Political connections, corporate governance and audit fees in Malaysia

Article

Wahab, Effiezal Aswadi Abdul, Zain, Mazlina Mat and James, Kieran. 2011. "Political connections, corporate governance and audit fees in Malaysia." Managerial Auditing Journal. 26 (5), pp. 393-418. https://doi.org/10.1108/02686901111129562
Article Title

Political connections, corporate governance and audit fees in Malaysia

ERA Journal ID19111
Article CategoryArticle
AuthorsWahab, Effiezal Aswadi Abdul (Author), Zain, Mazlina Mat (Author) and James, Kieran (Author)
Journal TitleManagerial Auditing Journal
Journal Citation26 (5), pp. 393-418
Number of Pages26
Year2011
Place of PublicationBingley, W Yorks. United Kingdom
ISSN0268-6902
1758-7735
Digital Object Identifier (DOI)https://doi.org/10.1108/02686901111129562
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.

Keywordscorporate governance; auditor’s fees; politics; Malaysia
ANZSRC Field of Research 2020500102. Business ethics
350102. Auditing and accountability
350101. Accounting theory and standards
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Byline AffiliationsUniversity of Science, Malaysia
Multimedia University, Malaysia
School of Accounting, Economics and Finance
Institution of OriginUniversity of Southern Queensland
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