The impact of board composition, ownership and CEO duality on audit quality: the Malaysian evidence / Wan Zanani Wan Abdullah, Shahnaz Ismail and Nurasyikin Jamaluddin

Corporate governance is an important element in monitoring the process of financial reporting system. There are three monitoring mechanisms that are theoretically used to ensure the credibility of corporate governance, namely,
external auditor, an internal auditing and the directorships. The trends of corporate governance model in developed countries cannot explain the reality of monitoring process of financial reporting in developing countries especially in Asian countries like Malaysia. Therefore, it is important to
know to what extent the corporate governance of the Malaysian listed
companies has been effective in meeting the responsibility of monitoring the
process of financial reporting system? Generally, this study intended to
examine an effective component of corporate governance in a Malaysian
listed companies and relationship with the audit quality. A total of 655
companies were selected as the sample representing 73.84% of total number
of companies across industries in year 2003. The analysis of logistic regression
was used to investigate the relationship between dependent and independent
variables. Results show that two independent variables had a significant
relationship with audit firm size. They were board independence and nonfinancial
institutional ownership. The executive directors’ ownership and
CEO/chairman had a negative relationship but not significant with audit
quality. Whereas non-executive directors’ ownership and financial
institutional ownership showed a positive relationship with audit quality
however, it was not significant. The findings posit that both board
independence and institutional ownership are important factors to the
companies listed at Bursa Malaysia perform effectively. These two elements
will improve the decision making process to be more transparent and
objective and enhance the independence in selecting quality of external
auditor. This study suggests that companies tend to audit by Big 4 if the level
of board independence and institutional ownership increase. So, these
criteria should be taken seriously by companies’ top management as well as regulator in order to increase the audit quality and then the quality of financial
reporting.