Engagement risk, auditor choice and audit fee in the Malaysian audit market

High risk of auditor litigation and audit market competitiveness motivate audit firms to place greater emphasis on the role of engagement risk in determining client-auditor relationship and audit cost (Johnstone, 2000; Johnstone & Bedard, 2004). Based on this development, this study examines the market structure and the impact of engagement risk on auditor choice and audit pricing in a low litigation risk setting. Drawing from the agency theory and its related hypotheses, the study anticipates that audit risk, auditor business risk and client business risk are significantly associated with auditor choice and audit fee. The samples of study consist of Malaysian public listed companies from 2008 to 2010. The descriptive analysis of 2,854 companies demonstrates that the Malaysian audit market can be described as a tight oligopoly. In determining the influence of risk on auditor choice and audit fee, some exclusion criteria were established. Using panel data analysis on 2,451 companies, it is found that engagement risk significantly influences auditor choice and audit fee. In particular, auditor business risk is more important than the other risks in auditor choice and it is positively associated with the choice of quality auditor whereas, audit risk elements are more dominant than the other risk factors in explaining audit fee. Auditors will charge higher audit fees for clients with higher audit risks. The engagement risk affects auditor choice and audit fee differently because of the different risk management practices by audit firms in establishing their client portfolio. Avoidance of small and risky clients among large audit firms would increase companies’ difficulty to access the capital market and delay growth. This study contributes to the auditing literature by addressing the audit firm’s risk management strategy in Malaysia, which is rarely investigated. The study also provides an insight into the regulator on factors that should be considered in enhancing the quality of an audit fir

The structure of Malaysian audit market: From 2008 to 2010

The purpose of this study is to provide updated knowledge and detail on the structure of Malaysian audit market in the pre and post Audit Oversight Board (AOB) establishment.This study includes all Malaysian listed companies from 2008 to 2010.The examination of audit market structure was based on rate of audit fee per unit of size, audit market concentration and individual firm's market share. The results suggest Malaysia audit market can be described as tight oligopoly and there is slight changes in the market during the period 2008 - 2010. The noted changes ore reduction of oudit supplies and the increment of audit fee. The result suggest evidence of economic of scale enjoyed by big size companies.It is interesting to note that, while Big Four are now reducing the number of audit clients, they instead are focusing on larger clients. Focusing on big size companies possibly indicates a strategic move to avoid risky clients.Ernst & Young and PricewaterhouseCoopers are the most influential among Big Four firms, meanwhile Four firms, is enlarging its market share.This study contributes to the audit market literature addressing the strategy adopted by audit firm in low litlgation risk environment.The study also examines the market power of non-Big Four firms in a developing country which is rarely investigated

Developing individuals for developing learning based systems

Research has highlighted that the implementation of learning based systems development is a complex issue as it requires the input of employees in all the levels of an organization.However, to obtain this is a challenge for organizations as the basic training and education offered by organizations and experiences on their own and other factors such as fear and ignorance prevent such actions.For this purpose, other elements are also required.This research aims to identify and explain the usage of the elements that can encourage employees to contribute inputs necessary for learning- based systems development.To achieve this aim, this research developed a conceptual framework based on the concepts of meta- abilities and tacit knowledge externalization and sharing.The framework is tested using a case study in Malaysia. It is concluded that the future focus the management of information in organizational learning (OL) should be towards the development of an individual’s meta-abilities and creating a suitable organizational culture and infrastructure such that knowledge sharing is promoted

The association between corporate governance and auditor switching decision

The purpose of this study is to examine the association between corporate governance and the propensity of auditor switching.In particular, the study seeks to investigate whether board independence and Chairman-CEO duality, influence the auditor-client realignment exercise. Understanding the reasons why companies switch auditor is very important as auditor switching could inhibit the flow of capital in the securities markets, and subsequently, increase the capital costs. Based on the analysis of 712 non-financial companies listed on Bursa Malaysia during the period from 31st December, 2009 to 2011, the results suggest that the companies with higher non-executive directors than the sample median tend to switch auditor.The Chairman-CEO duality, however, has no effect on the decision. The results also suggest that the provision of non-audit service, changes in key management, company size and Big 4 are significant determinants of auditor switch decision. The outcome of the study indicates the importance of sound governance on auditor switch decision and might provide insightful knowledge which helps shareholders to realize the importance of having balance BODs

The role of board of directors in the establishment of risk management committee

The objective of the study is to discuss the roles of board of directors in the establishment of risk management committee for Malaysian’s public listed companies.In Malaysia, based on the Malaysian Code on Corporate Governance (MCCG), (2007; 2012) clearly stated the role and responsibility of the board of directors toward the risk management activities.At the Corporate Governance Week 2010 and 2011 as well, the chairman of the Security Commission Malaysia highlighted the responsibility of the board of directors in risk management processes and she expressed concern over the failure of the board of directors to establish appropriate measures for the risk management process in the company.The statement of the chairman of Security Commission Malaysia is in line with MCCG’s best practices (2000; 2007; 2012), i.e., the board of directors should identify principle risks and ensure the implementation of an appropriate system to manage these risks

Competition in Malaysian audit industry: what the market is telling us?

The dominance of only a few audit firms in the market is of concern due to the possibility of market abuse and subsequently poor quality of audit work.While many studies of market structure have focused mainly on developed and efficient capital markets, fewer have studied the issue in emerging markets such as Malaysia.This paper highlights the structure of Malaysian audit market and assesses the level of market competition. The results suggest that the Malaysian audit market is of oligopoly type, with the top 10 audit firms dominating more than 91 percent of the market. Interestingly, there is also evidence that one of the Big Four is losing its grip in the market and one of the non-Big Four players is eyeing a position in the top four.This indicates the possibility that the barrier to entry has begun to collapse, as smaller audit firms enjoy better opportunities to enter the market

An analysis of internal audit investment among top Malaysian listed companies

The importance of internal audit function in improving the company’s internal control risk management and corporate governance has been emphasized in the Malaysian Code of Corporate Governance (MCCG) and Bursa Malaysia Listing Requirements.Based on the Listing Requirements, Malaysian listed companies are required to establish the internal audit function, which is independent and this function must be supervised by the audit committee. Although the importance of internal audit function has been highlighted in various code of corporate governance, little is known about the investment made by the company in internal audit activity. This study capitalizes the publicly available data on internal audit cost and the type of internal function provider in Malaysia setting. The primary purpose of this study is to describe internal audit practices, especially on the internal audit budget in Malaysia for the year 2017 for top 300 companies. Based on the descriptive analysis, it is found that the internal audit fee is relatively lower than the cost of external audit and most of the companies’ internal audit function was carried out by in house teams. Also, the benefit from economies of scale is less pronounced in internal audit as compared to external audit services. Some further analyses were also conducted, and the article is ended recommendations for future research to be undertaken in investigating the internal importance audit in Malaysia

Financial restatements among Malaysian listed companies: Do corporate governance and ownership matter?

With the issuance of Corporate Governance Code in 2000 in Malaysia, it is expected that corporate governance has played an important role ensuring the reliability of financial statements.This study seeks to examine the nature financial restatements in Malaysia.It also seeks to investigate whether the corporate governance characteristics are associated with financial restatement. Using the restated financial statements during the period of 2002 to 2005 matched with a control group of non-restating firms, the results show that the primary reason for misstating the accounts is to inflate earnings. The nomination committee of the firms that restated is less independent and managerial ownership and the logistic regression analysis indicates that the extent of ownership by outside blockholders is able to constrain managers from misstating accounts.The results also show that firms with high level of debts (an indicator of the presence of debt covenants) are more likely to commit in financial misstatement.The research is significant as it provides evidence on the role of corporate governance, especially the ownership by outside blockholders in Malaysia.This shows that outside blockholders is effective in disciplining managers so that the accounts so prepared are not misleading.This study does not support the move by Malaysian Government to require companies audit committee to be wholly independent.It is suggested that the more important thing is to have audit committee members who understand accounting and the related standards

Does placement of the auditor's report in Malaysian companies' annual reports matter?

This study attempts to investigate whether a management decision to locate the auditor's report in the financial statements is explained by information signaling theory.The location of the auditor's report in the financial statements is explained by information signaling theory.The location of the auditor's report is being the focus of this study because a decision on the location of the auditor's report in the financial statements is the management's discretion.The auditor's report is important because it tells readers of the annual report whether the firm has kept all the records properly and that the financial statements are prepared in accordance with the approved accounting standards.We posit that a firm that conveys good news is more likely to place its auditor's report at the beginning of the financial statements than at the end, and vice-versa.Based on 698 listed firms listed on the Bursa Malaysia as on December 31,2003, our evidence shows that information signaling theory does not support our prediction on the management decision to place the auditor's report.We find that about eighty percent of the firms in our study located their auditor's reports at the beginning of the financial statements.Therefore, it appears that it is the tendency of firms in Malaysia to place their auditor's reports at the beginning rather than at the end.Therefore, this signifies the importance of the auditor's report in the financial reporting framework.We reveal that none of the profitability measure, namely ROA, EPS and Tobin's q, is associated with the location of the auditor's report.Therefore, information signaling theory is not supported in explaining the location of the auditor's report

Financial restatements and corporate governance among Malaysian listed companies

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