Nonaudit services, audit committee characteristics and accruals quality in Malaysia

Wan Zurina Nik Abdul Majid,Effiezal Aswadi Abdul Wahab,Hasnah Haron,Mohammad Nasih,Dian Agustia

doi:10.1108/ajar-09-2020-0090

Abstract

PurposeThe study examines the relationship between nonaudit services (NAS) and accruals quality in Malaysia. The study also considers several important characteristics of audit committee as the determinant for accruals quality. Next, the study examines whether these characteristics mitigate the relationship between NAS and accruals quality.Design/methodology/approachThe study employs descriptive analysis, univariate tests and multivariate regression to investigate the potential effect of NAS on acruals quality. Data for audit committee characteristics were hand collected from annual reports downloaded from Bursa Malaysia's website.FindingsBased on 1,118 firm-year observations for the period 2009–2011, the study finds that NAS negatively impact accruals quality. This empirical result indicates that the economic bond that is created between auditors and clients restricts the auditors from performing their duty objectively. A fully independent audit committee weakens the negative relationship between NAS and auditor independence.Research limitations/implicationsThe sample period represents a limitation since it only covers three years of data. This limitation is largely driven by the nature of data collection of NAS fees.Practical implicationsThese results contribute to Malaysia's policy deliberation to account for the effects of NAS on auditor independence and the oversight role of an audit committee. This study contributes to theoretical perspectives on accruals quality and corporate governance in Malaysia.Originality/valueThe novelty of this research, coupled with institutional data in Malaysia, claims the originality of this research.

Highlights

Does the audit committee play its oversight roles in relation to auditor independence? This question has long been debated, especially when the incumbent auditor provides nonaudit© Wan Zurina Nik Abdul Majid, Effiezal Aswadi Abdul Wahab, Hasnah Haron, Dian Agustia and Mohammad Nasih
The result of this study shows a decrease in the value of nonaudit services (NAS) in Malaysia
Another likely cause is the effectiveness of audit committee members in determining the policies and procedures for NAS to be performed by incumbent auditors

Summary

Introduction

Does the audit committee play its oversight roles in relation to auditor independence? This question has long been debated, especially when the incumbent auditor provides nonaudit© Wan Zurina Nik Abdul Majid, Effiezal Aswadi Abdul Wahab, Hasnah Haron, Dian Agustia and Mohammad Nasih. Does the audit committee play its oversight roles in relation to auditor independence? The existence of an audit committee is expected to improve auditing and governance quality. Audit committee members’ independence is important because the committees’ monitoring affects earnings quality (Inaam and Khamoussi, 2016) and auditor independence (Abbott et al, 2003). Independent audit committees have been associated with a higher disclosure quality (Karamanou and Vafeas, 2005) and a lower cost of debt finance (Anderson et al, 2004)

Objectives

Results

Conclusion