The Role of Controlling Shareholders and Auditor-Client Relationships in Related Party Transactions: Evidence from Malaysia

This study investigates the relationship between controlling shareholders (CS), auditor-client relationships (ACRs), and related party transactions (RPTs) in Malaysia, a country characterized by concentrated ownership structures and family-controlled firms. The research aims to explore how specific levels of CS ownership (23% and 33%) influence RPT practices and disclosures, and to examine the moderating role of long-term ACRs in mitigating or exacerbating RPT risks. This study employs a pooled regression analysis using a sample of 580 companies listed on Bursa Malaysia from 2014 to 2017. Data were collected from annual reports and Datastream. The study also incorporates Social Network Theory to understand the dynamics of embedded relationships between auditors and clients. The findings reveal that CS with ownership levels of 23% and 33% are positively associated with RPTs, indicating that CS use their dominant positions to engage in RPTs for personal benefit. However, CS with higher ownership (33%) exhibit more cautious behavior, suggesting a nuanced relationship between ownership levels and RPTs. Long-term ACRs improve auditors’ ability to detect and disclose RPTs, but they also mitigate the positive relationship between CS and RPTs, indicating that close ACRs may restrict CS’s ability to exploit RPTs. Despite the use of data from 2014 to 2017, the findings remain highly relevant as Malaysia’s ownership structures and governance mechanisms have not undergone significant changes in recent years. The insights provided by this study continue to reflect the current state of RPT practices and their implications in Malaysia. The findings have important implications for policymakers and regulators. This paper suggests the need for stricter oversight of RPT disclosures, particularly in firms with concentrated ownership structures. Additionally, the study highlights the importance of maintaining auditor independence and skepticism in long-term ACRs to ensure transparency and fairness in RPT disclosures.