Directors’ Independence, Internal Audit Function, Ownership Concentration and Earnings Quality in Malaysia

Abstract

Concentration of ownership in Malaysian public listed companies contributes to agency conflict between majority and minority shareholders. An effective monitoring mechanism is critical to mitigate this conflict. The study aims to examine the influence of board and audit committee independence, internal audit function and ownership concentration on earnings quality proxied by discretionary accruals. The sample of the study 508 companies listed on the Bursa Malaysia Main Market from 2009 to 2012. Two measures of discretionary accruals are used: Modified Jones model (Dechow et al., 1995); and extended Modified Jones Model (Yoon et al., 2006). Using OLS regression, results of the study suggest that audit committee independence and more investment in internal audit function are related to higher earnings quality. However, board of directors' independence and ownership concentration are associated with lower earnings quality. The finding indicates the importance of audit committee independence in producing quality financial reporting. Consistent findings are found for most variables in both models. The findings of the study have implication on the use of measurement of discretionary accruals in earnings quality studies and corporate governance practices in Malaysia.

Earnings quality and audit attributes in high concentrated ownership market

“…These results support the agency theory and resource dependence theory, as IAF is an effective resource to enhance firm's monitoring device to decrease the agency problem between managers and financial reporting users. This contention is supported by Prawitt et al (2009) and Al-Rassas and Kamardin (2015aKamardin ( , 2015b. Moving on to the second hypothesis, the results in Table VII show an insignificant relationship between sourcing arrangements (IAFSOUR) and both DA1 and DA2, indicating that H2 is rejected.…”

“…Additionally, a negative and significant relationship between IAF and the absolute value of DAs (proxy of EQ) was reported by Johl et al (2013). Al-Rassas and Kamardin (2015aKamardin ( , 2015c) also found a significant and negative relationship. Thus, a higher investment in the IAF implies that firms have more competent IAF personnel to help the management establish stronger controls over financial reporting.…”

Mediating Effects of Remuneration on Earnings Management and Firm Equity Value

“…This study, following Garg (2018), measures AEM using signed value of discretionary accruals. As there are also literature that measure AEM using absolute values of discretionary accruals (Abdul Jalil & Abdul Rahman 2010; Cohen et al 2008), we re-estimate the mediation models using absolute values of AEM to test the combined effects of income-increasing or income-decreasing earnings management (Alzoubi 2016;Al-Rassas & Kamardin 2015;Cohen et al 2008;Klein 2002…”

Corporate Governance: Mechanisms for Control and Alignment of Interests of Participants of Corporate Relations in the Transitive Economy

“…Along with traditional and purely economic topics for analysis of the corporate governance, associated with interconnection between the specifics of financial flows and company performance (Al-Rassas and Kamardin, 2015;Prison and Turnbull, 2015;Rossi et al, 2015), interconnection between the governance structure and capital structure of corporations (Alves et al, 2015;Ducassy and Montandrau, 2015;Drago et al, 2015;Bocharova, 2014), interrelations of corporations and the state (Col and Errunza, 2015;Nhung and Okuda, 2015), issues of risk minimizing for investors (Chen et al, 2015;Tan and Ding, 2015), analysis of interaction of market and non-market mechanisms in the system of corporate governance functioning (Du et al, 2014), issues of increasing corporate governance quality in the conditions of imperfect markets, including in the conditions of information asymmetry (Elbadry et al, 2015). Works devoted to analysis of participation of stakeholders in the corporate governance system, in particular determinacy and feasibility of their interests (van Essen et al, 2015;Bruno, 2015;Uysal and Tsetsura, 2015;Ayuso et al, 2014;Lai and Chen, 2014) represent a special stratum of literature.…”