Corporate Governance Mechanisms, Whistle-Blowing Policy and Earnings Management Practices of Firms in Malaysia
Authors: Mujeeb Saif Mohsen Al-Absy, Ku Nor Izah Ku Ismail, Sitraselvi Chandren
This study examines whether corporate governance (CG) mechanisms in firms that have a whistle-blowing policy (WHBLP) are more effective in constraining earnings management (EM), than those without. A sample of 288 Malaysian firms for the years 2013 to 2015, amounting to 864 firm-years were grouped into firms with and without WHBLP. Results show that for firms without WHBLP, the board chairman tenure would minimize EM activities. Meanwhile, for firms with WHBLP, board chairman independence, board chairman tenure, audit committee size, audit committee meeting and women in the audit committees are found to be associated with less EM activities. Further, it is found that ownership concentration and Big 4 auditing firms help to reduce EM activities in firms with WHBLP, while not in firms without WHBLP. Hence, functional and effective governance can be achieved by having a WHBLP, which is in line with agency and resource dependent theories. Therefore, this study suggests that firms should have a WHBLP in place, and policymakers should come up with enhanced criteria to strengthen the mechanisms of WHBLP.
Keywords: Corporate governance, earnings management, whistle-blowing policy, audit committee, board of directors.
Digital Object Identifier (DOI): doi.org/10.5281/zenodo.3299765Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1063
 L. Magrath and L. G. Weld, “Abusive earnings management and early warning signs,” The CPA J., vol. 72, no. 8, pp. 50-54, 2002.
 Z. Rezaee, “Causes, consequences, and deterence of financial statement fraud,” J. Acc. Res., vol. 16 no. 3, pp. 277-298, 2005.
 M. Jones, Creative accounting, fraud and international accounting scandals. 2011, England: John Wiley & Sons.
 R. Abdul-Rahman and F. H. M. Ali, “Board, audit committee, culture and earnings management: Malaysian evidence,” Manag Audit J., vol. 21, no. 7, pp. 783-804, 2006.
 J. L. Perols and B. A. Lougee, “The relation between earnings management and financial statement fraud,” Adv Account., vol. 27, no. 1, pp. 39-53, 2011.
 S. Sulaiman, B. L. Danbatta, and R. A. Rahman, “Figure Massaging Practices in Malaysian Firms: Are they Fraudulent?,” Procedia-Soc Behav Sci., vol. 145, pp. 29-39, August 2014.
 B. Jackling and S. Johl, “Board structure and firm performance: Evidence from India's top companies,” Corp Govern Int Rev., vol. 17, no. 4, pp. 492-509, 2009.
 S.-W. Nam and I. C. Nam, “Corporate governance in Asia: Recent evidence from Indonesia, Republic of Korea, Malaysia, and Thailand,” Working Paper, Asian Development Bank Institute, 2004.
 T. M. Pergola, “Management entrenchment: Can it negate the effectiveness of recently legislated governance reform,” J Am Acad Bus., vol. 6, no. 2, pp. 177-183, 2005.
 S. Y. Cheung and B. Y. Chan, “Corporate governance in Asia,” Asia Pac Dev J., vol. 11 no. 2, pp. 1-32, 2004.
 S. Claessens and J.P. Fan, “Corporate governance in Asia: A survey,” Int Rev Finance., vol. 3 no. 2, pp. 71-103, 2002.
 C. Leahy, “Corporate governance in Asia. Euromoney,” pp. 31-35, 2005
 T. M. Shahwan, “The effects of corporate governance on financial performance and financial distress: evidence from Egypt,” Corp Govern., vol. 15, no. 5, pp. 641-662, 2015.
 E. F. Fama and M. C. Jensen, “Separation of ownership and control,” J Law Econ., vol. 26, no. 2, pp. 301-325, 1983.
 M. C. Jensen and W. H. Meckling, “Theory of the firm: Managerial behavior, agency costs and ownership structure,” J. Finan. Econ., vol. 3, no. 4, pp. 305-360, 1976.
 A. Klein, “Audit committee, board of director characteristics, and earnings management,” J. Account. Econ., vol. 33, no. 3, pp. 375-400, 2002.
 R. B. Adams and D. Ferreira, “A theory of friendly boards,” J. finance., vol. 62, no. 1, pp. 217-250, 2007.
 T. Shawver, “The effects of moral intensity on whistleblowing behaviors for accounting professionals,” J. Forensic. Inv. Acc., vol. 3, no. 2, pp. 162-190, 2011.
 X. Chen, Q. Cheng, and X. Wang, “Does increased board independence reduce earnings management? Evidence from recent regulatory reforms,” Rev Account Stud., vol. 20, no. 2, pp. 899-933, 2015.
 M. M. Zain, N. Subramaniam, and J. Stewart, “Internal auditors’ assessment of their contribution to financial statement audits: The relation with audit committee and internal audit function characteristics.” Int. J. Audit, vol. 10, no. 1, pp. 1-18, 2006.
 N. Brennan and J. Kelly, “A study of whistleblowing among trainee auditors,” Br Account Rev., vol. 39, no. 1, pp. 61-87, 2007.
 T. P. Meng and O. S. Fook, “Comparative analysis of whistleblower protection legislations in England, USA and Malaysia,” Afr J Bus Manag, vol. 5, no. 27, pp. 11246-11255, 2011.
 Y. Mak, Whistleblowing: Recent Developments and Implementation Issues, in GCGF+ PSO. 2007.
 G. Friebel and S. Guriev, “Whistle‐blowing and incentives in firms,” J Econ Manag Strategy, vol. 21, no. 4, pp. 1007-1027, 2012.
 D. Schultz and K. Harutyunyan, “Combating corruption: The development of whistleblowing laws in the United States, Europe, and Armenia,” Int Comparative Jurisprudence, vol. 1, no. 2, pp. 87-97, 2015.
 H. B. S. M. N. Alam, “Whistleblowing and corporate governance: Accidental allies or lifetime partners?” in International Conference on Corporate Law (ICCL). 2009, Universiti Utara Malaysia: Surabaya, Indonesia. p. 1-10.
 R. M. Bowen, A. C. Call, and S. Rajgopal, “Whistle-blowing: Target firm characteristics and economic consequences,” Acc. Rev., vol. 85, no. 4, pp. 1239-1271, 2010.
 N. G. Packin and B. P. Edwards, “Regulating Culture: Improving Corporate Governance with Anti-Arbitration Provisions for Whistleblowers,” William & Mary Law Rev Online, vol. 58, pp. 41-64, 2016.
 Z. Inaam and H. Khamoussi, “Audit committee effectiveness, audit quality and earnings management: a meta-analysis,” Int J Law Manag., vol. 58, no. 2, pp. 179-196, 2016.
 S. Baccouche and A. Omri, “Multiple directorships of board members and earnings management: An empirical evidence from French listed companies,” J Econ Finance Modelling, vol. 2, no. 1, pp. 13-23, 2014.
 S. R. Bao and K. B. Lewellyn, “Ownership structure and earnings management in emerging markets—An institutionalized agency perspective,” Int Bus Rev., vol. 26, no. 5, pp. 828-838, 2017.
 E. García-Meca and J. P. Sánchez-Ballesta, “Corporate governance and earnings management: A meta‐analysis,” Corp Govern Int Rev, vol. 17, no. 5, pp. 594-610, 2009.
 R. Chandrasegaram, M. R. Rahimansa, S. K. Rahman, S. Abdullah, and N. N. Mat, “Impact of audit committee characteristics on earnings management in Malaysian public listed companies,” Int J Finance Account., vol. 2, no. 2, pp. 114-119, 2013.
 A. H. Al-Rassas and H. Kamardin, “Earnings quality and audit attributes in high concentrated ownership market,” Corp Govern Int J Bus Soc., vol. 16, no. 2, pp. 377-399, 2016.
 S. Srinivasan, Consequences of financial reporting failure for outside directors: Evidence from accounting restatements and audit committee members. J Account Res., 2005. 43(2): p. 291-334.
 Y. W. Park and H.-H. Shin, “Board composition and earnings management in Canada,” J Corp Finance., vol. 10. no. 3, pp. 431-457, 2004.
 X. Chen, Q. Cheng, and X. Wang, “Does increased board independence reduce earnings management: Evidence from recent regulatory reforms,” University of Wisconsin-Madison, Chinese University of Hong Kong, 2011.
 J. P. Near and M. P. Miceli, “Organizational dissidence: The case of whistle-blowing,” J Bus Ethics., vol. no. 1, pp. 1-16, 1985.
 T. J. Shawver and L. H. Clements, “The intention of accounting students to whistleblow in situations of questionable ethical dilemmas,” Res Profess Respons Ethics Account., vol. 11, no. 1, pp. 177-191, 2006.
 T. J. Shawver and T. A. Shawver, “Will corporate governance and whistleblowing provisions improve financial responsibility?” Res Profess Respons Ethics Account., vol. 12, pp. 123-148, 2007.
 M. Schmidt, “Whistle Blowing” regulation and accounting standards enforcement in Germany and Europe—An economic perspective,” Int Rev Law Econ., vol. 25, no. 2, pp. 143-168, 2005.
 D. L. Seifert, J. T. Sweeney, J. Joireman, and J. M. Thornton, “The influence of organizational justice on accountant whistleblowing,” Account Organiz Soc., vol. 35, no. 7, pp. 707-717, 2010.
 N. F. Mela and A. Zarefar, “The relationship of professional commitment of auditing student and anticipatory socialization toward whistleblowing Intention,” Procedia-Soc Behav Sci., vol. 219, pp. 507-512, May 2016.
 P. M. Dechow, R. G. Sloan, and A. P Sweeney, “Detecting earnings management, ” Acc. Rev., vol. 70, no. 2, pp. 193-225, 1995.
 W. R. Guay, S. Kothari, and R. L. Watts, “A market-based evaluation of discretionary accrual models,” J Account Res, vol. 34, pp. 83-105, 1996.
 S. N. Abdullah and K. N. I. Ku Ismail, “Women directors, family ownership and earnings management in Malaysia,” Asian Rev Account., vol. 24, no. 4, pp. 525-550, 2016.
 W. M. W. Mohammad, S. Wasiuzzaman, and N. M. Z. N. Salleh, “Board and audit committee effectiveness, ethnic diversification and earnings management: a study of the Malaysian manufacturing sector,” Corp Govern Int J Bus Soc, vol. 16, no. 4, pp. 726-746, 2016.
 R. B. Kline, Principles and practice of structural equation modeling (4rd ed.). 2015, New York, London: Guilford publications.
 S. A. A. W. Al-Dubai, Family involvement and firm performance: Evidence from Saudi Arabia, in School of Accountancy. 2014, Universiti Utara Malaysia: Kedah, Malaysia.
 J. M. Wooldridge, Econometric analysis of cross section and panel data. 2010: MIT Press, Cambridge, Massachusetts. London, England.
 T. Yoshikawa and A. A. Rasheed, “Family control and ownership monitoring in family‐controlled firms in Japan,” J Manag Stud, vol. 47, no. 2, pp. 274-295, 2010.
 StataCorp, Stata longitudinal-data/panel-data reference manual: Release 14. 2015, College Station, Texas: StataCorp LP.
 F. Podestà, “Recent developments in quantitative comparative methodology: The case of pooled time series cross-section analysis,” in DSS Papers SOC 3-02. 2002, McDonough School of Business, Georgetown University, Washington, DC. p. 5-44.