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Impact of audit
Investigating the impact of audit features
features on money laundering
Evidence from Iranian stock exchange
companies
Shaban Mohammadi
Department of Accounting, Vocational University of Khorasan
Nader Naghshbandi
Department of Accounting, Hakim Nezami Institution of Higher Education,
Quchan, Iran, and
Zahra Moridahmadibezdi
Department of Auditing, Hakim Nezami Institution of Higher Education,
Quchan, Iran

Abstract
Purpose – The purpose of the present study is to investigate the impact of audit features, including audit
quality, audit fees and auditor tenure on money laundering in Iranian stock companies.
Design/methodology/approach – This research is descriptive-correlational and applied in terms of
purpose. To evaluate the audit features, variables including audit quality, audit fee and auditor tenure were
used. The statistical population of this study includes all companies listed in Tehran Stock Exchange and the
research period from 2012 to 2018. A sample of 150 companies was selected by the screening method. In this
study, logistic regression and Eviews 10 software were used for data analysis and hypothesis testing.
Findings – The results showed that variables including audit quality, normal audit fee and auditor tenure
have a significant effect on money laundering.
Originality/value – Observing money laundering rules and regulations for businesses involves is a
critical issue. In auditing the financial statements of the business units subject to these laws, the auditor
reviews their actions to obtain reasonable assurance of guaranteeing the money laundering laws, evaluates
their effectiveness and gains approval of managers regarding observing laundering regulations. In this
regard, the auditor is required to report definitive or suspected money-laundering cases or its certain or
suspected evidence to the relevant authorities. Although the law prohibits the auditor from disclosing such
matters to the client, it is not necessary. It seems that even if the auditors perform non-audit functions, they
should report money laundering or suspicious operations and transactions.
Keywords Audit fee, Money laundering, Auditor tenure, Audit quality
Paper type Research paper

1. Introduction
Money laundering is a global problem with devastating effects on the economy for a number
of reasons such as economic sanctions, monetary instability, financial system vulnerability,
increased corruption and social-economic instability (Drayton, 2002; Dowers and
Palmreuther, 2003). In the 1990s, several leading audit firms adopted a business risk-based Journal of Money Laundering
Control
audit approach, which required a comprehensive understanding of customer industries, © Emerald Publishing Limited
1368-5201
business models, strategies and processes (Bell et al., 2008). Previous studies confirm that DOI 10.1108/JMLC-09-2019-0072
JMLC external auditors behave based on the audit risk model; i.e. they expand their tests, increase
budget audits and audit costs for risk-taking clients as well (Johnstone and Bedard, 2001).
Money laundering can affect audit costs in two ways: first, by reducing the quality of
financial reporting, and second, by enhancing audit risk other than the quality of financial
reporting. Money laundering increases the risks of financial distortions and, therefore, calls
for additional audit efforts resulting in increased audit costs. If auditors feel that
management sector is more susceptible of, for example, conducting money-laundering
activities, they are more likely to engage in professional skepticism, thus requiring
additional audit efforts and increased audit costs (Call et al., 2017). Diekman (1999) stated
that fighting against corruption and money laundering is a global phenomenon that has a
positive impact on the economy and its prosperity in the long term. It feeds corruption and
organized crime, thereby disrupting financial markets and, in general, negatively affecting
the welfare and well-being of society. In 2007, the Islamic Republic of Iran adopted the Anti-
Money Laundering Act. The bylaws passed in 2008 led to the implementation of the anti-
money laundering act as well as the establishment of the Anti-Money Laundering High
Council, the Executive Secretariat and the Financial Intelligence Unit. To fight against
money laundering, prevent financing of terrorism and provide the necessary international
standards measures to implement the law on it. In this regard, the Society of Accountants
has approved and communicated the executive instruction of auditing of money laundering
by auditors in 38 articles and 15 notes. This audit directive, which includes 24 articles and 7
notes, covers the fight against money laundering and financing of terrorism in business and
non-profit organizations. According to this directive, all formal auditors are not only bound
to observe notification rules but also report the suspected cases in the corporate financial
information gathering system if they found any. The present study is the first effort to
examine the impact of auditing on money laundering. Given the negative effects of money
laundering on different pillars of the economy, economic planners must prioritize serious
measures (Call et al., 2017). In the following sections, some strategies proposed to deal with
this issue are presented. Because money laundering is an international activity, effective
coping requires applying appropriate tools and using international experiences; e.g. using
international institutions and their facilities to counter money laundering; using new
technologies to track suspicious money and transactions; using strict standards to issue
license for banks and financial institutions; supervising monetary and financial markets;
accurate identifying of customers in the monetary and financial markets; creating
appropriate business fields to attract wandering funds; and taking the necessary measures
to make the tax system more efficient and to cope with tax evasion. The auditor is
responsible for planning and executing the audit to reasonably assure that the financial
statements are free of important distortion because of error or fraud. Thus, despite the
auditor’s responsibility to detect and disclose fraud in the past, for the present time, the
following reasons can be presented for this claim by Glynn:

increasing the importance of the impact of fraud and its examples, including
corruption, money laundering and bribery on the economy of communities and, as a
result, an increasing need to deal with them;

asking auditors to help discovering fraud cases; and

the inability of auditors to properly and adequately investigate significant financial
fraud in financial statements.

Although in financial auditing, the “principle of importance” is central to reporting, in the

fight against money laundering, this principle has not been dominant in disclosing
suspected money laundering and should be reported regardless of the number of benefits Impact of audit
obtained. In the anti-money laundering law, audit firms are not allowed to give any warning features
or instruction to a customer that is under prosecution; otherwise, they would commit a
crime. Money laundering usually has no direct effect on financial statements and its indirect
effect is through the increase in potential liabilities arising from potential money laundering
complaints and claims. USA Auditing Standard No. 54 on auditors’ illegal activities does not
require auditors to design their audit procedures for the purpose of detecting the illegal
activities of clients that have an indirect effect on the financial statements, rather making
auditors aware of the possible illegal activities performed and their indirect effects is
enough. If auditors find activities such as money laundering, they are responsible for it. In
such a case, the auditors must first determine whether suspected money-laundering
activities have a significant effect on the financial statements, given the potential legal costs
and possible penalties and offenses. In this context, Standard No. 54 requires auditors to
design their audit procedures to determine whether the money laundering has actually taken
place. Additional procedures include acquiring a better understanding of questionable
transactions, the commercial reasons behind these transactions and the parties involved. In
the process of acquiring a better understanding of suspected money-laundering activities,
Standard No. 54 requires the auditor communicate and discuss with a higher level of
management of the entities involved in these transactions, if there are any. Obviously,
accountants are not expected to be experts in legal matters and have specific qualifications
in determining criminal offenses and legal consequences. What is expected is that
accountants seek professional advice whenever they feel its necessity. For example, if
management is unable to convince auditors that money laundering has not taken place,
Auditing Standard No. 54 states that the auditor should consult with the client’s legal
adviser or other professionals. If the auditor believes that money laundering has occurred
and is dissatisfied with management’s solutions, based on the Private Securities Claims Act,
he/she should report the money-laundering activities to the client’s board of directors. This
board, in turn, must notify the stock exchange within one day of being informed by the
accountant. In addition, this law requires the accountants to notify the stock exchange if the
board of directors refuses to do so. If the accountant believes that money-laundering
activities have a significant effect on the financial statements and are not properly explained
or disclosed, the auditor should issue a conditional or rejected financial statement according
to Standard No. 54. In addition, if the client prevents the auditor from obtaining sufficient
supporting evidence in evaluating the significance of the illegal activities in relation to the
financial statements, the auditor will usually issue a non-comment report [European
Commission (EU), 1990] . Therefore, the present study seeks to answer the question of
whether auditing affects money laundering or not.

2. Theoretical foundations and research background

2.1 Auditing and money laundering
The European Commission (1990) states that money laundering happens in the following
terms:

the acquisition or transfer of property obtained from criminal activity with the
intent of concealing the illegal source of property; and

hiding or altering the nature, origin and ownership of an object, knowing that the
ownership of such activity is originated from engaging or involving in criminal
activities.
JMLC The IMF defines money laundering as a process in which a person seeks to conceal the
relationship between the asset and the source of its acquisition. For the World Bank, money
laundering is any act or measure taken to conceal the source of the proceeds of illegal
activities so that the proceeds appear to be fully legitimate. From this definition, it is inferred
that in defining money laundering, there are three internationally agreed dimensions of
action, awareness and purpose. According to these dimensions, money laundering is
conducted knowing that the given property is because of one or more types of criminal
activities. Moreover, this definition shows that to conceal illegal sources of assets acquired
or to help the offender to avoid disclosing his/her activities, one engages in acquiring, using,
transferring, converting, transmitting, disposing of real assets or providing counseling.
From the definition, also the common features of this phenomenon are as follows: laundering
is a criminal, continuous, large-scale, long-term activity. In Iran, a positive action taken in
this regard is joining the Vienna and Palermo Conventions in 1991. Similarly, the bill on
fighting against money laundering was presented to the parliament by the then president in
2001 and passed. Money laundering is a criminal act designed to conceal the nature, source,
location or movement of money from illegal activities, such as tax evasion (McDowell, 2001).
Schlenther (2013) showed that although money laundering and tax evasion are completely
separate practical processes, they depend on the ability to conceal the financial
consequences of income. The ability of the South Africa Revenue Serviceability to detect
financial crimes and prevent tax evasion may have a significant impact on reducing money
laundering. Habib et al. (2017) indicated that money laundering increases audit costs. The
money-laundering process may occur as it has a significant impact on the economy:

economic distortions caused by inappropriate investments;

monetary instability because of unexplained changes in money demand and
volatility (World Bank, 2003);

vulnerability of financial systems to the sudden withdrawal of money (Bartlett,
2002);

the loss of significant tax revenue and thus the ability of the government to restrict
criminal activity (McDowell, 2001; James, 2002); and

increased corruption, crime and social and economic instability resulting from
increased criminal activity (Dowers and Palmreuther, 2003).

Melnik (2001) states that the auditor has been able to detect illegal acts of his/her clients
including money laundering in a number of cases. Money laundering can affect audit costs
in at least two ways:

by worsening the quality of financial reporting; and

by enhancing audit risk other than the quality of financial reporting.

Money laundering is an illegal activity through which the proceeds and revenues of unlawful acts
become legitimate. In other words, dirty money earned through fraudulent acts is transformed
into seemingly clean money and replaced in the body of the economy (Hamin et al., 2015). By
introducing white-collar criminals as individuals involved in cybercrime, market manipulation
and insider trading, Frunz et al. (2015) believe that money laundering has undergone many
changes in recent years as the crime and the use of internet tools become more complicated. So,
the financial sources used for money laundering are not only because of the activities of blue-
collar criminals but also more sophisticated activities such as cybercrime, market manipulation,
insider trading and so on. According to Frunz et al., financial markets are a good place for money
laundering because of the variety and complexity of financial instruments, the high volume and Impact of audit
speed of transaction executed and the ability to execute transactions globally. Rose-Ackerman features
and Carrington (2013), in their book, “Anti-Corruption Policies,” explore the advantages and
concerns of good governing and the programs of all international financial institutions in the
fight against corruption. In several chapters of this book, they emphasized that money laundering
is one of the most important and main corruption cases in the world. Nikoloska and Simonovski
(2012) stated that money laundering is a secondary crime that is referred to as the easiest way to
organize criminal activities in the legal and monetary system. According to Abiola and Kehinde
(2012), the policies adopted to fight against money laundering in the banking system affect the
nature of bank performance in the economy. This result is obtained considering the fact that
banks do not need to have a channel for illegal monetary activities to increase their performance
because money laundering has negative consequences for the economy, reduce government
revenue, increase crime in the society and domestic security, and threaten domestic stability and
security. MatIssa et al. (2015) emphasized that banking systems endure the most vulnerability
from money laundering. Schneider (2010) estimates money laundering and its development trend
in 20 developed countries using Multiple Indicators Multiple Causes (MIMIC) and econometric
models during 1995-2006. The study shows that the volume of money laundering in 1995 and
2006 amounted to $273bn and $603bn, respectively, in 1995 and 2006. Mugarura (2016) stated
that money laundering and corruption are inextricably interdependent. Both exist at the same
time. Money laundering increases the risk of instability because of the misallocation of resources
resulting from artificial and unrealistic asset activities. In short, money laundering and financial
crime may lead to drastic and unpredictable changes in money demand and the volatility of
international capital flows may increase interest and exchange rates (Tanzi, 1997). To investigate
the effect of money laundering on consumption, Araujo (2006) applied a general equilibrium
method to measure the effect of money laundering on the consumption of both money laundering
and labor. The results of this study show the negative impact of money laundering on worker
representative consumption. Salehi and Molla Imeny (2019) showed that Iranian banks have
appropriate anti-money laundering controls. In addition, banks with more employees and
experienced employees are more likely to establish stronger anti-money laundering controls. On
the contrary, banks with more branches are less likely to adjust their anti-money laundering
controls. Dujovski and Mojsoska (2019) stated that money laundering directly affects public
economic and social life and overall development, indicating that concerns about this
phenomenon are growing worldwide. The most important issue in fighting against money
laundering is to prevent and identify the problem. The police play an important role in the fight
against money laundering in the Republic of Macedonia, but they must work with the
Public Prosecutor Office and also other organizations to fight it more successfully.
Johannes Teichmann (2019) stated that consulting firms could be “the criminals’ best
friends.” Terrorists can buy or establish consulting companies in reputable countries
such as Switzerland or the UK. Afterward, they can merge real consulting services
with fake clients to cover their illegal activities.
In the present study, the following hypotheses were formulated to achieve the research
objectives given the theoretical basis and research background stated:

H1. Audit quality has a significant effect on money laundering.

H2. The audit fee has a significant effect on money laundering.
H3. Normal audit fee has a significant effect on money laundering.
H4. The auditor tenure has a significant effect on money laundering.
JMLC 3. Research methodology
3.1 Data collection method
Research data were collected from the database of the Tehran Stock Exchange.

3.2 Statistical population and sample

The statistical population of this research includes all companies listed in Tehran Stock
Exchange. In this study, systematic elimination method was used to select the statistical
sample. For this purpose, the following criteria are considered and if the company meets all
the criteria, they are selected as the research sample and eliminated, otherwise:

the company has been listed on the exchange before 2012 and will be active on the
exchange until the end of 2018;

because of the specific nature of the activities of the holding, insurance and leasing
companies, banks and financial and investment institutions and their significant
differences with the manufacturing and trading companies, the companies selected
in this research are not among them; and

the companies’ financial information is available.

After meeting all the above-mentioned criteria, 150 companies remain as the screening
population, all of which were selected as the sample. Hence, our observations reach
1,050 year-company (7 years  150 companies) over the interval between 2012 and 2018. In
this study, logistic regression and Eviews software are used to analyze the data and test the
hypotheses.

3.3 Research variables and models

To test the hypotheses, a regression model was used to estimate the relationship
between audit features and companies’ money laundering and a set of control
variables.
H1 test model:
MLSi;t ¼ b 0 þ b 1 Qualityi;t þ b 5 REPUi;t þ b 6 AOi;t þ b 7 CFOi;t þ b 8 SIZEi;t
þ b 9 LEVi;t þ b 10 ROAi;t þ b 11 LOSSi;t þ b 12 RESTi;t þ b 13 MTBi;t
þ b 14 changei;t þ b 14 dualityi;t þ b 14 growthi;t þ b 14 manageriali;t
þ b 14 ACsizei;t þ b 14 ACindi;t þ « i;t

H2 test model:
MLSi;t ¼ b 0 þ b 1 feei;t þ b 5 REPUi;t þ b 6 AOi;t þ b 7 CFOi;t þ b 8 SIZEi;t þ b 9 LEVi;t
þ b 10 ROAi;t þ b 11 LOSSi;t þ b 12 RESTi;t þ b 13 MTBi;t þ « i;t

H3 test model:

MLSi;t ¼ b 0 þ b 1 Normfeei;t þ b 5 REPUi;t þ b 6 AOi;t þ b 7 CFOi;t þ b 8 SIZEi;t

þ b 9 LEVi;t þ b 10 ROAi;t þ b 11 LOSSi;t þ b 12 RESTi;t þ b 13 MTBi;t þ « i;t
H4 test model: Impact of audit
features
MLSi;t ¼ b 0 þ b 1 Tenurei;t þ b 5 REPUi;t þ b 6 AOi;t þ b 7 CFOi;t þ b 8 SIZEi;t
þ b 9 LEVi;t þ b 10 ROAi;t þ b 11 LOSSi;t þ b 12 RESTi;t þ b 13 MTBi;t
þ b 14 changei;t þ b 14 dualityi;t þ b 14 growthi;t þ b 14 manageriali;t

þ b 14 ACsizei;t þ b 14 ACindi;t þ « i;t

The definition of all the variables in the four models above is presented in Table I.

6. Research results
6.1 Sample and descriptive statistics
Based on the results of Table III, there are no too high or too low (close to þ1 and 1)
correlation coefficient values to affect the results of the regression analysis, so there is no
collinearity between the independent variables of the study.

6.2 OLS regression results

We used logistic regression to estimate all models, as the dependent variable was a binary
virtual variable in the regression models. The results of models estimated using the logistic
regression method are presented in Tables IV-VII.
The results obtained from the model test using the logistic regression method are
presented in Table IV. Given that the significance level of the LR statistic is <0.05, it can be
claimed that at the 95 per cent confidence level, this model is statistically significant and has
high reliability. The results in Table IV also show that the calculated level of significance of
the audit quality variable (0.0377) is less than 0.05 and its estimated coefficient is negative.
As a result, we can state that audit quality has a significant effect on money laundering.
Accordingly, research hypothesis No. 1 is confirmed at 95 per cent confidence level. The
results presented in Table IV show that the coefficient of determination (R2) of McFadden is
0.124420. This value indicates that 12.4 per cent of the dependent variable variations is
explained by explanatory variables. The Hosmer–Lemeshow test was used to check the fit
of the estimated model.
The results obtained from the model test using the logistic regression method are
presented in Table V. Given that the significance level of the LR statistic is less than 0.05, it
can be claimed that this model is statistically significant and has high reliability at the 95
per cent confidence level. The results in Table V also show that the calculated level of
significance of the audit fee variable (0.0007) is less than 0.05 and its estimated coefficient is
negative. As a result, it can be stated that the audit fee has a significant effect on money
laundering. Accordingly, research hypothesis No. 2 is confirmed at 95 per cent confidence
level. The results presented in Table V show that the R2 of McFadden is 0.123090. This
value indicates that 12.3 per cent of the dependent variable’s variations are explained by
explanatory variables.
The results obtained from the model test using the logistic regression method are
presented in Table VI. Given that the significance level of the LR statistic is less than 0.05, it
can be claimed that this model is statistically significant and has high reliability at the 95
per cent confidence level. The results in Table VI also show that the calculated level of
significance of the normal audit fee variable (0.0011) is less than 0.05 and its estimated
coefficient is negative. So, it can be stated that the normal audit fee has a significant effect on
money laundering. Accordingly, research hypothesis No. 3 is confirmed at 95 per cent
 JMLC

Table I.

variables
Definition of research
Variable Symbol Type Operational definition

Money laundering MLS Dependent According to the anti-money laundering law, money laundering includes:
a. The acquisition, possession, retention, or use of proceeds of illegal activity knowing that it
has been obtained, directly or indirectly, as a result of a crime
b. Conversion, exchange, or transfer of proceeds to conceal their unlawful origin
c. Hiding or concealing the true nature, source or location, transfers, or relocation or
ownership of proceeds, directly or indirectly, acquired because of the crime
A company that has at least one of the above-mentioned criteria has done money laundering.
If a company has committed money laundering, it takes the value of 1, otherwise, it will get
0.
Audit Committee ACIND Controlling It is the ratio of independent committee members to the total number of audit committee
Independence members.
Audit Committee Size ACSize Controlling This variable is equal to the number of members of the audit committee.
Audit Quality Quality Independent It is a dummy variable; if the auditor is an auditor of the Audit Organization, it takes 1, and
otherwise, it will get 0.
Changing Auditor CHANGE Controlling It is a dummy variable; if the auditor of the company changes, it takes 1, otherwise, it will get
0.
Auditor Tenure TENURE Independent It is the number of years the auditor has been retained by the company.
Auditor Reputation REPU Independent This variable is set to 1 if the audit firm is known, otherwise, it is 0. To distinguish a
reputable audit institute from an unknown one, the number of companies audited was used.
In fact, they are classified by the method of their stock exchange workload and if the audit
institute is among the top 20 firms in terms of workload, they are classified as the well-
known auditors. Otherwise, they are considered as unknown ones.
Auditor’s Opinion AO Controlling If the auditor gives an acceptable opinion on the company’s financial statements, it is equal
to 1, otherwise, it is 0.
Audit Fee Audit fee Independent It is measured based on the natural logarithm of the auditor’s fee. The reason for using the
natural logarithm to calculate auditor’s fee is to homogenize the fee of
large and small-sized companies. This method has been used in all previous studies.
Company Size SIZE Controlling The company size is used by the natural logarithm of the total sales of the company
Financial Leverage LEV Controlling The debt-to-asset ratio represents the company’s financial leverage.
Return on Assets ROA Controlling Return on assets is the result of dividing net profit by total assets.
Losses LOSS Controlling The virtual variable; if the company has losses this year, it is equal to 1, otherwise it will be 0.
Renewal of presentation REST Controlling It is a binary virtual variable that is set to 1 if it is renewed in the financial statements;
otherwise, it will be 0.
(continued)
Variable Symbol Type Operational definition

Managerial Ownership
CEO Duality
Sales Growth
Normal Audit Fee
The ratio of market value to
book value
Operative Cash Flow
Managerial Controlling It is equal to the percentage of the major stocks in management ownership.
Duality Controlling It is a dummy variable; if the CEO is the chairman of the board of directors, it will be equal to
1 and otherwise equal to 0.
GROWTH Controlling It is the percentage change in total sales.
Normfee Independent Normal audit costs are derived from the difference between the real costs paid to the auditor
and the estimated abnormal audit fee: NORMFEE = LAF - ABFEE Where NORMFEE the
normal is audi t fee and ABFEE is the abnormal audit fee. Abnormal audit fees are the
residual model of audit fees that are unexpected. The model of audit fees is as follows:
LAF = b 0 þ b 1 LTA i,t þ b 2CRi,t þ b 3CA_TAi,t þ b 4AUDSIZEi,t þ b 5LEVE i,t þ
b 6OPINIONi,t þ b 7INTANGi,t þ b 8LOSSi,t þ b 9LOSSLAG i,t þ þ b 10ISSUi,t þ
b 11ARIVNi,t þ b 12ROAi,t þ b 13RESTA TEi,t þ « i,t Where, LAF: Log of audit fees;
LTA: Log of total assets; CR: current assets divided by current debts; CA_TA: current assets
divided by total assets; and AUDSIZE: the size of the au dit company. If the company is
audited by the audit organization, it will be equal to 1 and otherwise is 0. LEV: long-term
debt divided by total assets; OPINION: if the auditor submits a favorable opinion, it takes 1,
otherwise it will be 0. ARINV: the sum of inventories and accounts and business documents
divided by total assets; ROA: earnings before interest and taxes, divided by total assets;
LOSS: if the company suffers losses this year, it will be 1 and otherwise be 0. LOSSLAG: if
the com pany reported losses over the past year, the number will be 1 and otherwise be 0.
INTANG: the ratio of intangible fixed assets to total assets; RESTATE: if the company
renews its financial statements, it takes 1 and otherwise it will be 0; ISSUE: if stocks or
bonds issued this year, it takes 1 and otherwise it will be 0; « i,t: the residual is the audit fee
model used in this study as the abnormal audit fee.
MTB Controlling The ratio of market value to book value is obtained by dividing the product of the final share
price and the number of shares issued and owned by the shareholders by the book value of
the t otal company equity.
CFO Controlling This variable is derived from the following relation: Net Profit þ Non-Cash Expenses þ
Working Capital
features
Impact of audit

Table I.
JMLC confidence level. The results presented in Table VI show that the R2 of McFadden is
0.122022, suggesting that about 12.2 per cent of the dependent variable variations are
explained by explanatory variables.
The results obtained from the model test using the logistic regression method are
presented in Table VII. From the significance level of the LR statistic, which is less than
0.05, it is inferred that this model is statistically significant and has high reliability at the
95 per cent confidence level. The results in Table VII also show that the calculated level of
significance of the auditor tenure variable (i.e. 0.0478) is less than 0.05 and its estimated
coefficient is negative. Therefore, we can state that the auditor tenure has a significant
effect on money laundering. Accordingly, research hypothesis No. 4 is confirmed at 95
per cent confidence level. According to Table VII, R2 of McFadden is 0.123843,
suggesting that 12.3 per cent of the dependent variable variations are explained by
explanatory variables.
To evaluate the fit of the estimated model, the Hosmer–Lemeshow test was used.
Because the significance level of the statistic of the Hosmer–Lemeshow test in all four
models (0.8977, 0.4098, 0.5203 and 0.5702, respectively) is less than 0.05, the estimated
models have a good fit and the explanatory variables of the model have the ability to explain
the change in the dependent variable.

7. Discussion and conclusion

Money laundering is the process by which perpetrators of various crimes try to conceal and
transform the source and main ownership of interests of the proceeds of criminal and
unlawful activities, such as drug trafficking and terrorist activities, to stay safe from the
pursuit of the judicial authorities and to use these interests. According to the Interpol
definition, money laundering involves any act or attempt to conceal or hide the interests of
unlawful activity and to appear as legitimate or legal. According to Article 2 of the Anti-
Money Laundering Act of Iran adopted in 2007, money laundering is classified as a second
offense. In other words, it is a crime in which proceeds are laundered by individuals or by
others and seemingly become legitimate. One of the major challenges facing the fight
against money laundering in the Iranian economy is its unknown consequences and
detrimental effects. As a result, no serious measures have been implemented so far to cope
with this ominous phenomenon in the country. In general, money laundering is a refuge for
criminals to conceal an illicit source of wealth and to protect their assets, thereby avoiding
the suspicion of law enforcement agencies and preventing any trace that would cause a case
against them. In addition, terrorists and terrorist organizations resort to money-laundering
techniques to maintain their survival and carry on their terrorist activities. Briefly, it feeds
corruption and organized crime that disrupts financial markets and, in general, negatively
affects the welfare and well-being of society. The Islamic Republic of Iran adopted the Anti-
Money Laundering Law in 2007. The bylaws were adopted the next year, which led to the
implementation of the Anti-Money Laundering Act, as well as the establishment of the High
Anti-Money Laundering Council, the Executive Secretariat and the Financial Information
Unit. The main objective of conducting this study was the lack of research about the
dangers of broader operations at the economy level: operational risks when rates of money
and foreign exchange are high. Audit costs are higher for clients working in companies that
accept bribery to the officials as a secret law. The study also helps understand the economic
consequences of money-laundering operations. One of the most important causes of money
laundering is the spread of all kinds of crimes. Money laundering, on the one hand, leads to
the allocation of limited community resources to luxury goods by creating consumption for
some luxury goods versus essential goods. On the other hand, it increases government
 MLS TENURE QUALITY NORMFEE FEE REPU AO CFO SIZE LEV

Mean 0.115238 4.217143 0.234286 4.907607 4.907607 0.788571 0.467619 0.116159 13.91586 0.630144
Median 0.000000 3.000000 0.000000 6.104707 6.379459 1.000000 0.000000 0.103037 13.77544 0.617672
Maximum 1.000000 16.00000 1.000000 8.670504 9.348623 1.000000 1.000000 0.642210 19.72257 4.002704
Minimum 0.000000 1.000000 0.000000 -0.859136 0.000000 0.000000 0.000000 -0.460088 8.899731 0.108494
Std. Dev. 0.319461 4.100558 0.423753 2.709468 3.100078 0.408516 0.499188 0.126717 1.490523 0.255054
Observations 1050 1050 1050 1050 1050 1050 1050 1050 1050 1050

LEV ROA LOSS REST MTB CHANGE DUALITY GROWTH MANAGERIAL ACSIZE ACIND
Mean 0.630144 0.095512 0.120952 0.710476 2.443886 0.263810 0.256190 0.195224 65.63587 2.060952 0.476730
Median 0.617672 0.082909 0.000000 1.000000 2.036009 0.000000 0.000000 0.146558 70.95437 3.000000 0.666667
Maximum 4.002704 0.626784 1.000000 1.000000 121.5096 1.000000 1.000000 3.579455 99.45086 5.000000 1.000000
Minimum 0.108494 -1.063252 0.000000 0.000000 -53.21793 0.000000 0.000000 -0.739613 0.000000 0.000000 0.000000
Std. Dev. 0.255054 0.144552 0.326227 0.453757 6.139267 0.440907 0.436736 0.379882 23.64360 1.514499 0.369904
Observations 1050 1050 1050 1050 1050 1050 1050 1050 1050 1050 1050

Descriptive statistics
features
Impact of audit

of variables
Table II.
 JMLC

variables
Table III.
Correlation
coefficients of
MLS TENURE QUALITY NORMFEE FEE REPU AO CFO SIZE LEV ROA

MLS 1 0.048 0.079 0.100 0.106 0.010 0.087 0.075 0.123 0.102 0.226
TENURE 0.048 1 0.788 0.099 0.097 0.247 0.005 0.012 0.291 0.17 0.087
QUALITY 0.079 0.788 1 0.133 0.125 0.286 0.004 0.025 0.341 0.128 0.013
NORMFEE 0.100 0.099 0.133 1 0.875 0.001 0.154 0.017 0.226 0.070 0.050
FEE 0.106 0.097 0.125 0.875 1 0.010 0.138 0.048 0.193 0.084 0.059
REPU 0.010 0.247 0.286 0.001 0.010 1 0.000 0.026 0.092 0.052 0.055
AO 0.087 0.005 0.004 0.154 0.138 0.0008 1 0.136 0.022 0.153 0.221
CFO 0.075 0.012 0.025 0.017 0.048 0.026 0.136 1 0.159 0.277 0.488
SIZE 0.123 0.291 0.341 0.226 0.193 0.092 0.022 0.159 1 0.074 0.125
LEV 0.102 0.173 0.128 0.070 0.084 0.052 0.153 0.277 0.074 1 0.688
ROA 0.226 0.087 0.0139 0.050 0.059 0.055 0.221 0.488 0.125 0.688 1
LOSS 0.049 0.055 0.029 0.022 0.034 0.058 0.160 0.160 0.072 0.413 0.424
REST 0.045 0.096 0.078 0.007 0.010 0.011 0.096 0.014 0.038 0.073 0.062
MTB 0.020 0.035 0.041 0.030 0.048 0.009 0.015 0.016 0.032 0.037 0.051
CHANGE 0.020 0.469 0.280 0.059 0.064 0.134 0.049 0.027 0.099 0.023 0.021
DUALITY 0.054 0.148 0.077 0.026 0.029 0.020 0.009 0.091 0.001 0.096 0.074
GROWTH 0.131 0.589 0.015 0.033 0.051 0.003 0.004 0.052 0.1053 0.066 0.226
MANAGERIAL 0.018 0.071 0.124 0.094 0.087 0.071 0.217 0.092 0.046 0.163 0.032
ACSIZE 0.032 0.005 0.004 0.050 0.067 0.062 0.098 0.0450 0.308 0.053 0.059
ACIND 0.023 0.029 0.066 0.073 0.090 0.052 0.094 0.017 0.251 0.054 0.055
(continued)
 LOSS REST MTB CHANGE DUALITY GROWTH MANAGERIAL ACSIZE ACIND

MLS 0.049 0.045 0.020 0.020 0.054 0.131 0.018 0.032 0.023
TENURE 0.055 0.096 0.035 0.469 0.148 0.589 0.071 0.005 0.029
QUALITY 0.029 0.078 0.041 0.280 0.077 0.015 0.124 0.004 0.066
NORMFEE 0.022 0.007 0.030 0.0593 0.026 0.033 0.094 0.050 0.073
FEE 0.034 0.010 0.048 0.0645 0.029 0.051 0.08 0.067 0.090
REPU 0.058 0.011 0.009 0.134 0.020 0.0035 0.071 0.062 0.052
AO 0.160 0.096 0.015 0.049 0.009 0.004 0.217 0.098 0.094
CFO 0.160 0.014 0.016 0.027 0.091 0.052 0.092 0.045 0.017
SIZE 0.072 0.038 0.032 0.099 0.001 0.105 0.046 0.308 0.251
LEV 0.413 0.073 0.037 0.023 0.096 0.066 0.163 0.053 0.054
ROA 0.424 0.062 0.051 0.021 0.074 0.226 0.032 0.059 0.055
LOSS 1 0.043 0.029 0.016 0.016 0.0958 0.034 0.010 0.020
REST 0.043 1 0.040 0.058 0.033 0.035 0.060 0.007 0.013
MTB 0.029 0.040 1 0.007 0.041 0.011 0.005 0.037 0.041
CHANGE 0.016 0.058 0.007 1 0.025 0.017 0.034 0.004 0.011
DUALITY 0.016 0.033 0.041 0.024 1 0.018 0.038 0.042 0.036
GROWTH 0.095 0.035 0.011 0.017 0.018 1 0.019 0.043 0.045
MANAGERIAL 0.034 0.060 0.005 0.034 0.038 0.019 1 0.013 0.004
ACSIZE 0.010 0.007 0.037 0.004 0.042 0.043 0.013 1 0.880
ACIND 0.020 0.013 0.049 0.011 0.036 0.045 0.004 0.880 1

Table III.
features
Impact of audit
JMLC Dependent Variable: MLS
Method: ML-Binary Logit (Newton-Raphson/Marquardt steps)
Variable Coefficient Std. Error z-Statistic Prob.

C 0.844951 1.181815 0.714961 0.4746

QUALITY 0.687379 0.330818 2.077812 0.0377
REPU 0.136930 0.260197 0.526258 0.5987
AO 0.316833 0.227767 1.391040 0.1642
CFO 1.472353 1.008163 1.460431 0.1442
SIZE 0.111655 0.092034 1.213190 0.2251
LEV 1.016427 0.549637 1.849269 0.0644
ROA 7.443085 1.363859 5.457374 0.0000
LOSS 0.661818 0.369089 1.793113 0.0730
REST 0.498223 0.221793 2.246340 0.0247
MTB 0.011456 0.012178 0.940784 0.3468
CHANGE 0.042257 0.234295 0.180357 0.8569
DUALITY 0.477737 0.223910 2.133615 0.0329
GROWTH 0.568565 0.323052 1.759979 0.0784
MANAGERIAL 0.001725 0.004457 0.387020 0.6987
ACSIZE 0.191850 0.162313 1.181974 0.2372
ACIND 0.802568 0.637901 1.258138 0.2083
McFadden R-squared 0.124420 Mean dependent var 0.115238
S.D. dependent var 0.319461 S.E. of regression 0.307246
Akaike info criterion 0.658121 Sum squared resid 97.51511
Schwarz criterion 0.738369 Log-likelihood 328.5133
Hannan-Quinn criter. 0.688548 Deviance 657.0266
Restr. deviance 750.3901 Restr. log-likelihood 375.1950
LR statistic 93.36348 Avg. log-likelihood 0.312870
Table IV. Prob(LR statistic) 0.000000
Estimation Results of Obs with Dep = 0 929 Total obs 1050
Model 1 Obs with Dep = 1 121

expenses (mainly to restore money-laundering effects such as crime and trafficking), which
prevents government expenses from being allocated to high-priority cases of society. The
results of testing the research hypotheses showed that audit quality has a significant effect
on money laundering. Hence, H1 of the study is confirmed, suggesting that audit fee has a
significant effect on money laundering. H2 of the study is confirmed, as well, suggesting
that the normal audit fee has a significant effect on money laundering. Moreover, H3 (i.e. the
auditor tenure has a significant effect on money laundering) of the study is confirmed.
Finally, H4 of the study was also confirmed, as well. Jha and Chen (2015) believe that
auditors judge the credibility of their clients based on the company they work on and
calculate the audit costs, accordingly. The anti-money laundering laws do not require the
auditor to expand the scope of the audit work, but in routine audit works, the auditor may
identify cases of definitive or speculative money laundering that may require reporting.
During the audit of the financial statements of the entities subject to these laws, the auditor
reviews the entities’ actions to obtain reasonable assurance of observing the money
laundering laws, evaluates their effectiveness and obtains approval from managers
regarding observing the laundering regulations. If the auditor concludes that the owner or
its staff is committing money laundering or any other illegal activity, especially when one
cannot expect the usual trust-based relationships between the parties to be established, then
 Dependent Variable: MLS
Impact of audit
Method: ML-Binary Logit (Newton-Raphson/Marquardt steps) features
Variable Coefficient Std. Error z-Statistic Prob.

C 3.023833 1.050389 2.878775 0.0040

FEE 0.110278 0.032510 3.392126 0.0007
REPU 0.067927 0.252329 0.269202 0.7878
AO 0.201308 0.221086 0.910544 0.3625
CFO 1.434838 0.980251 1.463745 0.1433
SIZE 0.229022 0.078374 2.922184 0.0035
LEV 1.045099 0.544655 1.918827 0.0550
ROA 7.644143 1.277229 5.984941 0.0000
LOSS 0.833556 0.363043 2.296023 0.0217
REST 0.443003 0.219098 2.021937 0.0432
MTB 0.006674 0.011966 0.557767 0.5770
McFadden R-squared 0.123090 Mean dependent var 0.115238
S.D. dependent var 0.319461 S.E. of regression 0.306375
Akaike info criterion 0.647642 Sum squared resid 97.52641
Schwarz criterion 0.699568 Log-likelihood 329.0122
Hannan-Quinn criter. 0.667331 Deviance 658.0243
Restr. deviance 750.3901 Restr. log-likelihood 375.1950
LR statistic 92.36573 Avg. log-likelihood 0.313345
Prob(LR statistic) 0.000000 Table V.
Obs with Dep=0 929 Total obs 1050 Estimation Results of
Obs with Dep=1 121 Model 2

Dependent Variable: MLS

Method: ML-Binary Logit (Newton-Raphson/Marquardt steps)
Variable Coefficient Std. Error z-Statistic Prob.

C 3.145256 1.066308 2.949670 0.0032

NORMFEE 0.122674 0.037448 3.275807 0.0011
REPU 0.061245 0.251765 0.243264 0.8078
AO 0.191937 0.221914 0.864914 0.3871
CFO 1.314401 0.978604 1.343139 0.1792
SIZE 0.235538 0.078908 2.984970 0.0028
LEV 0.997822 0.537077 1.857874 0.0632
ROA 7.563943 1.276050 5.927621 0.0000
LOSS 0.833067 0.363322 2.292913 0.0219
REST 0.433935 0.219236 1.979305 0.0478
MTB 0.007906 0.012148 0.650796 0.5152
McFadden R-squared 0.122022 Mean dependent var 0.115238
S.D. dependent var 0.319461 S.E. of regression 0.306851
Akaike info criterion 0.648405 Sum squared resid 97.82957
Schwarz criterion 0.700331 Log-likelihood 329.4128
Hannan-Quinn criter. 0.668094 Deviance 658.8257
Restr. deviance 750.3901 Restr. log-likelihood 375.1950
LR statistic 91.56442 Avg. log-likelihood 0.313727
Prob(LR statistic) 0.000000 Table VI.
Obs with Dep=0 929 Total obs 1050 Estimation Results of
Obs with Dep=1 121 Model 3
JMLC Dependent Variable: MLS
Method: ML-Binary Logit (Newton-Raphson/Marquardt steps)
Variable Coefficient Std. Error z-Statistic Prob.

C 1.320825 1.121120 1.178130 0.2387

TENURE 0.067733 0.034219 1.979422 0.0478
REPU 0.114262 0.259636 0.440087 0.6599
AO 0.316744 0.227043 1.395084 0.1630
CFO 1.539824 1.010972 1.523112 0.1277
SIZE 0.128048 0.089523 1.430333 0.1526
LEV 1.035170 0.551937 1.875523 0.0607
ROA 7.659590 1.361937 5.624041 0.0000
LOSS 0.691394 0.369310 1.872125 0.0612
REST 0.514644 0.222665 2.311291 0.0208
MTB 0.011447 0.012179 0.939869 0.3473
CHANGE 0.184226 0.259185 0.710787 0.4772
DUALITY 0.506682 0.225353 2.248392 0.0246
GROWTH 0.553424 0.320130 1.728745 0.0839
MANAGERIAL 0.001229 0.004447 0.276406 0.7822
ACSIZE 0.185120 0.162878 1.136555 0.2557
ACIND 0.772872 0.638489 1.210470 0.2261

McFadden R-squared 0.123843 Mean dependent var 0.115238

S.D. dependent var 0.319461 S.E. of regression 0.307786
Akaike info criterion 0.658533 Sum squared resid 97.85853
Schwarz criterion 0.738782 Log-likelihood 328.7297
Hannan-Quinn criter. 0.688961 Deviance 657.4594
Restr. deviance 750.3901 Restr. log-likelihood 375.1950
LR statistic 92.93072 Avg. log-likelihood 0.313076
Table VII. Prob(LR statistic) 0.000000
Estimation Results of Obs with Dep=0 929 Total obs 1050
Model 4 Obs with Dep=1 121

Model Test Statistics value Prob. Chi-Sq prob

Table VIII. 1 H-L Statistic 3.5193 8 0.8977

Goodness-of-Fit Andrews Statistic 12.5580 10 0.2494
2 H-L Statistic 8.2466 8 0.4098
Evaluation for
Andrews Statistic 21.7500 10 0.0164
Binary Specification 3 H-L Statistic 7.1525 8 0.5203
Andrews and Andrews Statistic 13.1592 10 0.2149
Hosmer-Lemeshow 4 H-L Statistic 6.6917 8 0.5702
Tests Andrews Statistic 20.3866 10 0.0258

the auditor may decide to resign. The auditor should also consider whether continuing to
work with the company itself is a matter of money laundering or not. For example, if
continuing to work with the client constitutes complicity and assistance in money
laundering crimes based on the relevant laws, the auditor is required to withdraw from
employment under these laws. In cases where the auditor doubts about money laundering,
the auditor adjusts or conditions the audit report, depending on the significance of the Impact of audit
matter. The limitations of the present study are as follows: first, ways of making illegal and features
illicit money are not easily discovered; and second, there are no strong government and
regulatory laws to assess and evaluate the financial status and crimes of companies or, if
they exist, they are not properly implemented.

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Corresponding author
Shaban Mohammadi can be contacted at: arashmoh2019@gmail.com

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