Malaysian Government-Linked Companies and Earnings Management: The Interaction Effects of Internaland External Audit Governance Mechanisms on Earnings Management

Abstract

Abstract: This study aims to investigate the interactions between the audit governance mechanisms, such as the audit committee (AC), internal audit function (IAF), and external auditors (EA), and earnings management (EM) in Malaysia's government-linked companies (GLCs). It is one of the first papers to explore the complementary impact of external and internal corporate governance mechanisms on EM. This study used regression analysis on 340 firm-year-based observations with Malaysian GLCs available on the Bursa Malaysia main board during the period from 2009 to 2018. This study found that the interaction between the AC and the IAF is significantly and negatively correlated with EM. Similarly, the interaction between EA and the IAF negatively affects EM. However, the relationship between the AC and the EA interaction in lowering EM is negligible. One of the main conclusions of this study is that, in addition to ensuring the IAF's competency, the management of GLCs should establish and support the IAF, because of its critical position in assisting the roles of the AC and EA in minimizing opportunities for EM. The study provides empirical data on the effectiveness of the audit governance systems in Malaysian GLCs, which can aid the government, regulator, and other interested parties in their efforts to increase the GLCs' contributions to achieving orderly social and economic development in Malaysia.