Risk management committee, political connection and audit pricing: Evidence from Malaysia

Abstract

This study investigates the impact of risk governance mechanisms on audit pricing in a relationship-based context. Specifically, this study considers how the formation of a Risk Management Committee (RMC) and its characteristics affect audit pricing and what its moderating effects are on the relationship between political connection and audit pricing. This study uses 2,460 firm-year observations from 2012 to 2017, comprising data from non-financial firms listed on the Main Market of Bursa Malaysia, Malaysia’s stock market. A panel regression analysis was adopted in the main analysis, which generated mixed support for the hypotheses. Results showed that auditors charged higher audit fees to politically connected firms. Similarly, politically connected firms that have an RMC tend to pay more audit fees. RMC meeting frequency, size and expertise are associated with lower audit fees. Politically connected firms with an RMC with independent members and more diverse experts tend to pay lower audit fees. The findings from this study can provide guidance to policy makers and practitioners on the composition of the RMC when formulating future risk management legislation.