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Political connections, corporate governance and audit fees in Malaysia

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  • Effiezal Aswadi Abdul Wahab
  • Mazlina Mat Zain
  • Kieran James
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    Abstract

    Purpose – The purpose of this paper is to examine the relationship between political connection, corporate governance and audit fees in Malaysia. Specifically, it is argued that politically connected firms are perceived to be riskier and thus require auditors to undertake greater audit efforts which in turn lead to higher audit fee. Furthermore, it is also hypothesised that the demand for better corporate governance practices requires more audit effort exert from the auditors, and the demand for higher quality work is expected to be stronger for politically connected firms as these firms are being perceived to have higher risks. This is turn results in higher fees paid to the external auditor. Design/methodology/approach – This paper employs panel regression analysis. The panel data set consists of 382 non-financial firms (1,022 observations) for three years from year 2001 to 2003. Findings – Based on 1,022 firm-year observations for the period of 2001 to 2003, the results reveal that politically connected firms pay higher audit fees, while firms with better governance demand a higher audit quality, leading to higher audit fees. However, there is no evidence to support that corporate governance demands for a higher quality audit especially for politically connected firms. Originality/value – This paper contributes to the corporate governance-audit fees literature by examining a large number of corporate governance variables based on the Malaysian Code on Corporate Governance. In particular, instead of using several individual governance variables such as audit committee, board structure or composition, this study condensed the large number of corporate governance variables into a single index. Furthermore, this study was conducted in Malaysia, which is a unique environment that offers clear identifiable segments based along ethnic line, whereby, politically favoured firms are generally given special privileges by the government.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=0268-6902&volume=26&issue=5&articleid=1926749&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Auditing Journal.

    Volume (Year): 26 (2011)
    Issue (Month): 5 (May)
    Pages: 393-418

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    Handle: RePEc:eme:majpps:v:26:y:2011:i:5:p:393-418

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Web: http://www.emeraldinsight.com/maj.htm

    Related research

    Keywords: Auditor's fees; Corporate governance; Malaysia; Politics;

    References

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    1. Joseph P. H. Fan & T. J. Wong, 2005. "Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia," Journal of Accounting Research, Wiley Blackwell, vol. 43(1), pages 35-72, 03.
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    3. R.M. Haniffa & T. E. Cooke, 2002. "Culture, Corporate Governance and Disclosure in Malaysian Corporations," Abacus, Accounting Foundation, University of Sydney, vol. 38(3), pages 317-349.
    4. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc.
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    7. Kane, Gregory D. & Velury, Uma, 2004. "The role of institutional ownership in the market for auditing services: an empirical investigation," Journal of Business Research, Elsevier, vol. 57(9), pages 976-983, September.
    8. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
    9. Jenny Goodwin-Stewart & Pamela Kent, 2006. "Relation between external audit fees, audit committee characteristics and internal audit," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(3), pages 387-404.
    10. W. Robert Knechel & Marleen Willekens, 2006. "The Role of Risk Management and Governance in Determining Audit Demand," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9-10), pages 1344-1367.
    11. Francis, Jere R., 1984. "The effect of audit firm size on audit prices : A study of the Australian Market," Journal of Accounting and Economics, Elsevier, vol. 6(2), pages 133-151, August.
    12. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    13. Eichenseher, John W. & Shields, David, 1985. "Corporate director liability and monitoring preferences," Journal of Accounting and Public Policy, Elsevier, vol. 4(1), pages 13-31.
    14. Santanu Mitra & Mahmud Hossain & Donald Deis, 2007. "The empirical relationship between ownership characteristics and audit fees," Review of Quantitative Finance and Accounting, Springer, vol. 28(3), pages 257-285, April.
    15. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    16. Ferdinand A. Gul, 2006. "Auditors' Response to Political Connections and Cronyism in Malaysia," Journal of Accounting Research, Wiley Blackwell, vol. 44(5), pages 931-963, December.
    17. Craswell, Allen T. & Francis, Jere R. & Taylor, Stephen L., 1995. "Auditor brand name reputations and industry specializations," Journal of Accounting and Economics, Elsevier, vol. 20(3), pages 297-322, December.
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