Directors’ Independence, Internal Audit Function, Ownership Concentration and Earnings Quality in Malaysia

  •  Ahmed Al-Rassas    
  •  Hasnah Kamardin    


Concentration of ownership in Malaysian public listed companies contributes to agency conflict betweenmajority and minority shareholders. An effective monitoring mechanism is critical to mitigate this conflict. Thestudy aims to examine the influence of board and audit committee independence, internal audit function andownership concentration on earnings quality proxied by discretionary accruals. The sample of the study 508companies listed on the Bursa Malaysia Main Market from 2009 to 2012. Two measures of discretionaryaccruals are used: Modified Jones model (Dechow et al., 1995); and extended Modified Jones Model (Yoon etal., 2006). Using OLS regression, results of the study suggest that audit committee independence and moreinvestment in internal audit function are related to higher earnings quality. However, board of directors’independence and ownership concentration are associated with lower earnings quality. The finding indicates theimportance of audit committee independence in producing quality financial reporting. Consistent findings arefound for most variables in both models. The findings of the study have implication on the use of measurementof discretionary accruals in earnings quality studies and corporate governance practices in Malaysia.

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