Does Audit Committee Moderate the Relationship Between Auditor Independence and Earnings Management During Initial Implementation of MFRS in Malaysia?

Abstract

This paper presents an evaluation of auditor independence concerns against the backdrop of current Malaysian corporate financial scandals by examining the relationship between auditor independence and earnings management, and the role of audit committees in overseeing auditor independence. The study used 1,035 firm-year data in the main market of Bursa Malaysia from 2012 to 2014 and employed multivariate regression analyses. The results revealed that when non-audit fees and total fees were higher, it could reduce the auditor’s independence as higher fees can create economic dependency on his clients. This study found that audit committee size and the frequency of meetings were positively related to earnings management. When testing the audit committee moderation on auditor independence, the study found that audit committee size and its frequency of meetings weaken the positive relationships between lower auditor independence and earnings management. These findings help regulators and professional bodies think about the impact of audit and NAS fees on auditor independence and the audit committee's oversight responsibility. To assess auditor independence, companies should form a fully independent audit committee in accordance with the Malaysian Code on Corporate Governance 2021 (Securities Commission of Malaysia, 2021).