Article

Presentation 4

Malaysian Local Issues

and challenges in
Corporate
Governance
GROUP 4
SLIDESMANIA.C
 ARTICLE 1

POLITICAL CONNECTIONS, CORPORATE

GOVERNANCE
AND AUDIT FEES IN MALAYSIA
Effiezal Aswadi; Mazlina Mat Zain; Kieran James

PRESENTED BY: HAJAR SHAHIRA BINTI HUSIN

SLIDESMANIA.C

2021931479
 BACKGROUND
OF THE STUDY
SLIDESMANIA.C
 The objectives of the
study?
1.
To examine the relationship between political connections, corporate
governance, and audit fees in Malaysia.

2.
To examine the relationship between corporate governance and audit fees,
for the period of pre- and post-implementation of the MCCG (2001-2003).

3.
To explore the relationship between corporate governance and audit fees in
politically connected firms.
SLIDESMANIA.C
METHODOL
OGY
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 SAMPLE VARIABLES

 382 non-financial firms (2001 – 2003)  DV – Audit fees

 Corporate Governance variable hand  IV – CG (Part 2 – best practices &

collected from annual reports ( Part 4 – explanatory notes in
www.bursamalaysia.com) & Mergent MCCG) **Extend to political
Online databases connections

 The audit fees data are collected from  CV – client attributes, auditor
two sources: Compustat Global and attribute, engagement attributes,
SLIDESMANIA.C

annual reports. country attributes

FINDINGS
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 ■ 1,022 firm year observations suggested that audit fees are positively and significantly

related to corporate governance which is consistent with the standard “demand-side”

explanations.

■ Auditors perceived politically connected firms to be riskier and thus require more audit

effort, which resulted in a corresponding increase in audit fees.

■ The researchers could not find any support for the relationship between corporate

governance and audit fees in politically connected firms.

SLIDESMANIA.C
IMPLICATIO
NS
SLIDESMANIA.C
 Did you know?
This study could alert the regulators about the fact that the
code is merely just ticking the box and that the regulators
should be more careful to make sure that the code is being
applicable in terms of form and substance.
SLIDESMANIA.C
 FUTURE
RESEARCH/LIMITA
TIONS
SLIDESMANIA.C
 (1) (2)
Limitations Future Research

 similar to the caveat expressed in  Need to categories or examine

Gul (2006), this study list of political connections using a
politically connected firms different method or
depends solely on Johnson and measurements.
Mitton (2003).
 Try to examine the nature of the
factors in CGINDEX extensively
and their relation to audit fees.
SLIDESMANIA.C
 ARTICLE 2
EFFECT OF AUDIT COMMITTEE
INDEPENDENCE, BOARD ETHNICITY AND
FAMILY OWNERSHIP ON EARNINGS
MANAGEMENT IN MALAYSIA
(Wan Masliza Wan Mohammad, Shaista Wasiuzzaman)(2019)
NURAINI BINTI CHE HUSSIN (2021395665)
HAJAR SHAHIRA BINTI HUSIN (2021931479)
NIK AIDA SURAYA BINTI NIK AZHAR (2021346267)
NIK ILIE AINA BINTI NIK MOHAMED (2021594013)
Table of Contents
INTRODUCTION

THEORY

LITERATURE REVIEW

RESEARCH DESIGN

RESULT & DISCUSSION

SUMMARY & CONCLUSION

INTRODUCTION
 INTRODUCTION

However, For example, in

Experienced Audit Fearnley et. al., Malaysia, audit
Committee 2011 found that committee been
improve Financial 41% of financial appointed based on
Reporting issues are not influence and
(Davidson et. al., discussed with network rather
2015) audit committee than expertise
members (KPMG, 2013)
 INTRODUCTION (CONT’D)

However, family Family firms are

ownership is focused on gaining
In Asian,
burden with market and
ownership is
negative avoiding being
mostly
connotation that categorized as firm
concentrated in the
managers restrain that practice
hands of family
from fraud Earnings
reporting analysis Management
 INTRODUCTION (CONT’D)
OWNERSHIP STRUCTURE, GOVERNANCE, DIVERSITY AND FINANCIAL
REPORTING IN MALAYSIA

- In Malaysia, ownership concentration is considered to be in high level (Claessens et. al.

(2000)
- Ownership concentration in family firms influences director’s decision making
- For example, Type II Agency Problems (Controlling Shareholder Vs Minority
Shareholder) will occur

- Malaysia is a country that have multicultural ethnic group

- Ethnic diversity improves organization values and decision making through exchange
ideas and knowledge (Carter et. al., 2003)
- Most Malaysia companies practices relationship-based system
THEORIES
 THEORIES

Managerial Hegemony
Theory Alignment Effect Theory
- Appointment of Entrenchment Effect
independent directors as - Positive effect of Theory
an illusion of active disclosure practices on
board monitoring to earnings management - High levels of family
shareholders (Cohen et. activities ownership result in lower
al. 2008, Wan-Hussin, - Due to the long term disclosure of corporate
2009) growth and reputation of governance practices
- Appointed independent firms, family firm will (Ali et. al., 2007) and
directors in audit attempt to align the lower earnings
committee will not interest of family management (Wang,
protect the interest of members with other 2006)
minority shareholder stakeholders
(Zinkin, 2011)
LITERATURE REVIEW
 LITERATURE REVIEW

- However quality of the

- In developed countries audit committee
corporate governance members differs across
In Malaysia, audit
effectively reduce cultures and institutional
committee reduce earnings
earnings management environment.
management (Mohd-Salleh
- Two issues concerning
et. al., 2007). However, this
(Abbot et. al. 2004; on limited numbers of
study only focuses on
Baxter and Cotter, qualified independent
characteristics of audit
2009; Beasley et. al, director
committee without exploring
2009; Beclard et. al. 1) Time allocated to
ethnicity that might affect
2005; Jaggi and Leung, examine Financial
earnings management
2007) Statement’s accuracy
2) Lack of Power
 LITERATURE REVIEW (CONT’D)

HYPOTHESIS

H1 - A higher number of independence directors in audit committee significantly effects

earning management.

H1a - Audit committee independence moderated by family ownership is likely to have a

significant effect on earnings management

H2 - Board Ethnicity is likely to have a significant effect on earnings management

H2a - Board ethnicity moderated by family ownership is likely to have significant effect
on earnings management
RESEARCH DESIGN
 RESEARCH DESIGN

DV - Earnings
1,206 firm-year Management
Sample is taken
observations from IV - Audit
from non-financial
the fiscal years of Committee
companies listed
2004-2009 are Independence,
on Bursa Malaysia
collected Ethnicity and
Family Ownership
RESULT & DISCUSSION
 RESULT AND DISCUSSION

HYPOTHESIS

H1 - Percentage of independence non-executive directors in audit committee highlights

ineffectiveness of audit committee’s independence in mitigating earnings management
activities

H1a - Supported. It indicates that family ownership has a significant influence and
moderates the association between percentage of independence non-executive director and
earning management.

H2 - Not supported. No evidence of the effect of ethnicity on earnings management

H2a - Not supported. Family ownership is not found to have any significant moderating
effect on the relationship between ethnicity and earnings management.
SUMMARY & CONCLUSION
 SUMMARY & CONCLUSION

Lack of effectiveness of the role of independence directors are appointed

Independence in audit committee in family firms should be diligent to understand

the operating activities at a firm and contribute to the audit process

Firms appointing audit committee members are essentially based on the need to
fulfill stakeholders expectations and stock exchange requirement Makhael and
Sherer, 2017)
ARTICLE 3:
A Critical Review of
Corporate Governance
Reforms in Malaysia
(Hiyari, 2017)

Nik Ilie Aina, Nuraini, Hajar Shahira, Nik Aida Suraya

Introduction

OBJECTIVE MCCG
To assess the suitability of the Cadbury Followed the Anglo-American model in the UK,
Report to Malaysian business environment mainly the Cadbury Report
The code was changed for a more effective
Corporate Governance Code as scandals dominated
Hashim & Devi (2008) Malaysia's economic environment
Asian economic crisis in 1997/1998 and the
highly-publicized scandals revealed the need
to enhance CG

MCCG Milestone:

2000 – 2007 – 2012 – 2017 - 2021

31
Theoretical Background
Agency Theory

• Attempts to explain the relationship between

shareholders and managers (Godfrey et al.,
2010)
• Relationship existed when shareholders employ
managers to perform duties on their behalf
(Kirby & Davis, 1998)
• Separation of ownership and management; the
relationship is fuelled with conflicting interests
(Dey, 2008).
• Conflicting interests; agency problem which
lead to agency costs
• CG is intended to reduce agency costs and
mitigate potential conflicts between
management and shareholders.
32
 Level of ownership concentration influences owner-
manager relationships
Traditional agency theory does not apply in
Malaysia (Htay, Salman, Shaugee, 2013) Agency dilemma transforms from a shareholder-
manager conflict to a majority-minority shareholder
conflict (Fan and Wong, 2002)

Application of Agency Theory in the Malaysian Context

Due to significant ownership concentration (Liew, 2007;

Mustapha & CheAhmad, 2011), investors are more likely to
face Type II agency problems (Jaggi et al., 2009;
Villalonga & Amit, 2006)

33
 Literature Review

(Alonso-Paul & Pérez-Castrillo, (Chen & Zhang, 2014; Cohen et al., (Peasnell et al., 2000)
2012; Chen & Zhang, 2014) 2008; Dahya et al., 2002; Ghosh et
Cadbury Committee Report (1992)
al., 2010; Peasnell et al., 2000)
CG laws limit executive discretion addressed accrual-based earnings
and promote financial statement CG literature shows that codes reduce management and board composition.
reliability earnings management, improve
No indication of a significant link pre-
financial reporting quality, and raise
Cadbury and significant negative
firm value
association post-Cadbury

Dahya et al. (2002) (Chen and Zang, 2004) (Machuga and Teitel, 2007)
Cadbury report studied corporate Examined the CCCG effect on Whether MCGC increased earnings
performance and top management opportunistic earnings management quality
turnover 2007; improvement after
Strengthened CG procedures for
Organizations adopting the Cadbury limiting earnings management implementing the code
suggestions were more sensitive to 2009; no improve for firms with
Stronger favorable impact on
senior management turnover shared directors and family ownership
privately controlled enterprises than
state-managed firms
34
Main Challenges & Critics to MCCG

Malaysian companies are characterized by a Protecting minority shareholders' interests is

high level ownership concentration and the vital since controlling owners continue to
wide presence of family-controlled business exert their authority through ownership
(Claessens, Djankov, & Lang, 2000; Salleh & concentration and board membership (Tam
Stewart, 2012) and Tan, 2007)

MCCG have been based on Anglo-American

systems, which are unsuited for the local
The effectiveness of independent non- environment (Liew, 2007, 2008; Vithiatharan &
executive directors remains doubtful Gomez, 2014)

35
Conclusion

MCCG 2012; strengthen board structure and composition, acknowledge directors as

engaged and accountable fiduciaries, improve financial statement integrity, and respect
shareholders' rights
Its influence is uncertain because the code followed the Anglo-American approach (Htay
et al., 2013; Vithiatharan & Gomez, 2014)
Malaysia's agency problem requires more CG reform

36
 ARTICLE 4:
Corporate Governance
Dilemma
- evidence from Malaysia
(Ismail et.al., 2010)

Nik Ilie Aina, Nuraini, Hajar Shahira, Nik

Aida Suraya
 introduction

‐ Financial crisis in 1997 adversely affected the performance of many East Asian economies include Malaysia
‐ Lack of sound CG was a major reason for this economic crisis (D'Cruz, 1999; Khas, 2002; Kim, 1998) eg; Enron and
WorldCom collapse
‐ Lehman Brothers bank failure have increased understanding of the wide-ranging effect bad CG can have through
its repercussions on the capital markets
‐ Reasons of poor corporate governance (Mohamad, 2002);
• Board member selection
• Weak investor relations
• Lack of transparency in disclosing information
• Ineffectiveness of regulatory agencies in enforcing legislation
‐ Annual reports are less successful in conveying important information to consumers (Haat et al., 2005)

38
“ PURPOSE
This paper reviews various methods of measuring CG
practises and reports the results of a study on reporting CG
in Malaysia.
It examines Malaysian GLCs’ CG challenge and the
research found CG reporting concerns and solutions in
Malaysia

39
 RESEARCH QUESTIONS

What were the major issues in How accurate was corporate

corporate governance in Malaysia? governance reporting? What was
poorly reported?

How reliable was corporate

governance reporting as an indicator
of the quality and integrity of How could some of these issues be
company management? addressed?
40
 LITERATURE REVIEW

(Cheah and Kean, 2002) (Thompson and Hung, (OECD, 2003)

Explore corporate reporting and 2002) Five key issues in developing CG:
information disclosure Created a CG Scorecard based on the shareholder rights; shareholder
SCCG to measure compliance and CG treatment; disclosure, investment; and,
Malaysian domestic banks reveal less
standards role of shareholders
information than banks in the Basel
sample The scoring data indicates low Code Low CG score compared to other
compliance Asian counterparts

IFAC (Howarth, 2002, 2003;

Framework for improving CG on Wespac, 2003)
three key assumptions: Investigated the use of annual reports
credibility in financial reporting; for CG programs
corporate financial reporting; and
integrity

41
 METHODOLOGY

 Qualitative study; examined CG reporting difficulties and how to address them

 Conducted 12 structured interviews with four practitioners and eight CG experts
 Personal interviews were favored

42
 FINDINGS

Assessment of CG Issues not

Issues with CG in Accuracy of The Quality and Currently
Disclosure
Malaysia Reporting Integrity of Adressed by
Management Regulations

43
 FINDINGS (CONT’D)
Bursa Malaysia should
evaluate corporate
governance reporting External auditing on CG
reporting discloses integrity
CG gives legal boundaries for practices because it's an
companies to function, but independent opinion that
not information reliability analyses and validates the
reported information

1 3 4 5
2

- Board; leadership/ roles/

Business only report on Minimal reporting on the
quality
mandatory requirements and information related to the
- Human; values/
must increase voluntary BOD, assessment, and
governance/ capital
disclosure integrity
- CG auditing
- Integrity values
Malaysia's monitoring and - Investments information
enforcement needed - Public roles
improvement - Corporate responsibility/
44
social/ environment
 CONCLUSION

03 Recommendation

Verify CG reports for reliability

Malaysian GLC lack of CG

reporting and practice

Annual reports lacked

important information Limitations
01 02
The findings do not represent all
Malaysian PLC

Problems and issues discovered

are based on the respondents’
POV

45
 ARTICLE 5
Corporate Governance
& Malaysian Politic :
Theoretical
Framework for
Accounting Quality

Nor Farizal Mohammed, Zuraidah Mohd Sanusi, Fahdah Sultan Alsudairi

01 Introduction 02 Corporate Governance &
Political Influence in
Malaysia

03 Accounting and Policies 04 Theoretical Explanation

05 Conclusion
01.
Introduction
 Introduction

Explain on phenomena in relation to CG as the process & structure used to direct and manage
accounting quality and governance structure in the business and affair of a company towards enhancing
business prosperity corporate accountability (High Level
Malaysia
Finance Committee (HLFC)2000)

Political influence is identified as the The unique of Malaysia influenced by

intervening factor that undermines the politics and impact of accounting and
operation of the systems in Malaysia (Ball et governance.
al.2003: Zhang, 2009)
 02.
Corporate Governance
& Political Influence in
Malaysia
 Corporate Governance & Political
Influence in Malaysia

Ownership concentration is Malaysian government took The adoption of the Malaysian

quoted as one of the remedies the initiative to promote good Code of Corporate
for agency conflicts in western corporate governance practice Governance (MCCG) merely
market (Shleifer and on an effort to stimulate the mimics the recommendations
Vishny.1994) development of the local from developed countries.
equity market
03.
Accounting and
Policies
 Accounting & Politics

Leuz and Oberholzer-Gee (2006) NEP replaced with National

Picur (2004) show significant show political connections, if the
relationship between the firms closeness to Soeharto. are
Vision Policy 2001-2010
corruption and earning opacity negatively related to proxies for
disclosures

Gul (2006) –the effect of dynamic Wahab et al (2007) found the Wahab and Rahman(2009) find
changes from the social contract negative association between negative relationship between
from the perspective of auditors political connection and corporate institutional ownership and
assessments of audit risk for firms governance is mitigated by remuneration reduces in
institutional ownership politically-connected firms
 04.
Theoretical
Explanation
05.
Conclusion
Agency theory is relevant to monitoring role of CG
where the agency conflicts exist despite the
differences in institutional factors from developed
countries.

The frameworks using agency theory and

resources dependency theory can be extended
to the emerging markets.
THANK YOU