Corporate Governance Quality and Audit Quality in Malaysia

Ho Wai Kee,Kwong Chee Kueng,Oo Yu Hock,Y.Y Abdul Talib,F.H Rusly,A Ahmi,M.H Mohd Sharif,D Abdul Kadir,S Ishak,R.H Raja Mohd Ali

doi:10.1051/shsconf/20173404003

Ho Wai Kee, Kwong Chee Kueng + Show 8 more

Open Access

https://doi.org/10.1051/shsconf/20173404003

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Abstract

This paper examines the impact of corporate governance quality on audit quality in Malaysia. The sampling frame is 457 Malaysian non-finance listed companies, over the periods 2003 to 2007 (pre-2007 Code period) and 2008 to 2012 (post -2007 Code period), consisting of 2,285 observations for each period. This study uses pooled ordinary least square (OLS) to test the research hypotheses and model. The results show that the effectiveness of the audit committee (AC) has no significant influence on audit fees in the pre- and post-2007 Code period, and the effectiveness of the board has no significant influence on audit fees in the pre-2007 Code period, although it has significant influence on audit fees in the post-2007 Code period. The results suggest that the existing corporate governance framework in relation to AC has limitation in its governance role on audit process. Our study contributes to existing literature conducted in the US, the UK and Australia where their institutional settings are different from that of Malaysia. In addition, our study is based on the 2007 Code’s recommendation which contributes to the previous research conducted in Malaysia and provides an insightful evidence to the regulator on the corporate governance regime in Malaysia.

Highlights

In Malaysia, the board of directors of public-listed companies have a fiduciary duty to act in the interest of the company
In the post-2007 Code period, the effectiveness of the board is significant and positively related to audit fees; there is no evidence to show that the effectiveness of AC has significant influence on audit fees in the post-2007 Code period. This suggests that the existing corporate governance framework on the board has an influence on the quality of audit process, but corporate governance framework in relation to audit committee has limitation in its governance role on audit process
We find that lnTA, lnSUBs, LEV have a significant influence on lnAF in the pre-2007 Code period, lending support to the findings by [19, 15, 18, 15] had argued that companies with large total assets have more complex operations; companies with more subsidiaries have complex group transactions and weak internal control; companies with higher leverage will demand higher audit quality to protect themselves from business and finance risk and increase the audit fees paid to the external auditor

Summary

Introduction

In Malaysia, the board of directors (board) of public-listed companies have a fiduciary duty to act in the interest of the company. The board is required to establish an independent audit committee (AC) to implement and support the oversight function of the board. The governance role of the AC is to ensure that the interest of the shareholders are properly protected through the oversight of financial reporting and external audit processes. Systems [8, 9] These cases have caused a loss of public confidence in the role of auditors in preventing fraud. Investors had lost confidence in the Malaysia market during the 1997/1998 Asian Financial Crisis [10]. The regulators, the public and investors are closely scrutinised on corporate governance in Malaysia

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