Auditor Tenure, Audit Committee Independence, and Effect on Fraud Risk: Evidence from Malaysia

This study investigates the impact of the auditor–client relationship, proxied by auditor tenure, on the risk of fraudulent financial statements, with audit committee independence as a key corporate governance mechanism moderating the relationship. Using panel data from 578 public listed companies in Malaysia over the period 2013 to 2017, comprising 2,890 firm-year observations, the Altman Z-score is employed as a proxy for fraud risk. The results show that longer auditor tenure and stronger audit committee independence are each associated with higher Z-scores, suggesting lower fraud risk. However, the interaction between tenure and audit committee independence is negative and significant, indicating a substitution effect: when audit committees are highly independent, the incremental benefit of extended auditor tenure in reducing fraud risk diminishes. This challenges the conventional assumption that internal and external monitoring mechanisms always reinforce one another, instead suggesting they may overlap in function. The study extends agency theory and network theory by demonstrating how the interaction between external audit continuity and board-level governance mechanisms influences fraud risk. The findings provide practical implications for regulators, policymakers, and audit committees, emphasising the need to balance governance effectiveness with auditor tenure regulations in order to strengthen fraud prevention in emerging markets.