Political Connections, Risk Management Committees and Audit Fees: Malaysian Evidence

Background - Distinct from other board committees, RMC presents an interesting setting to understand the association between evolving risk governance mechanism and audit pricing, especially for firms with political background. Politically connected firms are commonly being viewed as risker and required additional efforts from auditors. RMC plays an increasingly vital role in monitoring the management and providing strategic resources to the boards, with the aim of strengthening the risk oversight function. However, prior literature is comparatively scarce in respect of how risk governance influences the audit function, particularly under a relationship-based capital market like Malaysia. Purpose - This study investigates the association between political connections, risk governance and audit fees in a relationship-based economy where the adoption of risk governance is on voluntary basis. Design/methodology/approach - This study is using 2460 firm-observations, comprising data from listed firms for the period 2012 to 2017. Panel regression analysis is adopted in the main analysis, along with System GMM to address for potential endogeneity problem. Findings - The results show that auditor charges higher audit fees to politically connected firms. Interestingly, the formation of RMC is associated with higher audit fees. We find that RMC meetings, RMC size and RMC experts are associated with lower audit fees. Also, politically connected firms with RMC that have more independent members and more expertise tend to pay lesser audit fees. Research limitations - It is possible to overlook firms that actually have working committees to deal with risk management but do not disclose it publicly since no mandatory compliance in place. Also, academic theory with regards to risk governance is not well established in the literature. Hence, the findings of this study cannot be construed as universally factual for all. Originality/value - This paper contributes to the emerging risk governance literature by examining the impact of risk management structures on auditing in a developing economy setting. Findings of this study also provide inputs to policy makers and practitioners on the structural attributes of RMC when formulating future risk management legislatio