Modified audit opinion and monitoring mechanisms: Empirical evidence from Malaysian public listed companies

Based on the agency theoretical background, the effectiveness of internal corporate monitoring mechanisms enhances the reliability of financial reporting and contributes to protect the interests of all shareholders. This study provides an answer to the following main question of “What are the factors that affect the prospect of receiving a modified audit opinion among Malaysian public listed companies?” to provide an insight-into the issue of internal corporate monitoring mechanisms and modified audit opinion. To date, little is known about this issue, especially in the Malaysian-setting. Accordingly, twelve hypotheses are developed to examine the association between the effectiveness of the board of directors’ characteristics, audit committee characteristics and internal audit function with a modified audit opinion (a proxy for the quality of financial-reporting) in the Malaysian context by using individual and aggregated tests. To examine these hypotheses, logistic regression is used to analyse the data of 136 firm-year observations of seven sectors from the main-market and ACE-market listed on Bursa-Malaysia over the period 2009-2011. Several important findings emerged that are consistent with the hypotheses that Malaysian public listed companies with a large audit committee, audit committee members with greater expertise in accounting and auditing process, outsourcing internal audit function and the investment in the internal audit function are less likely to receive a modified audit opinion. Furthermore, the results confirm the argument that the combined-scores of the board of directors’ characteristics and the audit committee characteristics contribute to their effectiveness in reducing the prospect of receiving a modified audit opinion. Importantly, this study provides evidence that corporate governance reforms in Malaysia can enhance the effectiveness of monitoring mechanisms in order to avoid the Malaysian public listed companies from obtaining a modified audit opinion. Therefore, the results of this study consistent with agency theory and might-be of interest to Malaysian-regulators and policymakers as well as marketparticipants and researcher