Determinants of Audit Fees in Malaysia's Top 100 Listed Companies: An Empirical Study

Determinants of Audit Fees in Malaysia's Top 100 Listed Companies: An Empirical Study

Prem Lal Joshi (Multimedia University, Cyberjaya, Malaysia), Ashutosh Deshmukh (Sam and Irene Black School of Business, Pennsylvania State University, Erie, PA, USA), Nik Mohamad Zaki Nik Salleh (Multimedia University, Cyberjaya, Malaysia) and Nahariah Jaffar (Multimedia University, Cyberjaya, Malaysia)
Copyright: © 2014 |Pages: 20
DOI: 10.4018/ijsds.2014100104
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Abstract

This paper examines the determinants of audit fees in a sample of top 100 companies listed in Bursa Stock Exchange in Malaysia; market capitalization of these companies is about 85% of the total market capitalization at the end of 2012. The authors collected data from the annual reports of the companies for the year 2012, and analyzed it using a multiple regression model. The authors report that firm size, profitability, and ownership structure are the main determinants of audit fees in Malaysia. Additionally, profitability shows a negative and significant relationship, which is also in line with findings of the most recent studies. The results also indicate that there is no Big 4 premium in audit fees in Malaysia; interestingly, the relationship though insignificant is negative. The adjusted R square is approximately 47% and there were no multicollinearity issues among the variables. The study makes an incremental contribution to the literature on audit fees in the Malaysian context.
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Motivation For Undertaking The Study

Hay et al., (2006) argue that audit fees determinants, the significance of certain variables, change according to the characteristics of each country. They suggest that these models be periodically revisited and revised. In recent years, there have been significant changes in the economic variables, especially in the context of accounting and auditing scenario in Malaysia, therefore, research into audit fees determinants warrants further investigation. Audit services serve as a monitoring mechanism because of the potential conflicts of interests between owners, managers, and other different classes of security holders (DeAngelo, 1981). Auditors play key role in enhancing the credibility of financial statements and increasing the quality of audit, therefore, the determinants of audit fees remains an important issue. Niemi (2005) argues that the extant research on audit fees determinants has focused primarily on markets where buyers are assumed to have a sufficiently homogeneous ownership structure, resulting in the lack of research on client ownership as a determinant of audit effort and fees. Apart from other determinants of audit fees, research in divergence in ownership structure and audit fees may be of interest in developing countries such as Malaysia due to the limited number of studies focusing on audit markets.

This study extends a few studies conducted on the audit fees in Malaysia such as Yatim et al., (2006), Bliss et al., (2007), Wahab et al., (2009), and Aswadi et al., (2011). Most of these studies focused on the impact of audit fees in the early implementation of Malaysian Code on Corporate Governance (MCCG) in 2001, except for Yaacob and Che-Ahmad (2012) who report that IFRS adoption resulted in a significant increase in audit fees in Malaysia. The present study focuses on the impact of audit fees after the revised MCCG 2007. Therefore, the study of the determinants of audit fees in Malaysia is motivated by two factors. First, corporate governance practices as practiced by Malaysian listed firms are considered different from those practiced in developed markets and Malaysian corporate governance mechanisms are still evolving. Second, Malaysian Accounting Standards Board (MASB) requires full convergence with the International Financial Reporting Standards (IFRS) on January 1, 2012, which significantly affects auditors’ responsibilities and audit work. Thus, the present study contributes to the existing base of knowledge by investigating determinants of the audit fees after the revision of MCCG 2007.

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