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Corporate governance in Malaysia came into the attention following the Asian Financial Crisis in 1997-1998 where Malaysian Government further strengthened its corporate governance standards (Ng, 2006; Singam, 2003). Corporate governance is basically a system by which companies are directed and controlled. It is often being viewed as both structure and relationships which influences the setting of a company's objectives, monitoring of risks by monitoring those parties who in charge of the resources owned by investors and require an account of their stewardship of those resources and to optimize the corporate performance (Ritchie, 1995; Kaplan Publishing, 2008). Good corporate structure could help companies to create value of the shareholders legally, ethically and on a sustainable basis (Shil, 2008).
Accounting is a process of gathering information for internal affairs' reporting purpose of an entity over an accounting period to different stakeholders. Thus, it is defined as the 'language of business" which communicates its result and position to stakeholders and plays a vital role for ensuring and retaining good corporate governance (Demand Media, Inc, 2010; Cal State Fullerton, 2009). In practice, accounting is highly controlled by accounting standards. This has brought accounting to a higher level of international discipline while the accounting practice is in line with the varied needs of stakeholders (Shil, 2008). Thus, it has clearly shown the interrelationship between accounting and corporate governance.
The latest accounting scandal in Transmile Group Bhd in Malaysia has sparked of concern regarding the importance of accounting. The revenue and profits are falsified through creative accounting which indicates 3 structural failures in regulatory oversight and full disclosure of our capital markets, unreliability of financial statements and poor corporate governance in Malaysia (Lim, 2007). The company has overstated its accounts to show it has made profits but in fact, the company has suffered a net loss (Corporate Governance and Financial Reporting Centre, 2007; Krishnan, 2007). Therefore, auditing plays a critical role in order to provide a high level of assurance about an accountability matter which is expressed as reasonable assurance (Kaplan Publishing, 2009). Auditors are now obliged to take a much stricter approach on their clients whereby their duties and obligations have expanded for the sake of capital market, stability of financial and economic sector and the varied interest from different stakeholders (Krishnan, 2007).
As for such, having good corporate governance could build up the public confidence in a corporation while lowering the cost of capital for investment (Shil, 2008). For instance, nearly all companies agreed that corporate governance is a key component in their investment decisions especially in the assessing of finance. According to International Finance Corporation, there are several examples of companies benefiting from improved performance and access to capital and valuation premiums. There is one investor cited a 40% market premium due to governance changes. Nowadays, corporate governance is kind of pride in business world; nevertheless, accounting does play an important role in establishing and retaining corporate governance (IFC.org, 2010).
1.1 Corporate governance and the disclosure environment in Malaysia
The onslaught of East Asian crisis and high profile scandals not only resulted in the loss of investor confidence but it is largely due to the weak corporate governance in many firms in this region (Mitton, 2002; Tan, 2000; Mishra, Randoy and Jensen, 2001). Thus, it has brought into focus that the need to enhance the standards of corporate governance in Malaysia. This has led to the demand to increase the disclosure of information which results in higher firm value and lower asymmetric information (Akhtaruddin et.al, 2009). With higher firm value, investors are willing to pay higher premiums for higher disclosure.
Financial reporting or disclosure quality is being treated as one of the mechanism in assessing the corporate governance of a firm (Zulkafli, Samad and Ismail, 2004), while Kadir (2002) stated that accounting is considered as a regulator in ensuring that companies exercise disclosure and transparent practices. This has supported the primary objective in corporate governance which contribute to improved corporate performance and accountability in creating long-term shareholder value (Kaplan Publishing, 2008). Accounting profession is responsible in safeguarding the quality of information disseminated to all stakeholders. This is where financial statements preparers will consider on providing useful information which is beyond the minimum requirements in order to create greater long-term value and fulfilling those investors' needs (Kadir, 2002).
1.2 Evidence on the improvement in Malaysia's corporate governance
In addition, accounting profession has done reasonably well job where there is an improvement in Malaysia's corporate governance rankings over the years. One of the major contributors to the higher scores was the quality of Malaysia's financial reporting standards. CLSA Asia-Pacific Markets (CLSA) has upgraded its scores for Malaysia's accounting standards from 5.0 in 2001 to 9.0 in 2004 (Anwar, 2004). Furthermore, Malaysia achieves a score of 51.67 out of 100 in the Financial Standards Index in 2010 which showing a high level of transparency in terms of disclosing its adherence to the international standards (The Financial Standards Foundation, 2010). A critical example is Public Bank Berhad which won the Overall Excellence Award of the Malaysian Corporate Governance Index 2009 (MCG Index) for their achievements in practising the highest level of corporate governance standard (Public Bank Berhad, 2010; MIA Resource Centre, 2009). The MCG Index tracks the level of corporate governance of Malaysian listed companies on the stock exchange (Yap, 2009). The Board of Directors of Public Bank not only highly exercising the principles of corporate governance but well exceeds mandatory requirements, particularly in terms of the extent and timeliness of corporate disclosure and financial reporting (Teh, 2008). The top 100 companies on Bursa Malaysia also scored an average of 64.36% out of 100% in the MCG Index 2009 (Yap, 2009). This showed that the 100 companies have been practising good corporate governance all the while.
Many successful organizations worldwide use management accounting to create value and increase their business performance. National Award for Management Accounting (NAfMA) in Malaysia has shown the importance of accounting in corporate governance (Malaysian Institute of Accountants, 2009). It is a step towards corporate excellence and good corporate governance in Malaysian companies. Management accounting serves as a key element in strategic business planning, which includes the efficient allocation of resources to achieve their corporate direction and vision (Camponovo, 2004; Ng, 2006). Moreover, it plays a critical role in fostering a culture of transparency and accountability in the business sector (Sulaiman, Omar and Rahman, 2005; Chemical Company of Malaysia Berhad, 2006).
1.3 Research objectives
This study examines the role of accounting which is mainly derived from accounting conservatism, forensic accounting, auditing and voluntary disclosure in corporate governance.
Accounting conservatism is an efficient financial mechanism which companies normally use to limit the risks in their accounting information. It used to anticipate no profit but anticipate all significant losses. This has provided stakeholders with information regarding the company's financial position without misleading them. In accounting conservatism, all revenues reported in financial statements will only be recognised once it is realisable. This is to ensure the company does not overstate on their revenue. Moreover, accounting conservative approach records higher allowances for doubtful debts in order to ensure that the company has an accurate future outlook for cash collections (Vitez, 2010). Accounting conservatism also ensures that company's value is not being overinflated in order to produce a clear picture on the company's financial information. Normally, a strong corporate governance firm tends to have high level of accounting conservatism. This can be shown by accounting conservatism which provides bad news serving as early-warning signals for the firm to further investigate on the reasons for the bad news.
Forensic accounting has become as important recently in Malaysia as it is quite new and many firms have now realized the importance of having forensic accounting as regards to the increasing fraud cases. It is generally a combination of financial skills and investigative mentality to unresolved issues, conducted within the context of the rules of evidence (Ibrahim and Abdullah, 2007). Forensic accountants are required to have a sound knowledge on finance, frauds and basic understanding of business reality and the working of legal system. Forensic accounting arises from the failure of audit system in companies and from the effect of fraud. As a result, forensic accounting is important as it provides an accounting analysis that assist investigators in legal matters and also preventing other frauds to happen.
Generally, Company Act 1990 has required all companies to have an external auditing. Shareholders of a company only own the shares in the company but could not control the running of a company. However, directors are accountable to the shareholders in making decisions on behalf of the shareholders and using the resources of the company efficiently and effectively. Therefore, auditors are there to ensure that directors of the company do things according to the company's need. Auditors are given powers to detect any wrongdoings by the management of a company. The auditors are able to remove biasness in the companies through the examination on the presentation of company's financial information. In addition, internal auditing does a pretty nice job in corporate governance whereby it monitors the internal control of an entity. They are able to report to which extent a company practices their corporate governance. In another words, auditing is the guardian of the company's financial integrity.
The voluntary accounting disclosure helps shareholders and investors to know how the directors are actually performing and also getting closer to the company's affairs. Accounting disclosure in Malaysian listed firms is largely influenced by the disclosure requirements set by regulatory authorities in order to improve the quality of disclosure. Financial statements generally prepared by directors using accrual accounting in disseminating company's information which intended to provide shareholders and investors with a better understanding on their company's performance and financial position with the accrual estimates (Chooi, 2006). The use of accruals has brought to highly favourable accounting disclosure. Having an adequate and reliable accounting disclosure could assist stakeholders in receiving information which largely influences their decision making.