Directors’ Independence, Internal Audit Function, Ownership Concentration and Earnings Quality in Malaysia

Ahmed Hussein Al-Rassas,Hasnah Kamardin

doi:10.5539/ass.v11n15p244

Abstract

Concentration of ownership in Malaysian public listed companies contributes to agency conflict between majority and minority shareholders. An effective monitoring mechanism is critical to mitigate this conflict. The study aims to examine the influence of board and audit committee independence, internal audit function and ownership concentration on earnings quality proxied by discretionary accruals. The sample of the study 508 companies listed on the Bursa Malaysia Main Market from 2009 to 2012. Two measures of discretionary accruals are used: Modified Jones model (Dechow et al., 1995); and extended Modified Jones Model (Yoon et al., 2006). Using OLS regression, results of the study suggest that audit committee independence and more investment in internal audit function are related to higher earnings quality. However, board of directors’ independence and ownership concentration are associated with lower earnings quality. The finding indicates the importance of audit committee independence in producing quality financial reporting. Consistent findings are found for most variables in both models. The findings of the study have implication on the use of measurement of discretionary accruals in earnings quality studies and corporate governance practices in Malaysia.

Highlights

The main objective of organizations is to ensure customers, investors, creditors, suppliers, regulators and the public at large that they are operating responsibly towards more accurate financial information (Abdullah, 1999)
The study aims to examine the influence of board and audit committee independence, internal audit function and ownership concentration on earnings quality proxied by discretionary accruals
We examined the effect of board and audit committee independence, quality of internal audit function and ownership concentration on earnings quality, measured by absolute value of discretionary accruals

Summary

Introduction

The main objective of organizations is to ensure customers, investors, creditors, suppliers, regulators and the public at large that they are operating responsibly towards more accurate financial information (Abdullah, 1999). This can be achieved through gaining the confidence of all parties to invest in the businesses. Evidence from the financial crisis in 1997 has shown the effect of poor corporate governance and lack of transparency in financial reporting. Good corporate governance practices and transparency of financial reporting can enhance the investors’ confidence (Hashim, 2007). Discretionary accruals have received much attention among academics as well as investors as an important indicator of earnings quality

Methods

Results

Conclusion