Financial restatements and corporate governance among Malaysian listed companies

Abstract

Purpose-This paper seeks to examine the effects of Malaysian Code on Corporate Governance on the nature of financial restatements in Malaysia and whether corporate governance characteristics are associated with financial restatements. Design/methodology/approach-Data for this paper are obtained from annual reports that had been restated for the period of 2002-2005 with firm-years being the unit of observation. A control group comprising non-restating firms is formed using match-pair procedures where restated and non-restated firms are matched by size, industry, exchange board classification, and financial year end. The data are subsequently analyzed using a t-test, the Pearson correlation and logistic regression. Findings-The results show that the primary reason for misstating the accounts is to inflate earnings. The nomination committee of the firms that restated is found to be less independent with higher managerial ownership. The logistic regression analysis indicates that the extent of ownership by outside blockholders deters firms from misstating accounts. Surprisingly, audit committee independence is associated with the likelihood of financial misstatement. Financial restatements, nevertheless, are not found to be associated with board independence, managerial ownership, and CEO duality. Finally, the results show that firms with high level of debts are more likely to commit in financial misstatement. Practical implications-The research is significant as it provides evidence on the role of corporate governance, especially the independence of the nomination committee and extent of ownership by outside blockholders in Malaysia. It shows that outside blockholders is effective in disciplining managers so that the accounts so prepared are not misleading. The move in 2007 by the Malaysian Government to require companies audit committee to be composed of only independent and non-executive directors, as well as requiring audit committee members to be financially literate, should be seen as important in ensuring the effectiveness of the audit committee. Originality/value-This research is considered as the first study which examines the effects of corporate governance variables on the incidents of financial restatements in a developing country. The findings of this paper would be useful for policy makers in evaluating the importance of corporate governance in emerging countries, specifically on the issue of quality financial reporting.

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