Abstract

The purpose of this study is to investigate whether financial reporting quality relates to national culture. Besides the conventional corporate governance mechanism of the board of directors and substitute corporate governance mechanism of ownership structure, culture and religious traditions have been considered as having an important influence on corporate governance systems employed in any one country. Malaysia is a multiethnic society with Chinese and Malays dominating economics and politics in Malaysia. Ethnicity acts as a suitable surrogate for culture in Malaysia, which has a multiracial society, each section of which still maintains its own unique ethnic identity and values. This study uses a discretionary component of the accrual quality model as a measure for financial reporting quality to examine the association between ethnicity and financial reporting quality. This study finds no significant relationship between the race of chairman and race of CEO and accrual quality. Interestingly, this study reports higher financial reporting quality associated with firms dominated by Malay directors. The finding of this study suggests that the quality of financial reporting cannot be culturally free and is impacted largely by government policy. This study offers an alternative explanation on the association between governance and financial reporting quality by examining the role of ethnicity that explicates the unique institutional context of an Asian country.

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