Abstract
This paper discusses the relationships between managerial overconfidence, financial distress, audit committee, CEO duality and audit quality and the occurrence of material accounting misstatements by Malaysian listed companies. Managerial overconfidence and financial distress are viewed as motives for accounting misstatements in this study. Audit committee characteristics, i.e., independence and expertise of its members, CEO duality and audit quality are viewed as the ‘loopholes’ in corporate governance mechanisms that provide opportunities for proprietors to issue accounting misstatements. The sample for this study consists of 237 Malaysian listed companies, which includes data from misstated company reports with its respective matched data of non-misstated company reports. The results of this study show that financial distress and CEO duality are significantly related to the occurrence of accounting misstatements. This paper contributes to the body of knowledge on how to mitigate accounting misstatements, especially with the inclusion of the managerial overconfidence variable, which is a new addition to the research on accounting misstatements in Malaysia.
Highlights
The International Federation of Accountants (IFAC) (2009) defines accounting misstatement as the dissimilarities between the representation of the reported financial statement items and the representation required by the applicable financial reporting framework
The study examined the relationships between managerial overconfidence, financial distress, audit committee, Chief Executive Officer (CEO) duality and audit quality and the occurrence of material accounting misstatement
This research contributes to the body of knowledge on the factors that could contribute to accounting misstatement and whether the corporate governance mechanisms tested, i.e., audit committee and audit quality, could act as effective control mechanisms to mitigate accounting misstatement
Summary
The International Federation of Accountants (IFAC) (2009) defines accounting misstatement as the dissimilarities between the representation of the reported financial statement items and the representation required by the applicable financial reporting framework. Unless stricter penalties are imposed and more stringent regulations as well as an effective monitoring mechanism are implemented, misstatements will continue and the credibility of financial reporting would be lost This provides reasonable justification for this study to determine the causes of accounting misstatements in Malaysia. Culture, corporate settings, legislations and financial reporting quality of each nation are unique, differences in findings can be expected, especially when comparing developed and developing countries Prior researchers, such as Dechow et al (2011) and Abdullah et al (2010) have suggested that the causes for accounting misstatement may differ between countries. As a firm‟s control and monitoring mechanisms, corporate governance was examined in this study, to determine whether or not its weaknesses, in terms of its audit committee, the existence of Chief Executive Officer (CEO) duality and audit quality, could provide an opportunity for material accounting misstatements to occur.
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