R 2 0.113 F-statistic: 3.876 Prob. F-Statistic: 0.003 Coefcient 5.761 0.174 0.433 2 0.048 2 0.700 0.157 Standard error 0.175 0.083 0.154 0.037 0.181 0.076 t 32.96 2.101 2.616 2 1.314 2 3.857 2.052 Signicant 0.000 * * * 0.038 * * 0.006 * * * 0.192 0.000 * * * 0.042 * * VIF 1.207 4.833 1.179 4.809 1.098

Table VII. Regression results of service quality of audit rms and client satisfaction (N 115)

Notes: * * Signicant at 0.05 level; * * * signicant at 0.01 level

Independent variable Constant Client satisfaction R 2: 0.098 Adjusted R 2 0.090 F-statistic: 12.126; prob. F-statistic: 0.001 Note: * * * Signicant at 0.01 level

Coefcient 3.363 0.332

Standard error 0.529 0.095

t 6.352 3.482

Signicant 0.000 * * * 0.001 * * *

Table VIII. Regression results of customer satisfaction and customer loyalty (N 115)

client loyalty. The positive signicant coefcient 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 rms, client satisfaction and client loyalty Client satisfaction may be considered as a mediator to the extent to which it carries the inuences 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 rms) is signicantly associated with the mediator (client satisfaction). . The independent variable (service quality of audit rms) is signicantly associated with the dependent variable (client loyalty) in the absence of the mediator (client satisfaction). . The mediator variable (client satisfaction) is signicantly associated with the dependent variable (client loyalty). . When the independent variable (service quality of audit rms) and the mediator variable (client satisfaction) are controlled, a previously signicant relationship between the independent variable and dependent variable is no longer signicant or it is signicantly decreased. For example, if Z, dependent variable; X, independent variable; and Y, intervening variable (Figure 2).
X Z

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Figure 2.

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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 rst model treats client satisfaction as the dependent variable and the ve 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 ve 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 Kennys (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 ndings by Parasuraman et al. (1991) in their studies on other service rms. The high ranking of the reliability and assurance dimensions suggest public listed companies expect audit rms to perform the services as promised independently and accurately. To them, the appearance of audit rms 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 rms and the latter are already equipped with the latest technology. Therefore, in order to fulll the needs of audit clients, audit rms must make sure that services delivered are reliable at all times. The overall SERVQUAL score for the audit rms were 2 0.69, indicating that the performance of the audit rms do not meet the expectation of audit clients. The ndings further indicate that the empathy dimension has the greatest service gap of 2 1.9, followed by the reliability dimension with a service gap of 2 0.91. 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 rm, 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 condence 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 ndings that they would like to see an improvement in this dimension. Findings in this study also indicate that tangibility, reliability and empathy dimensions have signicant effects on customer satisfaction. Responsiveness was found to be not signicant. It was also found that client satisfaction plays an important role in enhancing client loyalty. Thus, satised 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.

Model 1 Coeff 5.761 0.174 0.433 2 0.048 2 0.700 0.157 3.363 6.35 * * * 4.670 2 0.215 0.406 2 0.002 0.035 2 0.441 0.495 0.472 21.362 0.000 32.31 * * * 2 3.11 * * * 3.16 * * * 2 0.07 0.23 2 7.01 * * * 3.48 * * * 0.152 0.113 3.876 0.013 0.332 0.098 0.090 12.126 0.001 32.96 * * * 2.101 * * 2.61 * * * 2 1.314 2 3.857 * * * 2.052 * * * t

Model 4 Coeff 1.658 2 0.298 0.186 0.023 0.389 2 0.507 0.530 0.700 0.683 41.671 0.000 t 4.49 * * * 2 5.55 * * * 1.84 * 0.98 3.16 * * * 2 10.31 * * * 8.67 * * *

Independent variable

Dependent variable (client satisfaction and client loyalty) Model 2 Model 3 Coeff t Coeff t

Constant Tangibility Reliability Responsiveness Assurance Empathy Client satisfaction R2 Adjusted R 2 F-statistic Prob. F-Stat.

Notes: * * * Signicant at 0.01 level; * * signicant at 0.05 level; *signicant at 0.10 level

Service quality, satisfaction and loyalty

Table IX. Hierarchical regression results of services quality of audit rms, client satisfaction and client loyalty (N 115)

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Overall, ndings show that reliability is the most important dimension of the service quality yet to be fullled by the audit rms. Implications and future research The ndings of this study have important implications on the management of quality services provided by audit rms as perceived by public listed companies. This study demonstrates the usefulness of the SERVQUAL approach as a good measure of service quality in audit rms. 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 ndings that audit rms were not able to fulll the needs of the clients. Thus, audit rms 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 condence should also be part of the training agenda. To increase the level of satisfaction, audit rms should also allocate resources in the most effective and efcient manner to ensure that services rendered meet clients expectation. For future research, it would be benecial 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 ve dimensions in inuencing service quality. In this manner, the audit rms would be able to target specic 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 rms; for example, only the audit work instead of generalizing to all the services offered by the audit rm.
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Appendix Respondents were asked to rate on a scale of 1-7 their agreements with the following statements.
The audit rm is equipped with the latest information technology The physical facilities are visually appealing The employees are well dressed and appear neat to show professionalism The audit rm delivers services within a certain time frame as promised The audit rm is sympathetic and reassuring towards clients problems The audit rm is dependable in providing its/their services The audit rm has employees who are technically competent to perform the service 8. My audit rm provides timely services 9. My audit rm provides prompt services 10. Employees of my audit rms show willingness to help their clients 11. My organization is able to trust the employees of the audit rm 12. My organization experienced condentiality on transactions with the employees of the audit rm(s) 13. Employees of the audit rm are polite 14. Employees of the audit rm received adequate support from their organization to perform their task well 15. The services rendered by the audit rm commensurate with the fees charged 16. My audit rm does not provide my organization with individual attention 17. The employees of my audit rm do not know the needs of my organization 18. My audit rm does not have my organizations best interest at heart 19. My audit rm does not visit my organization at times convenient to us 20. My audit rm does inform my organization exactly when services will be performed 21. My audit rm has proper documentation of the audit work performed 22. Reports prepared by my audit rm are easily understood by my organization 1. 2. 3. 4. 5. 6. 7. 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 34 34 34 34 34 34 34 34 34 34 34 34 5 5 5 5 5 5 5 5 5 5 5 5 6 6 6 6 6 6 6 6 6 6 6 6 7 7 7 7 7 7 7 7 7 7 7 7

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Corresponding author Ishak Ismail can be contacted at: iishak@usm.my

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