An empirical study of auditors switching, corporate governance and financial performances of Malaysian Public Listed Companies (PLCs)

ABSTRACT In the past years, regulators and the business communities had expressed worries about the alarming rate at which firms or corporations collapse due to the mismanagement and manipulation of resources as seen in the cases of Enron, WorldCom in the United States of America; and to be specific in Malaysia, the cases of Megan Media Holdings Berhad and Transmile Group. Auditor switching is evident and the disorder of auditor switching often takes place in Malaysia; however, as time goes by, it is decreasing. Thus, this paper seeks to empirically examine the effect of auditor switching and corporate governance on financial performance of Malaysian PLCs. Secondary data on a total number of 100 PLCs from years 2009 to 2013 are used. The results reveal that the effect of auditor switching on performance does not vary with duality role and the board size. However, the independent director does not cause a good firm performance. Nonetheless, auditors do not have a direct effect on financial performance since they are not directly involved with the management of the firms which negates the results of previous study. Therefore, this paper has vital impact in that regulators and the public need to be educated through awareness campaigns to emphasize on the auditors’ roles as agents in understanding the impact of the association between corporate governance and financial performance. Furthermore, auditor switching should embrace not only rotation of audit partners, but rotation of audit firms as well in view that this will help in infusing discipline from the top to the bottom of the audit firms and the companies. Keywords: Corporate governance; CEO/chairman duality; board size; independent directors; auditor switching; financial performance; Return on Assets (ROA); Return on Equity (ROE); Tobin’s Q; Malaysia ABSTRAK Sejak beberapa tahun kebelakangan ini, pihak berkuasa tempatan dan komuniti perniagaan telah menyatakan kebimbangan mengenai kadar kejatuhan firma atau syarikat yang disebabkan oleh salah tadbir urus dan manipulasi sumber seperti yang terjadi ke atas kes Enron dan WorldCom di Amerika Syarikat dan kes Megan Media Holdings Berhad dan Transmile Group di Malaysia. Pertukaran juruaudit dan gangguan ke atas pertukaran juruaudit sememangnya telah terbukti berlaku di Malaysia walaupun pada kadar yang menurun. Oleh itu, kertas kerja ini adalah bertujuan untuk mengkaji secara empirikal tentang kesan pertukaran juruaudit dan tadbir urus korporat terhadap prestasi kewangan PLC di Malaysia. Data sekunder daripada sejumlah 100 PLC dari tahun 2009-2013 digunakan dalam kajian ini. Keputusan kajian menunjukkan pertukaran juruaudit tidak memberi kesan berbeza terhadap prestasi firma serta peranan dualiti dan saiz lembaga pengarah. Di samping itu, pengarah bebas tidak menunjukkan hasil yang baik ke atas prestasi firma. Kajian juga mendapati bahawa juruaudit tidak mempunyai kesan langsung terhadap prestasi kewangan kerana mereka tidak terlibat secara langsung dengan pengurusan firma di mana ini bertentangan dengan hasil kajian sebelumnya. Oleh itu, dapatan kajian ini memberi impak penting kepada pihak berkuasa tempatan serta orang ramai perlu dididik melalui kempen kesedaran terhadap penekanan peranan juruaudit sebagai ejen bagi mengukuhkan hubungan antara tadbir urus korporat dan prestasi kewangan. Tambahan pula, pertukaran juruaudit yang perlu diamalkan bukan sahaja dalam putaran rakan kongsi audit, tetapi putaran firma audit kerana ini akan membantu menyemai disiplin dari peringkat atasan ke peringkat bawahan firma audit dan syarikat. Kata kunci: Tadbir urus korporat; CEO/pengerusi dualiti; saiz lembaga pengarah; pertukaran juruaudit; prestasi kewangan; pulangan atas aset; pulangan atas ekuiti; Tobin’s Q; Malaysia