Earnings quality and audit attributes in high concentrated ownership market

Abstract

Purpose The purpose of this study is to examine the effect of the audit committee (AC) independence, financial expertise, internal audit function, audit quality and ownership concentration on earnings quality (EQ) and, consequently, ascertain whether the AC’s independence and financial expertise has a moderating effect on the relationship between internal audit function and EQ. Design/methodology/approach The study sample is 508 firms listed on the Main Market of Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange) for the years 2009 to 2012. EQ was measured using two modified Jones models of discretionary accruals. Findings The findings reveal that the independence of AC and investment in internal audit function, as well as the Big4 audit firm, are related to greater EQ. Ownership concentration is found to be associated with lower EQ. The study provides evidence that AC’s independence moderates the relationship between internal audit function (investment in and sourcing arrangements of internal audit function) and EQ. It also shows that AC’s financial expertise moderates the relationship between sourcing arrangements of internal audit function and EQ. Practical implications This study extends the prior related literature by examining the AC’s independence and financial expertise as moderating variables on the relationship between internal audit function and EQ. Social implications Policymakers might use the findings regarding EQ in relation to governance practices, to recognize the important roles played by the AC’s independence and financial expertise on the effectiveness of internal audit function with EQ. Originality/value This study uses the agency theory and resource dependence theory to provide empirical evidence on the impact of internal audit function and AC on EQ in the ownership concentration environment.

Accounting expertise in the audit committee and earnings management

“…It is also found that LEV is positively and significantly related to ABSDA1 and ABSDA2. This positively significant result is consistent with previous studies (Al-Rassas & Kamardin, 2016;Saleh et al, 2005Saleh et al, , 2007Salleh & Haat, 2013;Salleh et al, 2012). This is because companies that face financial difficulties attempt to report higher returns in order to hide their financial constraints (Campa, 2015;Park & Shin, 2004).…”

Audit Committee Characteristics and Audit Report Lag: Evidence From Oman

“…From the perspective of agency theory, independence and expertise of audit committee directors are much significant in maintaining the integrity of financial reporting and increase the monitoring quality as they are representatives of the shareholders and minority in particular (Watts & Zimmerman, 1978;Fama & Jensen, 1983).Independent directors have more motivation and expertise to reduce opportunistic behaviour, fraud and misleads in the accounting statements and in which to guarantee the interests of shareholders (Watts & Zimmerman, 1978;Baatwah et al, 2015a), and the quality of financial information (Al-Rassas & Kamardin, 2016). Moreover, directors with financial expertise in audit committee are more efficient when they are independent (Sharma & Kuang, 2014).…”

“…It is claimed that large board size has directors with diverse expertise may strengthen internal controls and capability of directors to monitor the actions of firm's management. Hence, reduce the late issuance of audit report (Basuony et al, 2016); Big4 audit firm (BIG4) is a dummy variable equal "1" if the firm was audited by one of the Big4 auditors and "0" otherwise (Al-Rassas & Kamardin, 2016;Ghafran &Yasmin, 2018). The recognized BIG4 audit firms have advanced resources, better technology and high expertise to provide the audit task by high quality and in faster time compared to non-Big4 firms (Alkhatib & Marji, 2012) and hence, they will provide audit report in a shorter time (Basuony et al, 2016).…”

Corporate Governance Mechanisms, Whistle-Blowing Policy and Real Earnings Management

“…Consequently, previous studies have extensively examined the influence of BOD mechanisms, i.e., CEO chairmanship (Abdul-Rahman & Ali, 2006; chairman independence (Al-Zyoud, 2012;Habbash, 2011;Mohammad et al, 2016), board independence (Chandren, Ahmad, & Ali, 2015;Ku Ismail & Abdullah, 2013;Mansor, Che-Ahmad, Ahmad-Zaluki, & Osman, 2013), board size (Abdullah & Ku Ismail, 2016;Mohammad et al, 2016;Zalata, Tauringana, & Tingbani, 2018), board meetings (Ahmed, 2017;Mansor et al, 2013;Mohammad et al, 2016), women on the boards (Abdullah & Ku Ismail, 2012Buniamin et al, 2012;Ku Ismail & Abdullah, 2013), board directors with corporate background and experience (Ahmed, 2017;Buniamin et al, 2012;Xie, Davidson, & DaDalt, 2003) and board directors with multiple directorships (Baccouche & Omri, 2014;Chandren et al, 2015;Jamaludin, Sanusi, & Kamaluddin, 2015) on mitigating the level of EM. Further, other studies also have extensively examined the influence of AC mechanisms, i.e., AC size (Abdullah & Ku Ismail, 2016;Al-Rassas & Kamardin, 2015;Mansor et al, 2013), AC meeting (Abdul-Rahman & Ali, 2006;Al-Rassas & Kamardin, 2015;Ishak, Haron, Salleh, & Rashid, 2011), AC independence (Abdul-Rahman & Ali, 2006;Al-Rassas & Kamardin, 2016;Haji-Abdullah & Wan-Hussin, 2015), women in the AC (Ku Ismail & Abdullah, 2013;Salleh & Haat, 2013), AC accounting expertise …”

“…Although the majority of firms have implemented the MCCG, ACs have not been effective in constraining EM (Chandrasegaram, Rahimansa, Rahman, Abdullah, & Mat, 2013). Thus, more studies are recommended (Al-Rassas & Kamardin, 2016;Chandrasegaram et al, 2013;Inaam & Khamoussi, 2016).…”