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ABSTRACT
The purpose of this study is to investigate the association of audit committee expertise and internal audit function characteristics, with audit quality, which is proxied by audit fee. As highlighted by prior studies, audit committee and internal audit are among the corporate governance mechanisms. Hence, among the corporate governance characteristics included in this study are audit committee expertise, frequency of audit committee meetings, structure of internal audit function and size of internal audit function. Using publicly available information, 200 Malaysian listed companies were utilised for both 2009 and 2010. It was shown that a positive relationship exists between external audit fee and two of the audit committee characteristics, i.e. audit committee with postgraduate qualification and frequency of audit committee meeting. Further, a positive relationship was found between external audit fee and a characteristic of the internal audit function, which is size of the internal audit function. Apart from contributing to the literature on corporate governance and audit quality, this study may serve as an input for regulators to encourage strict enforcement for Malaysian listed companies to incorporate corporate governance practices, especially in respect of audit committee composition and internal audit function. Finally, it highlights the call for continuous education for directors, to become more resourceful in order to improve their relationship with auditors.
JEL classifications: M41, M42
Key words:Audit committee, Internal audit, Corporate governance, External audit fee, Expertise
1. INTRODUCTION
Regulators recently highlighted the increasingly vital role of internal audit functions in supporting the audit committee to ensure the quality of financial reporting and auditing (i.e. Malaysian Code on Corporate Governance, 2007). This is due to the corporate collapses and highly publicized scandals (i.e. Enron, Worldcom, Parmalat, Transmile, Port Klang Free Zone) that have demonstrated the problems with the quality of financial reporting and auditing. These scandals have damaged investor confidence in corporate financial reports and raised doubts about the audit function. Further, the recent financial crisis, which unfolded in middle of 2008 also damaged investor confidence in financial reporting and audit quality. These highly publicized scandals and financial crisis have highlighted the critical need for regulators and firms to improve corporate governance practices. Therefore, several steps have been taken by regulators (i.e. Securities Commission, Bursa Malaysia) to reinforce the quality of...