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The Determinant of Audit Fees

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    Table of Content I. List of Table1 II. List of Figures1 III. List of Appendixes3 IV. Abstract4 V. Chapter 1 – Introduction5 A. Corporate Governance5 B. Problem Statement6 C. Research Objectives7 D. Research Questions7 E. Significant of Study7 VI. Chapter 2 – Literature Review8 A. Board of Director8 a. Board Size and Audit Fees8 b. Board Meeting and Audit Fees9 c. Role of Duality and Audit Fees10 d. Risk Management Committee and Audit Fees11 B. Family Ownership and Audit Fees12 C. Board Independent director and audit fees14 D.

    Institutional Shareholder and Audit Fee15 VII. Chapter 3 – Methodology18 A. Sample data18 B. Sources of data18 C. Description of data19 VIII. Chapter 4 – Result23 A. Board Size23 a. Vertical Analysis23 b. Horizontal analysis26 B. Board Meeting29 a. Vertical analysis29 b. Horizontal Analysis32 C. Role Duality35 a. Vertical analysis35 b. Horizontal analysis36 D. Family Ownership38 a. Vertical analysis38 E. Board independence39 a. Vertical analysis39 b. Horizontal Analysis42 F. Institutional shareholders45 a. Vertical analysis45 b. Horizontal analysis49 IX. Chapter 5 – Discussion and Conclusion52

    A. Discussion:52 a. Board Size52 b. Board Meeting:52 c. Role Duality:53 d. Family Ownership:53 e. Board independence53 f. Institutional Investor:54 B. Conclusion:54 List of Table Table 1: Table of measurement used in research19 Table 2: The data of financial statement from the Nestle Company from 2008 to 201020 Table 3: The data of financial statement from the Guinness Company from 2008 to 201020 Table 4: The data of financial statement from the Malaysia Airline System from 2008 to 201021 Table 5: The data of financial statement from the Sapura Resources Bhd from 2008 to 201021

    Table 6: The data of financial statement from the Zhulian Bhd from 2008 to 201022 Table 7: The data of financial statement from the Sunway City Berhad from 2008 to 201022 List of Figures Figure 1: Percentages audit fees of profit and board size of Nestle (M) Bhd. 23 Figure 2: Percentages audit fees of profit and board size of Guinness Anchor Bhd. 23 Figure 3: Percentages audit fees of profit and board size of Malaysian Airline System Bhd24 Figure 4: Percentages audit fees of profit and board size of Sapura Resources Bhd24 Figure 5: Percentages audit fees of profit and board size of Zhulian Berhad25

    Figure 6: Percentages audit fees of profit and board size Sunway City Berhad25 Figure 7: Percentages audit fees of profit and percentages board independence of all 6 companies in year 200826 Figure 8: Percentages audit fees of profit and percentages board independence of all 6 companies in year 200927 Figure 9: Percentages audit fees of profit and percentages board independence of all 6 companies in year 201028 Figure 10: Percentages audit fees of profit and board meeting of Nestle (M) Bhd. 29 Figure 11: Percentages audit fees of profit and board meeting of Guinness Anchor Bhd. 29

    Figure 12: Percentages audit fees of profit and board meeting of Malaysian Airline System30 Figure 13: Percentages audit fees of profit and board meeting of Sapura Resources Bhd30 Figure 14: Percentages audit fees of profit and board meeting of Zhulian Bhd31 Figure 15: Percentages audit fees of profit and board meeting of Sunway City Bhd31 Figure 16: Percentages audit fees of profit and board meeting of all 6 companies in year 200832 Figure 17: Percentages audit fees of profit and board meeting of all 6 companies in year 200933 Figure 18: Percentages audit fees of profit and board meeting of all 6 companies in year 201034

    Figure 19: Percentages audit fees of profit and number role of duality of Malaysian Airline System Bhd. 35 Figure 20: Percentages audit fees of profit and number role of duality of Zhulian Bhd35 Figure 21: Percentages audit fees of profit and number role of duality of all 2 companies in year 200836 Figure 22: Percentages audit fees of profit and number role of duality of 2 companies in year 200936 Figure 23: Percentages audit fees of profit and number role of duality of 2 companies in year 201037 Figure 24: Percentages audit fees of profit and and percentage of family ownerships of Zhulian Bhd38

    Figure 25: Percentages audit fees of profit and percentages board independence of Nestle (M) Bhd. 39 Figure 26: Percentages audit fees of profit and percentages board independence of Guinness Anchor Bhd. 39 Figure 27: Percentages audit fees of profit and percentages board independence of Malaysian Airline System Bhd. 40 Figure 28: Percentages audit fees of profit and percentages board independence of Sapura Resources Bhd40 Figure 29: Percentages audit fees of profit and percentages board independence of Zhulian Bhd41 Figure 30: Percentages audit fees of profit and percentages board independence of Sunway City Berhad41

    Figure 31: Percentages audit fees of profit and percentages board independence of all companies in year 200842 Figure 32: Percentages audit fees of profit and percentages board independence of all companies in year 200943 Figure 33: Percentages audit fees of profit and percentages board independence of all companies in year 201044 Figure 34: Percentages audit fees of profit and percentages of institutional investors of Nestle (M) Bhd. 45 Figure 35: Percentages audit fees of profit and percentages of institutional investors of Guinness Anchor Berhad45

    Figure 36: Percentages audit fees of profit and percentages of institutional investors of Malaysian Airline System Bhd. 46 Figure 37: Percentages audit fees of profit and percentages of institutional investors of Sapura Resources Bhd47 Figure 38: Percentages audit fees of profit and percentages of institutional investors of Zhulian Bhd47 Figure 39: Percentages audit fees of profit and percentages of institutional investors of Sunway City Bhd48 Figure 40: Percentages audit fees of profit and percentages of institutional investors of all companies in year 200849

    Figure 41: Percentages audit fees of profit and percentages of institutional investors of all companies in year 200950 Figure 42: Percentages audit fees of profit and percentages of institutional investors of all companies in year 201051 List of Appendixes 1, D. R. (n. d. ). BOARD SIZE, BOARD COMPOSITION AND PROPERTY FIRM PERFORMANCE. 2, F. A. (n. d. ). Corporate Governance Mechanisms and Performance of Public-Listed Family-Ownership in Malaysia. 3, N. V. (n. d. ). “Board meeting frequency and firm performance “. 4, C. M. (n. d. ). “How a company’s level of Corporate Governance affects external Audit Fees? . 5, C. e. (n. d. ). find a significant positive association between audit fees and the proportion of outside directors on the board, suggesting that outside directors who act diligently demand a higher quality audit. 6, K. A. (n. d. ). Board characteristics and audit fees: why ownership structure matters? 7, M. A. (n. d. ). “Board characteristics and audit fees: why ownership structure matters? ”. 8, G. S. (n. d. ). The association between corporate governance guidelines and risk management and internal control practices. 9, W. R. (November/December 2006). The Role of Risk Management and Governance in Determining Audit Demand”. Journal of Business Finance & Accounting , 33(9) & (10), 1344–1367. 10, F. M. (n. d. ). “CORPORATE GOVERNANCE AND AGENCY COSTS”. 11, P. A. (n. d. ). “Family Ownership, Agency Problems, Corporate Governance and Acquiring Firm Shareholder Wealth: Evidence from Acquisitions of New Economy Firms”. 12, A. K. (n. d. ). “Family firm, audit fee and auditor choice: Australian evidence”. 13, J. -Y. J. (n. d. ). The Effects of Auditing Quality and of Independent Directors & Supervisors on the Interest Cost of Newly Issued Corporate Bonds. 4. (October 2006). Malaysian Accounting Review. 15, M. M. (n. d. ). Institutional investors, political connection and audit quality in Malaysia. Abstract We have been assigned to do a research for investigating whether corporate governance structures influence the audit process in terms of audit fee pricing based on the 3 years annual report of 6 Malaysia Public Listed Companies. The study is carried out to identify the association between audit fees and board structure. The data shows there is a direct relationship between the board size and audit fees, as the board size increases, the audit fees increase.

    In addition, the larger of the board size of committee leads to more audit procedures to be carried out to reduce detection risks. However, there is negative connection among the board independence and audit fees in our study. The finding indicates that meeting frequency is significantly and positively associated with audit fees. More audit procedures are conducted to verify the correctness of the disclosure. However, we did not find any interrelated relationship between the institutional investors and audit fees.

    Moreover, the data states that role duality hold significant and positive relationships with audit fees. Agency problem may arise once there is role duality situation occurs and it leads to conflict of interest. Last but not least, the investigation was conducted on the impact of family ownership on audit fees. The result shows the audit fees are positively relative to proportion of family ownership. The situation allows them to take advantages on conducting business illegally, which may influence the profit and interests of shareholders.

    The nature of matters reserved to the board and delegated to management will necessarily depend on the size, independence, meeting, role duality and family ownership structure of the company and will be influenced by corporate culture, and by the skills of high management committees. Chapter 1 – Introduction Corporate Governance The subject of corporate governance has drawn much attention over the few years ago due to the failure of corporate and concerns about the performance of corporations and the way they are governed.

    Board structure forms an integral part of this research as they are theoretically supposed to calm some of the agency problems that exist in business organizations. Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how the performance is optimized. The Malaysian Code on Corporate Governance provides guidelines on the principles and best practices in corporate governance and the direction for the implementation as well as charts the forthcoming vision of corporate governance in Malaysia.

    The study reviews prior literature and recognizes the factors within the categories of board structure, from the aspect of board size, independence, number of meetings, institutional investor, role duality and family ownership that are likely to influence audit fees of the company. The finding is conducted to identify various agency relationships that exist in business life and related problems that arise due to such relationships. Apart from that, it indicates the role of various corporate governance mechanisms in mitigating the agency problems.

    Problem Statement Research Objectives The overall objectives of the finding: * To examine the relationship between the board size with the audit fees, * To examine the relationship between board independence with the audit fees, * To examine the relationship between board meeting with the audit fees * To examine the relationship between institutional investor with the audit fees, * To examine the relationship between role duality with the audit fees * To examine the relationship between family ownership with the audit fees.

    Research Questions We analysis our research according to the following prospect: * Is there any significant relationship between board size and audit fees? * Is there any material relationship between board independence and audit fees? * Is there any obvious relationship between board meeting and audit fees? * Is there any vital relationship between institutional investor and audit fees? * Is there any crucial relationship between role duality and audit fees? Is there any important relationship between family ownership and audit fees? Significant of Study In summary, the results and interpretations in prior research are statistically fragile and quite sensitive to changes in research design and variable measurement. We attach the existing literature by identifying a more complete set of measures for audit fees and board structure. The finding allows us to understand the differences in audit fee strategies of companies with the different size and internal governance variables.

    The auditors demand more audit fees to enlarge audit scope to reduce the risks. Hence, good mechanism of corporate governance can eliminate potential audit risks and effect decisions of auditors. Chapter 2 – Literature Review A. Board of Director Board Size and Audit Fees There was some argument between the effects of the size of the board of director toward the corporate governance of the company. As they argue that the board size is a significant influence to the firm performance thus the audits fees.

    The first literature by Lipton & Lorch (1992) and Jensen (1993) is defined that the smaller board size of committee is eventually leads to cost cutting and downsizing. Furthermore, the Hermalin and Weisbach (2003) argued that smaller board is more effective than the larger board. (1) From the statement above, the fact that as the board is in large composition, it would be difficult for the CEO to control and the performance of the firm will be driven down.

    Besides that, the discussion between the large boards will be meaningless due to the time consuming and diverse result in a lack of cohesiveness on the larger board. The reason is having more directors will take time to expressing the opinion and coordination all the result. As such, there will be a circumstance where the meeting is more on symbolic role rather than the role of function in performing the management of the company when the boards become larger in term of experience, skills, gender and nationality.

    There are several studies show the positive relationship between the board size of the firm and the audit fees. Mak and Yuanto (2002) examine the relationship between the size of the board and firm performance in Singapore and Malaysia, and find that board size is positive in relation to audit fees. The same relation found in Finland that Eisenberg et al. (1998) find evidence that there is a negative relationship between board size and profitability for small and medium size firms. (2) These finding of the research prove that the relationship between the board size and audit fees are positive.

    So we can defined that the smaller board is more effective than the larger board thus the audit fees for the smaller board is less than the larger board. Board Meeting and Audit Fees The frequency of the board meeting arise some issue where board meeting are beneficial to shareholders. The reason that the board meeting is useful as Lipton and Lorsch (1992) suggest that the most widely shared problem director’s face is lack of time to carry out their duties. Whereas Conger et al. (1998) suggest that board meeting time is an important resource in improving the effectiveness of a board. 3) There are considerable result shows that the board meeting is deemed more likely to perform their duties accordance with shareholders interest with more frequent the board meeting was held. However, some opposite sight were establishing where the time of the board meeting is not fully utilized by the director and maybe there are some topics that are not related to the discussion in the board meeting. This problem is a derivative of the fact that chief executive officer almost always set the agenda for board meetings (Jensen, 1993).

    Moreover, the limitation of the opportunities for outside directors to implement effective control over management exist because the absorption of the routine task by the meeting. (Jensen, 1993) suggests that boards should be relatively inactive, and that boards are usually forced to maintain higher activity levels in the presence of problems. 3 (3) Consequence, the board meeting is defined as not practical measure for improve the corporate governance because it is more likely serve for debating more than discussion.

    Abbott, Parker, Peters and Raghunandan (2003), reported significant positive associations between audit committee independence and financial expertise with audit fees, but there is no significant association between meeting frequency and audit fees. (4) Their findings were contrast to the findings of Carcello et al. (2002) (5), which found that audit committee characteristics were not significant in the presence of board-related variables. Meeting frequency was not associated with audit fees at the conventional levels.

    Based on the foregoing, there are no clear association about the board meeting and the audit fees. Role of Duality and Audit Fees The main concern of agency theory is that effective boards will be mainly composed of independent directors (Johnson, Daily and Ellstrand, 1996) and the need of segregation duties towards position of CEO and chairman whereas no CEO duality (Mallette and Fowler, 1992). If the chairman is also a CEO, then the management oversee can be describing as lack of independence and conflict of interest. CEO duality is often viewed as an impediment to the oard’s monitoring of top executives (Finkelstein and D’Aveni, 1994; Aguilera, 2005) and can serve to entrench a CEO within an organization by compromising the board’s abilities to monitor and discipline management (Mallette and Fowler, 1992). (6) CEO can be said that dominated the board if there is existence of the CEO duality and the chairman and the CEO is the same person. As such, CEO duality can influence the final decision making of management and induce the agency problem where act against the interest of the shareholders.

    The CEO duality breaks the balance of powers between the top management team and the board, potentially restricting the board’s effectiveness in controlling managerial initiatives and actions (Boyd et al. , 2005). (7) There may be probability of agency problem increase due to the appearance of the CEO duality because the information asymmetry between CEO and the board occur. This circumstance can be explained where the CEO have the wide knowledge about the industry and firm internal condition and duality of CEO as chairman in the board will easy modified the content and information of the board decision.

    Gul and Leung (2004) show that the CEO duality is associated with lower voluntary disclosure. 7 (7) The CEO duality have the authority to limit the external supervision exercised by auditor. Thus, the demand of external audit is negatively related to CEO duality. Hence, we can assume that the association between role of duality and audit fees is negative. Risk Management Committee and Audit Fees Other than the audit committee, the Malaysian Code on Corporate Governance also recommends that the board of directors establish a committee such as risk management committee but is less frequently set up by the listed firms.

    The connection between risk management and corporate governance can be made through asking how risk management creates value for the owners of the company and ensures that managers manage the company in the best interests of the shareholders when the managers and owners are different people (Berle and Means, 1933) (8). Through some review of certain public listed company, they do not establish risk management committee as it is not compulsory for company to follow this recommendation.

    Empirically, Knechel and Willekens (2006) find that audit fees are lower when a company discloses a relatively high level of disclosure of compliance risk, but higher when a company discloses a relatively high level of financial risk. (9, November/December 2006) Usually, both external and internal auditors are concerned about the proper controls that are applied in the corporate governance in the company. So, the external auditor is depending on the work of internal auditors in many respects in exercise the external audit duties.

    The function of the risk management committee is to assist the understanding of the external auditors toward the internal control of the company before any auditing works was carried out. Hence, the auditing work of external auditor will be more effective and efficiency as the audit hours that need to used for audit the company was reduce and then the audit fess will subsequently reduce. In addition, Goddard and Masters (2000) find was a negative relationship between audit fees and improved internal controls in the presence of audit complexity. 9 Thus, the relationship between the external audit fees and risk management is negative.

    Family Ownership and Audit Fees Family-owned or controlled businesses account for over 80 percent of all firms in the U. S. and families are present in one third of the S&P 500 and hold nearly 18 percent of firms’ equity stake (Anderson and Reeb, 2003) (10). The most common form of the business organization of the world is more on family controlled firm or family ownerships. However, this family ownership issue has arisen many debates (Berle and Means, 1932). Some positive argument about the family also arise (Demsetz and Lehn, 1985). The advantages of the family ownership can allow many shareholders to mitigate expropriation.

    Take as example, when an business in continuous operating , the historical present of the family ownership allow the firm to be influence and monitored and thus will lead to long term and more profitable investment horizon (James, 1999). The concentration of investor in family firm also generates the economic profit and thus reduces the agency conflicts (Demsetz and Lehn, 1985). In general, the family ownerships of the company is more concern of the well being that are closely tied to the firm, they will more effort to monitor managers and to reduce the free riders typical among small shareholder.

    The assumption that believe the families see their own activities as a wealth-producing assets for themselves as a successors (Casson and Chamy, 1999). So, family ownership can also be seen to improve internal monitoring and reduce conflict of interest inherent in manager-owner arrangements and thus reduce audit risk assessment and with a subsequent flow-on effect in lowering audit fee. However, there is more disagreement with the statement above where mostly research shows that there is more potential disadvantage in the family ownership in a firm.

    The combination of the ownership and control of the family may allows the taking of profits for private income (Fama and Jensen, 1983). Other than that, critics such as some family owner may choose non-pecuniary consumption and take resources away from profitable projects (Demsetz, 1983) (11). Furthermore, the family ownership firm often restricts managerial position to family member and this will limited the access to the talent and capable people who can increase the effectiveness of the management firm.

    This is considering as potential competitive disadvantage. The investment that will maximize the firm value is normally generate by a large group of shareholder who make investment decision but the investment normally restrict the benefit by hampering the growth and innovation if the decision is made by concentrated shareholders such as family ownership firm. As the family ownership shareholder is tend to reduce the possibility access to external contribution and will reduce the firm future profitability (Barklay and Holderness, 1989).

    Normally, company scandal such as family’s owners that act behalf their own benefit but derive the negative effect to the company and productivity of the management company (Shleifer and Summers, 1988). Carey et al. (2000) investigates the demand for audit quality in family firms and finds that the demand for voluntary audits increases when agency costs increase. (12) Furthermore, the more control of the family ownership in the firm will more likely to influence the financial report process and thus to arise the agency cost.

    While the agency cost was increase, the need of audit risk management and risk effort is higher and the audit fees will become higher than the normal requirements. DeAngelo (1981) argue that the big 4 auditor provide better quality audits because they have more reputational and legal risk. This suggest that the family ownership firm will more likely to assign Big 4 auditors to ensure the quality of audit is higher enough to guarantee the reputation of the family ownership firm. As a result, mostly theories argue that issue about the agency problems in family wnership firm. So we defined that the relationship of the family ownership and audit fees is more on positive. Where there is the existence of the family ownership in firm, the audit fees is tend to be higher. Board Independent director and audit fees According to O’ Sullivan (2000) (13) argue that the proportion of non-executive directors on the board has a significant positive impact on audit fees. It also mentioned that independent directors have a positive impact on audit quality which instead for audit fees by requiring more extensive auditing.

    In addition, independent board of directors seeks to acquire high quality audit services in order to protect their reputation capital and to promote shareholders interest. High-quality auditing can trace and disclose any mistake in the financial reports, faulty accounting information would be reduced, and the financial reports would be deemed reliable by their users (De Angelo, 1981; Watts and Zimmerman 1983). The board of directors plays an important role in corporate governance and can be considered as a major instrument to control the top management (Kose and Senbet, 1998).

    Beasley (1996) and Dechow and Sloan (1996) discover that a board of directors containing more external directors proves to effectively reduce the chance of erroneous disclosure of its financial reports. Klein (2002) finds that a company having independent directors is less likely to use unusual accrued items to manipulate their earning figures. Besides, independent directors on boards are associated with higher audit fees being paid by Malaysian companies. Higher audit fees reflects cost to auditors of providing higher quality audit services because more time and effort is spent conducting a better auditing report thorough audit.

    Governance theory argues that independent directors should utilizing higher quality audit services in order to protect shareholders’ interests. This is because auditing is one of the monitoring activities that have been used to control management behaviour (Jensen and Meckling, 1976) (14, October 2006). According to sentences mentioned above, independent director will be motivated to build their reputation as a professional supervisor to gain the opportunity to be hired by other entities as an external director. Subsequently, they can retain high degree of independence when dealing with the management (Fama, 1980; Fama and Jensen, 1983).

    Moreover, independent directors are argued to be free from influences by managerial activities when dealing with external auditors on audit issues. This finding is consistent with studies conducted in other settings, (for example, O’Sullivan, 2000 and Carcello et al. , 2002) where it was found that board independence is a significant explanatory variable of the variation in audit fees. Goodwin-Stewart and Kent (2006) in Australia found that the independence of the board of directors and the number of audit committee meetings had a positive and significant impact on audit fees.

    However, they did not find a significant correlation between the independence and financial expertise of audit committee members and the audit fee. Institutional Shareholder and Audit Fee Institutional shareholders, sometimes called institutional investors were perceived as a mechanism to facilitate savings based on consistent earnings and stable returns (Gomez and Jomo, 1999). The largest institutional investor in Malaysia was Employees Provident Fund (EPF). Nowadays, institutional investors were more attracted on participating in the corporate governance in order to influence.

    Institutional investor in Malaysia pools the fund they invested in a company will lead to increasing equity share ownership and owes fiduciary obligation to contributor and public. As a result, the institutional investor will become more active in corporate governance (Monk and Minow, 1995). In additional, Karpoff (2001) had document various case studies that proof the institutional shareholder actively persuaded firms to act according with their needs. Moreover, institutional investors have incentives to monitor corporate performance because they potentially benefit the most from this monitoring (Shleifer and Vishny, 1986).

    Therefore, institutional investors are an important factor in corporate governance. Since, the Malaysian capital market operates within the context of a racially diverse society and past evidences suggest that Malaysian has politically connected or favoured firms (Gomez and Jomo, 1999; Gul, 2006; Johnson and Mitton, 2003). Political connection’s firms are generally supposed that it involve poor corporate governance and leading to agency problem. Such perceptions in turn are expected to increase monitoring costs result to higher audit fees.

    According to journal that made a research about relationship between institutional investors and audit quality. In this case, audit fees used as a proxy of audit quality since higher audit fees are associated with higher audit quality (Goodwin-Stewart and Kent, 2006; Francis, 2004). We argue that in the presence of highly concentrated ownership and family control firms (Claessens et al. , 2000; Abdul Samad, 2004), which creates an agency conflict between majority and minority shareholders, institutional investors require good audit report from external auditors in order to control and leading management and majority shareholders.

    Moreover, institutional investors will seek better audit quality in order to monitor management and majority shareholders. Besides, they also have resources (Shleifer and Vishny, 1997), proficiency in analysing financial statements (Hand, 1990), ability to deal with media-pressure (Wu, 2004) and size (Jennings, 2005) in order to require an enhanced audit of the firms. Furthermore, Knechel and Willekens (2006) and Hay et al. (2008) argue that variation of audit fees arises from various factors including the cost of audit efforts, the auditor’s legal liability (Simunic, 1980) and demand from various stakeholders.

    For instance, when a firm’s concentrated shareholding structure is controlled by a few individuals could yield a requirement for better audit effort from minority shareholders. However, this scenario may be prevalent in the Malaysian capital market, as observed by Claessens et al. (2000). The institutional investors are better informed than individual investors on average because of their significant development and analysis of timely and important firm-specific information (Wahal and McConnell, 2000).

    Additionally, institutional shareholders have fiduciary duties to serve their contributors and minority shareholders of their firms (Hawley and William, 1997). In Asian firm, agency problem always happened between majority and minority shareholders (Claessens and Fan, 2002). Thus, institutional investors have an ideal to monitor or representative of minority shareholders. The most interest part is the relationship between institutional shareholder and audit fees. Audit fees is correspondent to audit quality seeing that higher audit quality will cause higher audit fees (Goodwin-Stewart and Kent, 2006; Francis, 2004).

    Other than that, audit pricing has been shown to be a function of auditor effort and perceived audit risks (Simunic, 1980). This is because when the auditors put more effort to effectively audit the client, they will charge fee premiums either due to firm complexity, increased regulation, or other factors. Besides, auditors will also charge higher price when they recognize a higher audit risk to compensate for an increased probability of litigation. Prior empirical studies shown large institutional shareholdings have an impact on audit fees.

    For example, O’Sullivan (2000) and Kane and Velury (2004) argue that the existing of a positive relationship between large institutional shareholdings and audit fees. On the basis of earnings quality, Kane and Velury (2004) assumed that institutional investors are influential and demand high-quality earnings information. Thus, the level of institutional ownership should be positively related with the provision of audit quality (Kane and Velury, 2004). Fascinatingly, Mitra et al. 2007) found a positive and significant relationship between subtle institutional investors which hold less than 5 percent ownership with the level of audit fees, but a negative relationship between institutional investors which hold more than 5 percent ownership. In addition, firms having greater numbers of institutional investors tend to employ the Big Four accounting firms (Velury, et al. , 2005). This again shows that these firms emphasize higher quality audit due to demand of institutional investors, reflected by the level of audit fees (15).

    Chapter 3 – Methodology A. Sample data Our research about the relationship between the corporate governance and the audit fees is involves panel data which comprise only 6 firms studied in the period of 2008 to 2011. The sample consists of firms listed under the property sector, service sector and technology sector on the main board of the Kuala Lumpur Stock Exchange (KLSE). The KLSE defines property firms as firms engaging in activities such as property development and construction, property investment, property management, hotels and leisure.

    Initially our sample only consist Nestle Company, Guinness Company, Malaysian Airline System, Sapura Resources Bhd, Zhulian Berhad and Sunway City Berhad which is 6 from the total number of listed firms. Since the study covers a period of 3 years, the availability of the annual reports, which is the main source of information, is a deciding factor as to determine the relationship no matter what nature of the business firm involved. The reason we choose the different field of the business firm to shows that the relationship of the audit fees and corporate governance with the nature of business is not related. Sources of data

    As all the companies we sample among all the company, they are public listed. So the financial information of each company can be obtained from the Kuala Lumpur Stock Exchange (KLSE). Whereas the information pertain to their directorship and financial statements are made available in their individual annual reports. In fact, the annual report of each company is the main source of information for this research. Whilst annual reports for the period of 2008 to 2010 are available online at the KLSE website. There is no difficulty in finding these annual reports as all are readily in the Kuala Lumpur Stock Exchange (KLSE) website.

    There is massive information available in the annual reports include: the firms’ compliance on corporate governance issues; profiles of directors; leadership structure; financial statements, But we only obtain a few of information for the purpose of this research. Description of data The following section describes the key characteristics and terms of measurement for each variable. Whilst this study focuses on the audit fees with independent board of director, board size, board independence, number of board meeting, institutional shareholder, role duality and family ownership.

    The terms of measurement used are described as in Table below. Ratio audit fee of profit after tax| Audit FeeProfit after tax| Percentage of board independence| IndependentTotal Number of directors| Percentage of board size| Number Board Size of the YearTotal Number Board Size of 3 Year| Percentage of board meeting| Number Board Meeting of the YearTotal Number Board Meeting of 3 Year| Percentage of institutional shareholder| | Role Duality| Number of the role duality position| Family Ownership| Percentage obtain from the financial statement| Table 1: Table of measurement used in research

    The six companies that we sample from the financial statement and computed the data collected as table below: | 2008| 2009| 2010| | Nestle company (RM ‘000)| Audit Fee| 386| 425| 425| Profit after tax| 340,887| 351,793| 391,398 | Ratio audit fee of profit after tax| 0. 1132%| 0. 1208%| 0. 1086%| Number of directors| | | | Independent| 5| 4| 4| Non-Independent| 3| 4| 3| Total| 8| 8| 7| Percentage of board size| 34. 78%| 34. 78%| 30. 44%| Percentage of board independence| 62. 50%| 50. 00%| 57. 14%| Percentage of board independence (average) | 38. 46%| 30. 77%| 30. 7%| Number of board meeting| 4| 4| 4| Percentage of board meeting| 33. 33%| 33. 33%| 33. 34%| Percentage of institutional shareholder| 6. 8726%| 6. 8737%| 7. 6500%| Role Duality| 0| 0| 0| Family Ownership| 0| 0| 0| Table 2: The data of financial statement from the Nestle Company from 2008 to 2010 | 2008| 2009| 2010| | Guinness company (RM’000)| Audit Fee| 115| 115| 115| Profit after tax| 125,857 | 141,988 | 152,691 | Ratio audit fee of profit after tax| 0. 0914%| 0. 0810%| 0. 0753%| Number of directors| | | | Independent| 6| 4 | 4|

    Non-Independent| 2| 2 | 2 | Total| 8| 6| 6| Percentage of board size| 66. 67%| 30. 00%| 30. 00%| Percentage of board independence| 75. 00%| 66. 67%| 66. 67%| Percentage of board independence (average) | 42. 86%| 28. 57%| 28. 57%| Number of board meeting| 4| 4| 4| Percentage of board meeting| 33. 33%| 33. 33%| 33. 34%| Percentage of institutional shareholder| 5. 1100%| 3. 3800%| 3. 8000%| Role Duality| 0| 0| 0| Family Ownership| 0| 0| 0| Table 3: The data of financial statement from the Guinness Company from 2008 to 2010 | 2008| 2009| 2010| Malaysian Airline System (RM’000)| Audit Fee| 869| 875| 915| Profit after tax| 245,697 | 522948| 237346| Ratio audit fee of profit after tax| 0. 3537%| 0. 1673%| 0. 3855%| Number of directors| | | | Independent| 5| 4| 5| Non-Independent| 6| 6| 6| Total| 11| 10| 11| Percentage of board size| 34. 38%| 31. 25%| 34. 37%| Percentage of board independence| 45. 45%| 40. 00%| 45. 45%| Percentage of board independence (average) | 35. 71%| 28. 57%| 35. 71%| Number of board meeting| 12| 14| 13| Percentage of board meeting| 33. 33%| 38. 89%| 36. 11%| Percentage of institutional shareholder| 14. 33%| 14. 8%| 14. 08%| Role Duality| 2| 1| 1| Family Ownership| 0| 0| 0| Table 4: The data of financial statement from the Malaysia Airline System from 2008 to 2010 | 2008| 2009| 2010| | Sapura Resources Bhd (RM’000)| Audit Fee| 92| 108| 113| Profit after tax| -6,663| -4,541| 6,041| Ratio audit fee of profit after tax| -1. 3808%| -2. 3783%| 1. 8706%| Number of directors| | | | Independent| 2| 2| 5| Non-Independent| 3| 2| 2| Total| 5| 4| 7| Percentage of board size| 31. 25%| 25. 00%| 43. 75%| Percentage of board independence| 40. 00%| 50. 00%| 71. 43%| Percentage of board independence (average) | 22. 2%| 22. 22%| 55. 56%| Number of board meeting| 5| 6| 8| Percentage of board meeting| 26. 32%| 31. 58%| 42. 11%| Percentage of institutional shareholder| 1. 46%| 1. 46%| 1. 46%| Role Duality| 0| 0| 0| Family Ownership| 0| 0| 0| Table 5: The data of financial statement from the Sapura Resources Bhd from 2008 to 2010 | 2008| 2009| 2010| | Zhulian Berhad (RM’000)| Audit Fee| 165| 167| 177| Profit after tax| 74,690| 82,057| 86,672| Ratio audit fee of profit after tax| 0. 22%| 0. 20%| 0. 20%| Number of directors| | | | Independent| 3| 3| 3| Non-Independent| 3| 4| 5| Total| 6| 7| 8|

    Percentage of board size| 28. 57%| 33. 33%| 38. 10%| Percentage of board independence| 50. 00%| 42. 86%| 37. 50%| Percentage of board independence (average) | 33. 33%| 33. 33%| 33. 34%| Number of board meeting| 5| 4| 4| Percentage of board meeting| 38. 46%| 30. 77%| 30. 77%| Percentage of institutional shareholder| 17. 34%| 17. 34%| 17. 34%| Role Duality| 1| 1| 1| Family Ownership| 99. 67%| 99. 68%| 99. 69%| Table 6: The data of financial statement from the Zhulian Bhd from 2008 to 2010 | 2008| 2009| 2010| | Sunway City Berhad (RM’000)| Audit Fee| 713| 930| 1038|

    Profit after tax| 74,690| 865,880| 837,927| Ratio audit fee of profit after tax| 0. 95%| 0. 11%| 0. 12%| Number of directors| | | | Independent| 4| 4| 3| Non-Independent| 6| 6| 6| Total| 10| 10| 9| Percentage of board size| 34. 48%| 34. 48%| 31. 04%| Percentage of board independence| 40. 00%| 40. 00%| 33. 33%| Percentage of board independence (average) | 36. 36%| 36. 36%| 27. 27%| Number of board meeting| 7| 8| 8| Percentage of board meeting| 30. 43%| 34. 78%| 34. 78%| Percentage of institutional shareholder| 21. 28%| 32. 54%| 21. 28%| Role Duality| 0| 0| 0| Family Ownership| 0| 0| 0|

    Table 7: The data of financial statement from the Sunway City Berhad from 2008 to 2010 Chapter 4 – Result A. Board Size a. Vertical Analysis Figure 1: Percentages audit fees of profit and board size of Nestle (M) Bhd. Nestle (M) Berhad was having eight members of board size in year 2008 and 2009. However, the board size was decreased to seven members in year 2010. The percentage of audit fee to net profit after tax in year 2008 was 0. 1132% and increased to 0. 1208% in year 2009 before decreased to 0. 1086% in year 2010. This depicts there was a direct relationship between the board size and audit fees.

    Figure 2: Percentages audit fees of profit and board size of Guinness Anchor Bhd. Guinness Anchor Berhad’s board size was eight members in year 2008 and decreased to six members in year 2009 and 2010. The percentage of audit fee to profit after tax in year 2008 was 0. 0914% and decreased to 0. 0810 in year 2009 and 0. 0753%. As a result, there was a direct relationship between audit fee and board size. Figure 3: Percentages audit fees of profit and board size of Malaysian Airline System Bhd Malaysian Airline System Berhad was having eleven members n the board in year 2008 and decreased to ten members in year 2009. The board size increased back to eleven members in year 2010. The percentage of audit fee to net profit after tax was 0. 3537% in year 2008 before decreased to 0. 1673% in year 2009. In year 2010, it had increased to 0. 3855%. This circumstance leads to a direct relationship between both of them. Figure 4: Percentages audit fees of profit and board size of Sapura Resources Bhd The board size of Sapura Resources Berhad was five members I year 2008 before decreased to four members only.

    However, it comprised of seven members only in year 2010. The percentage of audit fee to profit after tax was -1. 3808% in year 2008 and further to -2. 3783% in year 2009. In year 2010, it accounted for 1. 8706%. This shows that there was a positive relationship between audit fee and board size. Figure 5: Percentages audit fees of profit and board size of Zhulian Berhad Zhulian Berhad was comprised of six members in year 2008, seven members in year 2009 before increased again to eight members in year 2010. The percentage of audit fee to profit after tax was 0. 2% in year 2008 and 0. 20% in year 2009 and 2010. There was no clear relationship exists between board size and audit fee. Figure 6: Percentages audit fees of profit and board size Sunway City Berhad Sunway City Berhad was having ten members in both year 2008 and 2009. In year 2010, it comprised of nine members in year 2010. The percentage of audit fee to profit after tax was 0. 9500% in year 2008 before decreased to 0. 1100% in year 2009. It had increased to 0. 1200% in year 2010. There was no clear relationship between board size and audit fee. Horizontal analysis

    Figure 7: Percentages audit fees of profit and percentages board independence of all 6 companies in year 2008 In year 2008, Nestle (M) Berhad and Guinness Anchor Berhad had eight members on the board, Malaysian Airline Berhad eleven members, Sapura Berhad five members, Zhulian Berhad six members, and Sunway City Berhad ten members. The percentage of audit fees to net profit of Nestle (M) Berhad was 0. 11%, Guinness Anchor Berhad 0. 09%, Malaysian Airline System Berhad 0. 35%, Sapura Resources Berhad -1. 38%, Zhulian Berhad 0. 22%, and Sunway City Berhad 0. 95%. 66. 7% of the companies had positive relationship between board size and percentage of audit fees to net profits after tax. This depicts that 33. 33% of the companies had negative relationship between board size and audit fees. Figure 8: Percentages audit fees of profit and percentages board independence of all 6 companies in year 2009 In year 2009, Sapura Resources Berhad had four members, Guinness Berhad six members, Zhulian Berhad had seven members, Nestle (M) Berhad eight members, Sunway City Berhad and Malaysian Airline System Berhad had ten members. The percentages of audit fees to net profits after tax of Sapura Resources Berhad was -2. 8%, Guinness Berhad 0. 08%, Zhulian Berhad 0. 20%, Nestle (M) Berhad 0. 12%, Sunway City Berhad 0. 11% and Malaysian Airline System Berhad 0. 17%. This circumstance depicts positive relationship between board size and audit fees. Figure 9: Percentages audit fees of profit and percentages board independence of all 6 companies in year 2010 In year 2010, Guinness Anchor Berhad had six members, Nestle (M) Berhad had seven members, Sapura Resources Berhad had seven members, Zhulian Berhad had eight members, Sunway City Berhad had nine members, Malaysian Airline System Berhad eleven members.

    The percentages of audit fees to net profits after tax of Guinness Anchor Berhad was 0. 08%, Nestle (M) Berhad was 0. 11%, Sapura Resources Berhad was 1. 87%, Zhulian Berhad was 0. 20%, Sunway City Berhad was 0. 12%, and Malaysian Airline System Berhad 0. 39%. There was no clear relationship between board size and audit fees. As our conclusion, our result is consistent with hypothesis which is positive relationship between audit fees and board size. Therefore, the hypothesis is accepted in our research. Board Meeting a. Vertical analysis

    Figure 10: Percentages audit fees of profit and board meeting of Nestle (M) Bhd. Regarding to Nestle (M) Bhd, the board meetings were remained 4 times from year 2008 to year 2010 while the percentage of audit fees to net profit increased from 0. 11% in year 2008 to 0. 12% in year 2009 and decreased to 0. 11% in year 2010. There is no obvious relationship of board meeting to percentage of audit fees to net profit. Figure 11: Percentages audit fees of profit and board meeting of Guinness Anchor Bhd. According to Guinness Anchor Bhd, the board meetings were also remained from year 2008 to year 2010 which were 4 times.

    The percentage of audit fees to net profits were only changed 0. 01% from year 2008’s 0. 09% to year 2009 and 2010’s 0. 08%. This company also did not showed clear relationship between board meetings and percentage of audit fees to net profit. Figure 12: Percentages audit fees of profit and board meeting of Malaysian Airline System Malaysian Airline System Bhd showed a negative relationship between board meeting and percentage of audit fees to net profit. When the board meetings increased from 12 times in year 2008 to 14 times in year 2009, the percentage of audit fees to net profit decreased 0. 8%. When the board meetings decreased from 14 times to 13 times in year 2010, the percentage of audit fees to net profit was increased by 0. 22% to 0. 39%. Figure 13: Percentages audit fees of profit and board meeting of Sapura Resources Bhd The relationship of meeting and percentage of audit fees to net profit in Sapura Resources Bhd is vague. The board meeting was keeping on increasing from 2008’s 5 times to 2009’s 6 times and 2010’s 8 times. However, the percentage of audit fees to net profit was decreasing from -1. 38% in year 2008 to -2. 38% in year 2009 and increased 4. 5% to 1. 87% in year 2010. Figure 14: Percentages audit fees of profit and board meeting of Zhulian Bhd Zhulian Bhd showed an inverse relationship between board meetings ad percentage of audit fees to net profit. The company’s board meeting in year 2008 was 7 times while its percentage of audit fees to net profit was 0. 95%. In 2009, the board meetings had increased 1 time to 8 times while its percentage of audit fees to net profit was decreased to 0. 11%. The number of board meeting remained in year 2010 as year 2009, which was also 8 times.

    The percentage of audit fees to net profit was almost the same with year 2009 which only increased 0. 01% to 0. 12%. Figure 15: Percentages audit fees of profit and board meeting of Sunway City Bhd In year 2008, Sunway City Berhad had held five times board meeting while its percentage of audit fees to net profit was 0. 22%. In year 2009 and 2010, the frequency of board meetings decreased to four times and its percentage of audit fees to net profits also decreased to 0. 20 and remained same in these two years. This had shown a positive relationship of board meeting to percentage of audit fees to net profit in this company.

    Horizontal Analysis Figure 16: Percentages audit fees of profit and board meeting of all 6 companies in year 2008 In year 2008, the frequencies of board meetings of Guinness Anchor Berhad and Nestle (M) Berhad 4, Sapura Resources Berhad and Zhulian Berhad 5, Sunway City Berhad 7, and Malaysian Airline System Berhad 12. The percentage of audit fees to net profit after tax was 0. 09%, Nestle (M) Berhad 0. 11%, Sapura Resources Berhad -1. 38%, Zhulian Berhad 0. 22%, Sunway City Berhad 0. 95%, Malaysian Airline System Berhad 0. 35%.

    This depicts that almost all of the companies had positive relationship between board meeting and audit fees. Figure 17: Percentages audit fees of profit and board meeting of all 6 companies in year 2009 In year 2009, the frequencies of board meeting of Guinness Anchor Berhad, Nestle (M) Berhad, and Zhulian Berhad were 4, Sapura Resources Berhad 6, Sunway City Berhad 8, and Malaysian Airline System Berhad14. The percentage of audit fees to net profit after tax of Guinness Anchor Berhad was 0. 08%, Nestle (M) Berhad 0. 12%, Zhulian Berhad 0. 20%, Sapura Resources Berhad -2. 8%, Sunway City Berhad 0. 11%, Malaysian Airline System Berhad 0. 17%. All the companies were having positive relationship between board meeting and audit fees except for Sapura Resources Berhad. Figure 18: Percentages audit fees of profit and board meeting of all 6 companies in year 2010 In year 2010, the frequencies of board meeting of Guinness Anchor Berhad, Nestle (M) Berhad, and Zhulian Berhad were 4, Sunway City Berhad and Sapura Resources Berhad were 8, and Malaysian Airline System Berhad 13. The percentage audit fees to net profit after of Guinness Anchor Berhad was 0. 8%, Nestle (M) Berhad 0. 11%, Zhulian Berhad 0. 20%, Sunway City Berhad 0. 12%, Sapura Resources Berhad 1. 87%, Malaysian Airline System Berhad 0. 39%. This circumstance depicts that 66. 67% of the companies had positive relationship and 33. 33%of the companies had inverse relationship between board meeting and audit fees. As a conclusion, hypothesis is accepted in our vertical analysis that indicates there is no clear relationship between board meeting and audit fees. The hypothesis is not accepted in horizontal analysis which indicates positive relationship.

    Role Duality a. Vertical analysis Figure 19: Percentages audit fees of profit and number role of duality of Malaysian Airline System Bhd. Malaysian Airline System Berhad’s number of role duality in year 2008 was 2 persons and decreased to one person in year 2009 and 2010. The percentage of audit fees to net profit after tax was 0. 35% in year 2008 and 0. 17% in year 2009. In year 2010, the percentage of audit fees to net profits after tax was 0. 39%. There is no clear relationship between number of role duality and percentage of audit fees to net profit after tax.

    Figure 20: Percentages audit fees of profit and number role of duality of Zhulian Bhd Zhulian Berhad’s number of role duality is one from year 2008 to year 2010. However, the percentage of audit fees to net profit after tax was 0. 22% in year 2008. In year 2009 and 2010, the percentages of audit fees to net profits were 0. 20%. This shows that there is no clear relationship. Horizontal analysis Figure 21: Percentages audit fees of profit and number role of duality of all 2 companies in year 2008 In year 2008, the number of role duality of Zhulian Berhad was one and Malaysian Airline System Berhad two.

    The percentage of audit fees to net profit after tax of Zhulian Berhad was 0. 22% and Malaisian Airline System Berhad 0. 35%. There exist a positive relationship between role duality and audit fees. Figure 22: Percentages audit fees of profit and number role of duality of 2 companies in year 2009 In year 2009, the number of role duality of Malaysian Airline System Berhad and Zhulian Berhad were one. The percentage of the audit fees to net profit after tax of Malaysian Airline System Berhad was 0. 17% and Zhulian Berhad 0. 20%. There exist a positive relationship between role duality and audit fees.

    Figure 23: Percentages audit fees of profit and number role of duality of 2 companies in year 2010 In year 2010, the number of role duality of Zhulian Berhad and Malaysian Airline System Berhad were one. The percentage of audit fees to net profit after tax of Zhulian Berhad was 0. 20% and Malaysian Airline System 0. 39%. There exist a positive relationship between role duality and audit fees. As our conclusion, hypothesis is accepted where the result finding indicates that positive relationship is existed between role duality and audit fees. Family Ownership . Vertical analysis Figure 24: Percentages audit fees of profit and and percentage of family ownerships of Zhulian Bhd Zhulian Berhad’s percentage of family ownership was 99. 67% in year 2008 and keeps increasing to 99. 68% and 99. 69% in year 2009 and 2010. In year 2008, the percentage of audit fees to net profit after tax was 0. 22%. In year 2009 and 2010, the percentage of audit fees to net profit after tax was 0. 20%. There is an inverse relationship between percentage of family ownership and percentage of audit fees to net profit after tax.

    As a conclusion, our hypothesis is rejected because our research finding is inverse relationship as oppose to the positive relationship in the hypothesis. Board independence a. Vertical analysis Figure 25: Percentages audit fees of profit and percentages board independence of Nestle (M) Bhd. Nestle (M) Berhad‘s percentage of board independence was 62. 50% in year 2008 as compare to 50% in year 2009. The percentage of board independence increased to 57. 14% in year 2010. On the same time, the percentage of the audit fees to net profit was 0. 11% in year. It had increase to 0. 12% in year 2009 before dropped to 0. 1% in year 2010. This was trend shows that there was an inverse relationship between the percentages of board independence and percentage of audit fees to net profit after tax. Figure 26: Percentages audit fees of profit and percentages board independence of Guinness Anchor Bhd. The percentage of board independence in Guinness Anchor Berhad was 75% in year 2008 before decreased to 66. 67% in both subsequent year of 2009 and 2010. The percentage of audit fees to net profit was 0. 09% in year 2008. In the same direction, percentage of audit fees to profit after tax was also 0. 8% in both year of 2009 and 2010. This was situation depicts a positive relationship between percentage of board independence and percentage of audit fees to profit after tax. Figure 27: Percentages audit fees of profit and percentages board independence of Malaysian Airline System Bhd. Malaysian Airline System Berhad’s percentage of board independence was 45. 45% in year 2008 and decreased to 40% in year 2009. However, it had increased to 45. 45% in year 2010. Meanwhile, the percentage of audit fees to profit after tax was 0. 35% in year 2008. It had decreased to 0. 17% in year 2009 before increased to 0. 9% in year 2010. This shows that it was a direct relationship between percentage of board of independence and percentage of audit fee to net profit after tax. Figure 28: Percentages audit fees of profit and percentages board independence of Sapura Resources Bhd In year 2008, Sapura Resource Berhad was having 40% of board independence before increased to 50% in year 2009. In year 2010, it continues increased to 71. 43%. The percentage of audit fees to net profit after tax was -1. 38% and -. 2. 38% in year 2008 and 2009 respectively. It had increased to 1. 87% in year 2010.

    This shows that there was no clear relationship between percentages of board of independence and percentage of audit fee to net profit after tax Figure 29: Percentages audit fees of profit and percentages board independence of Zhulian Bhd Zhulian Berhad’s percentage of board in dependence was 50% in year 2008 and 42. 86% in year 2009. In year 2010, it had decreased to 37. 50%. The percentage of audit fees to net profit after tax was 0. 22% in year 2008 and 0. 20% in both year of 2009 and 2010. There was a negative relationship between percentages of board of independence and percentage of audit fee to net profit after tax.

    Figure 30: Percentages audit fees of profit and percentages board independence of Sunway City Berhad In year 2008 and 2009, Sunway City Berhad percentage of board independence was 40%. The percentage of board independence was 33. 33% in year 2010. The percentage of audit fees to net profit after tax was 0. 95% in year 2008, 0. 11% in year 2009, and 0. 12% in year 0. 12%. This was shows that there was an inverse relationship between percentages of board of independence and percentage of audit fee to net profit after tax. Horizontal Analysis

    Figure 31: Percentages audit fees of profit and percentages board independence of all companies in year 2008 In year 2008, the percentage of board independence of Sapura Resources Berhad and Sunway City Berhad had 40%, Malaysian Airlines System Berhad 45. 45%, Zhulian Berhad 50. 00%, Nestle (M) Berhad 62. 50% and Guinness Anchor Berhad 75. 00%. The percentage of audit fees to net profits after tax of Sapura Resources Berhad was -1. 38%, Sunway City Berhad 0. 95%, Malaysian Airline System Berhad 0. 35%, Zhulian Berhad 0. 22%, Nestle (M) Berhad 0. 11%, and Guinness Anchor Berhad 0. 9%. There was 66. 67% of the companies had inverse relationship and 33. 33% of the companies had no clear relationship between board independence and audit fees. Figure 32: Percentages audit fees of profit and percentages board independence of all companies in year 2009 In year 2009, Sunway City Berhad’s board independence percentage was 36%, Malaysian Airline System Berhad 40%, Zhulian Berhad 43%, Sapura Resources Berhad and Nestle Berhad 50% and Guinness Anchor Berhad 67%. The percentage of audit fees to net profits after tax of Sunway City Berhad was 0. 1%, Malaysian Airline System Berhad 0. 17%, Zhulian Berhad 0. 20%, Sapura Resources Berhad-2. 38%, Nestle Berhad 0. 12%, and Guinness Anchor Berhad 0. 08%. There was no clear relationship between board independence and audit fees. Figure 33: Percentages audit fees of profit and percentages board independence of all companies in year 2010 In year 2010, Sunway City Berhad board independence percentage was 27. 27%, Zhulian Berhad 37. 50%, Malaysian Airline System Berhad 45. 45%, Nestle (M) Berhad 57. 14%, Guinness Anchor Berhad 66. 67%, and Sapura Resources Berhad71. 43%.

    The percentage of audit fees to net profits after tax of Sunway City Berhad was 0. 12%, Zhulian Berhad 0. 20%, Malaysian Airline System Berhad 0. 39%, Nestle (M) Berhad 0. 11%, Guinness Anchor Berhad 0. 08%, Sapura Resources Berhad 1. 87%. This depicts that most of the companies was having a positive relationship between board independence and audit fees. As a conclusion, our result finding indicates that there is a negative relationship between board independence and audit fees which is consistent with the hypothesis. Thus, hypothesis is accepted. Institutional shareholders a.

    Vertical analysis Figure 34: Percentages audit fees of profit and percentages of institutional investors of Nestle (M) Bhd. According to annual reports of Nestle (M) Berhad, the relationship of percentages of institutional investors and percentages of audit fees to net profits is not clear enough. In year 2008, the percentage of institutional investors was 6. 87% while its percentage of audit fees to net profit was 0. 11%. In year 2009, the percentage of institutional investors was remained 6. 87% as year 2008 but its percentage of audit fees to net profit was increased to 0. 12%.

    In year 2010, the percentage of institutional investors was increased to 7. 65% while its percentage of audit fees to net profit was decreased to 0. 11%. Figure 35: Percentages audit fees of profit and percentages of institutional investors of Guinness Anchor Berhad The relationship of percentage of institutional investors and percentage of audit fees to net profit of Guinness Anchor Berhad was unclear. When the percentage of institutional investors reduced from 5. 11% in year 2008 to 3. 38% in year 2009, the percentage of audit fees to net profit was decreased to 0. 08% from 0. 9%. In year 2010, the percentage of institutional investors increased 0. 42% to 3. 80% while the percentage of audit fees to net profit remain unchanged from 2009 to 2010 which was 0. 08%. Figure 36: Percentages audit fees of profit and percentages of institutional investors of Malaysian Airline System Bhd. Regarding to Malaysian Airlne System Berhad, the institutional investors hold 14. 33% of shares in year 2008 when the percentage of audit fees to net profit was 0. 35%. In year 2009, the institutional investors’ shareholding was slightly decreased from 14. 33% to 14. 8% and the percentage of audit fees to net profit was decreasing to 0. 17%. In year 2010, the shareholding of institutional shareholders remained as year 2009’s but its percentage of audit fees to net profit was increased to 0. 39%. The relationship between percentages of institutional investors with percentage of audit fees to net profit was not clear. Figure 37: Percentages audit fees of profit and percentages of institutional investors of Sapura Resources Bhd According to annual reports of Sapura Resources Berhad, the percentages of institutional investors were remained between 2008 and year 2010 which was 1. 46%.

    However, the company’s percentage of audit fees to net profit experienced mild fluctuations in these three years. The percentage of audit fees to net profit decreased from -1. 38% from year 2008 to -2. 38% in year 2009 and increased to 1. 87% in year 2010. There is ambiguous relationship between percentages of institutional investors and percentage of audit fees to net profit. Figure 38: Percentages audit fees of profit and percentages of institutional investors of Zhulian Bhd Relationship between percentages of institutional investors with percentage of audit fees to net profit is not so obvious in Zhulian Berhad.

    The percentages of institutional investors remained between 2008 and 2010 which was 17. 34%. The percentage of audit fees to net profit only had mild changes in these few years. The percentage of audit fees to net profit in year 2008 was 0. 22% and decreased to 0. 20% in year 2009 and remained in year 2010. Figure 39: Percentages audit fees of profit and percentages of institutional investors of Sunway City Bhd In 2008, Sunway City Berhad’s institutional shareholders hold 21. 28% in year 2008 when the percentage of audit fees to net profit was 0. 95%. When the percentage of institutional investors increased to 32. 4% in year 2009, the percentage of audit fees to net profit decreased sharply to 0. 11%. In year 2010, the percentage of audit fees to net profit was increased to 0. 12% when the percentage of institutional investors decreased to 21. 28%. The relationship between percentages of institutional investors and percentage of audit fees to net profit was not clear. Horizontal analysis Figure 40: Percentages audit fees of profit and percentages of institutional investors of all companies in year 2008 In year 2008, Sapura Resources Berhad’s percentage of institutional investors was 1. 46%, Guinness Anchor Berhad 5. 1%, Nestle (M) Berhad 6. 87%, Malaysian Airline System Berhad 14. 33%, Zhulian Berhad 17. 34%, and Sunway City Berhad 21. 28%. The percentage of audit fees to net profit after tax of Sapura Resources Berhad was 1. 38%, Guinness Anchor Berhad 0. 09%, Nestle (M) Berhad 0. 11%, Malaysian Airline System Berhad 0. 35%, Zhulian Berhad 0. 22%, Sunway City Berhad 0. 95%. All the companies were having positive relationship between institutional investors and audit fees except for Zhulian Berhad. Figure 41: Percentages audit fees of profit and percentages of institutional investors of all companies in year 2009

    In year 2009, the percentage of institutional investors of Sapura Resources Berhad was 1. 46%, Guinness Anchor Berhad 3. 38%, Neslte (M) Berhad 6. 87%, Malaysian Airline System Berhad 14. 08%, Zhulian Berhad 17. 34%, and Sunway City Berhad 32. 54%. The percentage of audit fees to net profit after tax of Sapura Resouces was -2. 38%, Guinness Anchor Berhad 0. 08%, Nestle (M) Berhad 7. 65%, Malaysian Airline System Berhad 0. 17%, Zhulian Berhad 0. 20%, and Sunway City Berhad 0. 11%. There is no any clear relationship between institutional investors and audit fees.

    Figure 42: Percentages audit fees of profit and percentages of institutional investors of all companies in year 2010 In year 2010, the percentage of institutional investors of Sapura Resources Berhad was 1. 46%, Guinness Anchor Berhad 3. 80%, Nestle (M) Berhad 7. 65%, Malaysian Airline System Berhad 14. 08%, Zhulian Berhad 17. 34%, and Sunway City Berhad 21. 28%. The percentage of audit fees to net profits after tax of Sapura Resources Berhad was 1. 87%, Guinness Anchor Berhad 0. 08%, Nestle (M) Berhad 0. 11%, Malaysian Airline System Berhad 38. 55%, Zhulian Berhad 20. 0%, and Sunway City Berhad 0. 12%. There is no any clear relationship between institutional investors and audit fees. There is a positive relationship between board meeting and audit fees in our horizontal analysis. Whereas, in our vertical analysis there is no clear relationship between board meeting and audit fees. Our hypothesis is accepted in vertical analysis but rejected in horizontal analysis. Chapter 5 – Discussion and Conclusion A. Discussion: a. Board Size After we did our vertical and horizontal analysis, we realized that there is a direct relationship between board size and audit fees.

    The range of the board size is from four to eleven members. This difference is due to the variety in business nature and structure. We test the relationship between board size and audit fees based on net profit. The direct relationship shows that when board size increase, audit fees will increase also. This may due to board members imposed responsibilities on the audit tasks of the auditor. They may request the auditor to perform deeper auditing due to higher possibility of fraudulent activities. This leads to higher control risk thus, more audit procedures need to be carried out to reduce detection risks.

    According to Lipton & Lorch (1992) and Jensen (1993), the smaller the board size of committee, cost cutting and downsizing can be achieved. The role of board committee is increasingly becomes more symbolic. The process of coordination between board members when decision is to be made become more task challenging as the board members have got diverse points of opinion, experience, skills, gender, and the ways of doing things. Board Meeting: Based on our finding in horizontal analysis, there is a positive relationship between board meeting and audit fees while in the vertical analysis there is no clear relationship.

    Since our hypothesis state that there is a no clear relationship between board meeting and audit fees, our result finding in vertical analysis support with the hypothesis. When the number of board meeting increase, the audit fees tend to be high. This is because there is more frequent in checking the reliability if the financial statements by the board members. The inherent risk and control risk tend to be higher when board conducting more times of meeting. Thus, auditor needs to carry out more audit procedure to verify the correctness of the disclosure. As a result, audit fees increase and detection risk will decrease.

    Role Duality: Based on our result finding in horizontal analysis, there is a positive relationship between role duality and audit fees. Our hypothesis showed that there are positive relationship between role duality and audit fees. Therefore, the result is in line with hypothesis made. When the director holds more than one position in the company, role duality circumstance occurs. Control risk will increase because agency problem arise and lead to conflict of interest. There is high possibility of the directors in making decision for their own best interest at the expense of the company interest.

    Therefore, when the number of director involved in role duality increase, audit fees will also increase due to more audit procedures need to be carried out. Family Ownership: Based on our vertical research finding, there is a positive relationship between family ownership and audit fees. When the percentage of family ownership increases, the audit fees tend to increase too. This is because high shareholding concentrated in the family will lead to collusion between family members in conducting business affairs illegally. For instance, this situation facilitates them to take profits of the company as private income.

    This may sacrifice the interest of the other shareholders. Board independence Our research result indicates there is negative relationship between board independence and audit fees which is consistent with the hypothesis that we made. According to the Malaysian Code of Corporate Governance, a board must has at least 1/3 independent board members. All companies in our research fulfill this minimum requirement set by the regulatory authorities. This is because the likelihood of committing fraud can be reduced and less audit procedures need to be carried out when the percentage of independence directors increase.

    The risk of misstating financial statements can be minimized, because independent directors will over view the disclosure of the financial information in the financial statements. Thus, it is reliable to be relied by the users of the financial statements to make respective decision. We test the relationship between percentage of independence directors and audit fees based on net profit. Institutional Investor: Based on our result finding, there is no clear relationship between institutional investors and audit fees in the vertical analysis.

    This is because institutional investors do not have any related relationship with the audit fees. However, horizontal analysis indicates positive relationship between institutional investors and audit fees. This is because institutional investors will impose pressure in carry out high quality auditing process in term of our horizontal analysis. When the pressure imposed on the auditors increase, auditor need to carry out more substantive auditing procedures to detect the material misstatement in order to decrease the inherent risk while the control risk is high.

    This way can ensure that their benefit of interest is not been threatened by the possibility of the occurrence of fraud incidence. Conclusion: We noticed that our result finding may not in the same direction with others research findings. This may due to the company samples chosen in the analysis. The different structures of corporate governance may affect the result. We cannot perform the population analysis due to the impossibilities in time and expenses involved. Thus, we choose the public listed companies randomly. From our analysis completed, there is no clear relationship between board meeting and audit fees.

    There is negative relationship existed between board independence, family ownership and audit fees. On the other hand, board size and role duality has a positive relationship with the audit fees. In term of the institutional investors, our vertical analysis indicates has a not clear relationship while horizontal analysis indicates positive relationship. ——————————————– [ 1 ]. Dr. Roselina Shakir ,”BOARD SIZE, BOARD COMPOSITION AND PROPERTY FIRM PERFORMANCE”, Department of Estate Management, Faculty of Built Environment, Universiti Malaya [ 2 ].

    Fazilah Abdul Samad, “Corporate Governance Mechanisms and Performance of Public-Listed Family-Ownership in Malaysia”, Faculty of Business & Accountancy, Universiti Malaya [ 3 ]. Nikos Vafeas, “Board meeting frequency and firm performance “Department of Public and Business Administration, University of Cyprus, Nicosia, 1678, Cyprus [ 4 ]. Chau Mat Lo, Dillian, “How a company’s level of Corporate Governance affects external Audit Fees? “, Hong Kong Baptist University [ 5 ]. Carcello et al. (2002) find a significant positive association between audit fees and the proportion of outside directors on the board, uggesting that outside directors who act diligently demand a higher quality audit. [ 6 ]. Kurt A. Desender, ” Board characteristics and audit fees: why ownership structure matters? ” Department of Business Economics, Universidad Carlos III [ 7 ]. Miguel A. Garcia? Cestona, “Board characteristics and audit fees: why ownership structure matters? ” Universitat Autonoma de Barcelona. [ 8 ]. Gerrit Sarens, “The association between corporate governance guidelines and risk management and internal control practices”, Louvain School of Management, Universite?

    Catholique de Louvain [ 9 ]. W. Robert Knechel and Marleen Willekens, “The Role of Risk Management and Governance in Determining Audit Demand”, Journal of Business Finance & Accounting, 33(9) & (10), 1344–1367, November/December 2006 [ 10 ]. Fazilah M. Abdul Samad, “CORPORATE GOVERNANCE AND AGENCY COSTS”, Faculty of Business and Accountancy, Universiti Malaya (UM) [ 11 ]. Paul Andre, “Family Ownership, Agency Problems, Corporate Governance and Acquiring Firm Shareholder Wealth: Evidence from Acquisitions of New Economy Firms”, ESSEC Business School Paris, France [ 12 ].

    Arifur Khan & Nava Subramaniam, “Family firm, audit fee and auditor choice: Australian evidence”, School of Accounting, Economics and Finance, Deakin University, Australia [ 13 ]. Jiu-Young Jian, The Effects of Auditing Quality and of Independent Directors & Supervisors on the Interest Cost of Newly Issued Corporate Bonds, Department of Accounting, National Yunlin University of Science and Technology [ 14 ]. Malaysian Accounting Review, Volume 5, No. 2,October 2006 [ 15 ]. Mazlina Mat Zain, Institutional investors, political connection and audit quality in Malaysia , Faculty of Management, Multimedia University, Cyberjaya, Malaysia,

    The Determinant of Audit Fees. (2017, Jan 16). Retrieved from https://graduateway.com/the-determinant-of-audit-fees/

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