rahman and ali - 2006 - board, audit committee, culture and earnings management- malaysian evidence

Board, audit committee, culture and earnings management: Malaysian evidence Rashidah Abdul Rahman Faculty of Accountancy, Universiti Teknologi MARA, Selangor, Malaysia, and Fairuzana Haneem Mohamed Ali Universiti Tenaga National, Selangor, Malaysia Abstract Purpose – Aims to investigate the extent of the effectiveness of monitoring functions of board of directors, audit committee and concentrated ownership in reducing earnings management among 97 firms listed on the Main Board of Bursa Malaysia over the period 2002-2003. Design/methodology/approach – The current study employs the cross-sectional modified version of Jones, where abnormal working capital accruals are used as proxy for earnings management. Findings – The study reveals that earnings management is positively related to the size of the board of directors. This supports the view that larger boards appear to be ineffective in their oversight duties relative to smaller boards. A possible explanation for the insignificant relationship between other corporate governance mechanisms (independence of board and audit committee) and earnings management is that the board of directors is seen as ineffective in discharging their monitoring duties due to management dominance over board matters. The apparent reason for this phenomenon is attributed to the board of directors’ relative lack of knowledge in company’s affairs. The study also found that ethnicity (race) has no effect in mitigating earnings management, possibly due to the more individualistic behaviour of the Bumiputra directors. The modernisation of Malaysia and also the increase in Bumiputra ownership of national wealth may have caused the Malays to be more individualistic, similar to their Chinese counterpart. Originality/value – Since, there are relatively few studies conducted in this area specifically among Malaysian firms, this study will broaden the scope by providing empirical evidence of the relationship between various corporate governance characteristics, cultural factors and earnings management. Keywords Earnings, Boards of directors, Audit committees, Culture, Malaysia Paper type Research paper Introduction Based on agency theory, issues associated with the separation between ownership and control will lead managers (agents) to act in an opportunistic manner by increasing their personal wealth at the expense of the owners (principal) of an organisation (Jensen and Meckling, 1976). As financial statements provide value-relevant information to the external parties of the organisation, the heavy reliance placed on accounting numbers create powerful incentives for managers to manipulate earnings to their own advantage. The incentives for managers to manipulate reported earnings may be influenced by job security, contractual agreements between managers and the external stakeholders, self-interest in the presence of compensation schemes or the need to achieve target earnings and to meet market expectations (Healy and Wahlen, 1999). As such, earnings management, even if it is being done not in violation of the accounting standards, may lead to inaccurate information about the company. Hence, it The current issue and full text archive of this journal is available at www.emeraldinsight.com/0268-6902.htm Board, audit committee, culture 783 Managerial Auditing Journal Vol. 21 No. 7, 2006 pp. 783-804 q Emerald Group Publishing Limited 0268-6902 DOI 10.1108/02686900610680549 is crucial for an organisation to have an effective corporate governance mechanism to safeguard the rights of the investors in getting the true and fair information of the company. The 1997 economic crisis in Malaysia has exposed serious weaknesses in corporate governance practices namely, weak financial structure, over-leveraging by companies, lack of transparency, disclosure and accountability. The introduction of the Malaysian Code of Corporate Governance (2000) and the Bursa Malaysia Revamped Listing Requirement (2001) highlight the importance of corporate governance and disclosure requirements. This is particularly so with regard to the appointment of the majority of independent directors to the board and the forming of an audit committee comprising of at least three independent directors to strengthen capital market, boost investors’ confidence and improve the credibility and accountability of financial information produced by listed companies. As such, the focus of the study is to acquire an understanding of whether the existence of corporate governance mechanisms, namely the composition of the board of directors and audit committees, are effective in extenuating earnings management behaviour amongst Malaysian public listed companies. In essence, by examining the relationship between earnings management and corporate governance characteristics, the effectiveness of board monitoring can be further evaluated and improvised by the regulators. This study also aims to provide additional evidence that supports or rejects prior research findings in developed countries and to determine whether the findings can be generalised in Malaysia. Malaysia is of interest because it is a developing country with an emerging capital market and unlike the dispersed shareholding of the Anglo-Saxon world, Malaysia is characterised by concentrated shareholding. Many of the listed companies in Malaysia are family owned or controlled, with many companies having evolved from traditional family owned enterprises, reflecting different cultural traditions and aspirations (Claessens et al., 2000). Unlike companies with dispersed shareholding, there is a reduced agency problem in a company with concentrated ownership due to a better matching of the control rights of the dominant shareholder with its cashflow rights. Thus, the incentive of the controlling shareholder is more likely to be aligned to the interest of other shareholders. In fact, past studies have shown that concentrated or block ownership can assist the board in increasing its monitoring effectiveness (Shleifer and Vishny, 1997). As such, the study also aims to provide evidence on the impact of the presence of block shareholdings by outside investors on the effectiveness of the board in mitigating opportunistic earnings management activity in Malaysia. Previous studies in the area (Peasnell et al., 2001; Klein, 2002; Xie et al., 2003) have examined the effectiveness of corporate governance attributes in mitigating earnings management behaviour but they have not examined cultural factors that may affect the level of earnings management in a country. Cultural factors are important because the traditions of a nation are instilled in its people and might help explain why things are as they are (Haniffa and Cooke, 2002). Malaysia has its own unique historical background resulting from the cultural influence of different countries that either occupied Malaysia (Britain) or have had business practices in Malaysia (India and China). Hence, it is made up of various races, religions, creeds, customs and languages. These multiracial groups fall into two main categories: those with cultural affinities indigenous to the region, classified as the Malays or Bumiputras (literally meaning “sons of the soil”), and those whose cultural affinities lie outside, classified as MAJ 21,7 784 non-Bumiputra (consisting primarily of Chinese, Indians and others). Relative to their Chinese counterparts, the Malay directors have been found to have a higher level of voluntary disclosure (Haniffa and Cooke, 2002) and thus may have fewer tendencies to manage earnings. The examination of the level of earnings management in a multiracial society like Malaysia will, therefore, contribute to the existing knowledge on earnings management. The remainder of the paper is organised as follows. The next section discusses the relevant literature on issues pertaining to earnings management and the role of board monitoring together with cultural factors, which lead to the development of hypotheses. The third section explains the research method followed by a discussion of the results in section four. The paper ends with a summary and the conclusion of the research. Literature review and hypotheses development Earnings management occurs: when managers use judgement in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend on reported accounting numbers (Healy and Wahlen, 1999, p. 6). However, earnings management, unlike fraud, involves the selection of accounting procedures and estimates that conform to generally accepted accounting principles (GAAP). That is, any firms that have earnings management would be manifested within the bounds of accepted accounting procedure manipulation. The management’s use of judgment in financial reporting has both costs and benefits. Benefits include potential improvements in the management’s credible communication of private information to stakeholders that improve resource allocation decisions (Healy and Palepu, 1995). However, shareholders will face potential agency costs if managers manage earnings to obtain abnormal private gains that may take the form of increased compensation (Guidry et al., 1999) or reduced likelihood of dismissal when performance is low (Weisbach, 1988). The act of managing earnings does not necessarily reflect the true performance of the company, a situation that may contribute to shareholders and investors making inaccurate judgments about the company. Thus, effective board monitoring is important in reducing the incidence of earnings management when incentives for such manipulations are high. Board of directors’ characteristics Agency theory supports the idea that to increase the board’s independence from management, boards should be dominated by outside directors. Among the arguments is that non-executive directors are needed to monitor and control the actions of the directors whose behaviour has been referred to by Jensen and Meckling (1976) as “opportunistic”. The presence of those non-executive directors may influence the quality of directors’ deliberations and decisions, provide strategic direction and improve performance (Zahra and Pearce, 1989), thus ensuring that management is acting in a responsible way and in the best interests of the shareholders as well as the stakeholders. The resource dependence theory also argued for more non-executive directors on the board, due to their expertise, prestige and contacts (Kesner and Johnson, 1990). Board, audit committee, culture 785 However, some researchers do acknowledge the drawbacks of having a high proportion of non-executive directors on the board. Such shortcomings include stifling strategic actions (Goodstein et al., 1994), excessive monitoring (Baysinger and Butler, 1985), lack of business knowledge to be effective (Patton and Baker, 1987) and lack of real independence (Demb and Neubauer, 1992). This is especially so if these non-executives are former employees of the firm or have personal relationships with one of the executives. Nevertheless, there has been considerable pressure on firms to increase the number of non-executive directors on the board in the UK and USA (Davies, 2000). Similarly, all public listed companies in Malaysia must ensure that at least one-third of their board of directors consists of independent non-executive directors, thus enhancing the board’s independence of the management (Bursa Malaysia Revamped Listing Requirement, 2001). Several studies present evidence suggesting that effective governance with board independence improve firm performance (Agrawal and Knoeber, 1996; Baysinger and Butler, 1985), while the dominance of non-executive directors (in terms of numbers) could provide them with more power to force management to improve the quality of firm disclosure (Haniffa and Cooke, 2002). Unlike a Canadian study by Park and Shin (2003) who found no significant difference between discretionary accruals (DAC) and board composition, studies by Beasley (1996) and Klein (2002) found otherwise. Their studies suggested that having outside independent directors on the board provide added value to the board monitoring process. Beasley (1996) found a significant negative relationship between outside directors and the occurrence of fraudulent financial statements, whilst Klein (2002), Xie et al. (2003) and Peasnell et al. (2001) found that outside directors are negatively associated with DAC. Peasnell et al. (2001) suggested that the board balance between executive and non-executive directors contributes towards the integrity of financial statements. Hence, previous empirical findings seem to suggest that boards which are structured to be more independent of the management are effective in monitoring the corporate financial accounting process, thus leading us to the following hypothesis: H1. There is a significant negative relationship between discretionary accruals (DAC) and the proportion of independent directors on the board. In addition, independent directors who had served the board for a certain period may develop better governance competencies as well as provide additional knowledge and expertise to the firm, thus are capable of monitoring management performance. For example, Peasnell et al. (2001) found the average tenure of non-executive directors on the board is negatively associated with the level of earnings management. Experience as board members of the firm allows outside directors to gain a better understanding of the firm and its people, thus enabling them to develop better governance competencies. This leads to the following hypothesis: H2. There is a significant negative relationship between discretionary accruals (DAC) and the competence of independent directors on the board. Further, the Malaysian code recommends that the role of the chairman be separated from that of the CEO. This is to ensure that the CEO would not be in a position with too much power to handle daily business operations. Proponents of the agency theory also MAJ 21,7 786 argue for the separation of these two roles. The chairman, they argue should be independent of company’s affairs while being on the board and in so doing will be a useful check on the over-ambitious plans of the CEO (Blackburn, 1994). Proponents of the stewardship theory, on the other hand, argue that this role duality (where a CEO is also the chairman of the firm) will improve firm performance because the management’s compensation is tied to the firm performance, and that the CEO’s strategic vision can shape the destiny of the firm with minimum board interference (Rechner and Dalton, 1991). Past studies have reported that companies with duality function did not perform as well as their counterparts (Abdul Rahman and Haniffa, 2005) and are more likely to be subjected to accounting enforcement actions by the SEC for infringement of GAAP (Dechow et al., 1995). In addition, Klein (2002) found that absolute value of DAC is positively related to the CEO who holds a position on the board’s nominating and compensation committee. The results indicate that a CEO with excessive power over board matters could easily manipulate earnings. Hence, it is hypothesised that: H3. There is a significant negative relationship between discretionary accruals (DAC) and the separation of the roles of CEO and chairman. Board size is viewed as another important element in board characteristics that may have an effect on earnings management. The optimum number of board members should be appropriately determined by the whole board to ensure that there are enough members to discharge responsibilities and perform various functions (Malaysian Code of Corporate Governance, 2000). Goodstein et al. (1994) argued that smaller boards, between four to six members might be more effective since they are able to make timely strategic decisions, while larger boards are capable of monitoring the actions of top management (Zahra and Pearce, 1989). In fact, large board members with varied expertise could increase the synergetic monitoring of the board in reducing the incidence of earnings management. Xie et al. (2003) and Peasnell et al. (2001) found that having a larger board is associated with less earnings management. As such, the next hypothesis, which is related to board size and earnings management, is set as follows: H4. There is a significant negative relationship between discretionary accruals (DAC) and the size of boards. Audit committee Malaysian public listed companies have been required by Bursa Malaysia (previously known as Kuala Lumpur Stock Exchange) to establish an audit committee since 1 August 1994. In addition, the code specifies that an audit committee should comprise at least three directors, the majority of whom are independent, while its chairman should be an independent non-executive director. The establishment of the audit committee is to ensure continuous communication between external auditors and the board, where the committee meets regularly with the auditors to review financial statements and audit processes and also internal accounting systems and control. A study by Muhamad Sori et al. (2001) found that the Malaysian audit committee chairman perceives that the committee plays an effective role in monitoring audit and financial functions. Vicknair et al. (1993) stated that in order to function effectively, audit committees must be independent of the management as it allows both the internal and external Board, audit committee, culture 787 auditors to remain free of undue influences and interferences from corporate executives. Peasnell et al. (2001) did not find sufficient evidence on the effectiveness of the audit committee in reducing the level of earnings management. However, other empirical studies generally show that the independence of the audit committee has been found to be not only negatively associated with the occurrence of financial fraud (Beasley, 1996; Dechow et al., 1995), DAC (Xie et al., 2003), and being sanctioned for fraudulent or misleading reporting (Abbot and Parker, 2000), but are also positively related to financial reporting (Felo et al., 2003). Similarly, Choi et al. (2004) found that when members of the audit committee hold shares in a company, they have less incentive to deter earnings management. Thus, independence of the audit committee is arguably a key factor in enhancing their role in preventing misstatements in the financial statements. Hence, the next hypothesis is as follows: H5. There is a significant negative relationship between discretionary accruals (DAC) and the proportion of independent directors on the audit committee. In addition, the need to have competent and experienced directors, particularly in financial aspects, is equally important to audit committee members since the primary function of an audit committee is to monitor the financial reporting process of an organisation. Xie et al. (2003) and Choi et al. (2004) reported that outside directors who are financially competent, are effective as monitors in reducing earnings management behaviour. Further, Felo et al. (2003) found the percentage of audit committee members having expertise in accounting or financial management is positively related to the quality of financial reporting. The Bursa Malaysia listing requirements stipulates among others, that at least a member of the audit committee must possess relevant skills, experience and qualified knowledge, such as being a member of the Malaysian Institute of Accountants. Hence, an audit committee that has knowledge and skills in financial reporting is more likely to uncover opportunistic earnings management activity by the management: H6. There is a significant negative relationship between discretionary accruals (DAC) and the competence of members of the audit committee. Further, an audit committee that is independent and competent will play a more active, effective and efficient monitoring role. Xie et al. (2003) reported that the number of board meetings is negatively associated with the level of earnings management, indicating that the board that meets regularly could be better monitors. This may stem from the notion that an active board that devotes time to rectifying any immediate issues may deter earnings management. As such, the following hypothesis is developed: H7. There is a significant negative relationship between discretionary accruals (DAC) and the frequency of meetings of audit committee. Concentrated ownership Unlike in the UK and the USA which have a dispersed shareholder base, ownership and control in Malaysian public listed corporations tend to be much more concentrated, with shares often being owned by identifiable and cohesive groups of “insiders” who have longer term stable relationships with the company. They may be members of the company’s founding families or a small group of shareholders, such as lending banks, MAJ 21,7 788 other companies (through cross shareholdings and pyramidal ownership structures) or the government (Claessens et al., 2000). Past studies have shown that concentrated or block ownership can assist the board in increasing its monitoring effectiveness (Shleifer and Vishny, 1997) and in terminating top executives in poor performing firms (Denis et al., 1997). With regard to earnings management, Chtourou et al. (2001) found that firms with low-level DAC have a larger percentage of shares owned by blockholders. Thus, the presence of shareholders owning a large block of shares in a company provides an additional monitoring mechanism that may deter opportunistic earnings management: H8. There is a significant negative relationship between discretionary accruals (DAC) and concentrated ownership. Cultural characteristics Accounting research has for many years focussed on the influence of cultural values on the development of accounting practices. Past studies have provided evidence on the following: that accounting practices and disclosure are a function of the nation’s cultural values (Perera, 1989; Mohd Iskandar and Pourjalali, 2000); that cultural heritage affects attitudes towards business related fraud (Watson, 2003); and that an organisation’s culture can predispose a company into considering fraudulent financial reporting (Geriesh, 2003). Hofstede (1991) defines culture as the “collective programming of the mind which distinguishes the members of one group or category of people from another”. Among the components of national culture are the prevalent value systems that are transferred from generation to generation. Values refer to the broad preferences for one state of affairs over others. They are the acquired knowledge that people use to interpret experiences; direct feelings of good and evil, and affect perceptions of how things are, that eventually affect behaviour (Hofstede, 1991). Chuah (1995) argues that the mind of Malaysian managers is influenced by race, education and the type of organisation they work for. Using Hofstede’s (1983) four dimensions (individualism, power distance, uncertainty avoidance, and masculinity) in underlying the differences in the nation’s cultural values, Abdullah (1992) provides evidence that the Malays are rated lower on individualism, which is partly attributed to the fact that Islam emphasises groups and societies rather than individuals (Baydoun and Willet, 1995). In addition, the concept of zakat (tax) in Islam promotes the development of collectivism in the community by providing a mechanism for the rich to help the poor. Using race and education as surrogate for culture, Haniffa and Cooke (2002) found the Chinese to be more individualistic and more secretive in their disclosure partly due to their entrepreneurial skills that have a greater influence on the Malaysian economy. They, however, found Malaysian firms dominated by Malay directors have a higher level of voluntary disclosure, which is consistent with the Islamic business ethics that encourages transparency in business, thus may have fewer tendencies to manage earnings. As such, the presence of Malay directors on the board of a company and on audit committees may deter opportunistic earnings management: H9. There is a significant negative relationship between discretionary accruals (DAC) and the proportion of Malay directors on the board. Board, audit committee, culture 789 H10. There is a significant negative relationship between discretionary accruals (DAC) and the proportion of Malay directors on the audit committee. Research design The study examines 100 top companies listed on Bursa Malaysia Main Board, ranked by Market Capitalisation at 31 December 2001 (Investors Digest, 2002) January, for the period January 2002 to December 2003. A final sample comprising of 97 top companies for both years is selected from the list after excluding several companies that did not meet certain criteria in the study. For example, companies in the finance sector are excluded in the study since these companies come separately under the Banking and Financial Institutions Act of 1989. Moreover, they posses a unique and different working capital structure (Klein, 2002). In addition, utilities companies are also excluded because they are very much regulated by the government and acquire different incentives and opportunities to manage earnings (Peasnell et al., 2001). Companies that do not have complete financial data, complete information on directors or whose annual reports are unavailable are also excluded. Data relating to the board of directors and the audit committee attributes are gathered using the company’s annual report as disclosed on the Bursa Malaysia web site. Financial data are obtained from the Datastream. Any missing financial figures from Datastream are acquired from the annual report. Measuring earnings management Consistent with Xie et al. (2003) and Peasnell et al. (2001), working capital accruals are used in this study as a measure for earnings management, as managers have a great deal of discretion in determining the actual earnings a firm reports in any given period (Teoh et al., 1998). In addition, managing earnings through accruals manipulation is more subtle and difficult to detect by a lay user of financial statements. Consistent with empirical evidence from recent contemporary researches in earnings management, namely Klein (2002), Xie et al. (2003), Dechow et al. (1995) and Peasnell et al. (2001), the current study uses the cross-sectional modified version of Jones (1991). While the ability of the modified Jones (1991) model in measuring earnings management has been challenged by some researchers, Dechow et al. (1995) and Guay et al. (1996) found that the model is the most powerful in detecting earnings manipulation in the event of managers exercising their discretion over revenue recognition. For example, managers could determine the appropriate timing to recognise credit sales, which would either increase or decrease the reported earnings over a period. In addition, a cross-sectional analysis is used in this study, instead of time series as sample size can be maximised and survivorship bias problem can be eliminated (Peasnell et al., 2001). In employing the modified Jones’ (1991) model, working capital accruals are decomposed into non-discretionary and DAC. The non-DAC or normal accruals are estimates by managers that represent changes in the underlying economic performance of the company. For example, as the level of sales and purchases during the growth period increases, the magnitude of accounts payable and accounts receivable would increase accordingly. On the other hand, DAC are open to managers’ MAJ 21,7 790 discretion and hence are operationalised as a proxy for earnings management in the study. Non-DAC are estimated during the observation year (the year in which earnings management is estimated) as: NDAC i;t ¼ a ð1=TA i;t21 Þþ b ðDREV i;t 2 DREC i;t =TA i;t21 Þð1Þ where NDAC t ; non-DAC for company i in year t scaled by lagged total assets; DREC i;t ; net receivables for company i in year t less net receivables in year t 2 1; DREV i;t ; revenues for company i in year t less revenues in year t 2 1; TA i;t21 ; total assets for company i at the end of year t 2 1; a and b are industry-specific parameters. The change in receivables is subtracted from the change in revenues to reflect the fact that the change in receivables is treated as discretionary. Estimates of the industry-specific parameters a and b are obtained by using the following OLS regression model as illustrated in equation (2), in the estimation period. Equation (2) use data from all companies matched on the year of observation and are categorised in the same industry groupings. All variables in the regression model are deflated by lagged total assets to reduce heteroscedasticity problems (Teoh et al., 1998; Abdul Rahman and Abu Bakar, 2004; Abdul Rahman and Wan Abdullah, 2005). WCA j;t =TA j;t21 ¼ a 1 ð1=TA j;t21 Þþ b 1 ðDREV j;t =TA j;t21 Þþ1 t ð2Þ where WCA j;t ; working capital accruals in year t for industry j; defined as change in non-cash current assets minus the change in current liabilities, a 1 and b 1 , denote the OLS estimates of a and b in equation (1) above, 1 t ; the regression residuals. In essence, the working capital accruals are regressed on the change in revenue since the underlying assumption under this model is that revenue is a component of non-DAC. Equation (2) is estimated separately each year for all firms listed on Datastream that are in the same industry category. Consistent with Klein (2002), industries with less than eight observations are excluded in the analysis. The regression coefficients in equation (2) (i.e. a 1 and b 1 ) represent the parameter of interest in estimating changes in non-DAC. The discretionary working capital accruals (DAC) is then defined as the remaining portion of the working capital accruals: DAC i;t ¼ WCð1=A i;t Þ 2 NDAC i;t ð3Þ where DAC i,t , discretionary accruals for firm i in year t; WC, working capital; NDAC, non-DAC for firm i in year t. Measurement procedure The variables and their measurements used in this study are summarised in Table I. Consistent with Klein (2002), Becker et al. (1998) and Warfield et al. (1995), the study incorporates absolute value of DAC as the dependent variable. The direction of earnings management is disregarded to include the combined effect of income increasing and income decreasing earnings management. The variables for board of directors and audit committee are measured at the beginning of the year in which earnings management occurs. Four variables that represent board of directors’ attributes are the proportion of independent directors, Board, audit committee, culture 791 Variables Measurement scale Dependent variable Discretionary accruals Obtained using modified Jones model Board of directors Proportion of independent non-executive directors (BDIND) No of independent non-executive directors/total no of board members Average tenure of independent non-executive directors (INDTENURE) Average no of years of board service of independent non-executive directors CEO duality (DUALITY) Indicator variable with the value of “1” if the roles of chairman and CEO are combined and “0” otherwise Board size (BDSIZE) Total no of board members Audit committee Proportion of independent directors (ACIND) No of independent non-executive directors/total no of audit committee members Competence (ACQLFD) Indicator variable with the value of “1” if at least one member is a qualified accountant and “0” otherwise Frequency of meetings (ACMEETINGS) No of meetings conducted Corporate ownership Concentrated/block ownership (BLOCK) Combined number of significant shareholders/total no of ordinary shares Cultural characteristics Ethnic composition of directors on board (ECBD) Ratio of Bumiputra directors to total number of directors on board Ethnic composition of directors on audit committee (ECAC) Ratio of Bumiputra directors to total number of directors on audit committee Control variables Return on assets (ROA) EBIT/total assets Leverage (LEV) Total debt/total assets Cash flow (CFO) Cash flow from operations Size (SIZE) Log of total assets Book to market value ratio (GROWTH) Book value of equity/market value of equity Big5 auditor (Big5) Indicator variable with the value of “1” if audited by Big5 and “0” otherwise Table I. Summary of the operationalisation of variables MAJ 21,7 792 [...]... characteristics”, Auditing: Journal of Practice and Theory, Fall, pp 4 7-6 6 Abdullah, A (1992), “The influence of ethnic values on managerial practices in Malaysia”, Malaysian Management Review, March, pp 2 5-3 4 Abdul Rahman, R and Abu Bakar, A (2004), Earnings management and Malaysian corporate acquisitions”, Malaysian Accounting Review Journal, Vol 3 No 1, pp 2 9-4 2 Abdul Rahman, R and Haniffa, R (2003),... Vol 15, pp 24 1-5 0 Guay, W.R., Kothari, S.P and Watts, R.L (1996), “A market-based evaluation of discretionary accruals models”, Journal of Accounting Research, Vol 34, pp 8 3-1 05 Guidry, F., Leone, A.J and Rock, S (1999), Earnings- based bonus plans and earnings management by business-unit managers”, Journal of Accounting and Economics, Vol 26, pp 8 5-1 08 Haniffa, R.M and Cooke, T.E (2002), Culture, corporate... Journal, Vol 3 No 1, pp 9 1-1 10 Agrawal, A and Knoeber, C.R (1996), “Firm performance and mechanisms to control agency problems between manager and shareholders”, Journal of Financial and Quantitative Analysis, Vol 31, pp 37 7-8 9 Bartov, E., Gul, F.A and Tsui, J.S.L (2000), “Discretionary-accruals models and audit qualifications”, working paper, New York University, New York, NY Baydoun, N and Willet, R (1995),... mechanisms and performance of Malaysian listed firms”, paper presented at the ANZAM 2003 Conference, Perth, 2-4 December Abdul Rahman, R and Haniffa, R (2005), “The effect of role duality on corporate performance in Malaysia”, International Scientific of Corporate Ownership and Control, Vol 2 No 2, pp 4 0-7 Abdul Rahman, R and Wan Abdullah, W.R (2005), “The new issue puzzle in Malaysia: performance and earnings. .. in preventing opportunistic earnings management This is similar to that found by Park and Shin (2003) and Abdul Rahman and Haniffa (2005) There is also insufficient evidence to allow us to accept the ninth and tenth hypotheses where the presence of Bumiputra directors on the board and the audit committee may detect earnings management Among the control variables, only size and growth are found to be... examine in-depth the extent to which DAC is harmful or beneficial to the shareholders By distinguishing and focusing only on the DAC that are costly to shareholders, a more accurate picture can be obtained in examining the effectiveness of board of directors in constraining earnings management Board, audit committee, culture References Abbott, L.J and Parker, S (2000), “Auditor selection and audit committee... corporate governance and firm performance”, working paper, University of Washington, Seattle, WA Choi, J.H., Jeon, K.A and Park, J.I (2004), “The role of audit committees in decreasing earnings management: Korean evidence , International Journal of Accounting, Auditing and Performance Evaluation, Vol 1 No 1, pp 3 7-6 0 Chtourou, S.M., Bedard, J and Courteau, L (2001), “Corporate governance and earnings management”,... employing non-Big5 auditors (Becker et al 1998) In comparison to low quality auditors, high quality auditors such as Big5 auditors are more likely to detect questionable accounting practices and to a certain extent may compel management to follow accounting practices as prescribed by the accounting standards Board, audit committee, culture 793 MAJ 21,7 794 In addition, the log of book value of total... Vol 12, pp 15 5-6 0 Shleifer, A and Vishny, R.W (1997), “A survey of corporate governance”, The Journal of Finance, Vol 52, pp 73 7-8 3 Teoh, S.H., Welch, I and Wong, T (1998), Earnings management and the long-run market performance of initial public offerings”, Journal of Finance, Vol 53, pp 193 5-7 4 Vicknair, D., Hickman, K and Carnes, K.C (1993), “A note on audit committee independence: Evidence from... performance: a review and integrative model”, Journal of Management, Vol 15, pp 29 1-3 34 Board, audit committee, culture 803 MAJ 21,7 804 Further reading Christopher, P (2004), “Corporate governance and the role of non-executive directors in large UK companies: an empirical study”, Corporate Governance, Vol 4 No 2, pp 5 2-6 3 Conyon, M., Shleifer, A and Vishny, R.W (1986), “Large shareholders and corporate control”, . Board, audit committee, culture and earnings management: Malaysian evidence Rashidah Abdul Rahman Faculty of Accountancy, Universiti Teknologi MARA, Selangor, Malaysia, and Fairuzana. issue and full text archive of this journal is available at www.emeraldinsight.com/026 8-6 902.htm Board, audit committee, culture 783 Managerial Auditing Journal Vol. 21 No. 7, 2006 pp. 78 3-8 04 q. Leone, A.J. and Rock, S. (1999), Earnings- based bonus plans and earnings management by business-unit managers”, Journal of Accounting and Economics, Vol. 26, pp. 8 5-1 08. Haniffa, R.M. and Cooke,