internal auditors' perceptions of audit committee function and effectiveness: some malaysian...

Internal Auditor Perceptions on AuditCommittee Interactions: a qualitativestudy in Malaysian publiccorporations

Mazlina Mat Zain and Nava Subramaniam*

Audit committees (AC) and the internal audit function (IAF) are two key corporate governancemechanisms. The primary objective of this study is to provide insights into internal auditors’perceptions of their interactions with AC members in Malaysia. The paper thus contributes tothe extant literature by providing additional evidence from a South-east Asian country whichis recognised as being characterised with a high power distance culture and a developingcapital market. The findings are based on in-depth interviews of the heads of the internal auditfunction (HIAFs) from 11 publicly listed companies. The results indicate infrequent informalcommunications and limited private meetings between the HIAFs and ACs, and a need forclear reporting lines. Further, ACs are seen to be held in high esteem for their authority and areexpected to take on greater leadership in the inquiry of management’s decision-making. Thesefindings highlight the importance of the leadership role of ACs in supporting the IAF.

Keywords: Internal auditing, audit committees, corporate governance, independent directors

Introduction

A udit committees (ACs) and the internalaudit function (IAF) are two key facets of

the corporate governance mosaic that haveattracted considerable attention in recentyears. Gramling et al. (2004) and Cohen et al.(2004) in their recent reviews of the gover-nance role of the IAF and AC within organi-sations have specifically called for furtherresearch to identify organisational factors andaudit processes that promote effective IAF andAC relationships. Such evidence is critical asa more productive relationship between theIAF and ACs is likely to improve the quality offinancial reporting and related governanceprocesses within organisations (Gramling et al.,2004; Turley and Zaman, 2004). Further, it isargued that “a quality relationship between theIAF and the AC also works towards providingthe IAF with an appropriate environment andsupport system for carrying out its owngovernance-related activities (e.g. risk assess-

ment, control assurance and compliancework)” (Gramling et al., 2004, p. 198).

Our literature review indicates that priorstudies examining AC interactions with inter-nal auditors’ effectiveness have largely focusedon the composition of the AC (Goodwin andYeo, 2001; Raghunandan et al., 2001; Scar-brough et al., 1998). In general, much of theevidence suggests that ACs with greater inde-pendence and members with financial exper-tise interact more extensively with internalauditors. For example, ACs with greater inde-pendence tended to hold more frequent,longer and private meetings with the Heads ofthe IAF (HIAFs), as well as undertake morein-depth reviews of the internal audit pro-gramme and its results than those ACs withlower independence (Scarbrough et al., 1998;Raghunandan et al., 2001; Goodwin and Yeo,2001). However, much of the evidence in thisarea is largely based on questionnaire surveysundertaken in strong and sophisticated capitalmarkets, e.g. the USA, Canada and Australia

*Address for correspondence:Department of Accounting,Finance and Economics, Grif-fith University, PMB 50, GoldCoast Mail Centre, Southport,QLD 4214, Australia. Tel: 075552 8769; Fax: 07 5552 8068;E-mail: [email protected]

894 CORPORATE GOVERNANCE

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(Leung et al., 2004; Raghunandan et al., 2001;Scarbrough et al., 1998). Goodwin and Yeo(2001) argue that there is “a need for cautionand for more research across diverse regu-latory environments and different culturesbefore meaningful theory development can beundertaken” (p. 118). In particular, in countrieswhere capital markets are still emerging, thepracticalities of establishing more sophisti-cated governance systems can be impededby a lack of technological know-how andexperience.

In addition, national cultural nuances mayalso influence how internal auditors undertakefrank and open discussions about senior man-agement with audit committees. For example,the dimension of power distance as identifiedby Hofstede (1981) has been noted by previousresearchers as a significant factor affectingmanagerial behaviour (Kelley et al., 1987).1Managers in high power distance countries(such as those in the South-east Asian region)tend to be more autocratic and less willingto share their decision-making power withothers, especially subordinates. By contrast,managers in low power distance countriessuch as the UK, USA and Australia are morelikely to delegate decision-making power andto consult with peers and subordinates. Thus,it is possible that in high power distance coun-tries, criticisms of senior management may beconstrued as disrespectful, or perhaps even asinsubordination. Furthermore, Cohen et al.(2004) argue that cultural variations potentiallyimpact on corporate governance in multina-tional settings and predict that in “some othercultures, corporate governance mechanismsmay be merely symbolic and . . . the courts andlegal system may be more important in ensur-ing effective governance” (p. 145). This papercontributes to the corporate governanceliterature by examining internal auditors’ per-ceptions of their relationship with ACs inMalaysia where the capital market is stilldeveloping and power distance is high.2 Inparticular, the paper informs on the factorsthat may further enhance the interface be-tween the two key governance mechanismsfrom a broader international context.

The present study

This study adopts a qualitative research ap-proach using interview data from 11 HIAFsin large publicly-listed companies in Malaysia.Specifically, internal auditors’ perceptions ontheir interactions with ACs are examinedaround three main issues. First, we reviewHIAF views on ACs’ effects on the authorityand influence of the IAF. In particular, the

reporting line between the IAF and ACs isexamined, followed by how ACs are perceivedto strengthen the internal auditors’ sense ofauthority and ability to operate in an indepen-dent and objective manner. Second, weenquire into the nature of the audit processesand communication efficacy between the IAFand ACs. In particular, greater insight issought on the conduct of meetings betweenACs and the IAF, the types of issues that gen-erate significant debate in meetings, ACinvolvement in the reviews of internal auditplans and reports, and the quality of theoverall communication between HIAFs andACs. Third, we identify AC characteristics thatinternal auditors’ perceive as being relevantfor further improving the relationship be-tween IAF and ACs.

The findings of this study have significantimplications for improving the overall qualityof corporate governance through identifyingthe perceived strengths and weaknesses in therelationship between ACs and the IAF. Inaddition, the present study also aims to extendcurrent research in three other ways.

First, unlike previous studies relating to ACcomposition and IAF relationships which arelargely questionnaire survey-based, this studyundertakes a qualitative, interview-basedapproach to gather a more in-depth under-standing of the communication processbetween AC and internal auditors. As con-tended by Turley and Zaman (2004), “theimpact of ACs cannot be adequately investi-gated using solely questionnaire surveys andanalysis of databases” (p. 325). Likewise, Spira(1999) and Gendron and Bedard (2006) arguethat context-based studies of AC practicesare only beginning to emerge and morequalitative-oriented studies are vital toimprove our knowledge on the substance ofAC activities and its impact on overall gov-ernance effectiveness. For instance, whilesurvey-based research indicates that AC com-position is generally associated with improvedoversight of financial reporting, in-depth inter-views tend to better illuminate factors mostpertinent to this oversight process. Such anunderstanding will not only provide a valuableknowledge base to further improve the perfor-mance of both IAF and ACs, but also willpotentially expand prior findings from exist-ing survey-based studies (Goodwin and Yeo,2001; Raghunandan et al., 2001; Scarbroughet al., 1998).

Second, this study also extends prior studieson AC effectiveness through providing evi-dence from the internal auditors’ perspective.Gendron et al. (2004) for instance, used inter-view responses from 22 individuals (whereby13 were AC members and only three were

INTERNAL AUDITOR PERCEPTIONS ON AUDIT COMMITTEE INTERACTIONS 895

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HIAFs) in examining the AC practices in threedifferent public corporations, while Turleyand Zaman (2004) used a case study approachinvolving nine interviews on AC effectivenesswhich were conducted with a variety of per-sonnel from a large financial services company(of which one interviewee was the Head ofGroup internal audit and another, the ACchair). Al-Twaijry et al. (2002), however, inter-viewed a larger group of internal auditors, i.e.15 internal auditors (as well as five academicsand 13 external auditors) on the role of ACs inSaudi Arabia.

Third, given the fragmentary nature of avail-able evidence on corporate governance fromnewly industrialised economies, the presentstudy provides additional insights through theeyes of internal auditors in Malaysia. A keymotivation for choosing Malaysia as a researchsite relates to its developing capital marketand a high power distance culture. Gul andTsui (1992) argue that evidence from countriessuch as Hong Kong and Malaysia is essentialin order to understand the potential factorsthat could undermine the role of auditing inadding credibility to financial reporting. Theyspecifically argue that the continuing push forglobal harmonisation of accounting and audit-ing practices, and the inherent lack of infra-structure that support auditing practices indeveloping capital markets, necessitate furtherstudy on governance practices in such envi-ronments. Moreover, the impetus for meetingglobal standards of corporate governance iscritical for Malaysia, as it is one of the fastestgrowing economies in the world (UNCTADWorld Investment Report, 2003). Furthermore,with the market capitalisation of the Malaysianmarket being around US$140 billion (KLSEMarket Review, 2001), shareholder and poten-tial investor concerns over the quality of auditand other governance monitoring continue tobe strong.

In addition, Malaysia is typified as a highpower distance nation based on Hofstede’s(2001) national culture dimensions. In fact, thatstudy revealed Malaysia as occupying thehighest place on the power distance indexwith a score of 104 compared to the averagepopulation score of 57. By contrast, much ofthe previous studies on ACs have been under-taken in countries such as the UK and USAwhere power distance is low. The level ofpower distance, as discussed previously, hasimplications for managerial behaviour atwork, particularly in their interactions withtheir superiors and peers (Kelley et al., 1987).Thus, given Malaysia’s relatively young capitalmarket and its cultural context, it presents aninteresting context in which to study the inter-actions between AC and internal auditors.

In the next section of this paper, an overviewof the various regulations and corporate gov-ernance developments in Malaysia is pre-sented as background to the study. This isfollowed by a discussion of the IAF and ACrelationship, which leads to several researchquestions, and a delineation of the researchmethod. Finally, a discussion of the findings,and the conclusions and limitations of thestudy are provided.

Corporate governance in Malaysia –an overview

Corporate governance became topical in thelast two decades of the 20th century with anumber of comprehensive reports on thesubject in the UK (e.g. the Smith Committee,2003; Cadbury Committee, 1992), the USA(e.g. the Blue Ribbon Committee (BRC), 1999),and Australia (e.g. ASX Corporate GovernanceCouncil, 2003; Ramsay, 2001). In Malaysia, cor-porate financial reporting practices have beenlargely guided by the Malaysian CompaniesAct since 1965, with the duties of the directorsand auditors specified in the provisions of Sec-tions 167, 169 and 174 of the Act. Accountingtreatments and financial reporting practicespredominantly followed generally acceptedaccounting principles and International Ac-counting Standards (IASs). Such practiceswere guided by the two national accountingbodies in Malaysia – the Malaysian Institute ofCertified Practicing Accountants (MICPA),and the Malaysian Institute of Accountants(MIA) which were established in 1958 and1967, respectively. The management of corpo-rate governance within Malaysian companiesis also influenced by Bursa Malaysia (formerlyknown as the Kuala Lumpur Stock Exchange(KLSE)).3 Bursa Malaysia is a self-regulatingorganisation governing the conduct of publiccompanies and enforcing their listing and dis-closure requirements. The main professionalbody supporting internal auditors in Malaysiais the Institute of Internal Auditors Malaysia(IIA Malaysia). Formed in 1977, it is a non-profit professional organisation dedicated tothe advancement and development of theinternal auditing profession in Malaysia.The Institute is also part of the worldwideIIA organisation and has more than 1,300members.4

Interestingly, the importance of having ACswas acknowledged as early as 1993 in Malay-sia. In August 1993, the Malaysian SecuritiesCommission gave notice to all companieslisted on the KLSE to form audit committees intheir organisation. A grace period of one yearwas given for the companies to comply with


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the requirement. The study by Muhamad Soriet al. (2001) showed that in 1994, 56 per cent ofthe sample main board firms and 24 per cent ofthe sample second board firms had formed anaudit committee.5

However in 1997, the Asian financial crisiscaused a significant jolt in the Malaysiancapital markets, which in turn escalated thepressure for improved corporate governance.Alarm bells rang in unison with several otherAsian nations, e.g. Korea, Indonesia, Sin-gapore and Thailand, as calls from investorand public groups for greater accountabilityand transparency came loud and clear(Thomas, 2002). In particular, the overwhelm-ing magnitude of private sector debt was seenas a key feature of the woes of Malaysianfirms during the financial crisis, and “poor orineffective corporate governance in thesecompanies was a major contributory factorbehind such ill-advised investment decisions”(Thomas, 2002, p. 131). Subsequently, in 1998,the Finance Minister appointed the “High-Level Finance Committee” to oversee thedevelopment of a corporate governance frame-work, leading to the establishment of theMalaysian Code on Corporate Governance(MCCG) in 2000.6 While the Code was initiallyintroduced as a voluntary guide, by January2001, it became mandatory. The developmentof the Code was substantially guided by theUnited Kingdom’s Cadbury Code and theHampel report. A “hybrid perspective” wasadopted by the Code which involves both aprescriptive approach, i.e. following set stan-dards of corporate governance, and a non-prescriptive approach, i.e. emphasis ondisclosure of governance practices. Such anapproach was seen as being most suited for theMalaysian environment because there was aneed to raise corporate governance standards,as well as to encourage companies to con-sciously address their governance needs. Fur-thermore, consultations were also undertakenwith a broad range of stakeholders, includingrepresentatives from the accounting profes-sional bodies, banking institutions, stock bro-kerage firms and various other private andpublic sector entities. The High-Level FinanceCommittee also cited expanding judicialexpectations and interpretations of directorduties (namely non-executive directors’ dutyin tort) as a pivotal justification for developinga national set of corporate governance guide-lines. Additionally, the growing global com-petition for foreign investment within theSouth-East Asia region continued to increasethe pressure for an enhanced disclosureregime (Thomas, 2002).

In relation to the regulation of accountingpractice, a formal set of accounting stand-

ards was finally promulgated in 1998 withthe Malaysian Accounting Standards Board(MASB) holding the statutory authority to setsuch standards. The two accounting profes-sional bodies – MIA and MICPA continued toplay an important role in the accounting stan-dard development and consultation processes.Further, by 1998, all the sample firms inMuhamad Sori et al.’s (2001) study were foundto have formed audit committees in com-pliance with the Bursa Malaysia’s listingrequirements.

Presently, Bursa Malaysia’s listing rulesrequire an AC to comprise at least threemembers, of which the majority must be inde-pendent directors, the chairman be an inde-pendent director and at least one member be amember of the MIA. The main responsibilitiesof an AC are to provide assurance that theorganisation is compliant with pertinent lawsand regulations, and to ensure that effectiveinternal controls exist. These requirementsmirror the MCCG guidelines.7

In terms of the IAF, Bursa Malaysia has rec-ognised its importance as a key governancefunction that is closely linked with ACs. Whileit is not mandatory for public listed companiesin Malaysia to have an IAF, it was made man-datory for all such companies to include asummary of the internal audit activities per-formed during the year, or in the absence ofsuch activities, to provide an explanation ofhow the company may discharge the function.Likewise, the MCCG and the listing require-ments of Bursa Malaysia also recommend theestablishment of an IAF, and in the absenceof such a function, the company is advisedto assess whether there are alternate meansto regularly review the internal controls(Thomas, 2002; IIA, 2001). Further, in 2002 theIIA Malaysia launched “The Guidelines on theInternal Audit Function for Malaysian Com-panies” with the aim of guiding best practicesfor the internal audit practitioners and tostrengthen corporate governance overall. Con-sistent with the interest shown by the regula-tors and the professional bodies to promote astrong corporate governance framework inMalaysia, many public listed companies havemore recently established their own IAF. Astudy of 380 publicly-listed Malaysian compa-nies, titled 2002 Survey on IAF of Public ListedCompanies in Malaysia (IIA Malaysia, 2003)reveals that 58 per cent of respondent compa-nies had their own IAF.

The relationship between the IAFand ACs

Corporate governance guidelines in generaldenote that an overarching duty of an AC is



to ensure that the IAF’s scope and duties areadequate, it is appropriately resourced, andthat it has the necessary authority to carry outits work (BRC, 1999; Smith Committee, 2003;Finance Committee on Corporate Gover-nance, 2000). Empirical evidence on AC inter-actions with IAF remains limited however.Al-Twaijry et al. (2002), for instance, reportthat 11 out of the 15 (73 per cent) internalauditors participating in their study viewedthe relationship between their departmentsand the AC to be either non-existent or unsat-isfactory. For the present study, we focus onthree key areas.

First, we explore how HIAFs view ACs tosupport the status and independence of theIAF. A direct reporting line to the AC is com-monly viewed as an essential feature foremboldening the IAF’s status and its indepen-dence from management. For example, IIA(2001, Standard 1110) recommends a dualreporting relationship, whereby for functionalpurposes the chief audit executive shouldreport directly to the AC or its equivalent, andfor administrative purposes he or she ought toreport to the CEO of the organisation. Thefunctional reporting line defines the ultimatesource to the IAF’s independence and author-ity (e.g. approving the internal audit charterand audit plans), while the administrativereporting line defines the relationships thatfacilitate day-to-day operations of the IAF (e.g.human resource management matters). Inter-nal auditors, however, have seldom been clearon their authority and reporting obligations.For example, a recent survey of 380 respon-dent internal auditors in Malaysia (IIA Malay-sia, 2003) reveals that 85 per cent of therespondents report functionally to ACs, andthe remainder (15 per cent) report to manage-ment, thus suggesting direct reporting lines tobe dominant. Yet, the survey also notes that asignificant proportion of participants foundthe reporting relationships among internalauditors, the AC and management to beunclear and confusing at times.

A second set of research issues relates to thenature and quality communication betweenACs and the IAF. Previous studies suggest thatformal as well as informal processes areimportant for enhancing the communicationbetween the two functions (Raghunandan etal., 2001; Turley and Zaman, 2004). Yet, there isscant empirical evidence on whether suchcommunications occur in high power distancenations such as Malaysia where there is likelyto be greater reticence for organisational em-ployees to be critical of senior managementwithin the firm, or to socialise with those inhigh official ranking positions, such as ACmembers (Hofstede, 1981).

A third set of research issues revolve aroundinternal auditors’ views on how ACs mayfurther strengthen and improve the IAF.Cohen et al. (2002) found that AC membersoften lacked the expertise to perform their jobseffectively. Gendron and Bedard (2006) foundthat the extent of frankness internal auditorsdisplay in meetings is one of the criteria ACmembers use to assess the effectiveness of theAC. Further evidence is required on how ACmembers may encourage internal auditorsto develop greater confidence and trust inthe AC, which in turn has implications for theoverall effectiveness of both the IAF and theAC.

Research questions

In sum, based on the preceding discussion, thethree sets of research questions for this studyare:

1. How do internal auditors perceive theirreporting line to the AC, and what areas ofinvolvement of the AC are viewed tosupport the IAF’s status and independence?

2. What are the perceived facilitators and bar-riers to interactive communication betweenan AC and the IAF function?

3. What characteristics do internal auditorsperceive as being important for ACs tobetter enhance the IAF’s effectiveness?

Research methodology

Interview dataData were gathered through in-depth, face-to-face interviews. Interviews were chosen as theprimary mode of data collection as theyprovide an appropriate vehicle for gaining anin-depth understanding of the interactionbetween internal auditors and the AC. Twentyorganisations were chosen at random from thelist of companies listed on the main board ofthe Bursa Malaysia, and their respective HIAFwas then contacted. Telephone pre-notificationwas undertaken to solicit participation of thesubjects, and 11 HIAFs agreed to be inter-viewed. Most of the HIAFs who declined toparticipate claimed that they had a tight andbusy work schedule. All interviews were tape-recorded, and subsequently transcribed liter-ally. Interviews varied in length from 50minutes to 2 hours. Interviews were under-taken from November to December 2003,nearly two years after the MCCG becamemandatory.

A semi-structured questionnaire was uti-lised to guide the interview, and all partici-pants appeared confident and to have a very



good understanding of the organisations’background, structure and processes. Thesemi-structured questionnaire focused oninternal auditor perceptions on critical aspectsrelating to the three research areas of interest,namely the reporting and other communica-tion lines with the AC, the conduct of auditprocesses and related activities (e.g. frequencyand nature of meetings with the AC, ACinvolvement in reviewing IAF activities, etc.),and factors affecting the AC’s contribution toIAF effectiveness. Guided by Patton (2002), thetranscribed data from the interviews were firstcoded using key themes related to the mainresearch questions, and cross-checked by thesecond research team member. There wereminimal discrepancies between the initialcoding and subsequent checking of thecoding, and any differences in the classifica-tion of themes between the researchers werereviewed and a consensus reached prior tore-coding.

Interviewee, firm and AC characteristicsTable 1 provides background information onthe interviewees, and their related firms andACs. Of the 11 HIAFs who participated in theinterviews, the majority were male. In terms ofprofessional designation, five HIAFs weresolely a CPA (Certified Practising Accountant),three were solely a CIA (Certified InternalAuditor), and the remaining three held bothprofessional designations. All HIAFs held anaccounting qualification and were members ofthe Malaysian Institute of Accountants (MIA).The interviewees reported having at least fouryears of experience as internal auditors, andeach of them had held his or her position ashead of their IAF for a minimum of sixmonths.

All participants worked in large companieslisted on the main board of the Bursa Malaysia.The size of the company, in terms of totalassets, ranged from Ringgit Malaysia (RM) 173million to RM5.5 billion (i.e. using anexchange rate of 0.25, approximately US$43.2million to US$1.4 billion), with the exceptionof one organisation with total assets worthRM27.7 billion (or US$6.9 billion), and interms of number of employees ranged from100 to 7,000 employees. AC composition in all11 participant firms met the Bursa Malaysia’slisting requirements with each AC comprisingno fewer than three members, of whom two-thirds were independent directors, and the ACChairman being an independent director. Infact, 45 per cent of the participants reportedthat their AC comprised fully independentmembers.8 Further, six respondent firms haveIAFs that are long established (i.e. 10 years or

more), and interestingly, the older the IAF, thelarger its budget. Possibly, this may reflect longestablished organisations in general having atradition or culture that values internal auditactivities, and thus the willingness to continuechannelling higher levels of resources to inter-nal audit activities.

Findings

AC reporting line and implications forIAF authority and independence (RQ1)Reporting line. Nine of the 11 HIAFs werefound to report directly to the AC on a func-tional basis, and to senior management on anadministrative level. The predominantly dualreporting relationships appear to be in linewith the recommendations of the IIA Malaysiaand the BRC Report (1999). The two remainingHIAFs revealed that they report both function-ally and administratively to senior manage-ment. One of the HIAFs, in fact, stated that inhis company, IAF findings on all significantmatters are required to be tabled at the seniormanagement meetings where decisions aremade on which matters to disclose to the AC.The HIAF felt that he had little authority tocommunicate directly and on his own accordwith the AC. His attitude appeared quite sub-missive in that he was not willing to questionsenior management as he felt it would notmake any difference.

The general attitude of the other inter-viewees was that a direct line of communica-tion to the AC is critical because it places themin a more powerful position to be frank andopen as well as to resist management pressure.While the interviewees were reluctant todiscuss specific instances of management pres-sure (possibly to maintain information propri-etary to the firm and to avoid alleging anymanagement indiscretion), phrases such as“protected from management intervention”,“easier to discuss, follow up and keep track onwhatever issues were raised in the previousmeeting”, “internal auditors will be able to feelmore comfortable and safe to voice theiropinion” and “management will not penalisethe internal auditor” were used to convey asense of having greater power as a result ofdirect reporting lines to the AC. Further, inone case where the firm had recently changedtheir functional reporting line from theFinance Manager to the AC, the HIAF was ofthe view that the change has improved herperceived level of independence: “I cannotavoid the fact that I am paid by the companyand that management has the power to controlstaff, but that should not hamper my decision



Tab

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Par

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pant

,firm

,IA

Fan

dA

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Part

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P2

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P9

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35–4

030

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35–4

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35–4

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45–5

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45–5

035

–40

35–4

0Pr

ofes

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alifi

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IAC

PAC

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PAC

PA&

CIA

CPA

CPA

&C

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CIA

Wor

king

expe

rien

ceA

sin

tern

alau

dit

or9

year

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year

s10

year

s11

year

s4

year

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year

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year

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year

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year

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year

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year

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m2

year

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5ye

ars

2.5

year

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year

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1000

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700

2,00

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100

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Inte

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tes

tabl

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15ye

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20ye

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15ye

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30+

year

s7

year

s12

year

s30

year

s7

year

s6

year

s

Wor

king

expe

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9ye

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7ye

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10ye

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11ye

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4ye

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4ye

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6ye

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20ye

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bud

get

($M

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200,

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0,00

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0

AC

com

posi

tion

AC

com

pris

esso

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dir

ecto

rs

Yes

(100

%)

(67%

)N

o(6

7%)

No

Yes

(100

%)

Yes

(100

%)

(67%

)N

o(6

7%)

No

Yes

(100

%)

Yes

(100

%)

(67%

)N

o(6

7%)

No

AC

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year

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44

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Yes

Yes

Yes

Yes

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“By

invi

tati

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Yes

Yes

“By

invi

tati

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ly”

Yes

Yes

Yes



to report if I find something is wrong . . . atleast now I can inform the AC”.

Thus, these accounts in sum emphasiseinternal auditors’ consensus on the importanceof a direct reporting line between IAF and theAC.

AC influence. Turley and Zaman (2004),based on their case observations, argued thatan AC is able to set a “tone” that allows inter-nal audit to have a certain degree of influencein the organisation. In this study, a frequentexample provided by HIAF in terms of thetype of assistance from AC that they mostvalued relates to the monitoring of manage-ment’s responses to the IAF’s findings andrecommendations. Most interviewees felt thatthe AC played an important role in ensur-ing that recommendations by the IAF (e.g.improvements to internal controls) had beenfollowed-up by management in a timelymanner. Further, any inaction by managementwith regards to the recommendations was gen-erally required to be explained to the commit-tee. In most cases, a time limit was set forremedial measures to be actioned, with theHIAF bringing the matter to the attention ofthe AC once the time limit was exceeded. Inone instance, such a report by the HIAF to theAC resulted in specific managers’ bonusesbeing withheld. As noted by the interviewee:“AC’s role in this matter (i.e. questioningmanagement) is essential for follow-upactions . . . to make sure the suggestionsmade by the internal audit have been fol-lowed . . . and the actions have improved thesituation”.

Likewise, another HIAF recounted anaccounts payable audit where the AC was seento be instrumental in ensuring recommenda-tions made by the IAF were carried out bymanagement: “AC has been very effec-tive . . . they have thrown their weight aroundand as a result management have scrambled totackle our recommendation. . . . If they (i.e. themanagement) don’t act on it, the penalty is thatthey will then have to appear in front of the ACand explain the costs of their action and assurethat it will be resolved in the future . . . and notmany people would like to explain to the ACas they will be torn apart”.

Clearly, these comments reflect the confi-dence the HIAF have in the AC’s ability tofortify their position and recommendations,and to ensure management adhere to goodcorporate governance practices.

Prior studies also suggest that internal audi-tors tend to view certain types of AC roles tobe more useful than others. For example, inPorter and Gendall (1998) internal auditorsranked AC discussions of the internal auditfindings and reports with the chief audit

executive to be more important than ACinvolvement in the appointment and dismissalof the chief audit executive. In this study, theAC’s involvement in the appointment and ter-mination of the HIAF was seen by the majorityof the interviewees to be desirable and as con-ferring added security for HIAFs. Interest-ingly, one interviewee felt that unless ACs arefully independent, any appointment or termi-nation decision of an HIAF will be stronglyinfluenced by the executive member. As statedby this HIAF: “it depends on who is sitting onthe AC, if management forms part of the AClike here in (the company), one will still feel abit threatened to provide their opinion as CEOis on the AC . . . of course it will be more dif-ferent in the case whereby the AC membersare all non-executive members”.

Symbiotic relationship. Interestingly, whilethe AC was regarded to be a significant sourceof support for the IAF, all 11 HIAFs also per-ceived that ACs can only be effective if the IAFis well-functioning and well-resourced. Asmentioned by one interviewee:

the role of the AC cannot be effective if we don’thave a strong internal audit department thatknows exactly what they want to do and how todo it because an AC relies on internal audit. Ifwe don’t tell them (i.e., AC members) thestrategies to go about, the AC cannot make deci-sions . . . because ACs make reliable decisionsbased upon the information given by the inter-nal audit. . . . This means that the effectivenessof the AC is dependent on the effectiveness ofour internal audit and there is no way that theAC can function on its own without oursupport.

It also appears that a common view amongHIAFs was that independent AC memberstend to lack internal know-how of an organi-sation. As expressed by one interviewee: “weprovide regular feedback to the AC, and sincethe majority of the members are non-executivedirectors, they don’t really know what’s goingon inside the organisation . . . internal auditprovides them with such information”.

Likewise, another interviewee similarlystated: “the problem . . . with having indepen-dent AC members is that sometimes they donot feel the pinch of the problems we face, asthey are not part of the organisation”.

Not surprisingly, most HIAFs stronglybelieved that ACs were highly dependent onthem for information, particularly on mattersrelating to the operational workings of thefirm. This finding also reflects Turley andZaman’s (2004) case observation whereby it isargued that “the AC is very much a ‘receivingand responding’ body and it is therefore verydependent on the manner in which other



parties choose to interact with, and provideinformation, to the AC” (p. 17).

Thus, in relation to the first research ques-tion, our findings suggest that HIAFs placesignificant value on having direct reportinglines to the AC, and strongly appreciate theauthoritative position held by the AC inlending support to IAF reports and recom-mendations. Interviewees were also keenlyaware of the relationship being rather symbi-otic in nature, particularly the AC memberswho were independent (i.e. non-executive innature) were seen lacking in organisationalknow-how, and thus the IAF had a critical roleto play in providing the AC with relevant andreliable information.

Perceived facilitators and barriers toAC-IAF communications (RQ2)Frequency of meetings. All 11 HIAFs stated thatthey meet with their respective ACs a mini-mum of four times a year and in one caseseven meetings were held during the year.This suggests that, as advocated by the BRCreport and the MCCG, internal auditors andACs meet on a regular basis. All the inter-viewees appeared satisfied with the frequencyof meetings with ACs.

The presence of senior management in meetings.Nine HIAFs reported that senior managementwere always present in their meetings with theAC. Most participants stated that private meet-ings were rare, and that usually the ExecutiveDirector or the Chief Financial Officer wouldbe present at their meetings with AC. Only intwo cases were senior managers absent unlessthey were invited to provide further clarifica-tion on specific issues. The general attitude ofHIAFs was that the absence of managementwould make it much easier to discuss the find-ings and recommendations of the IAF. Forexample, one of the interviewees (where theAC comprised a two-thirds majority of inde-pendent directors), stated that: “managementshould attend the AC meeting only when theyare invited . . . I will feel more comfortable inproviding my opinion . . . AC meeting is theplatform for discussion between AC and theinternal auditor, and that should be the way”.

Clearly having an executive director on theAC was unsettling for this HIAF. Private meet-ings facilitate confidential exchanges betweenthe internal auditor and the AC (Kalbers, 1992)and given the potential sensitivity of internalaudit findings such meetings are important forfull and frank discussions to take place(Braiotta, 1999; IIA, 2001). Yet, the perceivedlack of such meetings as found in this studyraises a significant concern over managerialinfluence.

Types of reports and issues discussed. Wefurther explored the types of reports andrelated discussions held in the meetingsbetween HIAFs and the AC. Additionalqueries were made on issues that generatedconsiderable discussion and debate. The issuescommonly discussed in the meetings appearto relate to compliance, operations, risk man-agement and financial reporting matters.Further, two key specific observations weremade in this area.

First, while compliance and internal controlreviews were still dominant in discussionsbetween AC and internal auditors, most inter-viewees also believed that their role in riskmanagement has expanded. This is particu-larly reflected in ACs actively seeking andholding internal auditors’ opinions in highesteem and wanting a high level of assuranceon the effectiveness of internal controls inmitigating the risks. For example, in onecase, although a risk management committeeexisted, the AC still requested the HIAF tofurther clarify and provide an opinion on thefirm’s: “risk assessment framework andmethodology . . . the level of risks, what arethe controls implemented to mitigate thoserisks . . . and internal audit needs to tell them(AC members) whether the controls are effec-tive or not”.

The HIAF also noted that sometimes the ACwould request the internal controls be furthertightened to mitigate the identified risks.Several HIAFs, however, appeared to beapprehensive as to whether they could fulfilthe increasing expectations of ACs given thatthey also felt that IAF resources were limited.Furthermore, in one case where the managingdirector of the firm was the head of the riskmanagement committee, the HIAF stated thathe generally restricts his comments to whetherthe internal controls to mitigate the risks areadequate and lets the managing director makeall other explanations. The HIAF was particu-larly keen to avoid any confrontation with themanaging director due to his status.

The second general observation is thatinvestment project appraisals tended to be amajor source of inquiry and debate in themeetings between ACs and IAF. SeveralHIAFs strongly expressed their views on howinvestment project appraisals are often highlyproblematic and contentious, and that man-agement tend to become emotional and com-mitted towards selected projects. The HIAFsalso noted that in such cases AC members whohad the requisite experience and knowledge inthe investment area were the most probingand helpful in instigating a more thoroughinvestigation of such projects. As expected,more knowledgeable AC members were seen



to better understand the complexities of aninvestment project and thus be able to providefurther advice on the issues at hand andsupport the HIAFs’ stance for more in-depthinvestigations. For example, in one instancethe AC (which was fully independent) becamevery concerned as to whether managementhad undertaken a proper feasibility study on aproposed investment, and proceeded todemand management undertake a moredetailed project evaluation. After some debate,management conceded to the request and thematter was to be tabled in the followingmeeting. The HIAF strongly emphasised that itis this type of questioning attitude that isneeded from AC members so as to improveorganisational decisions.

Review of internal audit programme andresources. The MCCG recommends that ACsreview the scope of the internal audit pro-gramme and its results, as well as assess theresources available to the IAF. All intervieweesreported that their respective ACs normallyreviewed the annual audit plan and otherrelated reports including a review of the extentof the company’s compliance with the provi-sions set out under the MCCG. However, thegeneral opinion of several interviewees is thatACs are not really able to fully assess theadequacy of the programmes without assis-tance from internal auditors. In fact, severalHIAFs stated that the ACs are normally happyto approve internal audit programmes astabled. As noted by one interviewee, “internalaudit has the expertise and they develop theaudit program . . . the process is so well-established, and the AC does not have much tocontribute”.

Interestingly, in relation to the IAF re-sources, the HIAFs felt senior managementtend to put pressure on limiting and sanction-ing the resources, but that AC involvement inreviewing the adequacy of resources for theIAF is limited. Surprisingly, only one inter-viewee stated that he had discussed some bud-getary issues with the AC and that the issueswere subsequently resolved. While this lowrate of complaints may explain AC’s limitedinvolvement, it is also possible that the AChaving approved the internal audit plan wouldautomatically expect management to providethe necessary resources.

Overall communication. We also made enqui-ries on the more general and affective dimen-sions of the relationship by asking how eachinterviewee would describe his or her relation-ship with the AC. The common phrases usedby HIAFs include “open”, and “active”, sug-gesting regular communication and the abilityto discuss matters in an honest and frankmanner. Some regarded the AC in high rever-

ence, noting the AC to be like “a father”,whereby they are expected to support andguide the IAF. For instance, as stated by oneinterviewee: “internal auditors will disclose allmatters to the AC, and if there is any problem,AC is in the position to give advice, solutionsand act like a ‘father’ to internal auditors”.

Likewise, as stated by another HIAF: “ourrelationship with AC members is very close,interactive, productive and effective; wherebyI report to the chairman of the AC on a fre-quent basis . . . and have regular communicationwith some of the other AC members”.

On the other hand, there were also com-ments indicating a more passive relationship.One participant even felt that while he briefsthe AC on a frequent basis, he is not able tofully trust the AC: “some of the AC membersplay safe, they are not willing to risk their posi-tion when sensitive matters are brought up tothe AC meetings . . . sometimes ACs do notplay their role effectively”. Another HIAFstated: “they (AC members) should have morestrength in putting forward the problems tothe board”.

While these latter two comments form theminority, nevertheless such views are worri-some as having a climate of trust is vital for ahealthy relationship between the AC and IAF(Gul and Subramaniam, 1994). Possibly, devel-oping more informal communication channelsbetween HIAFs and AC members mayprovide opportunities for more open andfrank discussions. For instance, Turley andZaman (2004) report that informal processesand communications are an important meansthrough which ACs are able to gain moreinformation. In a similar vein, Gendron andBedard’s (2006) case observations reveal that“a significant level of activity on matters thatfall under the jurisdiction of the AC takes placeoutside of formal meetings” (p. 230).

Interestingly, our findings are in contrastwith the prior studies by Turley and Zaman(2004) and Gendron and Bedard (2006). In ourinterviews, there is limited evidence of infor-mal communications between HIAFs and ACmembers outside the formal meetings. OneHIAF stated that only on certain complex orsensitive issues would he call the Chair of theAC and discuss the matter. Otherwise, hispreference was to raise matters throughnormal formal channels which require seniormanagement being consulted before thematter is brought to the AC’s attention. Only inone of the cases, the HIAF stated that he occa-sionally played golf with one of the ACmembers, and at times they do end up discuss-ing company matters outside the office. Nev-ertheless, the overall impression based on thegeneral reaction of the interviewees to this



question is that informal communication maynot be appropriate as senior management mayconstrue such communication as being disre-spectful and inappropriate. This finding is notsurprising given the high power distance char-acteristic of the Malaysian culture (Hofstede,1981) where obedience to authority (parent,boss and officials) is the accepted norm. Fur-thermore, subordinates in a high power dis-tance culture would be more willing to actbased on specific directives from superiors,and avoid any confrontation with their imme-diate superiors. Thus, communications by anHIAF with other officials (such as ACmembers) without the explicit knowledge ofsenior management is less likely to occur inMalaysia because from a power distancecontext such behaviour would be easily con-strued as being disrespectful of senior man-agement. In contrast, Gendron and Bedard’s(2006) case evidence was based on three Cana-dian firms where the power distance is low,and informal communications between HIAFand AC committees are thus more likely tooccur.

Overall, with regards to the second researchquestion, our findings suggest that factors per-ceived pertinent to the effectiveness of theaudit processes and communication betweenIAF and ACs include regular meetings withHIAFs where AC members with requisiteskills and knowledge are willing to questionmanagerial decisions, and offer plausible solu-tions for problem solving. By contrast, existingaudit practices and attitudes such as limitedprivate meetings, a lack of trust in ACmembers as expressed by some HIAFs, and amore submissive approach adopted whendealing with management (such as havingsenior management take the lead in risk man-agement) may act as barriers to an effectiveIAF–AC relationship.

Perceptions on AC ability to furtherenhance the internal auditactivities (RQ3)The third research question addresses internalauditors’ perceptions on how ACs may furtherimprove and strengthen the IAF. The commonresponses of HIAFs to this issue indicate theirpreference for AC members:

1. to have in-depth knowledge and experiencethat is directly related to the industry inwhich the firm operated in,

2. to possess appropriate financial knowl-edge (preferably an accounting/auditingqualification),

3. to be more broad-based with expertise in avariety of fields, e.g. law, environment, engi-neering, etc.,

4. to display good communication skills inorder to share their ideas with internalaudit staff, and

5. to be committed in promoting a moreethical corporate environment that sup-ports “honesty”, “professionalism” and“respect”.

The first two factors clearly mirror theexisting recommendations of the various pro-fessional pronouncements (e.g. the BRCreport and the MCCG), whereby ACs arerequired to be composed of at least onemember having an accounting backgroundand for the members to have sufficient under-standing of the issues dealt with by the com-mittee. For example, one interviewee stronglyemphasised the need for ACs to be knowl-edgeable and experienced, stating that theorganisation: “cannot simply appointsomeone with a prominent name who doesn’tknow how to play his role”.

Another interviewee’s response was: “ACsmust possess better financial expertise . . . andask the critical and difficult questions . . . onlyif they have the expertise, they can provide ususeful feedback and direction”.

In addition, several HIAFs emphasised theimportance of having a more broad-based AC.For example, in one case the AC comprised anaccountant, a judge, an engineer and an econo-mist, and the HIAF of this firm perceived theAC to be highly effective because discussionswere usually rigorous as different perspectiveswere brought together, leading to betteractions and decisions by the committee.

The fourth factor emphasises the need forthe AC members to have good communicationskills. Several interviewees emphasised theneed for ACs to more effectively share theirknowledge and ideas. As noted by one inter-viewee: “they (AC members) have to behands-on, know a problem in depth in order toprovide direction . . . directly communicatewith internal auditors, and show support forthe IAF”.

The fifth factor highlights the leadership roleexpected of ACs in terms of promoting a cor-porate environment that supports high qualitygovernance mechanisms. The general consen-sus being ACs should be setting the tone ofwhat is acceptable and what is not acceptablebehaviour, particularly to senior management.For instance, according to one interviewee: “Inmany industries they have ACs for name sake,but do not have much influence. Sometimesthe Board can influence them and overridetheir power . . . they (the ACs) should beleading and discussing matters at length. . . communication and culture has to bethere!”



Another interviewee emphasised the needfor mutual respect in an organisation betweenHIAF and AC members, where values such as“professionalism”, “honesty” and “integrity”are promoted.

Discussion of findings

This study has highlighted a number of find-ings that contrast with commonly assumedviews on the relationship between HIAFs andACs. For one, the HIAFs reports on the AC’sactive participation in dealing with some diffi-cult and sensitive issues are in contrast withGendron and Bedard’s (2006) case observa-tions where the researchers report, “our inter-views suggest that as a result of informaldiscussions AC members are usually not con-fronted with difficult situations to arbitrate” (p.21). The findings of the present study in factsuggest that HIAFs place significant trust inACs to take up the key questioning role inmore formal settings. One possible explana-tion is that this is a result of the fact that Malay-sia is a high power distance nation (Hofstede,1981) where the cultural norm emphasisesclass distinctions based on the level of author-ity (i.e. the greater one’s authority, the morehighly revered and feared one is).9 Conse-quently, HIAFs may prefer ACs to deal withthe more sensitive issues at formal meetings.Another possible explanation is that in anemerging capital market there is a smaller poolof experienced AC members, and thus manyAC members may be busy serving on numer-ous committees and boards and have less timeto develop informal communication channels.Consequently, AC members may have had todeal with controversial issues at the formalmeetings instead. Furthermore, we also notethat such confrontations were reported byHIAFs with fully independent ACs and ACmembers with significant knowledge andexperience in the investment areas, suggestingsuch AC characteristics have a positive impacton AC diligence, as found in prior surveybased studies (e.g. Scarbrough et al., 1998;Raghunandan et al., 2001).

By the same token, the HIAFs in this studyalso appear to have several reservations on theeffectiveness of ACs. For one, the non-executive status of the independent ACmembers was seen as both an asset and aliability. While independent AC memberswere viewed as being more objective and tohold broad-based skills, they were also seen tobe lacking in organisational know-how perti-nent to the firm. Not surprisingly, most HIAFsfelt that they had the upper hand in terms ofsupplying such information to the AC, and

that ACs can only be effective if the IAF isstrong and well-resourced. These observationsare also in line with Gendron et al.’s (2004)findings that AC “members especially rely onthe work of the internal auditor to developtheir own appreciation of the controls’ effec-tiveness” (p. 165). Spira (1999) and Turley andZaman (2004), likewise acknowledge thecritical role HIAs play in supporting ACdeliberations.

However, what is additionally revealing inthe present study is the perception held by afew HIAFs that independent AC membersmay lack empathy towards internal problemsfaced by employees or the firm itself, and thatthey are not fully free from senior manage-ment influence, suggesting a lack of trust innon-executive AC members. This situationpossibly is further exacerbated by the per-ceived lack of private meetings between theHIAFs and the ACs, with some HIAFsexpressing strong disapproval over manage-ment’s presence in meetings that were initiallyplanned to be private. A similar concern wasexpressed by Krishnamoorthy et al. (2002) whofound a high level of influence by manage-ment on the relationship between externalauditors and AC. As highlighted in Krish-namoorthy et al.’s (2002) study, “managementcould inhibit an independent and fruitful dia-logue between ACs and the (external) audi-tors, thus undermining the auditor’s freedomfrom management pressures” (p. 11). The situ-ation is liable to be made more difficult forinternal auditors as they also work closelywith management on a day-to-day basis.Encouraging private meetings and informalcommunication with AC members may bepossible ways to improve overall exchange ofrelevant and reliable information between thetwo governance functions.

The factors suggested by the HIAFs forfurther enhancing the ACs’ ability tostrengthen the IAF raise several issues forthe recruitment, training and support of ACmembers. The call for AC members to holdspecific knowledge of both the industry andaccounting/auditing issues, as well as prefer-ence for a broad-based membership of ACs,signal the need for more careful attention tothe recruitment process of ACs. While theMCCG and the Bursa Malaysia listing require-ments emphasise having at least one memberwith accounting expertise, the overall exper-tise and knowledge held by an AC as a groupneeds careful review for improving its quality.Additionally, the personality, attitude andcharacter brought into the relationship by theindividual members are also important vari-ables affecting an AC’s effectiveness (Spira,1999). Specifically, this study highlights that



AC members need both integrity and courageto be able to perform diligently in terms ofquestioning and confronting management onthe more difficult or dubious issues. No doubt,further research on the processes that helpdetermine the appropriate combination ofexpertise and the decision-making styles at theAC level would be timely.

Our findings also highlight the importanceHIAFs place in having AC members who arebetter able to communicate and share ideaswith internal auditors. In particular, the abilityof ACs to lead and set the right ethical tonewithin an organisation are seen as essentialattributes for more effective ACs. As arguedby Leung et al. (2004), having an organisationalenvironment that promotes transparency andhonesty is critical as there needs to be “abso-lute willingness to table issues throughout theorganisation at every level, thus ensuring thesubsequent debate is focused on appropriateresolution” (p. 33). Undoubtedly, additionalresearch on how ACs and the IAF engender anorganisational environment that exalts goodcorporate governance would be beneficial.

Conclusion

This study has investigated internal auditors’perceptions concerning their interactions withACs and found ACs to be viewed as an essen-tial and invaluable support to the IAF. Many ofthe sentiments expressed by the HIAFs inMalaysia mirror those found by previousstudies undertaken in nations with strongcapital markets, e.g. the USA, Canada and theUnited Kingdom (Spira, 1999; Turley andZaman, 2004; Gendron and Bedard, 2006).These include an appreciation of AC members’authority, knowledge and expertise, as well asthe diligence in undertaking the various auditprocesses. By the same token, several findingsmay possibly reflect cultural nuances akin toMalaysia where there is still a preponderancefor an HIAF to look up to higher authoritysuch as an AC to deal with situations that canbe confrontational with senior management, aswell as having limited informal communica-tions with AC members. The importance ofhaving clear reporting guidelines for HIAFs,and the development of better communicationand leadership skills among AC members areclearly critical factors for the relationshipbetween HIAFs and ACs. Thus, while therehave been significant developments in Malay-sia in terms of establishing corporate gover-nance guidelines that are aligned withinternational pronouncements such as thoseissued by MCCG, the challenge remains forAC members and HIAFs to surpass cultural

and other communication barriers to interactmore effectively and support each other.

Interpretation of the findings of this study,however, needs to recognise its limitations.First, this study has focused solely on the per-ceptions’ of internal auditors. Further researchthat examines the views of the AC membersand senior management as well will provide amore holistic view on the quality of AC andIAF interactions. Future studies will alsobenefit from further examination of howHIAFs in dual reporting situations resolve ten-sions regarding their reporting responsibili-ties. A related research opportunity lies inundertaking more detailed examination ofsituations that are heavily debated at AC meet-ings, especially regarding internal auditreports, plans and budgets, as such insight islikely to reveal more clearly the power dynam-ics between AC, internal auditors and themanagement. The second limitation of thisstudy is that data were based on HIAFs fromonly one nation, i.e. Malaysia. Another area forfurther research is to examine governance pro-cesses in a variety of national settings. Specifi-cally, while many countries in the South EastAsian region may be classified as being a highpower distance culture, the historical frame-work for the legal institutions may differ andmay have as much bearing on the role of ACsand internal auditors in the financial oversightprocess.

A third limitation is that much of the dataare also based on qualitative evidence col-lected through face-to-face interviews, andthus open to biases such as memory recall andsocial desirability bias. However, the inter-viewees appeared to be sincere and were nothesitant, thereby making us comfortableregarding the trustworthiness of the inter-views. Finally, the study involved very largepublic listed firms with diverse shareholdings.Given that previous studies indicate that theeffectiveness of ACs may diminish in organi-sations that have a single large shareholder ora more concentrated share ownership (Krish-namoorthy et al., 2002), the significance of ACfor financial reporting oversight remainsunclear for such firms.

Clearly, the development of a broaderunderstanding of the relationship betweenACs and internal auditors is important forimproving audit practice and better corporategovernance. The implications that can bedrawn from this study could be useful for alarger cross-sectional study on the relationshipbetween internal auditors and ACs. In turn,such a study has the potential to assist regula-tors and organisations to set guidelines thatare more effective in enhancing the communi-cation between the IAF and the AC.



Notes

1. The concept of power distance (PD) refers to theinterpersonal power of influence between twopeople as perceived by the less powerful (Hof-stede, 1981). Specifically, PD refers to the way inwhich societies deal with the problem of humanequality. Low PD societies are characterised by abelief that inequalities in between people shouldbe minimised, and the existence of hierarchieswithin society and its organisations is for admin-istrative convenience only. In contrast, high PDsocieties are characterised by the acceptance ofinequality, its institutionalisation within hierar-chies that locate people to “rightful places”, andthe striving of the powerful to maintain thepower differential (Hofstede, 1981).

2. Hofstede (1981) in his seminal work identifiedfour broad dimensions of national culture:power distance, individualism (versus collectiv-ism), masculinity (versus femininity) and uncer-tainty avoidance. Individualism stands “for asociety in which the ties between individuals areloose: everyone is expected to look after him/herself and her/his immediate family only”(Hofstede, 2001, p. 225). Uncertainty avoidancerefers to “the extent to which the members of aculture feel threatened by uncertain or unknownsituation” (Hofstede, 2001, p. 161), while mascu-linity relates to “the division of mankind intotwo sexes, and what represents the appropriaterole for men (who tend to make their concept oftheir own role a model for society as a whole)”(Hofstede, 2001, p. 258).

3. In 2003, the KLSE was renamed as BursaMalaysia.

4. Comparatively, the Australian chapter appearsmuch larger with 2,500 members.

5. Firms on the main board must have a minimumissued and paid-up capital of RM60 million(US$15 million), while second board firms have aminimum issued and paid up capital of RM40million (US$10 million).

6. In 1998, the Malaysian Institute of CorporateGovernance (MICG), a public company limitedby guarantee was set up to promote and encour-age corporate governance development, educa-tion and training for the benefit of its membersand other interested agencies.

7. Part 2, section BB of the MCCG delineates thekey responsibilities of an AC which includeoverseeing the appointment of the externalauditor, discussing with the external auditor thenature and scope of the audit, reviewing thequarterly and year-end financial statements andcoordinating the internal and external auditfunctions.

8. A comparison of the nine non-respondent firmswith the 11 sample respondent firms does notreveal any non-response bias in terms of firmsize (i.e. average total asset nor number ofemployees).

9. Criticisms of Hofstede’s (1981) cultural dimen-sions include that the dimensions identified byHofstede are more socio-economic in origin andnot anthropologically based, and that there areinherent limitations to quantifying cultural

values based on numeric dimensions and matri-ces. For a more recent discussion of the issue,please review Baskerville (2003) and Hofstede(2003).

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Mazlina Mat Zain is a Senior Lecturer inthe Department of Accounting and Finance,School of Business, Monash University, Malay-sia. Her research interests are in the areasof corporate governance, financial reportingquality, internal and external auditing.

Nava Subramaniam is an Associate Professorin the Department of Accounting, Finance andEconomics, Griffith Business School, GriffithUniversity, Australia. Her main researchinterests are in corporate governance, internaland external assurance services, manage-ment control systems and corporate socialresponsibility.



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