INFLUENCE OF AUDIT COMMITTEE EFFECTIVENESS ON EARNINGS CONSERVATISM OF MALAYSIAN PUBLIC LISTED FIRMS

Abstract

The study’s primary objective is to examine influence of audit committee effectiveness on the extent of earnings conservatism amongst Malaysian publicly listed firms. Drawing on agency theory, supplemented by tenets of key corporate governance reforms undertaken in Malaysia since the Asian financial crisis in 1997, it is expected that audit committee effectiveness is positively associated with earnings conservatism. Aside from considering audit committee effectiveness through a holistic lens, the influence on earnings conservatism of three key components underlying audit committee effectiveness (independence, expertise, and diligence) is also examined. Conservatism is defined in terms of timeliness, and measured using models developed by Basu (1997). Analysis is based on annual data collected from 100 Malaysian firms (selected using stratified random approach) listed continuously on the Bursa Malaysia from January 1, 2002 till December 31, 2011. Following exclusions for missing data, empirical analysis is based on a final useable sample of 938 firm-year observations. Findings suggest a lack of association between audit committee effectiveness and the earnings conservatism within the Malaysian capital market setting. Overall, findings provide valuable insights and understanding, not only in respect to the audit committee effectiveness/earnings conservatism linkage, but the significance of corporate governance and earnings conservatism concepts.