An Investigation IFRS Adoption in Malaysia on The Relationship between The Audit Committee and Quality of Financial Statement

Abstract

Audit committees are one of Corporate Governance (CG) mechanisms which are the significant factor in improving its role in inhibiting financial statement fraud (Choi, Jeon & Park, 2004; Habbash, 2010; Soliman & Ragab, 2014). Quality of the Financial Statement emphasised as being in compliance with accounting standards accepted in general, the disclosure scale, and reported numbers although this is not merely a task for the IFRS (Cascino & Gassen, 2010). In recent years, the issue of IFRS adoption in developed and developing countries have been a great deal of attention from many researchers. However, regarding the relationship between the Audit Committee and Quality of Financial Statement with IFRS requirements is still questioning. In fact, the results obtained from some previous researches are inconsistent. Therefore, the objectives in this study are aims to investigate whether post the mandatory IFRS adoption in Malaysia would limit earnings management practice in highlights of governance monitoring on the quality of financial reporting in this environment. This paper gives some evidence: 1) The effect of pre- and post IFRS adoption in Malaysia in the relationship between the Audit Committee and earnings management adoption. 2) examine the differences of the level earnings management on two periods of IFRS adoption in Malaysia. Quality of Financial statement in this study was measured by the level of earnings management with discretional accrual (DA) proxy. The audit committee variable measured by Audit Committee Independence (ACIND), Audit Committee Financial Expertise (ACFEX), Audit Committee Meeting (ACMEET), Audit Committee Size (ACSIZE) and control variable in this study using Board Size (BRDSIZE) and Firm Leverage (FRMLEV). The sample of this study including the two main time periods, there are pre-IFRS adoption and post-IFRS adoption. Using 81 listed companies in Malaysia as a sample, with 567 observations is analysed from 2009 to 2015 (7 years observations) with purposive judgement sampling selection. For seven years, a total of 567 observations is analysed. The pre- IFRS adoption period was tested from 2009 through 2011, and the post-IFRS adoption was tested from 2012 through the end of 2015. The findings in this study with multiplied regression analysis revealed that the hypothesis test in a period of pre- and post IFRS adoption ACFEX and FIRMLEV statistically were significance at 5% level. It means that Audit Committee Financial Expertise (ACFEX) have a significant effect on earnings management practise. According to the result found in the post IFRS adoption period, Audit Committee Meeting (ACMEET) is significant. It means that the frequency of audit committee meetings could be decreasing the level of discretionary accrual. The evidence also unveils both of ACIND and ACSIZE at 5 % level p-value is not significant. The most important result finding on pre- and post period of IFRS adoption in Malaysia provide evidence that based on the statistically significant was upward or the relation more significantly. However, this study also reported with paired sampled test analysis there was no significant difference between the level of earnings management in pre- and post period the adoption of IFRS in Malaysia at 5% level significance. 
 An important contribution this study has the impact on practices and has implications useful for regulators. The study provides empirical evidence that a relationship between the audit committee and earnings management in the case of IFRS adoption. In contributing to the strength of governance quality and FRQ need to be revisited, especially after mandatory IFRS adoption. Though the audit committee and audit quality are implicitly mentioned in the CG act, it is recommended that formulates specific rules relating to the quality of Financial Reporting. In this regard, it is suggested that company reports would be presented high quality in financial reporting to provide appropriate responses to recommendations made in the reports. Finally, these findings suggest that CG practices in Malaysian that have its own peculiar characteristics compared to other emerging economies.