Audit Committee Characteristics, Board Diversity, and Fraudulent Financial Reporting in Malaysia

Marziana Madah Marzuki,Iman Harymawan,Noor Marini Haji-Abdullah,Rohana Othman,Effiezal Aswadi Abdul Wahab

doi:10.21315/aamj2019.24.2.7

Abstract

We investigate the relationship between audit committee characteristics, board diversity, and the propensity of committing fraud among Malaysian firms. Based on a matched-pair sample of 64 observations for the years 2002–2014, we find limited evidence to suggest that audit committee characteristics matters. However, we find a negative relationship between the percentage of female directors and the likelihood of fraud. Results highlight the importance of the audit committee (in) effectiveness and the relative importance of female directors in Malaysia. Our results are robust when we consider a structural change in corporate governance policies in Malaysia.

Highlights

Fraudulent financial reporting (FFR) has received considerable attention in recent years
Using a sample of 64 fraud and non-fraud firms in Malaysia, we examine the association between fraudulent financial reporting and audit committee characteristics
We focus on the effects of audit committee characteristics on fraud after the establishment of Malaysian Code on Corporate Governance (MCCG) since 2001

Summary

Introduction

Fraudulent financial reporting (FFR) has received considerable attention in recent years. According to Vlad et al (2011), fraudulent financial statements can pose serious threats such as the erosion of public confidence, investors’ confidence in the reliability of the financial information reported. They emphasised that FFR undermines the reliability, quality, transparency, and integrity of financial reporting. The purpose of corporate governance is to facilitate effective, entrepreneurial, and prudent management that can lead to the long-term success of the company (Council, Financial Reporting, 2012). Little is known whether these corporate governance characteristics hold the potential to mitigate FFR especially in developing countries such as Malaysia, which have different institutional settings from developed countries like the United States

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