An Investigation on the Impact of Audit Quality, Audit Committee and Financial Reporting Quality: Evidence from Malaysia

Abstract

Purpose of study: In recent decades, there has been a noticeable increase in the practice of earnings management as a proxy for financial reporting, especially real activities, with effect on the quality of financial statements. The role of the audit committee in mitigating earnings management remains ambiguous because of inconclusive findings. Therefore, this study examines the moderating effect of audit quality and audit committee on financial reporting quality, also known as REM in Malaysian companies. Methodology: The study utilized the multiple regression analytical technique approach with 2,226 firm-year observations of non-financial firms listed on the Bursa Malaysia over a six-year period from 2013 to 2018.Results:The results show that corporate governance mechanism such as financial accounting expert, meeting and indicate significant results with real earnings management while, audit committee independence and size, shows an insignificant result on real earnings management. In addition, the results show that audit quality of the audit committee leads to less aggressive earnings management practice in real activities Implication/Application: The findings also show that audit quality and audit committee have a significant role in restricting the real earnings management. Audit quality is found to significantly moderate the relationship between audit committee with financial reporting quality proxy. Novelty/Originality of this study: This study provides a reference point for the relevant parties such as regulatory bodies, policymakers and standard setters towards improving the quality of earnings and corporate governance practices in ensuring credible accounting information.