Article2011

Political connections, corporate governance and audit fees in Malaysia

Effiezal Aswadi Abdul Wahab · Mazlina Mat Zain · Kieran Edmond James

108 citations0/0 files storedManagerial Auditing Journal

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Auditing, Earnings Management, Governance Corporate Governance and Financial Management Political Influence and Corporate Strategies

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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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1990Institutions, Institutional Change and Economic Performance 1991Institutions, Institutional Change and Economic Performance 2003Corporate Governance and Equity Prices 1991Institutions, Institutional Change and Economic Performance.1963Economic Backwardness in Historical Perspective.1993Dictatorship, Democracy, and Development 2008What Matters in Corporate Governance?

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