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Dysfunctional Audit Behaviour: An Exploratory Study in Malaysia

Purpose - The quality of the opinion provided by audit firms is an important determinant of their long-term survival, but audit quality is difficult to gauge, which makes it particularly sensitive to the behaviour of the individuals who carry on audit work. This paper seeks to identify the incidence of dysfunctional audit behaviours and audit quality reduction behaviours, actions taken by an auditor during engagement that reduce evidence-gathering effectiveness. Design/methodology/approach - The paper is based on a survey of 244 auditors working in small/medium and big audit firms in Malaysia. Findings - The paper identifies key variables leading to dysfunctional audit behaviour. Research limitations/implications - The paper is subject to the normal limitations associated with survey research. Practical implications - The paper provides basic empirical evidence of a potentially serious risk of dysfunctional behaviours that may impair audit quality. Originality/value - The paper provides empirical evidence to address the concerns of the Malaysian regulatory authorities regarding audit quality.

Auditor acceptance of dysfunctional behaviour: An explanatory model using individual factors

Purpose - The purpose of this paper is to investigate individual or personal factors contributing to individual auditor differences in acceptance of dysfunctional audit behaviour (DAB). Dysfunctional behaviour and staff turnover are associated with decreased audit quality, and is characterised as premature sign-off, gathering of insufficient evidence, accepting of weak client explanation, altering or replacing the audit procedures, and under-reporting of time, and have negative effects on the auditing profession. In this study the organizational behaviour and industrial psychology literatures provide the basis for the development and testing of an individual factors’ model of DAB. Design/methodology/approach - Using path analysis for direct and indirect effects, survey results from registered Audit Managers are used to provide support for an explanatory model. Findings - Overall, results indicate that auditors who are more accepting of dysfunctional behaviour tend to possess an external locus of control and exhibit higher turnover intentions. Originality/value - These results suggest that individual factors play a role in identifying those who are more accepting of dysfunctional behaviour. The results can be useful in the operational and management control mechanism of human and social developments relating to dysfunctional behaviour issues.

Attitudes toward dysfunctional audit behaviour: The effect of budget emphasis, leadership behaviour, and effectiveness of audit review

This study develops and tests a theoretical model that identifies factors contributing to dysfunctional audit behaviour. Budget emphasis, leadership behaviour structure and consideration, and effectiveness of audit review were examined as antecedents of attitudes toward dysfunctional audit behavior by using PLS method. The findings produced consistent evidence in support of the theoretical model. It is not an emphasis on meeting budgets that leads to undesirable behaviour, but contextual variables, such as leadership behaviour structure and effectiveness of audit review.

The Influence of External Auditor's Working Style, Communication Barriers and Enterprise Risk Management toward Reliance on Internal Auditor's Work☆

Abstract The extent to which external auditors rely on the work of internal auditors is an important judgment. Audit methodology reform of Business Risk Audit (BRA) and Section 404 of the Sarbanes-Oxley Act (SOX) requires external auditors to give an opinion that there is a comprehensive, efficient and effective control framework clearly documented and consistently applied to prevent material misstatement in financial statements. Recently, the Public Company Accounting Oversight Board (PCAOB) has recommended that external auditors “rely more on the work of others” to reduce the greater-than-expected costs associated with compliance with Section 404 of the SOX. External auditors’ reliance on internal auditors have been researched for almost three decades, but the main focus of many studies has been on objectivity, work performance and competence of the internal audit function. This current study is therefore different. Its main objective are to explore the effects of external auditors’ working styles, perceived communication barriers and moderating effects of clients risk management on the reliance of internal audit work. In order to obtain the necessary information and opinion, questionnaires were distributed to 250 audit firms in the Wilayah Persekutuan Malaysia and only 109 responses were received. The results showed that two factors, which are external audit working style and communication barriers, had a significant relationship with external audit reliance on the internal audit work. The relationship was found to be stronger with the moderating effect of clients’ enterprise risk management (ERM). In addition, consistent with expectations, auditors’ rank (manager versus senior) did influence the reliance judgment.

Internationalization of Small and Medium Enterprises

Small and medium enterprises (SMEs) including microenterprises help in fostering growth, employment and income in the country. In recent years, SMEs have performed well and they are critical about the economic transformation as they form the domestic source of growth and bedrock of private sector activities. SMEs are also important in stimulating innovation and act as stabilizers of growth during an economic slowdown. Since they are important to the economic growth, they should be brought up towards internationalization. However, in order to accomplish this, the SMEs need institutional supporters such as Majlis Amanah Rakyat (MARA), Tabung Ekonomi Kumpulan Usaha Niaga (TEKUN), Perbadanan Usahawan Nasional Berhad (PUNB), etc. This paper is aimed towards drawing attention to SMEs that intend to embark on internationalizing their businesses. This paper also intends to encourage SMEs to assist the government to attain its envisioned objectives towards SMEs plan (2011–2020) by upgrading and promoting SME businesses to embark on a new business environment.

Financial reporting risk assessment and audit pricing

Financial information that has being deteriorated by fraud will misled users. Hence, the main objective of this paper is to identify the association between five ratios of financial reporting risks to predict fraud. Furthermore, this paper also investigates the impacts of fraud detection on audit fee. Thus, sample of 10 of fraudulent companies and sample of 40 non fraudulent companies are being identified to achieve the objective. Stepwise logistic regression was being employed. The results clearly indicate that changes in sales, receivables and allowance for doubtful debts have significant effect of fraud detection. However, fraud detection gives no or little impact on audit fees.

The Impact of Educational Level of Board of Directors on Firms’ Performance

The importance of education has been emphasized by the Malaysian Code of Corporate Governance which recommends directors to have qualities in knowledge and professionalism. However, there is comparatively lack of studies on the effects of educational background on the board level and its impact on performance. Thus, this study attempts to fill the gap by investigating the association between board diversity and firm performance of 26 government-linked companies (GLCs) and 26 non-government-linked companies (non-GLCs) in Malaysia. The study used characteristic of education diversity and tested on firm performance as measured by return on equity (ROE) and return on asset (ROA). It is predicted that education diversity has a negative association with both ROA and ROE. In order to investigate the findings, a final sample of 196 GLCs and non-GLCs listed on the Bursa Malaysia from 2007 to 2010 were used. It was analyzed using a quantitative method employed by Statistical Package for Social Science (SPSS) which compared education diversity of boards with firm performance. Multiple regression analysis was also used to estimate the relationships proposed in the hypothesis. The finding reveals that only education diversity in GLCs supported the hypothesis but not for non-GLCs. As a conclusion, this study established that education diversity in board would diminish firm performance especially in GLCs because their culture in appointing successful directors emphasizes on network with governance characteristics rather than education characteristic.

Ethnic Board Diversity and Financial Performance: Evidence from Malaysian GLCs

Recently, there has been an increasing research regarding government involvement in corporate control. Most of them focus on the ownership structure and firm performance but very little concentrate on the board diversity and financial performance. Therefore, the main objective of this study is to investigate the association between board diversity and firms’ financial performance of 26 Malaysian government-linked companies (GLCs). Focusing on ethnicity variable to explain the board diversity, this study aims to observe its relationship with financial performance of the firms, as measured by return on equity (ROE) and return on asset (ROA). A final sample of 99 GLCs listed on the Bursa Malaysia across four years from 2007 to 2010 was utilized. The empirical results revealed that ethnic board diversity in GLCs was negatively and significantly related to firms’ financial performance. The findings hence rejected the hypothesis made in this study that ethnic board diversity has a positive impact towards financial performance. As GLCs have unique characteristics compared to other entities, a future look on other aspect of firm performance may help to explain the goodness of ethnic board diversity in the GLCs.

ISO 14001 and Financial Performance: Is the Accreditation Financially Worth It for Malaysian Firms☆

Abstract It is well known that ISO 14001 certification has been widely subscribed by various types of organizations to cope with their environmental affairs. However, what remains a puzzle is whether the ISO 14001 subscription has desirable effects on the participating firms. Such investment should only be advised if it can enhance firms financial standing particularly for business oriented companies. Based on 17 companies certified with ISO 14001 which are listed in Malaysian Stock Exchange, this paper studies the impacts from this voluntarily action on firm financial performance through analysis of financial ratios. Three years of performance covering before and after the certification periods for selected ratios was analyzed using Paired Sample T-Test. The results show that the ISO 14001 certification does not significantly induce higher financial performance based on the perspective of firms’ asset management, profitability, leverage, liquidity and earnings per share (EPS). The finding would suggest that, the realization time for the positive impacts of the ISO 14001 certification could somehow take a much longer period.

The Legal Overview on Falsification, Fraud and Forgery☆

Abstract Falsification of documents, forgery, and fraud are categorized as white colour crime offences. To establish successful prosecution and civil claim, the prosecutor and claimant must prove the intention and conduct of the accused person and the presumption of intention that fall under respective statutory provision. However, the applicability of evidential standards are different particularly in civil action even though this conduct is an offence under Penal Code. This paper examines the elements, contradictions and proposes a reform to standardizing the evidential aspect in criminal and civil claim based on reported case law.