The Audit Committees, Internal Audit and External Audit Quality Effects on Earnings Management: An Analysis of Malaysian Government-Linked Companies

Abstract

The role of audit governance mechanisms as part of the corporate governance architecture has been promoted to ensure the integrity of the financial reporting process. In order to get insights on their effectiveness, this study investigates the effects of the audit governance mechanism, specifically audit committee, internal audit function and external audit quality on earnings management in Malaysian government-linked companies. Using a cross-sectional variation of the modified Jones Model (1995) to estimate discretionary accruals, this study examined 38 GLCs from 2009–2018, which consisted of 340 firm-year pair observations. Panel data regression analysis was carried out using the generalised least square method to analyse the effect of audit governance mechanisms on earnings management. The findings suggest that lower likelihood of earnings management is associated with the internal audit function. Further analysis on the proxy of internal audit measures suggests that in-house internal audit function is negatively associated with earnings management. This research would provide insights for regulators and management to strengthen in-house internal audit function in order to mitigate earnings management in Malaysian government-linked companies. Keywords: Earnings management; audit committee; internal audit function; government-linked companies; external auditor ABSTRAK Peranan mekanisme tadbir urus audit sebagai sebahagian daripada seni bina tadbir urus korporat digalakkan untuk memastikan integriti proses pelaporan kewangan. Untuk mengetahui keberkesanannya, kajian ini menyiasat kesan mekanisme tadbir urus audit khususnya jawatankuasa audit, fungsi audit dalaman dan audit luaran terhadap pengurusan perolehan dalam syarikat berkaitan kerajaan Malaysia. Kajian ini menggunakan variasi keratan rentas Model Jones yang diubah suai (1995) untuk menganggarkan akruan mengikut budi bicara, dengan mengkaji 38 GLC dari 2009–2018, yang terdiri daripada 340 pemerhatian tahun-syarikat. Analisis regresi data panel telah dijalankan menggunakan kaedah rawak persegi terkecil (GLS) untuk menganalisis kesan mekanisme tadbir urus audit ke atas pengurusan perolehan. Penemuan mencadangkan kemungkinan pengurusan perolehan yang lebih rendah dikaitkan dengan audit dalaman. Analisis lanjut mencadangkan audit dalaman sendiri dikaitkan secara negatif dengan pengurusan perolehan. Penyelidikan ini akan memberikan pandangan kepada pengawal selia dan pengurusan syarikat untuk mengukuhkan aspek fungsi audit dalaman sendiri bagi mengurangkan pengurusan perolehan dalam syarikat berkaitan kerajaan Malaysia. Kata kunci: Pengurusan pendapatan; jawatankuasa audit; fungsi audit dalaman; syarikat berkaitan kerajaan; audit luaran