Ownership Structure Firms in Malaysia: Internal Audit Function and Audit Fees

The main objective of this study is to further the understanding of the association between the internal audit function attributes and audit fees in the context of an emerging economy that has an institutional setting that differs from most developed western economies. The revision of the Bursa Malaysia Listing Requirements (BMLR) in 2008 to enhance the internal governance mechanisms of firms provides a fitting opportunity to examine audit fees in a different ownership structured firms. The uniqueness of the Malaysian corporate setting with the presence of politically connected (PCON) firms, institutional ownership and managerial ownership (INST&MGRL) firms, and family ownership (FAMILY) firms further motivated this study to examine the relationship between internal audit function attributes and audit fees. Using data from 567 firm-year observations from years 2008 to 2010 after the revision of BMLR, we find that the association between internal audit function attributes namely objectivity and work performance, and audit fees is positive and significant for PCON firms, suggesting that firms with strong corporate governance practices have the tendency in engaging higher levels of internal auditing and are also willing to pay for a higher quality of external audit work. The findings of this study support the claim in the World Bank 2012 that enhanced reforms since 2008 have been effectively implemented by listed firms in Malaysia.