HOW RECENT CHANGES IN INTERNAL CORPORATE GOVERNANCE MECHANISMS AND FINANCIAL STATUS WERE RELATED TO AUDITOR QUALITY OF MALAYSIAN LISTED COMPANIES?

Abstract

Business entities are exposed to changing external environments and thus, they do need good leadership and governance to survive in longer term. Corporate governance is defined as the processes and configuration of a company design to manage their day to day activities towards achieving the company’s main objectives. In Malaysia, the Malaysian Code on Corporate Governance (MCCG) serves as guiding tools for listed companies to strive towards their desired goals while preventing unwanted conflicts (MCCG 2017). The MICG was revised for the 3rd time in 2017. This study examined how these most recent changes and financial status were related to auditor quality among public listed companies in Malaysia. Secondary data were extracted from the 2016’s and 2017’s annual reports and these panel data were analysed using a binary logistic regression model. Managerial ownership, audit committee size and board independence were selected to represent internal corporate governance mechanisms. The other independent variable was financial status. The results indicate that the managerial ownership was negatively and significantly related to auditor quality whereas audit committee size was positively and significantly related to the auditor quality, implying that the audit committee played an important role in the screening process of external auditor selection. Negative relation between managerial ownership and auditor quality indicated lower managerial ownership would increase the agency risk faced by external shareholders. However, the financial status of the company was not a significant variable. This study contributed to the current body of knowledge by adding new perspectives in auditor quality as prior studies mainly focus on linear relationships between corporate governance mechanisms and auditor quality. This study also offers insights on the effectiveness of the MCCG 2017. Future research may include other internal corporate governance mechanisms such as the CEO duality and the remuneration committee size.