Profitability, Market Incentive and Audit Quality of Financial Misstatements: Evidence from Malaysian Public Listed Companies (PLCs)

Abstract

The purpose of this study is to examine whether there is mean difference in profitability (Profit), market incentive (EPrice) and audit quality (AudQ) variables between restatement and non-restatement firms in Malaysia. The sample comprises of 285 public listed companies on the Main Board of Bursa Malaysia for the years between 2005 and 2013. A descriptive statistics analysis is performed to differentiate the characteristics of restatement and non- restatement firms. The study finds significant difference between restatement and non-restatement firms in the profitability and market incentive variables. The results show that restatement firms reported higher profit than non- restatement firms in the year prior to the restatement year. And, restatement firms have higher earnings-to-price ratio (proxy for market incentive) relative to the non-restatement firms that are matched by total assets, but lower than non-restatement firms which not matched by total assets. This indicates that restatement firms are able to maintain high growth expectations embedded in the firm’s share price. The study finds no significant difference in audit quality between misstatement and non-misstatement firms. The comparable audit fees between restatement and non-restatement firms indicate that the external auditors of restatement firms failed to appropriately assess the audit risk of these firms.