The Effects of Politically Connected Audit Committees on Audit Fees: Evidence in Malaysia

Abstract

This study aims to contribute to an understanding of politically connected audit committees on audit fees in an emerging market, using the case of Malaysia. Malaysia offers an interesting and important setting as Malaysian companies are highly concentrated and politically sensitive. In particular, the study seeks to examine the level of political connections represented in the audit committees associated with the level of audit fees incurred by Malaysian public listed companies. For the purpose of this study, a quantitative approach (archival data analysis) has been adopted. Three hypotheses are tested: (1) There is a positive relationship between the proportion of audit committee members who are senior government officers (SGO) and audit fees; (2) There is a positive relationship between the proportions of audit committee members who are politicians and audit fees; (3) There is a positive relationship between audit committee characteristics (independence, size, meeting and financial expertise) and audit fees. The results of the study indicate that politically connected audit committees (identified by members who are either senior government officers or politicians) have a significant association with the incidence of higher audit fees. This suggests that politically connected audit committees are able to capitalize on their connections to influence companies and create direct demand for the auditors to increase their audit effort, as measured by audit fees. One of the issues that emerge from these findings is that companies highly value political connections to obtain external resources given the uncertainties in the business environment. Also, the findings highlight the need for stronger corporate governance to mitigate the higher inherent audit risks in politically connected companies.