Article2016

Earnings quality and audit attributes in high concentrated ownership market

Ahmed Hussein Al-Rassas · Hasnah Kamardin

82 citations0/0 files storedCorporate Governance

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

Purpose The purpose of this study is to examine the effect of the audit committee (AC) independence, financial expertise, internal audit function, audit quality and ownership concentration on earnings quality (EQ) and, consequently, ascertain whether the AC’s independence and financial expertise has a moderating effect on the relationship between internal audit function and EQ. Design/methodology/approach The study sample is 508 firms listed on the Main Market of Bursa Malaysia (formerly known as Kuala Lumpur Stock Exchange) for the years 2009 to 2012. EQ was measured using two modified Jones models of discretionary accruals. Findings The findings reveal that the independence of AC and investment in internal audit function, as well as the Big4 audit firm, are related to greater EQ. Ownership concentration is found to be associated with lower EQ. The study provides evidence that AC’s independence moderates the relationship between internal audit function (investment in and sourcing arrangements of internal audit function) and EQ. It also shows that AC’s financial expertise moderates the relationship between sourcing arrangements of internal audit function and EQ. Practical implications This study extends the prior related literature by examining the AC’s independence and financial expertise as moderating variables on the relationship between internal audit function and EQ. Social implications Policymakers might use the findings regarding EQ in relation to governance practices, to recognize the important roles played by the AC’s independence and financial expertise on the effectiveness of internal audit function with EQ. Originality/value This study uses the agency theory and resource dependence theory to provide empirical evidence on the impact of internal audit function and AC on EQ in the ownership concentration environment.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1998Principles and Practice of Structural Equation Modeling 2011External Control of Organizations: Resource Dependence Perspective 1999Corporate Ownership Around the World 1991Earnings Management During Import Relief Investigations 2005Performance matched discretionary accrual measures 1995Detecting Earnings Management.2000The separation of ownership and control in East Asian Corporations

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2017Ownership concentration, earnings management and stock market liquidity: evidence from Malaysia 2019The impact of audit committee, CEO, and external auditor quality on the quality of financial reporting 2018The associations between audit firm attributes and audit quality-specific indicators 2019Audit committee chairman characteristics and earnings management 2020THE IMPACT OF AUDIT QUALITY, AUDIT COMMITTEE AND FINANCIAL REPORTING QUALITY: EVIDENCE FROM MALAYSIA

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