The Malaysian Corporate Governance Reform and Financial Reporting Quality

Chains of critical corporate and economic events pre and post millennium periods have dramatically shifted the focus of firms, investors and regulators worldwide on corporate governance and financial reporting issues. Particularly, the 1997/1998 Asian financial crisis has motivated many Asian countries including Malaysia to reform their respective governance regime. This study undertakes an empirical investigation with regards to the Malaysian public policy reform effectiveness related to corporate governance from the specific perspective of firm’s financial reporting quality (FRQ). The motivation behind this study is the propositions set out by the Malaysian government upon introducing series of governance reform programs which includes the expectation that reform programs would improve directors’ monitoring and oversight effectiveness towards financial reporting matters. These propositions are considered in this study as “maintained assumptions”, which become the subject of the empirical investigation. Accordingly, three research objectives and three main hypotheses were established. Six board characteristics and two ownership types were selected, representing the predictor variables. Contributing to the body of governance knowledge is the consideration given to a new director’s characteristic of social title which is Malaysia’s unique board feature. Other board characteristics include leadership structure, independence, multiple directorships, founding family directors and financial expertise. The two considered ownership types are directors’ and institutions’ and the FRQ being the dependent variable is proxied by accruals quality metrics commonly used in prior FRQ studies. A total of one hundred and three survived listed firms in Bursa Malaysia throughout the eleven years period from 1996 to 2006, with complete data were chosen. The survived firms were sampled to accommodate the balanced observations research design, thereby facilitating the objective assessment of governance reform implications on firm’s FRQ. The regression analyses were done separately to reflect the two separate reform types of regulatory (reform-I) and institutional and best practices (reform-II). This thesis postulates that the introduction of both reform types would introduce an inflexion point to firm’s FRQ (i.e. improvement) and favorably moderate the statistical relationships between firm’s FRQ and both, board and ownership variables. The results indicate that majority (88% in reform-I and 75% in reform-II analysis period) of the predictor variables considered in this study are significant determinants of FRQ (in the predicted direction) in Malaysia. The interaction results (testing on reforms’ moderating effect) generally reflect poor ability of reform-I to favorably moderate the link between predictor variables and FRQ as compared to reform-II, indirectly suggesting higher moderating effectiveness of reform-II. The study is however unable to find any evidence of FRQ improvement post reform periods. Three reasons of (1) the macroeconomic condition; (2) the importance of governance in enhancing firm’s FRQ; and (3) the presence of unique, country-specific economic and governance characteristics are suggested to explain the findings. The sensitivity tests results suggest that, except for some minor differences in results, these findings are moderately robust to alternative variables specification and study period. Overall, this study contributes to the extant of governance literature in emerging economies by evidencing that governance reform effectiveness in ensuring firm’s FRQ is sensitive to economic conditions and various unique governance and institutional characteristics

Earnings quality of Malaysian IPO firms: the effect of share moratorium provision and institutional ownership

The paper focuses on earnings quality (EQ) of Malaysian Initial Public Offering (IPO) firms and examines the effect of share moratorium regulation and institutional ownership on IPO firms’ EQ behavior. Analyzing both real and accrual earnings management (EM) to measure EQ of 220 sample IPO firms over the period from 2002 to 2009, the results indicate that Malaysian IPO firms engage in both real and accrual discretionary EM. Both EQ measures are also observed to be similar between firms with and without share moratorium provision, evidencing the support towards Malaysia's public policy guideline of subjecting all IPO firms to share moratorium regulations as a commitment device to reduce information asymmetry and adverse selection problem between the strategic owners and new investors. The multivariate results further indicate the effective monitoring of institutional shareholders over investee firms’ EQ. The overall results collectively suggest the need for investors to examine investee firms’ real activity discretionary behavior in their investment decisions while regulators should device means of constraining it

Questioning public policy’s “maintained assumption”: the case of governance rules impacting regulatory sanctions among capital market players in Malaysia

Legal obligations are primarily introduced and enforced on capital market players with the aim of ensuring orderly capital market activities which should (rightfully) lead to capital market stability and hence unhindered economic growth. In the Malaysian context, listed firms being part of the Country's capital market players are mandated to observe and comply with extensive capital market rules introduced and enforced by the Country's capital market regulatory bodies. It includes the need for listed firms to practice sound governance and transparent reporting of financial information. These market disciplining apparatus are essentially economic centric public policies, developed and subsequently imposed on public listed firms premising on the maintained assumption that strong and sound governance structures would result in enhanced market discipline. This research paper reports empirical findings which form part of a larger research project on regulatory sanctions in Malaysia. Examining specific and conventional governance, ownership and firm specific elements comparatively between sanctioned and matched non-sanctioned firms between 2001 and 2008, we document prelude evidence questioning the validity of governance rules’ maintained assumptions that strong and sound governance structures would at least, insulate firms from being sanctioned. The results further signify the entrenched culture of box-ticking among listed firms in Malaysia, whereby the problem practically forms large improvement void which are potentially detrimental to the Country's capital market stability if left unattended

Understanding and assessing governance agents relationships: the contribution of leader-member exchange theory

It is a textbook truism that many corporate relationships among governance agents could be theoretically informed by the established agency paradigm. The economic based principal-agent theorization is however falling short of allowing researchers to evaluate the quality of such relationships. In this paper, we depart from the mainstream principal-agent theoretical argumentation by attending to “Leader-Member Exchange” theory (LMX theory), a commonly applied theorization in organizational psychology and communication management literature repertoire. We delineate relevant governance relationships among various governance agents across contexts and subsequently, theoretically argue the applicability of LMX theory in explaining their dyadic relationships. Interfacing LMX theory with corporate governance, we further provide the necessary instruments for measuring governance agents’ relationships quality. Despite the theoretical and argumentative nature of our research endeavour, this paper presents a novel attempt to theoretically demonstrate in light of the subtlety in governance scholarship with respect to the quality of corporate relationships prevailing in any established governance arrangements, that the LMX theory provides an applicable and useful framework through which the dynamics of corporate relationships within the context of corporate governance could be appropriately analyzed and evaluated

Accountability through accounting and reporting lenses: lessons from an awqaf institution in a Southeast Asia country

Purpose – The purpose of this paper is to review, understand and document the contemporary waqf-S management, financial accounting and reporting practices and to understand relevant drivers behind the current accountability culture in waqf-S, aiming at exploring the intertwined nature of accounting, reporting and the religion of Islam. The accountability literature has been relatively scant on the role played by accounting and reporting in not-for-profit, religious-based organizations and its implications for accountability discourse. Three accountability drivers of regulatory, stakeholders and religious image are tested. It is interesting to research how management, accounting and reporting are being practiced in an Islamic organization setting in a non-Islamic country. Design/methodology/approach – Consistent with the established research objectives, this study adopts the qualitative research approach of a single case study research involving semi-structured interviews and archival documentation review and analyses. Sample is chosen using purposive sampling to suit the research objectives. Findings – The paper finds that waqf-S is a very successful awqaf manager. The administration and management are carried out in the most effective manner with comprehensive rules, guidelines and procedures. The awqaf financial reporting and management are impressive as annual financial reports are published on time and available for the public online. The paper proposes three lenses to examine the accountability drivers of waqf-S: Regulatory, Stakeholders and Religious image of Islamic organization and, it turns out that all three are equally important in driving the organization accountability practices. Research limitations/implications – The sample is an Islamic organization in a non-Islamic country; therefore, the results are unique and may not be generalised to organizations in Islamic nations, as it will be a different setting with different variables. Secondly, the paper only focuses on awqaf financial accounting, awqaf reporting and investigating the driving factors for the institution’s accountability culture. Practical implications – This paper is important as it shows that the management and administration of awqaf, which has been plague by mismanagement, embezzlements and lack of talents, can be improved and managed systematically, although there is a clear evidence of the lack of capable or talented human resources. It is compensated by the significant use of technology. Originality/value – Focusing on a single awqaf institution (waqf-S) operating in a non-Islamic Southeast Asian country, our analysis allows us to observe the influence of multiple factors influencing its organizational wide accountability policy. We consider this as a contribution to the literature, as it generates knowledge on how management, accounting and reporting are being devised as strategic tools in the institution’s accountability policy framework, beyond the normal office management, financial data recording and disclosure per se. Multiple factors drive the structured and transparent reporting by waqf-S, transcending beyond the traditional financial accounting and reporting boundary of meeting regulatory requirements; it reaches the concerned while ensuring that the necessary accountability towards stakeholders is observed and upheld

Real and Accrual Earnings Management, Does Ownership Retention Matters? Evidence from Emerging Market IPOs

The paper investigated the real and accrual earnings discretionary behaviour of Malaysian IPO firms contemporaneously in terms of nature, direction and quantum. It investigates the discretionary behaviour according to year of listing, industrial sectors, individual accounting items and the impact of ownership retention. The sample consists of 253 Malaysian IPO firms from 2002-2013. The 1991,modified Jones and Roychowdhury, (2006) cross sectional models were used to investigate accrual and real activity discretionary behaviour. The results indicate significant positive abnormal real earnings management and a significant difference in earning management proxies across industrial sectors. Retained ownership is negatively associated with earnings management proxies which seem to support the alignment hypothesis. The study justifies the merging of Main and Second boards and recommend tightening of regulations to constrain real activity discretionary behaviour. It provides academics, analysts, regulators and other gatekeepers with better understanding of earnings management around the IPO event. Keywords: Real and Accrual Earnings Management, Initial Public Offering, ownership Retentio

Does leverage constrain real and AEM around IPO corporate event? evidence from the emerging market

The article investigates whether Malaysian initial public offering (IPO) firms engage in real and accrual earnings management (AEM) and examines the impact of leverage on the earnings management’s discretionary behaviour of the firms for the period of 2003–2013. The Dechow, Sloan, and Sweeney (1995, The Accounting Review, 70[2], 193–225) cross-sectional modified Jones model was used to estimate discretionary accruals, while Roychowdhury’s (2006, Journal of Accounting and Economics, 42[3]), 335–370) cross-sectional models were used to investigate abnormal real activity discretionary behaviour. The results indicate Malaysian IPO firms engage in real and accrual discretionary behaviour. The graphical presentations of the earnings’ management proxies indicate higher real and AEM for high-leverage firms. Similarly, the multivariate analysis indicates a positive relationship between leverage and earnings management, which is in tandem with the agency cost of free cash flow theory and debt hypothesis. It is also consistent with the pecking-order theory of capital structure. This study suggests that regulatory agencies and standard setters should continue to improve quality of accounting reports in order to protect investors’ invested capital

Ownership structure and earnings quality pre- and post-IFRS: does investor protection matter?

Research aims: This study examines whether managerial and institu-tional ownership is associated with higher earnings quality (EQ) after the implementation of International Financial Reporting Standards (IFRS), in comparison to the pre-IFRS period. It also examines the moderating effect of investor protection (INPT) on the link between ownership structure and EQ. Design/Methodology/Approach: This study uses a dynamic panel data modelling on a sample of 2090 firm-year observations, from 2007–2016, in Malaysia. This study applies the generalized method of moments (GMM) to deal with the econometric problems. Research findings: The results indicate that managerial ownership is essential for improving EQ before and after IFRS adoption. No significant improvement is noted for institutional shareholders. The results provide evidence showing that managerial ownership is more efficient in monitoring earnings management in a healthy INPT environment. Theoretical contribution/Originality: The findings highlight the complementary influence of firm- and country-level governance mechanisms in improving firm’s EQ. The results suggest that the agency theory and the institutional theory could be used together in emerging economies. This is because even good CG cannot improve the monitoring performance in countries with weak institutional settings. Practitioner/Policy implication: The results highlight the significance of accounting standards and law enforcement for enhancing the monitoring role of ownership structure in improving EQ. Research limitation/Implications: This study investigates the impact of ownership structure on EQ. Further research should seek to under-stand other CG variables used in other countries with other EQ proxies such as real earnings management

Tracing awqaf mutawalli’s accountability: some preliminary Malaysian evidence

Mutawalli’s accountability is a pressing issue as it is inextricably linked to awqaf institution’s sustainability and survival. Being a manager to awqaf assets, mutawalli’s accountability is therefore expected to influence donators’ confidence and hence their continuous financial support.It is hence timely that mutawalli’s accountability from the acute dimensions of accounting and reporting are explored and examined.This effectively provides a basis for reality check for the necessary improvements. Consistent with the above, this study explores the current accounting and reporting practices of two distinct mutawallis operating on different operational platforms. Utilizing multiple research techniques comprising both, interviews and record reviews, the preliminary empirical results are arguably unique, systematically providing an appropriate basis for reality check on mutawalli’s accountability, thereby providing improvement framework on waqf management to other Malaysian mutawallis

Unethical audit behaviour among Malaysian auditors: an exploratory study

The purpose of this paper is to investigate the occurrence of unethical behaviours commonly known as Reduced Audit Quality Practices (RAQP) among auditors. The study employed a mail survey to collect data from auditors registered with the Malaysia Institute of Accountants. The results of this study indicated that RAQP did occur in the Malaysian auditing profession, especially among auditors with less auditing experience and practicing in non-big four audit firms