AUDIT COMMITTEE AND CEO ETHNICITY AND AUDIT FESS

Agenda

1. Abstract2. Objectives and Motives3. Why Focus on Malaysia4. Contributions of the research5. What theory is used?6. What is the Empirical Model?7. What are the variables?8. What are the main findings?9. What is your comment regarding the paper?10. Limitation11. Conclusion

1. Abstract

To determine the relationship between ethnicity (bumiputra vs non-bumiputra), corporate governance attributes, and audit fees using data from 559 publicly-listed companies in Malaysia in 2005.

To discuss their two hypotheses that predict positive associations between audit fees and (1) the proportion of bumiputra members on audit committees, and (2) the presence of a bumiputra CEO.

The results support the hypothesis that firms with bumiputra CEOs incur higher audit fees, but they do not find an association for firms with bumiputra-dominant audit committees.

Firms managed by a bumiputra CEO with a fully bumiputra-composed audit committee tend to pay higher audit fees than the other firms, indicating that there is a combined ethnicity effect on audit fees.

2. Objectives and Motives

The main objective this study is to determine the relationship between ethnicity (bumiputra vs non-bumiputra), corporate governance attributes, and audit fees using data from 559 publicly-listed companies in Malaysia in 2005 in audit pricing.

MOTIVESi. Ethnicityempirical evidence from a number of countries suggests that ethnicity has the potential to shape organizational management and commercial exchanges.

ii. Political ConnectionsIn Malaysia, a steady stream of research has developed about the corporate setting, where the political economy has a strong effect on how firms are run both externally (generally based on political intervention) and internally (based on ethnicity) (Abdul Wahab, How, & Verhoeven, 2007; Faccio, Masulis, & McConnell, 2006; Gul, 2006; Haniffa & Cooke, 2002.

OBJECTIVES

3. Why Focus on Malaysia

A key justification for choosing Malaysia as the context for this study is that it presents an ideal setting for studying the relationship between ethnicity and economic outcomes because of its unique corporate environment.

Malay and Chinese, the two ethnic groups in particular play a major role in the socio-economic fabric of the country, with the Malays controlling the political administration and the Chinese having significant influence over the economic environment.

Government policies favouring bumiputra firms acted as a form of institutionalized positive discrimination based on ethnicity and led to the propagation of many bumiputra business ventures.

4. Contributions of the research

The present study contributes to this growing body of research by providing a closer examination of the relationship between the ethnicity of two major governance stakeholders (members of the audit committee and the CEO), and audit pricing behaviour in Malaysian publicly-listed firms.

Prior studies in this area have largely focused on the effects of ethnicity dominance in terms of firm ownership and board membership (Abdul Wahab et al., 2007; Che Ahmad et al., 2006; Gul, 2006; Yatim et al., 2006).

These studies have given little regard to the ethnicity implications at the individual level (namely, those in corporate governance-related functional roles). This void in the literature motivates for the present study.

5. What theory is used?

Drawing from theories of ethnicity and political economy, they discuss our two hypotheses that predict positive associations between audit fees and (1) the proportion of bumiputra members on audit committees, and (2) the presence of a bumiputra CEO.

The positive association found between bumiputra CEOs and audit fees provides preliminary empirical support for the link between ethnic culture-related theories and audit pricing (Hofstede, 1983; Osman-Gani & Tan, 2002).

6. What is the Empirical Model?

ORDINARY LEAST SQUARES REGRESSION MODEL used to test the hypothesis.

In the model, the natural logarithm of audit fees (LAF) is the dependent variable.

The audit fee model used in this study includes firm size, client, audit complexity, firm age , auditor quality , and politically-connected firms.

In the model specified, bumiputra audit committee (BUMIAC), and bumiputra CEO (BUMICEO) are the hypothesised ethnicity variables relating to H1 and H2, respectively.

7. What are the variables?

Dependent variable LAF natural logarithm of audit fees

Control variables LASSET natural logarithm of total assets LEV book-value of long-term debt to total equity RECTA book-value of receivables to total assets INVTA book-value of inventories to total assets CACL current assets to current liabilities ROE net income to total equity YE 1 for financial year ending 31/12, 0 otherwise LSUB natural logarithm of the number of subsidiaries LFORSUB natural logarithm of the number of foreign subsidiaries LOSS 1 for firms with a loss in the prior year, 0 otherwise LAGE natural logarithm of the number of years since date of incorporationBIG4 1 for big audit firms, 0 otherwise

7. What are the variables?

Control variables OPINION 1 if the audit report is qualified, and 0 otherwise ATENURE 1 if the incumbent auditor is the auditor for more than three years, and 0 otherwise POL 1 if the firm is politically connected to the ruling party—Barisan Nasional, and 0 otherwise BODIND proportion of independent directors on the board BODMEET number of board meetings held in the year ACIND percentage of independent non-executive audit committee members ACMEET umber of audit committee meetings held in the year ACFE number of audit committee members with accounting and financial backgrounds to total number of audit committee members

Hypotheses variables BUMIAC percentage of bumiputra members on the audit committee BUMICEO 1 if the firm's CEO is a bumiputra, and 0 otherwise.

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8. What are the main findings?

1. Positive association between audit fees and firms with bumiputra CEOs, but we find no such association for bumiputra-dominant audit committees.

2. Premium paid by firms with a bumiputra CEO is higher for smaller client firms.

3. Large firms may be better able to attract bumiputra CEOs with business nuance, which in turn affects the quality of the CEO–auditor interactions and reflected in their lower audit fees when compared with smaller firms.

8. What are the main findings?

i. The Pearson correlations presented in Table 3 generally suggest that audit fees are positively correlated with the two hypothesised variables—bumiputra audit committee (BUMIAC), and bumiputra CEO (BUMICEO). The correlations amongst the independent variables are comparatively low

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8. What are the main findings?continued

ii. A total of four estimations were carried out, as reported in Table 4. The first estimation was carried out to test the validity of the audit fee model without incorporating any of the test variables, followed by the second and third estimations to test the two hypotheses (H1 and H2). Finally, the fourth estimation tests both H1 and H2 jointly.

9. What is your comment regarding the paper?

i. Qualitative approaches can be undertaken to gain a more in-depth understanding of the role ethnicity plays in auditor–client interactions and, consequently, its implications for audit pricing.

ii. Adopt the demand-side perspective for audit fees.

iii. Broaden the time period for data collection

10. Limitation

i. This study did not systematically assess and compare the differences in the perceptions of the business management reputations of bumiputra directors and managers as opposed to their non-bumiputra counterparts.

ii. This study adopts a supply-side perspective for audit fees and does

not test the demand-side for audit fees.

iii. Exogenous factors at the entity level that correlate with audit committee characteristics, CEO appointments, and audit fees.

iv. Data used related to a specific time period.

11. Conclusion

i. Results support a significant and positive association between audit fees and firms with bumiputra CEOs, but find no such association for bumiputra-dominant audit committees.

ii. The audit premium paid by firms with a bumiputra CEO is higher for smaller client firms. Large firms may be better able to attract bumiputra CEOs with business nuance, which in turn affects the quality of the CEO–auditor interactions and reflected in their lower audit fees when compared with smaller firms.

iii. There are significant interaction between bumiputra CEOs and bumiputra audit committees, where firms with fully bumiputra-dominant audit committees and managed by a bumiputra CEO are found to pay significantly higher fees than the rest of the sample.

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