The Effect of Regulatory Oversight on the Association between Internal Governance Mechanisms and Audit Fees

Abstract

Recent episodes of corporate scandals have resulted in higher levels of regulatory oversights and calls for enhanced corporate governance (CG) and audit quality. These measures impact audit fees which are intrinsically linked to CG. Whilst prior research examines the relationship between internal governance mechanisms and audit fees, the impact of regulatory oversight has not been examined. Hence, the primary objective of this study is to examine the moderating effect of regulatory oversight on the relationship between audit committee (AC) characteristics, internal audit (IA) function attributes and external audit fees in an emerging market, namely Malaysia. The Bursa Malaysia revised its Listing Requirements (BMLR) in 2008, requiring increased interaction between the AC and IA function. Prior thereto, Bank Negara Malaysia, had exercised oversight functions over financial institutions and insurance companies. They were and continue to be highly regulated. This study focuses on the pre- and post-revised BMLR, and also differentiates between highly regulated and less regulated industries. The contributions from this proposed study are threefold. Firstly, we expect the results to provide empirical evidence of the impact of the revised BMLR on audit to feedback to regulators of the efficacy of their CG policy initiatives. Secondly, this study will evidence the moderating role of such regulatory oversights on CG practices. Thirdly, given that prior studies show mixed results regarding the relationship between IA function and external auditing, whether substitutes or complementary, taking account of the regulatory environment may explain the mixed findings thus far. A methodological triangulation approach, involving qualitative and quantitative methods of data collection, through interviews with selected audit practitioners and data from firms’ annual reports, is used. The theoretical model to test the hypotheses is built upon the Simunic (1980)’s model further modified by Griffin and Lont (2007), incorporating the local nuances in the emerging economy context. Supervisors: Assoc. Prof. Dr. Susela Devi, Dr.Chan Wai Meng, Faculty of Business Administration and Accountancy, University of Malaya, Malaysia.