An Investigation on the Audit Committees Effectiveness:  The Case for GLCs in Malaysia

Nurul Nazlia Jamil; Sherliza Puat Nelson

doi:10.22146/gamaijb.5484

An Investigation on the Audit Committees Effectiveness: The Case for GLCs in Malaysia

Nurul Nazlia Jamil, Sherliza Puat Nelson

(Submitted 1 December 2014)

(Published 12 September 2011)

Abstract

Financial reporting quality has been under scrutiny especially after the collapse of major companies. The main objective of this study is to investigate the audit committee’s effectiveness on the financial reporting quality among the Malaysian GLCs following the transformation program. In particular, the study examined the impact of audit committee characteristics (independence, size, frequency of meeting and financial expertise) on earnings management in periods prior to and following the transformation program (2003-2009). As of 31 December 2010, there were 33 public-listed companies categorized as Government-Linked Companies (GLC Transformation Policy, 2010) and there were 20 firms that have complete data that resulted in the total number of firm-year observations to 120 for six years (years 2003-2009). Results show that the magnitude of earnings management as proxy of financial reporting quality is influenced by the audit committee independence. Agency theory was applied to explain audit committee, as a monitoring mechanism as well as reducing agency costs via gaining competitive advantage in knowledge, skills, and expertise towards financial reporting quality. The study is important as it provides additional knowledge about the impact of audit committees effectiveness on reducing the earnings management, and assist practitioners, policymakers and regulators such as Malaysian Institute of Accountants, Securities Commission and government to determine ways to enhance audit committees effectiveness and improve the financial reporting of GLCs, as well as improving the quality of the accounting profession.

Full Text: PDF

DOI: 10.22146/gamaijb.5484

References

Abbott, L. J., and S. Parker. 2000. Audit committee characteristics and auditor choice. Auditing: A Journal of Practice and Theory 19 (2): 47-66.

Abbott, L. J., S. Parker, and G. F. Peter. 2004. Audit committee characteristics and restatements. Auditing: A Journal of Practice and Theory 23 (1): 69-87.

Atef, M. Y. 2009. Does audit committee constraint discretionary accruals in MESDAQ listed companies? International Journal of Business and Social Science 1 (3).

Balsam, S., J. Krishnan, and J. S. Yang. 2003. Auditor industry specialiszation and earnings quality. Auditing: A Journal of Practice and Theory 22 (2) (September): 71.

Baxter, P., and J. Cotter. 2009. Audit committees and earnings quality. Accounting and Finance 49: 267-290.

Beasley, M.S. 1996. An empirical analysis of the relation between the board of director composition and financial statement fraud. The Accounting Review 71 (4): 443-465.

Beasley, M. S., J. V. Carcello, and D. R. Hermanson. 1999. Fraudulent Financial Reporting: 1987-1997 An Analysis of US Public Companies. New York, NY: COSO

Bedard, J., S. M. Chotourou, and L. Corteau. 2004. The effect of audit committee expertise, independence, and activity of aggressive earnings management. Auditing: A Journal of Practice and Theory 23 (2): 13-35.

Bronson, S. N., J. V. Carcello, C. W. Hollingsworth, and T. L. Neal. 2009. Are fully independent audit committee necessary? Journal of Accounting and Public Policy 28: 265-280.

Carcello, J.V., and T. L. Neal. 2000. Audit committee composition and auditor reporting. The Accounting Review 75 (4): 453-467.

Cohen, D. A., A. Dey and T. Z. Lys. 2008. Real and accrual-based earnings management in the pre- and post-Sarbanes-Oxley period. The Accounting Review 83 (3): 757-787.

Collier, P., and A. Gregory. 1999. Audit committee activity and agency costs. Journal of Accounting and Public Policy 18: 311-332.

Choi, J. J, S. W. Park, and S. S. Yoo. 2007. The value of outside directors: Evidence from corporate governance reform in Korea. Journal of Financial and Quantitative Analysis 42 (4). 941-962.

Dalton, D. R., and C. M. Daily. 1999. No return on independence, chief executive. Strategic Management Journal 138: 58-59.

Dechow, P. M., R. G. Sloan, and A. P. Sweeney. 1995. Detecting earnings management. The Accounting Review 70 (2): 193-225.

Dechow, P. M., and I. D. Dichev. 2002. The quality of accruals and earnings: The role of accrual estimation errors. The Accounting Review 77 (Supplement): 35-59.

DeZoort, F. T., D. R. Hermanson, D. S. Archambeault, and S. Reed. 2002. Audit committee effectiveness: A synthesis of the empirical audit committee literature. Journal of Accounting Literature 21: 38–75.

Dowdell, T. D. and J. Krishnan. 2004. Former audit firm personnel as CFOs: Effect on earnings management. Canadian Accounting Perspectives 3 (1): 117-142.

Doyle, J. T., W. Ge, and S. McVay. 2007. Accruals quality and internal control over financial reporting. The Accounting Review 82 (5): 1141-1170.

Felo A. J., S. Krishnamurthy, and S. A. Solieri. 2003. Audit committee characteristics and the perceived quality of financial reporting: an empirical analysis. Working Paper. Graduate School of Professional Studies, Penn State University, Great Valley, Malvern, PA.

Francis, J, R. LaFond, P. M. Olsson, and K. Schipper. 2004. Cost of equity and earnings attributes. The Accounting Review 79 (4): 967-1010.

Gendron, Y., and J. Bedard. 2006. On the constitution of audit committee effectiveness. Accounting, Organisations, and Society 31: 211-239.

Gul, F.A., S. G. Lynn, and J. S. L. Tsui. 2002. Audit quality, management ownership, and the informativeness of accounting earnings. Journal of Accounting, Auditing, and Finance 17 (1): 25-49.

Hamid, A. A. 2011. Network Governance in Government linked companies and Non-government linked companies in Malaysia. Journal of Financial Reporting and Accounting 9 (1): 54-73.

Hashim, H. A., and D. Susela. 2008b. Board independence, CEO duality and accrual management. Asian Journal of Business and Accounting 1 (1): 27-46.

Ismail, H., T. M. Iskandar, and M. Rahmat. 2008. Corporate reporting quality, audit committee and quality of audit. Malaysian Accounting Review 7 (1).

Jaggi, B., and S. Leung. 2007. Impact of family dominance on monitoring of earnings management by audit committee: Evidence from Hong Kong. Journal of International Accounting, Auditing and Taxation 16: 27-50.

Jensen, M., and W. Meckling. 1976. Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Finance and Economics, Vol. 3, pp. 305-360.

Klein, A. 2002. Audit committee, board of director characteristics, and earnings management, Journal of Accounting and Economics 33: 375-400.

Klein, A. 2002a. Economic determinants of audit committee independence. The Accounting Review 77 (2): 435-452.

Klein, A. 2002b. Audit committee, board of director’s Characteristics and earnings Management. Journal of Accounting and Economics 33: 375-400.

Krishnan, G. V. 2003. Does big 6 auditor industry expertise constrain earnings management? Accounting Horizons, Vol. 17, (Supplement), pp. 1-16.

Lin, J. W., J. F. Li, and J. S. Yang. 2006. The effect of audit committee performance on earnings quality. Managerial Auditing Journal, 21(9), 921–933.

Mac 2007. Putrajaya Committee GLCs High Performance’s Summary of Transformation Manual.

Mak, Y. T., and C. K. Chng. 2000. Corporate governance practices and disclosures in Singapore: An update. International Research Journal of Finance and Economics 61: 35-59.

Malaysian Code on Corporate Governance. 2007. Finance Committee on Corporate Governance, Securities Commission. Kuala Lumpur.

Mazzolini, R. 1979. Government Controlled Enterprises: International Strategic and Policy Decisions. John Wiley & Sons.

Menon, K., and D. Williams. 1994. The use of audit committees for monitoring. Journal of Accounting and Public Policy 13: 121-139.

Najid, N. A., and R. Rahman. 2011. Government ownership and performance of Malaysian Government-Linked Companies. International Research Journal of Finance and Economics 61: 35-59.

Nelson, S. P. 2011. Audit Committee Expertise and Financial reporting quality: An Empirical Study in Malaysia. LAP Lambert Academic Publishing: Germany.

Park, Y. W., and H. H. Shin. 2004. Board composition and earnings management in Canada. Journal of Corporate Finance 10: 431-457.

Persons, O. S. 2005. The relation between the new corporate governance rules and the likelihood of financial statement fraud. Review of Accounting & Finance 4 (2): 125-148.

Piot, C., and R. Janin. 2004. External auditors, audit committee and earnings management in France. European Accounting Review 16 (2): 429-254.

Powell, V. 1987. Improving Public Enterprise Performance: Concepts and Techniques. Geneva: International Labour Office.

The STAR. 2010. Transforming the GLCs (12th June).

Qin, B. 2007. The Influence of audit committee financial expertise on earnings quality: US evidence. ICFAI Journal of Audit Practice 4 (3): 7-28.

Rahman, R. A., and F. H. Ali. 2006. Board, audit committee, culture and earnings management: Malaysian evidence. Managerial Auditing Journal 21 (7): 783-804.

Razak, N. H., and R. Ahmad, H. J. Aliahmed. 2008. Ownership structure and corporate performance” A comparative analysis of government Linked and Non-government linked companies from Bursa Malaysia. Corporate Ownership and Control 6 (2) (Winter): 434-442.

Razak, N. H., R. Ahmad, and H. J. Aliahmed. 2011. Does government linked companies perform better than Non Government Linked Companies: Evidence in Malaysia. Journal of Applied Finance and Banking. (1) (1): 213-240.

Saleh, N. M., T. M. Iskandar, and M. N. Rahmat. 2007. Audit committee characteristics and earnings management: Evidence from Malaysia. Asian Review of Accounting 15 (2): 147-163.

Sivaramakrishnan, K.; and S. C. Yu. 2008. On the association between corporate governance and earnings quality. Working Paper. University of Hoston.

Tabachnick, B. G., and L. S. Fidell. 2007. Using Multivariate Statistics (5th ed.). USA: Pearson Education Inc.

The Green Book. 2006. Enhancing Board Effectiveness. Putrajaya Committee on GLC High Performance, Malaysia.

Xie, B., W. N. Davidson III, and P. J. DaDalt. 2003. Earnings management and corporate governance: The role of the board and the audit committee. Journal of Corporate Finance 9: 295-316.

Yang, J. S., and J. K. Krishnan. 2005. Audit committees and quarterly earnings management. International Journal of Auditing 9: 201-219.

Yen. J. W, L. S. Chun, S. Z. Abidin, and B. A. Noordin. 2007. Earnings management practises between Government Linked Companies and Chinese Linked Companies. International Journal Economics and Management: 387-406.

Zhang, Y., J. Zhou, and N. Zhou. 2007. Audit committee quality, auditor independence, and internal control weaknesses. Journal of Accounting and Public Policy 26: 300.

Refbacks

There are currently no refbacks.