Husnin 2016

Asian Review of Accounting
Corporate governance and auditor quality – Malaysian evidence

Azrul Ihsan Husnin Anuar Nawawi Ahmad Saiful Azlin Puteh Salin
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To cite this document:
Azrul Ihsan Husnin Anuar Nawawi Ahmad Saiful Azlin Puteh Salin , (2016),"Corporate governance and auditor quality –
Malaysian evidence", Asian Review of Accounting, Vol. 24 Iss 2 pp. -
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Corporate Governance and Auditor Quality – Malaysian Evidence
Introduction
Malaysia was heavily affected by the Asian financial crisis in 1997. Since that crisis, Hong
Kong, Singapore, and Malaysia have since taken large steps towards improving their
corporate governance (Sawicki, 2009; Mitton, 2002; Manan, Kamaluddin & Salin, 2013)
such as greater transparency and stricter legislation enforcement (Haat et al., 2008), as it was
identified that weaker corporate governance leads to poor transparency, while crony
capitalism (Claessens and Fan, 2002) and concentrated ownership (Fan and Wong, 2005)
were responsible for escalating the crisis.
Malaysia reached a significant milestone in the implementation of good corporate

governance with the introduction of the Malaysian Code of Corporate Governance (MCCG)
in 2000. The auditing profession was strengthened with the issuance of public practice
licences only to those genuinely qualified. They have become subject to the rigorous
regulations issued by Malaysian Institute of Accountant (MIA), a statutory body established
to regulate and develop public practice in Malaysia. Such regulation was enhanced further in
2010, when the Audit Oversight Board (AOB) was set up to oversee the quality and
reliability of the audited financial statements of public interest entities by the auditors. This
indirectly signalled a demand for audit quality, leading to a basis for changes in the selection
of auditors (Nazri, Smith & Ismail, 2012; Beattie and Fernly, 1995; Schwartz & Mennon,
1985).
This effort continued in 2007 with the revised MCCG, which replaced the previous
MCCG 2001. Some key changes included making the audit committee (AC) comprised of all
non-executive directors, as well as requiring a higher frequency of meetings between the AC
and external auditors without the presence of executive board members.
Due to these changes, it is interesting to study whether these amendments give an

immediate impact to the auditors’ selection and hence, the audit quality of the Malaysian
companies. Malaysia was chosen as the setting for this study as corporate governance
practices in Malaysia are still in infancy stages as compared to developed countries like US
and the UK. Furthermore, the capital market in Malaysia is somewhat unique, as a majority
of the companies are politically-affiliated, ethnic-controlled, and dominated by family firms.
Therefore, it would be worthwhile to explore how these elements have a place in corporate
governance reform in Malaysia.
It is expected that there will be a shift towards high quality auditors, since there will be
an increasing demand for a high quality and reliable financial information. This is based on
the argument that a new composition of AC consisting of all non-executive directors, as well
as an increase in the number of independent directors, will less likely to favor less quality
auditor, and thus more likely to choose a high-quality auditor in order to ensure higher
credible financial information for the stakeholders.
Also, the current study is intended to explore and investigate the relationship between the
firm’s internal corporate governance mechanisms with the selection of auditor’s quality.
Apart of AC composition and operation, the study interested to examine whether ownership
concentration, Chief Executive Officer (CEO) duality, the financial state of the company,
ownership dominance, political connection, share price, and family control firms have a
1
significant and immediate impact on the selection of a higher-quality auditor. Though a great
deal of research has been done in the area of corporate governance, little research has been
conducted in the Malaysian market, especially in line with this study, which focuses on
dissecting the Malaysian corporate governance mechanism and its effects towards the choice
of auditors.
This paper makes several contributions. First, it deepens current understanding of the
effectiveness of Malaysian corporate governance, as well as firm corporate governance
determinants on the selections of auditor particularly on its immediate impact after MCCG
revision in 2007. Second, research concerning auditor quality in Malaysia is very limited,
though a number of studies may be found concerning this topic, such as those by Yassin and
Nelson (2012) and Wahab et al. (2009). These studies, however, used audit fees as a proxy
for audit quality. We have extended their study using other indicators of audit quality, such as
audit firm size. Finally, we have provided analysis on the auditor selection based on the pre
and post changes in corporate governance code in 2007. Much of the research in this area
does not consider this factor and thus, this study is intended to fill those gaps. In addition, we
examine whether this changes is immediately responded by the company.
The remainder of this paper is organized as follows. In the next section, we review the
existing literature and concepts regarding audit and auditor quality. We then provide an
argument for the hypotheses developed for this study. In the third section, we explain the
method use to conduct the current research followed with findings. The fifth section contains
discussion, while the last section is conclusion.
Literature review and hypotheses development

Audit quality
Audit quality is vital, as it affects the reliability of the financial report and protects the
interest of its reader. It may also enhance the transparency of a report via higher voluntary
disclosure (Barros, Boubaker & Hamrouni, 2013) and lessen earnings manipulations
(Almeida-Santos, 2013). However, lower quality reports may possibly mislead and provide
incorrect information to users.
Higher audit quality is yet more essential when separation of ownership between the
owner and management leads to a divergence between management’s and owner’s interests
(Jensen & Meckling, 1976; DeFond, 1992; Chen, Elder, & Hsieh, 2007) that cause an agency
problem. Because of that, external or independent auditing is engaged to mitigate agency
problems resulting from the separation of ownership and control (Al-Ajmi, 2009).
Higher audit quality also provides an independent oversight of the companies (Francis,
2004). Stakeholders demand more reliable financial information; thus, they consider external
audits to be monitoring tools alongside the process of financial reporting (Schwartz &
Mennon, 1985; Lin & Liu, 2010). In cases in which a task has been delegated from the
principal to an agent, the agent may take advantage on asymmetrical information existed
(Dittmann, 1999). The monitoring role of the external audit will alleviate the agency problem
between management and owners (Joseph & Wong, 2005).
Many scholars have provided definitions of audit quality and hence, auditor quality. Audit
quality and auditor quality are closely related concepts. A quality auditor will perform a high
quality audit, and vice versa. Audit quality in many ways has been defined as an outcome
2
conditional on the presence of auditor’s attributes (Knechel et al., 2013). One of the most
widespread is the definition given by DeAngelo (1981), defining audit quality as the
probability of an auditor will both discover and report an error or breach in their client’s
accounting system. This definition posits two important characters of a quality auditor –
competency and professionalism. The auditor should be able to uncover any breach and
violations of the client’s accounting system and then, report the breach using appropriate
channels. A minor breach will be discussed with the AC, while a major breach will be
reflected in their overall assessment of the company.
Francis (2004) suggested that audit quality is attained when the audit complies with the
minimum legal and professional requirement. Audit quality is inversely related to audit
failures, meaning the higher the failure rate, the lower the audit quality. This definition is
consistent with that of Peecher and Piercey (2008) and Casterella et al. (2009), who related
adverse outcomes from the poor audit with litigation action on the part of the auditor.
From a more positive perspective, Knechel et al. (2013) defined audit quality as execution
of a well-designed audit process by properly motivated and trained auditors who understand
the inherent uncertainty of the audit and appropriately adjust to the unique conditions of the
client. This definition is unfortunately complex, as it is difficult to operationalise this
definition compared to audit quality expressed in terms of failure.
Due to difficulty in directly determining audit quality (Francis, 2004), researchers have
used various proxies to represent audit quality, such as size of audit firm (Guy, Ahmed, &
Randal, 2010; DeFond & Lennox, 2011; Sundgren & Svanstrom, 2013; Kim, Song and Tsui,
2013), audit engagement tenure (Al-Ajmi, 2009), audit structure (Kaplan, Menon, &
Williams, 1990), audit fees (Haat et al., 2008), litigation actions against the listed firm and
their auditors (Mary, Mark, & David, 2005; Schmidt, 2012), and auditors’ industrial expertise
(Lowensohn et al., 2007). However, the most commonly studied factor in terms of audit
quality is audit firm size (Haat et al., 2008).
Collectively, most researchers have pointed out the significant relationship between audit
quality, as well as better monitoring capability with the size of audit firm (DeAngelo, 1981;
Palmrose, 1988; Francis & Simon, 1987; Jang-Yong & Lin, 1993; Leuz & Verrecchia, 2000;
Al-Ajmi, 2008). Sundgren & Svanstrom (2013) stated that larger firms have more resources
and greater technical expertise than smaller firms. Small firms may ignore important audit
procedures when carrying out a large number of jobs, therefore reducing audit quality
(Sundgren & Svanstrom, 2014), especially during peak season (Lopez & Peters, 2012).
In addition, a bigger firm has a superior investment in reputational capital and is wealthier.
Therefore, bigger firms need to minimize audit errors to safeguard their reputation (Beatty,
1989) as greater loss will be experienced due to damage resulting from low audit quality
(Dye, 1993). Large audit firms also show more courage to disagree with the client and are
seen as more independent from the client (DeFond & Jiambalvo, 1993).
There has been relatively limited research conducted on the factors that determine the
auditor selection especially in selecting better audit quality in Malaysia. Previous studies on
auditor choice were largely conducted in developed countries such the US (Pittman & Fortin,
2004; Lee et al., 2004; Hudaib and Cooke; 2005), Australia (Beatty, 1989) and the UK
3
(Chaney et al., 2004; Abidin, 2006), while Lin and Liu (2009) conducted a similar study in
the developing country of China.
In Malaysia, studies on auditor selection have been conducted by a few researchers. Abdul
Naseer et al. (2006) studied auditor selection in terms of audit tenure, client size, client
growth and client financial risk. Ismail et al. (2008) and Joher et al. focused on the factors
that lead to auditor switching, while Jaafar and Alias (2002) examined the impact on the
firm’s rotation. This study therefore extends the auditor choice literature in the Malaysian
context by examining the determinants of the auditor quality selection in respect of internal
corporate mechanism.
Internal corporate governance mechanism and selection of audit quality

Arguably, good corporate governance cannot be achieved by a company only on the strength
of regulations, but must also be based on some other internal factors functioning as self-
disciplinary mechanisms. Carcello et al. (2002) and Abbott et al. (2003) posited that firms
with stronger internal corporate governance structures demand better audit quality. Examples
of these internal corporate governance structures includes AC, balance of power between
management and board, and company ownership.
Empirical evidence shows that AC role is very important because it is responsible for
oversight of the financial reporting process (Johl et al., 2012) and able to prevent fraudulent
financial statements (Klein, 2002). Therefore, financial reporting integrity as required by
MCCG 2007 may be achieved by the way of monitoring roles carried out by the AC. These
roles are effectively executed when AC members are greater in number, because every
member can compensate other member weaknesses. Hashim, Nawawi and Salin (2014) for
example found that number of directors in the board significantly impact the strategic
information disclosed by the company. Prior research has determined that the size of an AC
has a significant relationship with its monitoring effectiveness (DeAngelo, 1981; Leuz &
Verrecchia, 2000; Al-Ajmi, 2008). Hence, the bigger the size of the AC, the stronger the
monitoring is expected; thus, higher quality auditors should be selected.
Independent and non-executive directors are also critical in contributing to better

performance of the company (Huang & Chan, 2013; Knyazeva, Knyazeva & Masulis, 2013)
by enhancing the effectiveness of the audit function (Abbot et al. 2003; Carcello et al., 2002).
Directors that do not get involved in daily management operations are more objective and
able to uphold the public interest from their point of view. The revised MCCG 2007
specifically requires the AC to be fully comprised of non-executive directors. This reflects
the importance of the AC to be more independent and free from conflicts of interest. In the
newly revised MCCG 2012, this requirement is reinforced by limiting the tenure of
independent directors up to nine (9) years (Satkunasingam & Cherk, 2012) so that their role
in providing independent judgment can be safeguarded (Kassim, Ishak & Manaf, 2013).
Directors that are free from influence of management is crucial to monitor the managers
(Bhagat et al., 2008), mitigating collusive behaviour of managers (Upadhyay et al., 2013),
reducing the likelihood of financial statement fraud (Beasley, 1996) and earnings
management (Bruynseels and Cardinaels, 2013), improved financial performance (Daily et
al., 2003) and supporting the independent auditor in management-auditor disputes (DeZoort
and Salterio, 2001).
4
The impact of higher AC size and level of independence is greater when they engage in
more frequent meetings, because they are able to actively address more important issues.
Beattie, Fearnley and Hines (2013), in a recent survey in the UK, found that AC activities
will enhance audit quality. With a good AC composition and operation, the committee is able
to act successfully as a monitoring tool. This will increase the possibility of employing a high
quality auditor to ensure better safeguarding of the public interest. Based on the previous
discussions, the following hypotheses have been derived:
Hypothesis 1: Ceteris paribus, a firm with more AC members, higher proportion of

independent and non-executive directors on AC and meet more frequently is more likely
to choose a high quality auditor.
Hypothesis 1a: Ceteris paribus, a firm with AC meets frequently is more likely to choose a
high quality auditor.
Hypothesis 1b: Ceteris paribus, a firm with higher proportion of independent directors in
AC is more likely to choose a high quality auditor.
Hypothesis 1c: Ceteris paribus, a firm with more members in AC is more likely to choose
a high quality auditor.
Hypothesis 1d: Ceteris paribus, a firm with higher proportion of non-executive directors in
AC is more likely to choose a high quality auditor.
A majority of companies in Malaysia have a concentrated type of shareholding

(Thillainathan, 1999; Claessens et al., 2000). This is not healthy, as Allen (2000) and
Globerman et al. (2011) suggested, because corporate governance in Asian firms renders
them unable to function effectively due to high concentrated ownership, especially when
external governance mechanisms are weak (Fan and Wong, 2005). Krishnamurti et al. (2005)
and Lemmon and Lins (2003) posited that during the Asian financial crisis firms with high
control right in respect to their ownership have the ability to expropriate, especially if legal
protection of shareholders is weak. Other researchers, such as Rafael La, Florencio and
Andrei (1999), Copley and Douthett (2002) and Haiyan, Ahsan and Clive (2009) have also
mentioned the similar effects of ownership concentration on the corporate governance. When
a majority of shares are in the hands of a single or a few shareholders (identified as block
shareholder)s, they have more power in decision-making and the tendency to abuse that
power (Solomon, 2007) to influence the management to manipulate financial statements for
rent-seeking (Copley and Douthett, 2002; Fan and Wong, 2002).
Block shareholders can also access company’s private information and take advantage by
expropriation activities to protect their own investment (Shleifer and Vishny, 1986, La Porta
et al., 2002, Anderson et al., 2004), particularly during the crisis to compensate for their
losses (Bae et al., 2012). Based on this, it is considered supported that the controlling
shareholders had more incentive to expropriate the minority’s wealth (Cheung et al., 2005;
Burkart and Panunzi, 2006). Engaging a high-quality auditor may limit their incentives to
expropriate company’s wealth as quality auditor will ensure the financial statements will
strictly comply with the accounting standard and relevant rules and regulations. Thus, the
next hypothesis has been derived:
5
Hypothesis 2: Ceteris paribus, the higher the percentage of total shares held by the largest
owner, the less likely a high quality auditor will be chosen.
CEOs that also serve as a Chairman, well-known as CEO duality, have been of great
interest to both academic researchers and practitioners for the last two decades (Forker, 1992;
Dalton et al. 1998; Kim et al., 2009). Stiles and Taylor (1993) and Blackburn (1994) were
against CEO duality practices, as separation of these two roles is important to provide checks
and balances over management (Haat et al., 2008) and effective corporate governance
mechanisms (Cohen et al., 2002). CEO duality allows little transparency (Imhoff, 2003) via a
lack of monitoring on the CEO’s actions, as he or she has a significant influence on board’s
decision (Lin and Liu, 2009, Kim et al., 2009). Consequently, a board of directors is less
impartial in monitoring the management (Lin and Liu, 2009). It has been found that the
company with CEO duality aggressively managing their earnings (Dechow et al., 1996;
Hudaib and Cooke, 2005) and are likely to become involved in corporate scandals and
corruption (Sharma, 2004).
However, when the chairman is a different person than the CEO, he or she able to oversee
the company in more impartial manner and hence increase oversight effectiveness (Cohen et
al., 2002; Lee et al., 2004; Wilkinson and Clements, 2006). As hiring a quality auditor may
cause his/her private intention be limited, there is less incentive for the company with CEO
duality to employ a high quality auditor. Thus the following hypothesis is derived:
Hypothesis 3: Ceteris paribus, a firm with duality of positions of CEO and Chairman is
less likely to choose a high-quality auditor.
In Malaysia, most financially-troubled firms are classified as Practice Note 17 (PN17) firms.
However, loss-making companies are also considered to have high probability of facing
financial distress. There are a few reasons why financially troubled company will be selective
in choosing their auditor. First, many audit firms, especially larger firms, are likely to issue
going concern reports to the loss-making company, which will have a negative impact on the
share market (Chen and Church, 1996; Menon and Williams, 2010). To avoid this, the
company will prefer an auditor willing to issue a clean report on the financial position of the
company. Second, Kaplan and Williams (2012) found that financially stressed companies are
unable to hire larger firm because such a firm may insist on shedding the financially
distressed firm due to their higher risk nature. The potential litigation cost may exceed the
benefits of auditing a financially-troubled company (Power, 2003). Rama and Read (2006)
and Landsman et al. (2009) documented that larger audit firm will resign from high risk
clients and consequently, the company will become unable to hire an auditor of the same size
and quality (Shu, 2000). Finally, the financially distressed firms may still want to present
favourable financial statements such as “minimising loss” via incompliance with laws and
accounting standard to avoid being liquidated. Therefore, the company will engage smaller
firms of a less quality to achieve their motives. Lin and Liu (2009), for example, found that
opaqueness gain derived by the Chinese company during the bear market from 2001-2004
caused them to become less likely to hire a high quality (large) auditor. Thus, the following
hypothesis is derived:
Hypothesis 4: Ceteris paribus, a firm categorized as PN17 and loss-making is less likely to
choose a high quality auditor.
6
There are a few scholars that have studied the influence of culture and ethnicity on business
practices, such as Efferin and Hopper (2007) in Indonesia, Biggs et al. (2002) in Kenya,
Davie (2005) in Fiji, Kim (2004) in New Zealand, Blanco and De la Rosa (2008) and Carter
et al. (2010) in the US, Hoque and Noon (1999) in the UK, Hammond et al. (2009) in South
Africa, and James and Otsuka (2009) in Australia. Hofstede (1980) suggest that different
cultures may lead to different specific behavior and hence, business decision making.
Ethnicity is a part of social fabric and may impact economic transactions (Zagefka, 2009).
Based on their findings, it is worthwhile to examine whether the selection of auditor may also
be influenced by cultural and ethnic differences.
Malaysia is a unique country consisting of multiracial communities and its economics

segment is divided along ethnic group (Jesudason, 1989). The country’s biggest racial blocks
belong to two major groups, the Bumiputras and the Chinese. Although there are other ethnic
groups such as the Indians, the distinction between the two main ethnic groups (Bumiputras
and Chinese) dominates most of the socio-economic activities and political decisions (Yatim
et al., 2006). Chinese are known as successful entrepreneurs that contribute the most to the
Malaysian economy. They have strong business networks, are the main players of the audit
market, and account for the majority of members of accounting professional bodies in
Malaysia (Che Ahmad et al., 2006). Cultural and language similarities and the role of the
Chinese networks that provide market information to its members have influenced the
selection of auditors among the Chinese-controlled firms (Che Ahmad et al., 2006).
Ironically, for the same reason, the Bumiputras have also been encouraged by the
government to give priority to their fellow ethnic members in business dealings including in
selecting the auditor. Yatim et al. (2006) suggested that the domination of key decision
makers by ethnic groups in the company may lead to a different monitoring approach.
Previous studies have documented the influence of ethnicity on audit pricing (Yatim et al.,
2006; Johl et al., 2012), audit services (Che Ahmad, 2001) and disclosure practices (Haniffa
and Cooke, 2002). Based on such arguments, ownership dominance based on ethnicity in an
organisation may dictate the selection of an auditor based on ethnicity preferential and not
audit quality. Thus, the following hypothesis is derived:
Hypothesis 5: Ceteris paribus, there is a positive relationship between the ownership

dominance of the firm with the selection of auditors.
The Malaysia business sector also influenced by the existence of connections with
political parties and government (Johl et al. 2013; Gul, 2006) by the way of ownership and
favouritism. Bushman et al. (2004) argued that politically connected firms will damage the
good governance of the country, because such firms may withhold information to hide
expropriation activities by politicians and their cronies in return for control over regulatory
and financial policies to favour this company, such as paying lower effective tax rates
(Adhikari et al., 2006). Bushman et al. (2004), Bushman and Piotroski (2006) and Gul (2006)
found that firms with higher government ownership demonstrate low financial transparency
and report poorer quality of earnings (Chaney et al., 2011). These firms were also hit harder
during the 1997 financial crisis because of their weak governance (Johnson and Mitton,
2003).
In Malaysia, researchers found that political connection caused a lower level of financial
reporting quality (Ball et al., 2003) and higher earnings management (Johl et al. 2013). For
7
example, Bumiputra CEOs tend to have poor business management and are more open to
cronyism (Johl et al., 2012). Politically-owned firms are perceived to bear higher inherent
risk by auditors due to the higher possibility of business failure and more likely to misstate
financial information (Effiezal et. al, 2009). Hence, a low-quality auditor who can easily be
influenced may be employed. Thus, the following hypothesis is derived:
Hypothesis 6: Ceteris paribus, politically-connected firms are less likely to choose a high
quality auditor.
Based on the signaling theory, the management may be able to inform shareholders the
position of its corporate governance through the choice of auditor. The selection of a high
quality auditor may signal that good corporate governance exists within the company, and
this will be translated into higher performance in terms of share price. Huson et al. (2000),
for example, found that investors react positively in the share market when company switches
to Big 4 auditors but react negatively when company replaces the Big 4 auditors to the non-
Big 4 auditors. Nichols and Smith (1983), Eichenseher et al., (1989), and Teoh and Wong
(1993) found that stock market reacts more positively on higher earnings disclosure for the
company with larger audit firms compared to company with smaller audit size. A similar
positive response was found for a company undergoing initial public offerings (Jang and Lin,
1993) which has less possibility of encountering under-pricing (Firth and Smith, 1992). Thus,
the following hypothesis is derived:
Hypothesis 7: Ceteris paribus, there is a positive relationship between the choice of

auditors and share price.
Family control firms represent a large portion of the public listed firms in Bursa Malaysia
(Claessens et al. 2000; Abdul Rahman, 2006; Ibrahim and Samad, 2011c) accounted
approximately more than 40% of the stock exchange’s main board from 1999 to 2005
(Ibrahim and Samad, 2011a; 2011b). The major issues with family control firms are that these
firms usually appoint their family members as directors (Ibrahim and Samad, 2011a) and that
they combine the role of the CEO and the Chairman (Amran and Che Ahmad, 2009; Ibrahim
and Samad, 2011a). This may lead to a weak corporate governance due to the large
composition of non-independent directors (Amran and Che Ahmad, 2009; Ibrahim et al.
2011; Chen et al., 2008; Hashim, 2011) who are more likely to treat the company’s property
as a family asset (Mishra et al., 2001). The number of outside directors monitoring
effectiveness is also reduced in family controlled firms (Jaggi et al., 2009) which results in
deterioration of company performance (Klein et al., 2005; Lins et al. 2013), less value
(Shleifer and Vishny, 1997; Lauterbach and Vanisky, 1999; Ibrahim and Samad, 2011a), and
low levels of transparency (Chau and Gray, 2002; Akhtaruddin et al., 2009; Darmadi and
Sodikin, 2013).
However, a family firm may want to offset these negative impressions by appointing a
high quality auditor. Based on the signaling theory, family firms will appoint a bigger firm to
signal outsiders their favorable monitoring aspects (Bar-Yosef and Livnat, 1984; Chow,
1992; Carey et al., 2000). This has been supported by Azizan and Amer (2012), who found
family firms tend to show improvement in share price when there is an improvement on
governance activities after intervention by the shareholder monitoring body. Claessens and
Fan (2002) also suggested that the controlling shareholders can employ a high quality auditor
8
to alleviate concern from the minority about the possibility of assets expropriation. Thus, the
following hypothesis is proposed:
Hypothesis 8: Ceteris paribus, there is a positive relationship between family control firms
and the selection of high quality auditor.
Research method
Regression model
In order to test the hypotheses on the selection of auditors, a regression model modified from
the research of Lin & Liu (2009) has been developed as follows:
Y = β0 + a1X1+a2X2+a3X3+a4X4+a5X5+a6X6+a7X7+a8X8+a10CV+ε
The binomial regression method has been employed to test auditor selection based on the
predetermined quality of audit. The dependent variable is auditors’ quality, and the
independent variables are AC composition and operations, concentrated ownership, CEO
duality, company’s financial position, ownership dominance, political influence, family
control and share price. Control variables for the study include the company’s size, growth,
profitability, assets structure, financial leverage and risks. Table 1 summarizes the variables
and its definition used in this study.
INSERT TABLE 1 HERE

Data collection
The population of this study includes all the companies listed on the Bursa Malaysia,
excluding companies from the financial sector due to the differences in the laws and
regulations that bind the operations and hence, governance of the company. A similar
approach was also taken by Lin & Liu (2009). The industry classifications are derived from
Worldscope, which gives thorough and detailed industry classifications. The final samples
consist of 900 firm years comprised of 300 firms for each year from 2006 to 2008. This study
only used three years for the data collection period, because this study aims to examine the
immediate response of the companies on the new requirements of MCCG 2007. Year 2006
represents the pre-amendment period and 2008 the post-amendment period, while 2007 is
chosen as the transition or cut-off period, since 2007 was the year in which the new MCCG
2007 was introduced to the market. Table 2 shows the firms’ sample based on industries (in
alphabetical order).
INSERT TABLE 2 HERE
Findings
9
Descriptive statistics
Table 3 shows the descriptive statistics used to gain understanding of the characteristics of
the sample for 2006, 2007, and 2008. It has been found that approximately 60% of the
samples hire Big 4 auditors for all three years of the study. With respect to independent
variables, the values for all the variables are consistent throughout the period. The highest
dispersion value belongs to only one of the control variables, return on assets, in which the
mean almost doubled in value in 2007 from 2006, but suddenly decreased by 50% in 2008.
INSERT TABLE 3 HERE
Coefficients of correlation
To describe the strength of a linear relationship among the dependent and independent
variables, the coefficient of correlation has been determined through Pearson’s correlation
matrix. Table 4 of Correlation Coefficient Matrix of Dependent and Independent Variables
(2006-2008) (Appendix 1) depicts the correlation coefficient matrix of the dependent and
independent variables.
In general, the findings clearly suggest that most independent variables were significantly
correlated with the dependent variables at either 5% or 1%. In relation to the independent
variables that measured auditor selection based on audit quality, 9 out of 15 measures were
statistically significant (excluding control variables). Auditor selection was significantly
correlated with AC size, r=0.14, p<.001; proportion of non- executive directors in AC,
r=0.08, p<.05; percentage of block shareholders, r=0.19, p<.01; financial state, r=-0.13,
p<.01; Chinese dominance, r=-0.13, p<.01; Bumiputra dominance, r= -0.07, p<.05;
institutional dominance, r=-0.17, p<.01; strong political connection, r= 0.21, p<.01; and
yearly closing share price, r=0.14, p<.01.
There was no indicator suggesting a harmful multicollinearity problem on the explanatory

variables. The highest correlation identified between the independent and dependent variables
was only at r = 0.79, which was lower than the r = 0.9 cut-off measures as suggested by Field
(2009) and used in many studies.
Regression results
INSERT TABLE 5 HERE
Table 5 consists of the three years of the regression results: 2006 (pre-MCCG 2007), 2007
(transition to MCCG 2007) and 2008 (post-MCCG 2007). The first column depicts the
variables tested. The second column depicts the predicted direction of the coefficients based
on the developed hypotheses. Wald statistics was used to test the contribution of predictors to
the predictions of the outcomes of this study. According to Field (2009) the “Wald statistics
tells us whether the b coefficient for the predictor is significantly different from zero”
(p.270). This is because if the coefficient is significantly different from zero, then we can
assume that the predictor is making a significant contribution to the prediction of the outcome
(Y) (p.270).
Summary statistics
Table 5 provides the regression results for the study. The Pseudo R-square and chi-square
were reported as R²=0.20, Model χ²=46.99 in 2006, R²=0.23, Model χ²=56.67 in 2007, and
R²=0.23, Model χ²=54.88 in 2008. This model was statistically significant at p<.001 and it
10
was able to differentiate between those firms that chose the Big Four and the non-Big Four
auditors. On this basis the model correctly classified 68% of firms in 2006, 70.3% of firms in
2007, and 67.7% of firms in 2008.
As reported in various papers with the same theme, Pseudo R² was reported based on
Nagelkerke’s R² measure. Even though Field (2009) has suggested that the Pseudo R² in
terms of interpretation “can be seen as similar to the R² in linear regression in that they
provide a gauge of the substantive significance of the model” (p262), in this study it was
suggested that any interpretation in relation of Pseudo R² should be made with extra caution.
The low Pseudo R² values were considerably acceptable as Hosmer & Lemeshow (2000)
suggested that low R² value was usually normal in logistic regression cases. For the purpose
of hypotheses testing, only the significance levels of 1% and 5% will be regarded as
significant.
Hypotheses results
The regression results in Table 5 showed that all the AC related variables was not significant
in all three years of observation. AC frequency meeting (2006: β= -0.13, Wald=1.79; 2007:
β= -0.15, Wald=1.43; 2008: β= -0.05, Wald=0.13), proportion of independent directors in AC
(2006: β= -1.91, Wald=1.74; 2007: β= -0.26, Wald=0.06; 2008: β= 0.30, Wald=0.13), size of
AC membership (2006: β= 0.13, Wald=0.37; 2007: β= -0.35, Wald=2.29; 2008: β= -0.07,
Wald=0.10) and the proportion of non-executive directors in the AC (2006 β= 0.86,
Wald=0.58; 2007: β= 0.72, Wald=0.63; 2008: β= 1.08, Wald=0.90) were not statistically
significant with the selection of a high quality auditor. Thus, all the hypotheses (H1a, H1b,
H1c and H1d), including the general hypothesis 1, were not supported.
The regression results in Table 5 suggested that H2 was not supported in 2006, as the size
of the block shareholders did not have any negative statistically significant relationship with
the selection of a high quality auditor (β= 0.56, Wald=0.39, p>0.05). Even though the size of
the block shareholders was statistically significant at the 5% level in 2007 (β= 2.17,
Wald=5.49, p<0.05), H2 in 2007 was not supported due to the deviation in the actual
coefficient direction with the predicted direction. Moreover, H2 in 2008 was also not
supported, as the size of block shareholders did not have any negative significant relationship
with the selection of a high quality auditor (β= -1.09, Wald=3.38, p<0.1). The consistent
positive coefficient has suggested that during the three years observed, the size of the block
shareholders was positively related with the selection of a high quality auditor, different from
the initial negative prediction.
The regression results suggested that CEO duality has no significant negative relationship
with the selection of a high quality auditor during the three years observed (2006: β= 0.15,
Wald=0.24, p>.05; 2007: β= 0.26, Wald=0.77, p> .05; 2008: β= 0.38, Wald= 1.57, p>.05).
Thus, H3 was not supported. It is noted that the direction of the coefficient during all the
three years observed moving positively instead of negatively as per the initial prediction.
Table 5 also shows that there was a significant negative relationship between firms
categorized as PN17 and loss making with the selection of a high quality auditor in 2006 at
the 10% level (2006: β= -0.74, Wald=3.63, p<.10). However, there was no such significant
relationship in 2007 and 2008 (2007: β= 0.05, Wald=0.01, p> .05; 2008: β= 0.32, Wald=
0.67, p>.05). Since only the significant level below than p<.05 was accepted thus, H4 was
11
rejected. In addition, it was identified that only the coefficients in 2006 and 2007 moved in
line with the initial prediction, while in 2008 they moved in the opposite direction.
Ownership dominance variables (X5) consist of three sub variables. Variable X5a denoted
Chinese ownership dominance; variable X5b denoted Bumiputra ownership dominance;
while X5c denoted institutional ownership dominance. All X5 sub variables were
dichotomous where 1 referred to ‘yes’ and 0 referred to ‘no’. Based on the regression results
in Table 5, there was no statistically significant relationship at the 5% level between Chinese-
dominated firms with the selection of high quality auditors during the three years observed
(2006: β= -0.32, Wald=0.19, p>.05; 2007: β= -0.60, Wald=0.54, p> .05; 2008: β= -0.23,
Wald= 0.11, p>.05). Furthermore, the same results were also identified between Bumiputra-
dominated firms and auditor selection (2006: β= -0.70, Wald=0.62, p>.05; 2007: β= -1.55,
Wald=2.67, p> .05; 2008: β= -0.58, Wald= 0.51, p>.05). On the other hand, there was no
statistically significant relationship between institutional ownership dominance with the
selection of high quality auditor (2006: β= 0.44, Wald=0.32, p>.05; 2007: β= -0.18,
Wald=0.04, p> .05; 2008: β= 0.51, Wald= 0.50, p>.05). Based on all the results for
ownership dominance, H5 was not supported.
The variable in relation to politically-connected firms (X6) consisted of two sub variables.
X6a denoted strong political connection while X6b denoted weak political connection. Since
both variables were dummy variables, both were coded as 1 for “yes” and 0 for “no”. The
results from Table 5 have suggested that strong political connection firms (X6) had a
significant positive relationship with the selection of a high quality auditor at the 5% level in
2006 as well as in 2007, and at the 10% level in 2008 (2006: β= 1.21, Wald=5.05, p<.05;
2007: β= 1.09, Wald=3.98, p< .05; 2008: β= 1.04, Wald= 3.58, p<.10). The coefficient results
for the three years however, moved in the opposite direction from the initial negative
prediction. Weak political connection firms (X6b) however, had no significant relationship
with the selection of a high quality auditor in the three years observed (2006: β= -0.70,
Wald=2.69, p>.05; 2007: β= -0.02, Wald=0.01, p> .05; 2008: β= -0.02, Wald= 0.16, p>.05).
It is worth mentioning that X6b in 2006 had a significant level of 10%. Based on the results
of X6a and X6b, it was concluded that H6 was not supported.
As shown in Table 5, the closing share price did not have a statistically significant
relationship with the selection of a high quality auditor during, pre, and post transition to
MCCG 2007 (2006: β= 0.07, Wald=0.89, p>.05; 2007: β= -0.02, Wald=0.11, p> .05; 2008:
β= -0.02, Wald= 0.16, p>.05). Thus, H7 was not supported by this study.
The final variable, family control of firms, was significantly positive with the selection of
a high quality auditor at the 5% level in the year 2006 (β= 0.73, Wald=44.9, p<.05).
However, it is not significant in 2007 and 2008 (2007: β= 0.28, Wald=0.67, p> .05; 2008: β=
0.19, Wald= 0.31, p>.05). Taking into consideration of all the available results, H8 was
supported only for the year 2006.
INSERT TABLE 6 HERE
Result of the control variables

The selection of control variables was mainly based on the study of Lin & Liu (2009), which
derived the control variables from a large body of past literature. Based on Table 5, none of
12
them were statistically significant in 2006. However, both the natural log of total assets (X10)
and asset turnover (X11) were statistically significant at the 5% level in 2007 and 2008.
Discussion
The selection of auditor in 2006 (prior to MCCG 2007)
This study found that there was no evidence suggesting the influence of the AC in the
selection of an auditor before, after or during the introduction of MCCG 2007. It is important
to note that one of the duties of the AC is to consider the appointment of the external
auditors. The fact that the AC variables did not significantly influence the determination of
the quality-differentiated auditors was possibly due to the nature of the appointment of
auditors in Malaysia, based on business networking instead of professional business
decisions. This is consistent with the view of Che Ahmad et al. (2006). Due to this, there was
no difference in the selection of an auditor, regardless of their quality.
The same argument may also explain why the ownership dominance also was not
significant in the selection of a high quality auditor, consistent with Husnin, Nawawi and
Salin (2013). Take note that Chinese ownership dominance represented more than half of the
samples (62% in 2006, 61% in 2007, and 62% in 2008). This indicated that the overall results
were determined by how the Chinese owned companies selected their auditors. Chinese
business networks have played a big role in providing market information to its members.
This argument has further reiterated the auditor selection criteria among Chinese owned
firms.
It was also found that companies with higher risk have been moving to improve their
corporate governance through the selection of a high quality auditor. The earlier hypothesis
suggested that politically-connected firms had more incentive to choose a low quality auditor
in order to manipulate related reports. However, this was not the case in Malaysia, as during
2006 and 2007, strong politically-connected firms tended to choose a high quality auditor.
The selection of a high quality auditor by strong politically-connected firms may be

explained based on stakeholder protection and image. High quality financial reports protect
the interest of the stakeholders. For example, shareholders may make a more accurate
forecast on their investments while lenders also could accurately monitor the entity’s
covenant compliance. Disclosure from a high quality report showed that these companies
were trying to reduce information asymmetry. Politically-connected firms also may need to
preserve their image through the selection of quality differentiated auditors. Government link
companies for example may deliver a wrong signal to the public by employing less quality
auditor. It has been identified that strong politically-connected firms in the majority
employed bigger auditors in all the three years observed (86% in 2006, 90% in 2007, and
90% in 2008).
Another explanation is due to the range of services provided by the audit firms. It is the
usual practice in Malaysia the audit firms also provide non-audit services to their audit
clients. Before the introduction of MCCG 2007, the regulation on internal audit function was
weak. A company may have its own department, outsource, or even not have one. Strong
politically-connected firms are very big in terms of size, and in order to outsource such a
function, they should find any audit firms which are competent to handle such a heavy task.
Therefore, they may choose bigger firm due to their available resources and competent level.
13
This finding is consistent with that of Svanstrom (2013) and suggests that provision of non-
audit services does not necessarily impair auditor independence that damages audit quality.
The same explanation could be used for family controlled firms. This study supports the
notion that there is a positive relationship between family control firms and the selection of a
high quality auditor. Family controlled firms represent a large slice in the sample, represented
54% of the total sample in 2006 then followed by 53% in both 2007 and 2008. It has been
noted that family controlled firms tend to elect their own family members as directors and
management team, inflicting weak governance. More than half of the family controlled firms
identified in the sample practised CEO duality (51.5% in 2006, 53.5% in 2007, and 52.5% in
2008). Since family control firms tend to keep the business ownership and decision power to
them, having a control on business is very essential. One of the ways to improve good
governance without jeopardizing ownership and power to outsiders is the selection of a high
quality auditor.
The selection of auditors in 2008 (Post MCCG 2007)

The immediate effect of MCCG 2007 on the selection of high quality auditors was very
obvious. Based on the regression results, there was no tested variable that was significant
with the selection of a high quality auditor in 2008. In other words, there was no significant
difference between those who selected the Big Four and those who did not after the
introduction of MCCG 2007. The most reasonable explanation is that MCCG 2007 had
unveiled the perception of the companies towards the quality of audit provided by the Big
Four after an internal audit function was made compulsory.
Companies may find that an internal audit function is important as a monitoring tool and
early fraud detection. With the internal audit function becoming compulsory, this without a
doubt has further improved the corporate governance. As a result, companies may perceive
that the employment of a high quality auditor is not that important as before, compared to
what an internal audit function could offer.
The other possible reason is that a company may need more time to comply with the
revised guidelines. This can become an important issue in term of the readiness of the
company to quickly respond to the dynamic and fluctuating business environment, including
changing rules and regulations. Slow response will signal to outsiders regarding inferior
management and their inability to immediately capitalize and take a strong business
opportunity when it appears. This is not favorable, especially when competition is very
intense and split second decisions are crucial to ensure that the company performs
satisfactorily.
However, based on the regression results, two classical factors that determined the
employment of the Big Four after MCCG 2007 have been introduced: size and growth. This
means that only companies that are wealthy and able to pay for the high premium imposed by
the Big Four will employ them. But, this may not be the only reason. Size and growth could
also be related to complexity. The bigger the size or the faster the growth of a firm will
usually involve more complex transactions in day-to-day operations. These findings are
actually in line with the classical studies on the selection of the Big Four firms which were
also used as a control in this study.
Conclusions
14
This study reports the results of the study on the relationship between corporate governance
mechanisms with the selection of auditors and audit quality. The results indicate that only
ownership concentration, political connection, and family control have a significant
relationship with audit quality, although not for all three years of observation. Ownership
concentration only influenced auditor selection during the transition period (2007) while
influencing only family controlled firms before the transition (2006). A strong political
connection was significant in both year 2006 and 2007. Interestingly, all the variables,
including the aforementioned, were not significant after the transition (2007).
There are several implications of this study. Before introduction of MCCG 2007, the
selection of the auditor had influence on business networking, and there was no difference in
the selection between quality differentiated auditors. However, companies that were
associated with inherently higher risks, such as politically-connected and family controlled
firms, had more incentives to improve their corporate governance through the employment of
the Big Four. In all the years observed, it was found that the largest block shareholder
employed different methods of monitoring and relied less on external audits, eventually
reflecting a lesser demand for audit effort.
After the introduction of MCCG 2007, this study found evidence of diminishing reliance
on quality-differentiated auditors as the internal audit function integrated into the companies
monitoring tool. Only bigger companies could afford to pay for the high premium imposed
and those involved in complex transactions able to employ the Big Four. Employment of
independent directors set-off the risks carried by companies practicing CEO duality.
There are some drawbacks of the study, thus open up opportunity for future research. First,
this study did not take into consideration the AC expertise. The inclusion of the AC expertise
into the AC composition and operation may further give corroboration into the important
roles of the AC with the introduction of MCCG 2007. Second, this study only had a three
year observation period, with the post MCCG 2007 only being observed for one year. It is
suggested that a future study could evaluate the impact of MCCG 2007 in a more specific and
detailed manner. The data suggested are in a longer longitudinal time frame, so that solid
evidence could be found. For example, data can be collected from 2001 to 2013 and 2001 to
2006 to represent the pre-amendment period, while 2008 to 2013 represents the post-
amendment period. If the companies take more time to respond, possibly the result would be
differences with this study. Third, MCCG was revised for the third time in 2012 with the
introduction of eight (8) governance principles. Audit quality requirements have been
explicitly stated under Principle 5: Uphold Integrity in Financial Reporting. It would be
interesting if a future study could replicate this study while using new MCCG as a basis to
compare the responses of the company in terms of audit quality. Fourth, a comparative study
among the developed and developing countries is also suggested to increase the relevance
and contribution of this study. Finally, incorporation of qualitative data such as interviews
and surveys may increase the value of this study.
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Author Biographies
AZRUL IHSAN HUSNIN @ ASMUNI is a Master Degree graduate at the Faculty of Accountancy, Universiti
Teknologi MARA, Malaysia (Passed with Distinction). He received his Bachelor Degree (Hons) in Accounting
from International Islamic University Malaysia (IIUM). Currently, he is completing his certificate as a Qualified
Accountant (ACCA) from HELP University (Part-time). He has experience in audit with a Big Four firm and
currently being employed as an Executive in a Fortune 500 company in Kuala Lumpur. His current research
interests include areas such as corporate governance, ethics and financial accounting.
ANUAR NAWAWI is a lecturer at the Faculty of Accountancy, Universiti Teknologi MARA, Malaysia. He received
his PhD in Commerce (Accounting) from the University of Adelaide, South Australia. He also holds a professional
qualification of the Chartered Institute of Management Accountants (Passed Finalist), an affiliate Registered
Financial Planner and a Master of Accounting (with distinction) from Curtin University of Technology, Western
Australia. He has taught a variety of courses centred on the accountancy discipline. Among them are financial
accounting, auditing, management accounting, taxation, financial management, strategic management,
computerised accounting and research methodology. His research interests are diverse, including areas such as
management accounting, strategic management, forensic accounting, corporate governance and ethics.
AHMAD SAIFUL AZLIN PUTEH SALIN is a Senior Lecturer at the Faculty of Accountancy, Universiti Teknologi
MARA (UiTM) Perak and currently pursuing a PhD in corporate governance and ethics at Edith Cowan
University, Australia. He also a Fellow Member of the Association of Chartered Certified Accountant United
Kingdom (ACCA, UK), a full member of Malaysian Institute of Accountants (MIA) and a member of Malaysian
Insurance Institute (MII), International Economics Development Research Centre (IEDRC) and Qualitative
Research Association of Malaysia (QRAM). He has taught a variety of courses in corporate governance,
business ethics, taxation, financial accounting and reporting, management accounting, costing and integrated
case study. His research interests focus primarily in the field of governance, Islamic and business ethics, financial
reporting, management, accounting education, small medium enterprises (SMEs) and public sector accounting.
He published many articles in local and international journals and was appointed as a reviewer in several
international journals and conferences.
24
List of tables
Table 1: Summary of Variables

Symbol Variable Definition
Y Auditor’s choice A dependent variable that indicates the selection of auditor
based on the predetermined quality of audit which is divided
into Big Four and Non-Big Four
X1 Audit Committee AC composition and operation consists of four key variables.
composition and First, the frequency of AC meeting during the year (X1a).
operation Second, the proportion of independent directors in AC (X1b).
Third, the number of AC members (X1c). Fourth, the
proportion of non-executive directors in AC (X1d)
X2 Block Shareholder The percentage of ownership that an individual who holdsthe

largest shares on an entity
X3 CEO duality A dummy variable to indicate the existense of CEO who also
holds the position as Board chairman in an entity
X4 Financial state A dummy variable to indicate whether an entity faces a
financial distress situation or not. Financial distress
companies include those companies that are listed as PN17
or those which experienced financial loss for 3 years
consecutively from 2006 to 2008
X5 Ownership A variable that indicates the ownership control based on
dominance shareholders’ ethnic majority within a specific entity whether
Chinese dominated (X5a), Bumiputra dominated (X5b) or
institutionally owned (X5c)
X6 Political influence A variable that indicates the strength of political influence
within an entity whether strong (X6a) or weak connection
(X6b)
X7 Share price An entity yearly closing share price as at 31st December
X8 Family-controlled A dummy variable that indicates whether an entity is
controllled by a family or not
X10 Log of total assets A control variable that indicates the size of an entity
X11 Assets turnover A control variable that indicates the growth of an entity
X12 Return on assets A control variable that indicates the profitability of an entity
X13 Current assets A control variable that indicates asset structure of an entity
over total assets
X14 Total liabilities A control variable that indicatesfinancial leverage of an
over total assets entity
X15 Beta A control variable that indicates the risk of an entity;the
higher the riskier.
Table 2: Analysis of Firms’ Samples Based on Industries 2006 to 2008
Sector Frequency
Aerospace 2
Apparel 13
Automotive 15
Beverages 5
Chemical 18
Construction 16
Diversified 16
Drugs, cosmetics and healthcare 15

Electronics 15
Food 19
Machinery and equipment 17
Metal Producer 19
Metal products manufacturer 15
Miscellaneous 19
Oil, gas, coal and related industry 10
Paper 18
Printing 5
Recreation 9
Retailer 12
Textile 9
Tobacco 1
Transportation 16
Utilities 16
Total 300
Table 3: Descriptive Statistics
Minimum Maximum Mean Std. Deviation

2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008
Dependent Variables
Big 4 auditor 0.00 0.00 0.00 1.00 1.00 1.00 0.61 0.60 0.59 0.49 0.49 0.49
Independent Variables
AC meeting frequency 0.00 1.00 2.00 16.00 17.00 17.00 4.78 4.76 5.03 1.56 1.19 1.33
Proportion of INED in AC 0.40 0.40 0.50 1.00 1.00 1.00 0.71 0.76 0.83 0.10 0.15 0.17
AC size 3.00 3.00 2.00 7.00 7.00 9.00 3.51 3.44 3.31 0.71 0.71 0.64
Proportion of non-executive
0.60 0.60 0.33 1.00 1.00 1.00 0.78 0.85 0.94 0.14 0.16 0.12
director in AC
Percentage of block shareholder 0.06 0.07 0.05 0.75 0.99 0.75 0.34 0.34 0.34 0.16 0.16 0.16
CEO duality 0.00 0.00 0.00 1.00 1.00 1.00 0.35 0.35 0.35 0.48 0.48 0.48
Financial state 0.00 0.00 0.00 1.00 1.00 1.00 0.22 0.22 0.28 0.42 0.41 0.45
Chinese dominance 0.00 0.00 0.00 1.00 1.00 1.00 0.62 0.61 0.62 0.49 0.49 0.49
Bumiputra dominance 0.00 0.00 0.00 1.00 1.00 1.00 0.06 0.07 0.07 0.24 0.25 0.26
Institutional dominance 0.00 0.00 0.00 1.00 1.00 1.00 0.28 0.28 0.27 0.45 0.45 0.44
Strong political connection 0.00 0.00 0.00 1.00 1.00 1.00 0.14 0.13 0.13 0.35 0.34 0.34
Weak political connection 0.00 0.00 0.00 1.00 1.00 1.00 0.12 0.12 0.12 0.32 0.32 0.32
End of year closing share price 0.01 0.01 0.02 43.25 41.25 44.50 1.50 1.80 1.36 3.15 3.47 3.12
Family controlled firm 0.00 0.00 0.00 1.00 1.00 1.00 0.54 0.53 0.53 0.50 0.50 0.50
Control Variables
Nature log of total assets 2.87 2.78 2.57 11.54 11.12 11.15 5.77 5.83 5.90 1.47 1.46 1.51
Assets turnover 0.05 0.00 0.02 4.65 3.61 6.69 0.84 0.87 0.93 0.60 0.61 0.74
Return on assets -137.32 -27.63 -84.97 45.25 771.45 56.96 5.15 9.10 4.41 11.17 45.21 10.91
Current assets over total assets 0.07 0.07 0.08 0.99 1.00 0.97 0.51 0.52 0.50 0.20 0.20 0.19
Total liabilities over total assets 0.02 0.01 0.01 7.31 1.53 2.19 0.45 0.42 0.43 0.46 0.22 0.23
Beta -1.75 -1.75 -1.75 5.24 5.24 5.24 0.95 0.95 0.95 0.86 0.86 0.86
Table 5: Binary Logistics Regression Results
2006 2007 2008

Predictions B S.E Wald B S.E Wald B S.E Wald
X1a + -0.13 0.10 1.79 -0.15 0.13 1.43 -0.05 0.13 0.13
X1b + -1.91 1.45 1.74 -0.26 1.10 0.06 0.30 0.82 0.13
X1c + 0.13 0.21 0.37 0.35 0.23 2.29 -0.07 0.23 0.10
X1d + 0.86 1.13 0.58 0.72 1.06 0.46 1.08 1.14 0.90
X2 - 0.56 0.90 0.39 2.17 0.92 5.49** 1.69 0.94 3.21*
X3(1) - 0.15 0.29 0.24 0.26 0.30 0.77 0.38 0.30 1.57
X4(1) - -0.74 0.39 3.63* -0.05 0.40 0.01 0.32 0.39 0.67
X5a(1) ? -0.32 0.74 0.19 -0.60 0.81 0.54 -0.23 0.67 0.11
X5b(1) ? -0.70 0.89 0.62 -1.55 0.95 2.67* -0.58 0.81 0.51
X5c(1) ? 0.44 0.79 0.32 -0.81 0.85 0.04 0.51 0.73 0.50
X6a(1) - 1.21 0.54 5.05** 1.09 0.55 3.98** 1.04 0.55 3.58*
X6b(1) - -0.70 0.43 2.69* -0.55 0.43 1.60 -0.38 0.44 0.77
X7 + 0.07 0.07 0.89 -0.02 0.06 0.11 -0.02 0.06 0.16
X8(1) + 0.73 0.34 4.49** 0.28 0.34 0.67 0.19 0.34 0.31
X10 ? 0.20 0.14 2.19 0.33 0.15 4.51** 0.35 0.14 6.43**
X11 ? 0.33 0.29 1.31 0.73 0.28 6.70** 0.55 0.26 4.60**
X12 ? -0.03 0.02 1.69 0.00 0.01 0.05 0.02 0.02 0.84
X13 ? -0.25 0.78 0.10 -0.51 0.77 0.44 -0.74 0.78 0.91
X14 ? -0.71 0.48 2.22 -1.00 0.76 1.73 -1.28 0.74 3.01*
X15 ? -0.04 0.16 0.06 0.07 0.16 0.17 0.03 0.16 0.03
Constant ? 0.03 1.63 0.00 -2.75 1.76 2.44 -3.01 1.80 2.81*
Model
Pseudo
R² 0.20 0.23 0.23
Chi- 46.99 56.67 54.88

Square
P<001 P<001 P<001
The variables are defined as : Y1= The selection of Big Four auditor; X1a= audit committee
meeting frequency; X1b= Proportion of independent director in AC; X1c= AC size; X1d=
proportion of non-executive directors in AC; X2= Percentage of block shareholder; X3=
CEO and Chairman duality; X4= Financial state; X5a= Chinese dominance; X5b= Bumiputra
dominance; X5c= Institutional dominance; X6a= Strong political connection; X6b= Weak
political connection; X7= Yearly closing share price; X8= family –controlled firm; X10=
natural log of total assets; X11= assets turnover; X12= return on assets; X13= current assets
over total assets; X14= total liabilities over total assets; X15= beta.
*Significant at the 10% level.
** Significant at the 5% level.
*** Significant at the 1% level.
Table 6: Summary of Results of Hypotheses
Hypothesis 2006 2007 2008
(Pre-MCCG (Transition to (Post-MCCG
2007) MCCG 2007) 2007)
H1 Not supported Not supported Not supported
H1a Not supported Not supported Not supported
H1b Not supported Not supported Not supported
H1c Not supported Not supported Not supported
H1d Not supported Not supported Not supported
H2 Not supported Not supported** Not supported

H6 Not supported** Not supported** Not supported
H8 Supported** Not supported Not supported
Note: ** Significant at p<.05 with the opposite coefficient from predicted sign.
*** Significant at p<.01 with the opposite coefficient from predicted sign.
Appendix
Table 4 of Correlation Coefficient Matrix of Dependent and Independent Variables (2006-2008)

Y1 X1a X1b X1c X1d X2 X3 X4 X5a X5b X5c
Y1 1.00
X1a 0.02 1.00
X1b 0.01 0.02 1.00
X1c 0.14*** 0.08*** -0.19*** 1.00
X1d 0.08** 0.12*** 0.50*** -0.08** 1.00
X2 0.19*** 0.02 -0.05 0.22*** 0.33 1.00
X3 0.01 -0.01 0.00 -0.11*** -0.15*** -0.03 1.00
X4 -0.13*** 0.04 0.04 -0.17*** 0.03 -0.19*** 0.00 1.00
X5a -0.13*** -0.14*** -0.02 -0.20*** -0.20*** -0.12*** 0.22*** -0.08*** 1.00
X5b -0.07*** -0.03 0.01 -0.02 0.03 0.03 0.01 -0.01 -0.34*** 1.00
X5c 0.17*** 0.16*** 0.01 0.24*** 0.18*** 0.15*** -0.25*** -0.08** -0.79*** -0.17*** 1.00
X6a 0.21*** 0.24*** -0.04 0.14*** 0.15*** 0.16*** -0.12*** 0.00 -0.23*** -0.02 0.27***
X6b -0.01 -0.11*** -0.04 0.14*** 0.07* 0.13*** -0.01 -0.12*** -0.14*** -0.06* 0.19***
X7 0.14*** 0.05 0.01 0.23*** 0.13*** 0.22*** -0.08** -0.10*** -0.20*** -0.05* 0.16***
X8 0.00 -0.13*** -0.01 -0.13*** -0.14*** 0.07** 0.39*** -0.88** 0.49*** 0.06* -0.55***
X10 0.26*** 0.25*** 0.06* 0.26*** 0.18*** 0.24*** -0.08** -0.28*** -0.37*** 0.00 0.39***
X11 0.08** -0.05 0.03 0.02 0.06* 0.10*** -0.09** -0.05 -0.07** -0.08** 0.07*
X12 0.01 0.02 0.03 0.04 0.04 0.05 -0.05 -0.15*** -0.06* -0.02 0.06*
X13 -0.08** -0.07*** -0.04 -0.02 -0.08** -0.01 -0.05 -0.05 0.07** -0.04 -0.06*
X14 -0.05* 0.09*** 0.01 -0.05 -0.02 -0.07* 0.03 0.22*** -0.08** 0.00 0.07***
X15 -0.02 0.09** 0.00 -0.01 0.04 -0.10*** -0.13*** 0.11*** -0.15*** 0.14*** 0.12***
(Continue to next page)

Table 4 of Correlation Coefficient Matrix of Dependent and Independent Variables (2006-2008)

X6a X6b X7 X8 X10 X11 X12 X13 X14 X15
Y1
X1a
X1b
X1c
X1d
X2
X3
X4
X5a
X5b
X5c
X6a 1.00
X6b -0.14*** 1.00
X7 0.18*** 0.10*** 1.00
X8 -0.23*** 0.01 -0.13*** 1.00
X10 0.45*** 0.07* 0.32*** -0.10*** 1.00
X11 -0.12*** 0.12*** 0.18*** -0.04 -0.07** 1.00
X12 0.00 0.10*** 0.12*** 0.00 0.03 0.01 1.00
X13 -0.18*** 0.11*** -0.06* 0.04 -0.31*** 0.36*** 0.075** 1.00
X14 0.03 0.05 0.03 -0.05 0.10*** 0.13*** -0.07** 0.04 1.00
X15 0.07** -0.10*** -0.07** -0.09** 0.07* -0.15*** -0.04 0.01 0.09** 1.00
The variables are defined as : Y1= The selection of Big Four auditor; X1a= audit committee meeting frequency; X1b= Proportion of independent
director in AC; X1c= AC size; X1d= proportion of non-executive directors in AC; X2= Percentage of block shareholder; X3= CEO and
Chairman duality; X4= Financial state; X5a= Chinese dominance; X5b= Bumiputra dominance; X5c= Institutional dominance; X6a= Strong
political connection; X6b= Weak political connection; X7= Yearly closing share price; X8= family –controlled firm; X10= natural log of total
assets; X11= assets turnover; X12= return on assets; X13= current assets over total assets; X14= total liabilities over total assets; X15= beta
*Significant at the 10% level. ** Significant at the 5% level. *** Significant at the 1% level.

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Asian Review of Accounting

Corporate governance and auditor quality – Malaysian evidence

*Related content and download information correct at time of download.

Malaysia reached a significant milestone in the implementation of good corporate

Due to these changes, it is interesting to study whether these amendments give an

Literature review and hypotheses development

Internal corporate governance mechanism and selection of audit quality

Independent and non-executive directors are also critical in contributing to better

Hypothesis 1: Ceteris paribus, a firm with more AC members, higher proportion of

A majority of companies in Malaysia have a concentrated type of shareholding

Malaysia is a unique country consisting of multiracial communities and its economics

Hypothesis 5: Ceteris paribus, there is a positive relationship between the ownership

Hypothesis 7: Ceteris paribus, there is a positive relationship between the choice of

INSERT TABLE 1 HERE

INSERT TABLE 2 HERE

INSERT TABLE 3 HERE

There was no indicator suggesting a harmful multicollinearity problem on the explanatory

INSERT TABLE 6 HERE

Result of the control variables

no difference in the selection of an auditor, regardless of their quality.

The selection of a high quality auditor by strong politically-connected firms may be

The selection of auditors in 2008 (Post MCCG 2007)

Journal of Applied Management Accounting Research, Vol. 7 No. 1, pp. 1-19.

19 No. 1, pp. 17-39.

investors, political connection and audit quality in Malaysia”, Accounting Research

Vol. 47 No. 3, pp. 302-332.

Leuz, C. and Verrecchia, R. E. (2000), “The economic consequences of increased

Vol. 9 No. 4, pp. 221-229.

Table 1: Summary of Variables

X2 Block Shareholder The percentage of ownership that an individual who holdsthe

Drugs, cosmetics and healthcare 15

Table 3: Descriptive Statistics

Minimum Maximum Mean Std. Deviation

2006 2007 2008

Chi- 46.99 56.67 54.88

H3 Not supported Not supported Not supported

Table 4 of Correlation Coefficient Matrix of Dependent and Independent Variables (2006-2008)

(Continue to next page)

Table 4 of Correlation Coefficient Matrix of Dependent and Independent Variables (2006-2008)

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