Mohd Mohid Rahmat

Audit committee characteristics and earnings management: evidence from Malaysia

Purpose - Conflicts between managers and outside auditors may exist in choosing alternative accounting procedures. Since auditors are appointed by the firm, they are subject to dismissal if divergent opinions cannot be resolved. To a lesser extent, financial reports are often negotiated. In order to produce unbiased financial reports, audit committee members are appointed to act independently in order to resolve conflicts between the managers and outside auditors. This study aims to assess the effectiveness of some audit committee characteristics, i.e. the independence of members, size, frequency of meeting and knowledge of the members, to monitor management behavior with respect to their incentives to manage earnings. Design/methodology/approach - This paper uses discretionary accruals obtained from the established model as a signal of the presence of earnings management. Findings - The evidence shows that the presence of a fully independent audit committee reduces earnings management practices. It was also found that firms which had more knowledgeable audit committee members and held more audit committee meetings recorded fewer earnings management practices compared with other firms. Originality/value - This paper is different from prior studies, in that it makes a significant contribution towards enhancing ones knowledge in the interacting role of audit committee characteristics.

Audit committee characteristics in financially distressed and non‐distressed companies

Purpose - The purpose of this paper is to investigate whether there is any difference in the characteristics of an audit committee between financially distressed and non-distressed companies listed on the Bursa Malaysia (formerly known as the Kuala Lumpur Stock Exchange). Financial distress among big companies is a sign of weak corporate governance, of which the audit committee is one of elements. Four characteristics of the audit committee being examined are size, independence, activity, and accounting knowledge. Design/methodology/approach - The sample comprises 73 financially distressed and the matched pair of 73 financially non-distressed listed companies. The financially distressed companies have been suspended from the listing under the provision of the practice note 4 (PN4) of the listing requirements. Findings - Results show that financial distress of companies has a significant negative association with financial literacy of the audit committee and the quality of external audit. Research limitations/implications - The finding is limited to PN4 companies and the selected match of the non-PN4. Results may not be generalized to other companies that are faced with financial difficulties but are not classified as financially distressed under the PN4 provision. Practical implications - The paper does not examine other qualitative factors such as the culture and dynamics of audit committee meetings which may have effect on the audit committee performance. An examination on the issue requires a different research design. Hence, further research is needed to address the issue. Originality/value - The evidence suggests that financial literacy of audit committee members is a significant factor which helps the audit committee enhance the financial performance of the company. It also suggests that a quality external audit, in addition to an effective audit committee, enhances company financial performance.

Detecting financial statement frauds in Malaysia: comparing the abilities of Beneish and Dechow models

Financial statement frauds ( FSF ) are becoming rampant phenomena in current economic and financial landscapes. One of the ways to curb FSF is to detect them early so that preventive measures can be applied. This study aims to empirically investigate the abilities of two financial-based models namely the Beneish’s M-score and Dechow’s F-score, to detect and predict FSF for Malaysian companies. In addition, this study compares the accuracy including the error rates between the two models. Financial data of Malaysian listed companies from 2001 to 2014 are used using a matched pair in this study. The findings reveal that both Beneish and Dechow models are effective in predicting both the fraudulent and non-fraudulent companies with average accuracy at 73.17% and 76.22%, respectively. The results also indicate that Dechow F-score model outperforms the Beneish M-score model in the sensitivity of predicting fraud cases with 73.17% compared to 69.51%. On the efficiency aspect, the Dechow F Score model is found to have lower type II error (26.83%) than Beneish M Score model (30.49%). This finding suggests that Dechow F Score model is a better model that can be used by the regulators to detect FSF among companies in Malaysia.