The influence of "culture" on accounting and auditing in Malaysia

Citation

(2006), "The influence of "culture" on accounting and auditing in Malaysia", Managerial Auditing Journal, Vol. 21 No. 7. https://doi.org/10.1108/maj.2006.05121gaa.001

The influence of "culture" on accounting and auditing in Malaysia

Dr Roszaini HaniffaSenior Lecturer and Head of Accounting and Finance Group at Bradford University School of Management. She received her BSc in Accounting and Finance from Northern Illinois University, MSc in Accounting and Finance from University of Stirling, and PhD in Accounting and Finance from University of Exeter. Her research interest includes international accounting, auditing, corporate governance, social responsibility reporting, culture and the Islamic perspective of accounting. Her recent publications have appeared in journals such as Abacus, Journal of Accounting & Public Policy, Journal of Business Ethics and Journal of Business Finance & Accounting.

The influence of "culture" on accounting and auditing in Malaysia

This special issue explores the influence of culture on accounting and auditing practices in Malaysia. It is acknowledged that culture is an extremely elusive construct (Jahoda, 1984) but it includes among others, the social, political and other factors which may influence individuals’ behaviour (Hamid et al., 1993). Trompenaars (1993, pp. 3, 6) defined culture as “… the shared ways groups of people understand and interpret the world” and also “ … the way in which a group of people solves problems.”[1]. Since, accounting and auditing involve both technical and cognitive activities, the various elements of culture that prevail in the country may influence the auditing practice. Two cultural aspects that may have substantial influence on the profession are the ideology and the socio-economic structure. The former refers to societal norms and values such as collectivism, fatalism, attitude towards time, professionalism, innovation, flexibility, etc. as well as dominance of religion, sentiments, ethical principles, world-views, ethos and the like in the society’s everyday life. The latter include factors such as the political and legal system, the power of the profession, the tax system, education system, etc. inherent in the country. In short, cultural factors are important because the traditions of a nation are instilled in its people and might help explain why things are as they are (Haniffa and Cooke, 2002) including accounting and auditing practices.

In multiracial countries, the prevailing societal values may not necessarily reflect the values of the nation as a whole especially if each ethnic group prefers to maintain its own identity and values. Differences between the groups may also be apparent if there is a history of conflict or when ethnic differences coincide with national socio-economic (Pettigrew, 1979) or ideological differences. Similarly, the extent of shared values and degree of co-operation is determined by organisational co-ordinating activities and formality in the various socio-economic systems. As such, it is important to acknowledge that norms and values may differ between groups even within a nation (Specter and Solomon, 1990).

The papers selected for this issue should provide readers insight into various aspects of “culture” that influence the accounting and auditing practices in Malaysia. The authors of the papers are mainly Malaysian and their writing reflects their own national perspective and “personalities, national traditions and language” (Olson et al., 1998, p. 26, cited in Poullaos, 1999) within various constraints. The focus of the papers varies but there are three common themes addressed in this issue. The following sections discuss the themes raised in each of the papers and elaborate on suggestions for further research.

Auditing profession

In their seminal papers, Willmott (1986) and Puxty et al. (1987) call for the study of accounting to be conducted within its social context and argue that an understanding of the profession requires an appreciation of the political, economic and legal circumstances that have supported and constrained its development. In other words, to understand the role of accountants and the concept of a profession requires scrutiny of how it has been mediated, formed and transformed in tandem with changes in the political and socio-economic structures inherent in the country.

Consistent with this view, the first paper by Ali et al. (2006) presents the chronological development of the profession in Malaysia with reference to the dynamic changes in its political and socio-economic environment in the first four decades following independence from the British. The authors classified the forty years into three “episodes” each beginning with a description of the socio-political and economic environment in that particular time-frame, followed by a description of how they impact the direction and magnitude of development of the profession and the state of auditing in that era. Similar to studies on the accounting profession in Asia (Hao, 1999; Sakagami et al., 1999; Suseela, 1999; Yapa, 1999; Dyball and Valcarcel, 1999) and other former British colonies (Uche, 2002; Annisette, 1999; Bakre, 2005), the paper illustrates how the formation and function of auditing in Malaysia are connected to significant socio-political changes: from upholding the status quo of colonial elites in the early years post-independence, to responding to a transition from a bureaucratic and command-economic system brought about by changes in ethnic relations following the government’s New Economic Policy (NEP), to a weakening of the audit infrastructure as a consequence of the ambiguous relations between the profession, state, market and politics (Poullaos, 1999).

However, the narration of the auditing saga in Malaysia by Ali et al. (2006) stops at the period just before the onset of the Asian financial crisis. Since, then, there have been continuing changes to the roles of accounting firms and professional governance. Hence, future research may want to consider the state of the profession after the crisis. Particularly, how has the profession responded to the crisis and the issue of globalisation? Has the role of the profession changed and has it managed to define its relations with the state, market and political elites? What is the state of competition between MACPA (private body representing the big international audit firms) and MIA (the state sponsored body of accountants) and has the profession moved in an expeditious fashion to meet its responsibilities as perceived by the public? How has the profession responded to the issue of transparency and accountability and the demands by Malaysian stakeholders? How has past and current fraud cases been tackled? Those are some of the issues that need answers, if confidence in the profession in the country is to be maintained.

Auditor-client relationships

Whilst the paper by Ali et al. (2006) provides a snapshot of the audit environment and the state of the profession in Malaysia at the macro level, the papers by Che Ahmad et al. (2006), Nasser et al. (2006) and Ismail et al. (2006) look at the micro-level, i.e. auditor-client relationships. Specifically, the papers discuss the determinants of auditor choice, tenure, rotation and switching in the Malaysian audit environment.

According to Beattie and Fearnley (1998, p. 73), auditor choice theory suggests that, given the nature of the demand for external audit, auditor choice will be jointly influenced by auditee characteristics (particularly those related to agency costs), auditor characteristics (such as size, reputation, class and industry specialization) and the auditing environment (Wallace, 1985). Although the Anglo-American literature established those factors as influencing auditor choice, there may be other factors that are unique in certain business environment. For instance, in most East Asian countries, there exists a close relationship between business and government such as the chaebol in South Korea and keiretsu in Japan (Haniffa and Cooke, 2005; Johnson and Mitton, 2003). Such arrangements impact on the role of auditing and the choice of auditor.

The paper by Che Ahmad et al. (2006) offers new insights on how national policies influenced the auditor selection process. The government’s NEP, which is a form of institutionalised positive discrimination based on ethnicity and the liberalisation policy that encourages foreign ownership, affects corporate behaviour including choice of auditor. Their empirical results confirmed their contention that building strong network of business alliances (Weidenbaum and Hughes, 1996) and engaging auditors from one’s ethnic group seems to be a norm in Malaysia, partly due to a feeling of solidarity and also to support the government’s policy. The paper also reports an association between foreign-owned companies and Big4 auditors, suggesting differentiation of auditor quality is present in the environment.

However, their findings are based on data for the period 1993-1995, a period before the onset of the financial crisis. Thus, it would be interesting to see if ethnic networking and preferential treatment still influence auditor selection process in Malaysia. Future research may want to revisit policies to safeguard auditor independence and examine whether aspects of ethnicity should be addressed in those policies. The influence of ethnicity on auditor choice could also have implications for other developing countries where the government takes a special interest in racial and business policies such as Fiji, Hong Kong, India, Indonesia, Sri Lanka and Singapore. Hence, future researchers may replicate the study and test it in those countries. Another avenue for research is in terms of research method. Instead of using the positivist approach, qualitative research may enhance our understanding of the “culture” (surrogated by “ethnicity”) in selecting auditors and also how clients and auditors from different background deal with each other in various auditor-client relationships.

Nasser et al. (2006) tackles a different aspect of auditor-client relationship; auditor tenure and propensity of switching in Malaysia. Lengthy tenure is said to have an adverse effect on auditor independence. In some countries, mandatory rotation of the audit firm or audit partner has been introduced to promote greater independence. Malaysia too is considering introducing audit firm rotation every five years. The results in their study provide some evidence of possible impairment of independence stemming from the unhealthy competitive environment and the presence of financially distressed companies over the period of analysis. Although the paper does not specifically address the impact of “culture” it provides some insight on the audit environment, the extent of auditor-client relationship and whether the move to make rotation mandatory is indeed necessary. Future research may consider the impact of ethnicity on audit tenure, audit switching and audit quality together with financial distress and types of audit opinion. If rotation is made mandatory, is there any resistance or conflict between the various parties viz. regulators, the professional bodies, auditors and clients, as is currently the case in Indonesia? Should the mandatory rotation be for audit firms or audit partners? Should rotation be applied differentially to clients of large and small audit firms? Those are some issues worth investigating and perhaps qualitative research may help answer some of the questions that may not be captured through the quantitative approach.

The paper by Ismail et al. (2006) looks at the issue of auditor choice from a marketing perspective and partly addresses the issue of research method. Audit firms are service providers and like any other service-oriented industry, the quality of service rendered is an antecedent to clients’ satisfaction and loyalty. Using questionnaires adapted from the SERVQUAL instrument used in marketing research, the researchers gauged the expectations and perceptions of service quality of audit firms as well as identify symptoms and underlying problems that inhibit the effective provision of quality service by audit firms. The findings in their study are based mainly on the five service quality dimensions viz. tangibility, reliability, responsiveness, assurance and empathy reported in the marketing literature. Hence, future study may identify and explore other dimensions that are unique to the auditing industry and also compare if those dimensions are perceived in the same way in other countries that share similar socio-economic structures. Another avenue for research is to explore the perceptions of Malaysian stakeholders other than the clients about the current role of the profession and the services it provides, and link these perceptions with auditing concepts such as auditor independence, “due care” and “a true and fair view”.

Financial reporting and governance mechanisms

The Asian financial crisis, which was to a certain extent attributed to weak corporate governance (Kim, 1998; Khas, 2002), prompted the governments in the region to seriously consider ways of improving the governance structures in their respective countries. Most of the countries in the region have each now established a code of corporate governance to ensure the continuous flow of funds and to boost the confidence of investors in their capital markets. It is worth noting that the codes are largely derived from recommendations in developed countries and may not necessarily be applicable to developing countries. Every nation has its own national character as well as social and economic priorities and as such, what is desirable in one country may not be so in another. Likewise, every corporation has its own unique history, culture and business goals (Haniffa and Hudaib, 2006). Hence, efforts to reform corporate governance and to make governance mechanisms effective requires understanding of the cultural norms and expectations of that society.

The papers by Yatim et al. (2006) and Abdul Rahman and Mohamed Ali (2006) tackle the issues related to efficacy of governance mechanisms in reducing auditors’ risk assessments (and in turn, lower audit fees) and earnings management, respectively. They include ethnicity as one of the variables. Yatim et al. (2006) find external audit fees to be positively related to board independence, audit committee expertise, and the frequency of audit committee meetings. They posit that due to weaker governance practices, Bumiputera-controlled firms pay higher audit fees but instead found audit fees to be negatively related to Bumiputera-owned firms. Additional analysis conducted confirmed that Bumiputera firms practice more favourable corporate governance practices compared to their non-Bumiputera counterparts. Abdul Rahman and Mohamed Ali (2006) found earnings management to be positively related to the size of the board of directors but not other corporate governance mechanisms (independence of board and audit committee and ethnicity).

One drawback of the papers is that they are cross-sectional studies and therefore time-specific. A longitudinal study could be undertaken to enhance our understanding of the issues related to governance. Given the high concentration of ownership in Malaysia (as elsewhere in Asia), future research may consider the influence of ownership structure on earnings management and auditors’ risk assessment.

Concluding remarks

This MAJ special issue may not be exhaustive in coverage of research in accounting and auditing related to ‘culture’ but the authors’ chosen themes provide useful insights and add to the literature of accounting in Asia. The papers illustrate how political and socio-economic changes at the macro level impact the profession, auditor-client relationships and governance mechanisms on reporting and risk assessment in Malaysia. The papers yield many possibilities for future research, both national and international (especially comparative studies with other countries that share similar structures). Hopefully readers are inspired to take the challenge in contributing to the literature on culture and accounting.

Ros HaniffaAccounting and Finance Group,Bradford University School of Management, Bradford, UK

Note1. Several other definitions of culture have been advocated by researchers. According to Hofstede (1980, p. 25), culture is “the collective programming of the mind which distinguishes the members of one human group from another.” Rohner (1984, p. 119) defined culture as “the totality of equivalent and complementary learned meanings maintained by a human population, or by identifiable segments of a population, and transmitted from one generation to the next.” Harris (1987, p. 6) defined it as “the learned, socially acquired traditions and life styles of the members of a society, including their patterned, repetitious way of thinking, feeling and acting.” Culture is also defined as a “filter for perceiving the environment” (Birnberg and Snodgrass, 1988, p. 448). Perera (1989, p. 43) regarded culture as “an expression of norms, values, beliefs, and customs which reflect typical behavioural characteristics” that are widely shared in a specific society at a particular point in time.