Abstract
The aim of this paper is to investigate the determinants of firm’s auditor choice in Malaysia in respect of their corporate governance mechanisms. A logit regression model was developed to test the impact of firms’ internal corporate governance mechanism on auditor choice decisions made by public listed companies listed on main board of Bursa Malaysia from year 2006 to 2015. Five variables are used to proxy for firm’s internal corporate mechanism which are the ownership concentration, the duality of CEO and chairman of BOD, the size of audit committee, the size of BOD and the number of independent directors on the board. All auditors in Malaysia were classified into Big Four and non-Big Four, assuming Big Four auditors can provide higher quality audit services. The final result show that firms with less concentrated ownership, with larger size of audit committee, larger size of the BOD, with lower proportion of independent directors on the board, or in which CEO and BOD’s chairman are not the same person are more likely to hire a high-quality auditor. Hence, it suggests that when benefits from lowering capital raising costs are trivial, firms with good corporate governance mechanism are prone to choose a high-quality auditor.
Highlights
This paper studies the role of internal corporate governance mechanisms as the deciding factors that determine auditor choice decision in Malaysia
The objective of this study is to examine the effect of corporate governance mechanisms toward public listed firms’ auditor choice decisions
The results suggest that firms with larger Board of Directors (BOD) size are more likely to choose a Big Four auditor which supports Hypothesis 4 (H4) which proposed that smaller BOD size will be less likely to choose a high quality (Big Four) auditor
Summary
This paper studies the role of internal corporate governance mechanisms as the deciding factors that determine auditor choice decision in Malaysia. This study is inspired by the growing body of researches that scrutinizes auditor choice decision (Ahmad, Houghton and Yusof, 2006; Beattie and Fearnley, 1995; Chaney, Jeter and Shivakumar, 2003; Guedhami, Pittman and Saffar, 2009; Hope, Kang, Thomas and Yoo, 2008; Johnson and Lys, 1990; Linda Elizabeth, 1982; Mahdavi, Maharlouie, Ebrahimi and Sarikhani, 2011; Pittman and Fortin, 2004; Wang, Wong and Xia, 2008). The after effect of corporate scandals such as the Enron shocking incident and other current financial crisis further lead the policy makers and regulators to draw more attention to the needs for a better quality and more transparent financial reporting (Bardos, 2011)
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