Overview and relevant information on audit committee in Malaysia

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This section provides an overview and relevant information on audit committee in Malaysian public listed companies. In addition, this section also describes the establishment of the audit committee in Malaysia and when the audit committee embarks on to be an important component in a company. The main objective that drives through this study is to examine the relationship between the audit committee characteristics with the performance of the company in this entire study.

1.2 Corporate Governance and Audit Committee

The argument on Corporate Governance in Malaysia, as well as in other East Asian countries, has been further concerned since the economy down turn in East Asian in the second half of 1997. At that exacting point, concern and recognition of Corporate Governance to the public and private sector in those countries was being a major issue conferred.

In Malaysia, financial crisis commenced when the nearer neighbor, Thailand was facing the currency deflation and resulting the investors retook their funds as they have lost confidence in making investment in the country. Due to that matter, the nearest countries such as Malaysia, Indonesia and Philiphine were affected as well. As for Malaysia itself, the deflation had become elevated, causing higher interest rate and credit tightening. This phenomenon has created tough contractions in productivity and business profitability has become worst and stock prices were down. The Bursa Malaysia Index has declined for quite a period; from June 1997 to August 1998. Real estate industry markets have been declined sharply due to high interest rates and other crisis that occurred. The financial industry, such as bank, was also affected badly as it is classified into that industry in term of providing loans. The attrition of investors' confidence was recognized as one of the major factors that exacerbated the financial crisis in Malaysia and other Asian countries. Noordin (1999), argued that the erosion of investors' confidence in Malaysia was brought about by the country's poor corporate governance standards and a lack of transparency in the financial system.

As the investment and profitability have declined and decreased, this crisis can be affirmed that it is due the corporation failure to standardize good quality governance. Corporate governance effectiveness becomes tool as an assurance in protecting the welfare of investor, which protect the investment and ensure that the investors will earn potential return. Scheifer and Vishny (1997) argue that corporate governance mechanisms protect investors who invest in organizations, and the investor will receive adequate returns in their investments. As the crisis in 1997 occurred, it, in fact, affected the value of the investment as efforts on shareholders security were insufficient. The result to poor governance in both private and government-owned companies caused the East Asian financial crisis occurred. In Asia, most companies tend to follow the "insider" model, which the major shareholder will control the company (Aik leng and Abu Mansor, 2005).

Due to the pressure of financial crisis struck, many companies suffered loss and down turn. A factor that caused those companies did not survive in facing the world financial problems was due to the inefficient in making decision of company governance itself. Self-government in Malaysia has provided a guideline to assist companies in Malaysia to govern companies well.

Report on Corporate Governance (2007) defines Corporate Governance in Malaysia as: "Corporate governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value, whilst taking account the interests of other stakeholders". The above definition indicates that corporate governance is not only useful to the shareholders but for all the stakeholders as well. Corporate governance is a significant component in achieving the highest return from the investment that has been made.

One of the parts in the governance structure is the Audit Committee. The Audit Committee obtained a lot of publicity in the middle of corporate accountability for the investment community. The issue of mandatory audit committee formation and how to improve the effectiveness of audit committee is always discussing. One of the most authoritative contributions towards this cause was the Blue Ribbon Committee Report (BRC). The audit committee is increasingly becoming important as a part of corporate governance across the global market economy was seen as a monitoring mechanism. The study argues that the existence of audit committees reduce the likelihood of management decisions that compromise the interest of shareholders of their actions and decisions that are being monitored by the audit committee. This is expected to reduce the possibility of resource companies invested in projects that are not productive or motivated to go to satisfy the interests of self-management personnel in order to improve its operational effectiveness and efficiency. The yield on assets (ROA) was used to substitute for effective and efficient operations. There is also empirical support for this argument. For example, Chan and Li (2008) review the sample of Fortune 200 companies and found that the audit committee was able to increase its value.

It is a fact accepted that the audit committee function effectively in the corporate sector will contribute to the nurturing of good corporate governance and improve the quality of financial reporting. This situation occurs if all audit committee members of committees cooperate with all parties and carry out work properly and efficiently. This is supported by, Simnet et al. (1993) found that audit committees can improve, or at least maintain the quality of financial reporting process, helping the real and perceived independence of internal and external auditors and to enhance consumer confidence in the financial reporting aspects of the quality of financial reporting. Therefore, there is an important requirement for the Audit Committee Report (ACR) to increase the transparency of the oversight committee in the financial reporting process, to provide additional motivation for the members of the committee to effectively discharge their duties, and to increase the confidence of investors to invest in the company (Carcello et al, 2002)..

Charter of the Audit Committee is to determine the responsibility of the audit committee report found on most companies. However, what actually the audit committee may deviate from what they should do (Carcello et al 2002). Furthermore, studies performed by Menon and Williams (1994) found that many companies have voluntarily established audit committees, not really rely on them. In other words, the audit committee may be there just for the picture. Thus, no information about any of the audit committee has done, is still not possible to conclude what has contributed towards good corporate governance, and also makes them serve the greater certainty to shareholders that the information reported can be trusted.