Audit Committee and Audit Fees in Malaysia: The Moderating Role of Political Connection

Abstract

The Malaysian corporate governance regime underwent significant enhancement through the revamp of the Bursa Malaysia Listing Requirements (BMLR) in 2008 in respect of audit committee characteristics in order to address adverse market perceptions of its relationship based economy with the strong presence of politically connected (PCON) firms. This study investigates whether such reforms have made a difference. We examine if PCON firms have higher audit fees post implementation of BMLR 2008 on audit committee characteristics. Using data from 945 firm-year observations for 2005 to 2009 we find that PCON firms have higher audit fees due to improved governance which demands an increase in audit effort. Further, the association between audit committee independence, diligence, and expertise and audit fee is stronger post-2008, suggesting that PCON firms are committed to strong corporate governance and are prepared to pay a higher quality external audit work.