The Relationships Between Managerial Overconfidence, Audit Committee, CEO Duality and Audit Quality and Accounting Misstatements

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.

Association of Overconfidence Management With Earnings Management: Moderation of Audit Committee Effectiveness

“…In research from Palestine (2009) and Sanjaya (2008) which found that the audit committee is not able to influence earnings management. Research by Azhari et al (2020) found that the audit committee's expertise and independence were not significant in deterring accounting misstatements. Research from Haniffa et al (2006) and (Peasnell et al, 2005) also found no relationship between audit committee and earnings management.…”

Is Pakistan's Financial Distress Guilty of Accounting Misrepresentation? A Manager's Mediating Role Due to Overconfidence

“…The issue of accounting deception has been extensively studied in industrialized nations, whereas emerging economies have received far less attention (Lau & Ooi, 2016). Pakistan and other developing Asian nations have been the subject of very little research on accounting misrepresentation (Azhari, Hasnan, & Sanusi, 2020;Latif & Abdullah, 2015). Due to variations in legal frameworks, corporate structures, cultural norms, regulatory environments, and the caliber of financial reporting, outcomes may differ between nations.…”

Board Characteristic and Financial Restatement

“…BoDs that have an overconfidence attitude tend to make inaccurate estimates or estimates. This action creates misreporting of accounting records (Azhari et al, 2020). BoD overconfidence increases the potential for overstatement, and it is not consistent with the conservatism principle (Ramsheh & Molanzari, 2014).…”

“…Second, not many scholars have discussed the consequence of BoD overconfidence on the financial restatement. Most of the previous findings discuss the impact of managerial overconfidence on accounting conservatism (Hsu et al, 2017), accounting misstatement (Azhari et al, 2020), earning management (Berry-Stölzle et al, 2018;Sutrisno, 2019), and financial statements comparability (Almaleki et al, 2021). However, board overconfidence has two opposite consequences.…”

“…However, there are still limitations of empirical research that discusses the BoC's role in a financial restatement. The majority of previous studies only identified BoD's role in financial restatement (Azhari et al, 2020;Cai & Chang, 2014;Hasnan et al, 2017;Ma & Chang, 2015). Only a few studies examine the BoC characteristics and financial restatement (Butar, 2018;Siregar & Rahayu, 2019;Yuristisia & Lukviarman, 2008).…”