Nonaudit Services, Corporate Governance And Auditor Independence In Malaysia
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Date
2016-09
Authors
Nik Abdul Majid, Wan Zurina
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Abstract
This study explores the unsolved issues that have been debated for more than 50 years and provides critical insights into the current regulatory issues confronting the auditing profession in Malaysia. The issue of auditor independence on nonaudit services has become a concern to the academicians, researchers, and regulators, especially Securities and Exchange Commissions (SECs) not only in the US, UK, Australia, but also worldwide, including Malaysia. The Enron case in the US and the other collapsed companies throughout the world, including Tramsmile and Megan Media in Malaysia, has raised question on the credibility of external auditor and the governance aspect. Most of the anecdotal evidence claim that the provision of nonaudit services might impair auditor independence and reduce the earnings quality. Previous studies have provided mixed evidence that nonaudit services affect auditor’s independence (due to economic bonding) and nonaudit services yields knowledge spillover and improve auditor efficiency. Past researchers have suggested that nonaudit services should be categorised into types and recurring and nonrecurring to get clear picture on the impairment in auditor’s independence. Therefore, this study examines the association of nonaudit services, types of nonaudit services, recurring and nonrecurring nonaudit services, and types of recurring and nonrecurring nonaudit services with auditor independence. The study also examines the relationship between corporate governance variables and auditor independence. The study tests the interaction effect of corporate governance variable between nonaudit services and auditor independence. This study adopts the accruals quality (Modified Dechow and Dichev (2002) Model) as a proxy for auditor independence. Beginning in June 2001, the Bursa Malaysia Listing Requirements came out with the requirement for all companies listed in Bursa Malaysia to disclose information on nonaudit services. Therefore, with the availability of the data, this research covers duration of three years (2009-2011), with 1118 observations. The study found that nonaudit services in total affect auditor independence, which is in contradiction to the hypothesized statement. This empirical result indicates the economic bonding
created between auditor and client restricted the auditors from objectively performing their duty. In addition, different types of nonaudit services pose different threat to auditor independence. In an unexpected but interesting result, recurring nonaudit services indicate a threat to auditor independence. The negative relationship between nonaudit services and recurring nonaudit services and accruals quality weakens with the presence of good governance. These results contribute to policy deliberation in Malaysia to account for the effects of types of nonaudit services, recurring, and nonrecurring nonaudit services on auditor independence. This study also contributes to the theoretical perspectives on accruals quality and corporate governance in Malaysia.
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Keywords
Nonaudit Services, Corporate Governance , And Auditor Independence In Malaysia.