Document Type : Original Research


1 Faculty of Management, Canadian University Dubai, Dubai, United Arab Emirates

2 Faculty of Management, COMSAT University of Islamabad, Islamabad, Pakistan

3 Depatment of Accounting, City University of Ajman, Ajman, United Arab Emirates


In this study we have examined the effect of internal audit committee and external auditor quality on accrual-based measures of accounting conservatism, and the benefits of accounting conservatism on firms’ market performance. Moreover, this study also investigates whether the accrual-based conservatism mediate the relationship between audit committee and external auditor quality factors with market-based firms’ performance. A total of 543 sample firms are selected from the Bursa Malaysia for the period from 2004 to 2013. For data analysis, panel data methodology is employed and structural equation modeling (SEM) technique is used to test the developed hypotheses of this study. Results show that audit committee effectiveness and external auditor quality found to be significant with two-year-lagged effect on accrual-based measure of conservatism. Furthermore, accrual-based measure of conservatism mediated the relationship between (a) audit committee effectiveness and market-based firms’ performance, and (b) external auditor quality and market-based firms’ performance. The findings of this study contribute to the signaling theory, agency theory, reputation theory and accounting conservatism literature in emerging economies settings.


Abbott, L. J., Parker, S., Peters, G. F., & Raghunandan, k. (2003a).The association between audit committee characteristics and audit fees. Auditing: A Journal of Practice &Theory 22 (2), 17-32.
Abbott, L. J., S. Parker, & G. F. Peters. (2004). Audit committee characteristics and restatements. Auditing: A Journal of Practice & Theory 23 (1): 69-88.
Ahmed, A., & Duellman, S. (2007). Conservatism and board of director characteristics: An empirical analysis. Journal of Accounting and Economics, 43, 411-437.
Attig, N., El Ghoul, S. and Guedhami, O. (2009). Do Multiple Large Shareholders Play a Corporate Governance Role? Evidence from East Asia. Journal of Financial Research. 32(4), 395-422.
Ball, R., & Shivakumar, L. (2005).The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research.
Balsam, S., Krishnan, J. & Yang, J. S. (2003). Auditor industry specialization and Earnings quality.Auditing: A Journal of Practice and Theory, 22, 71-97.
Barberis, N., Shleifer, A. and Vishny, R. (1998). A Model of Investor Sentiment. Journal of Financial Economics, 49, 307–343.
Basioudis, I. G., E. Papakonstantinou, & M. A. Geiger.(2008). Audit fees, non-audit fees and auditor going-concern reporting decisions in the United Kingdom. Abacus 44(3): 284-309.
Basu, S. (1997).The conservatism principle and the asymmetric timeliness of earnings. Journal of Accounting and Economics, 24, 3-37.
Beekes, W., Peter, F.P., & Young, S. (2004). The link between earnings timeliness, earnings conservatism and board composition: Evidence from the U.K. Corporate governance: An International Review, 12, 47-59.
Bliss, J. H. (1924). Management through accounts. New York: The Ronald Press Co.
Byrne, B. M. (2010). Structural equation modeling with LISREL, PRELIS and SIMPLIS: Basic concepts, applications, and programming (2nd ed.). Mahwah: Erlbaum.
Cahan, S., & Zhang, W. (2006). After Enron: Auditor conservatism and ex-Andersen Clients. The Accounting Review, 81, 49-82.
Caramanis, C., & C. Lennox. (2008). Audit effort and earnings management. Journal of Accounting and Economics 45 (1): 116-138.
Chen, K. Y., Elder, R. J., & Hsieh, Y. M. (2007a). Corporate governance and earnings management: the implications of corporate governance best-practice principles for Taiwanese listed companies. Journal of Contemporary Accounting & Economics, 3(2), 73-105.
Chen, L., Paek, W., & Sami, H. (2007b).Accounting conservatism, earnings Persistence and pricing multiples on earnings. Working Paper.
Choi, H. M., Sul, W. & Min, S. K. (2012a).Foreign Board Membership and Firm Value in Korea. Management Decision.50 (2), 3-3.
Choi, J. H., & Doogar, R. (2005).Auditor tenure and audit quality: evidence from Going concern qualifications issued during 1996-2001. Working Paper. Hong Kong. Hong Kong University of Science and Technology.
Christensen, J., Kent, P. and Stewart, J. (2010).Corporate Governance and Company Performance in Australia. Australian Accounting Review, 20(4), 372-386.
Chung, R., Firth, M., & Jeong-Bon, K. (2003). Auditor conservatism and reported    earnings.
Cohen, J., G. Krishnamoorthy, & A. Wright. (2004). The corporate governance mosaic and financial reporting quality. Journal of Accounting Literature 23: 87-152.
Daily, C. M., & Dalton, D. R. (1992). The relationship between governance structure and corporate performance in entrepreneurial firms. Journal of Business Venturing, 7(5), 375-386.
DeFond, M. L., Hann, R. N., & Hu, X. (2005). Does the market value financial expertise onaudit committees of board of directors? Journal of Accounting Research 43 (2): 153-193.
DeZoort, F. T., & S. E. Salterio. (2001). The effects of corporate governance experience and financial reporting and audit knowledge on audit committee member's judgements. Auditing: A Journal of Practice & Theory 20 (2): 31-47.
DeZoort, F. T., D. Hermanson, R. , D. S. Archambeault, & S. A. Reed. (2002). Audit committee effectiveness: A synthesis of the empirical audit committee literature. Journal of Accounting Literature 21: 38-75.
Dhaliwal, D. S., Naiker, V., & Navissi, F. (2006).Audit committee financial expertise, corporate governance and accruals quality: An empirical analysis. Working Paper. Texas, US. University of Arizona.
Dhole, S. (2010).On the firm-specific component of conservatism and its determinants. Doctoral Dissertation. Texas: University of Houston
Duellman, S. (2006). Evidence on the role of accounting conservatism and corporate governance (Doctoral thesis). Retrieved from ProQuest Dissertations and Theses database. (AAT 3241851).
Evans. R. & Clifford, P., (1997). Non-executive directors: A question of independence. Corporate Governance: An International Review 5 (4): 224-231.
Fei. G. C. (2014). Economic incentives, involvement in management, monitoring and performance of family businesses in Malaysia. Doctoral Dissertation, Universiti Teknologi Malaysia, Malaysia.
Fei. G. C., Rasli, A. & Khan, S. R. (2014). CEO duality, board independence, corporate governance and firm performance in family firms: evidence from the manufacturing industry in Malaysia. Asian Business & Management, 13(4), 333-357.
Francis, J., LaFond, R., Olsson, P.M., & Schipper, K. (2004).Costs of equity and earnings attributes. The Accounting Review, 79, 967-1010.
Francis, J.R., Maydew, E.L., & Sparks, H.C. (1999).The role of big 6 auditors in the credible reporting of accruals. Auditing: A Journal of Practice and Theory, 18, 17-34.
Garcı´a Lara, J. M., Garcı´a Osma, B., & Penalva, F. (2009). Accounting conservatism and corporate governance. Review of Accounting Studies, 14(1), 161-201.
Garcia, J.M., Garcia Osama. B., & Penalva, F. (2009). Accounting conservatism and corporate governance. Review of Accounting Studies 14, 161-201.
Ghosh, A., & Moon, D. (2005).Auditor tenure and perceptions of audit quality. The Accounting Review 80 (2): 585-612.
Givoly, D., & C. Hayn. (2002). Rising conservatism: Implications for financial analysis. Financial Analysts Journal 58 (1): 56-74.
Givoly, D., & Hayn, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of Accounting & Economics, 29, 287-320.
Givoly, D., Hayn, C.K., & Natarajan, A. (2007). Measuring reporting conservatism. Accounting Review, 82, 65-106.
Grosfeld, I. (2009). Large Shareholders and Firm Value: Are High-Tech Firms Different? Economic Systems. 33(3), 259-277.
Gutierrez, L. H. & Pombo, C. (2009). Corporate Ownership and Control Contestability in Emerging Markets: The Case of Colombia. Journal of Economics and Business. 61(2), 112-139.
Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2010). Multivariate data analysis. A global perspective (7th ed.). Upper Saddle River, NJ: Person-Hall International.
Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2006). Multivariate data analysis (6th ed.): Pearson Prentice Hall.
He, J. and Wang, H. C. (2009). Innovative Knowledge Assets and Economic Performance: The Asymmetric Roles of Incentives and Monitoring. The Academy of Management Journal. 52(5), 919-938.
Healy, P. M., & Wahlen, J. M. (1999). A review of the earnings management literature and its implications for standard setting. Accounting Horizons, 13(4), 365-383.
Hong, H. and Stein, J. C. (1999). A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets. The Journal of Finance 54 2143–2184.
Hong, H., Torous, W. and Valkanov, R. (2007). Do Industries Lead Stock Markets? Journal of Financial Economics, 83, 367–396.
Jeffrey, L. C., Chen, F., Dou, Y., &   Xina. B. (2014). Accounting Conservatism and Performance Covenants: A Signaling Approach. AAA 2010 Financial Accounting and Reporting Section (FARS) Paper. Available at SSRN: or
Karamanou, I., & Vafeas, N. (2005). The association between corporate boards, audit committees, and management earnings forecasts: An empirical analysis. Journal of Accounting Research, 43(3), 453-486.
Khan, F. (2014). Economic exposure, pricing of risk and various volatility dynamics of stock returns on an emerging stock market. Doctoral Dissertation. Uinversiti Teknologi Malaysia, Malaysia.
Khan, M., & Watts, R.L. (2009). Estimation and empirical properties of a firm-year measure of conservatism. Journal of Accounting and Economics, 48, 132-150.
Kim, M., & Kross, K. (2005). The ability of earnings to predict future operating cash Flows has been increasing not decreasing. Journal of Accounting Research 43 (5): 753-780.
Kinney, W. R., &Uecker, W. C. (1982). Mitigating the consequences of anchoring in auditor judgments.The Accounting Review, 57, 55-69.
Klein (2002a). Economic determinants of audit committee effectiveness. The Accounting Review (April):435-454.
Klein (2002b). Audit committees, board of director characteristics and earnings management. Journal of Accounting and Economics (33): 375-400.
Kline, R. B. (2005). Principles and Practice of Structural Equation Modeling (2nded.). New York: The Guilford Press.
Krishnan, G. V., & G. Visvanathan. (2008). Does the SOX definition of an accounting expert matter? The association between audit committee directors' accounting expertise and accounting conservatism. Contemporary Accounting Research 25 (3): 827-857.
Krishnan, G. V., & Visvanathan, G. (2007). Does the SOX definition of an accounting expert matter? The association between audit committee directors' accounting expertise and accounting conservatism. Contemporary Accounting Research 25 (3): 827-857.
Krishnan, G.V. (2007). Did earnings conservatism increase for former Andersen clients? Journal of Accounting, Auditing & Finance, 22, 141-163.
Kung, F. H., James, K., & Cheng, C. (2008). Is accounting conservatism more pronounced for Chinese companies cross-listed on an overseas exchange? In Accounting and Finance Association of Australia and New Zealand (AFAANZ) Conference. Sydney, NSW. Accounting and Finance Association of Australia and New Zealand.
Kwon, Y.K., Newman, D.P., &Suh, Y.S. (2001).The demand for accounting conservatism for management control. Review of Accounting Studies, 6, 29-51.
LaFond, R., & Watts, R. (2008).The information role of conservatism. The Accounting Review, 83, 447-478.
LaFond, R., &Roychowdhury, S. (2008). Managerial ownership and accounting conservatism. Journal of Accounting Research, 46, 101-135.
Lara, J. M.G., Lara, G.,  Osma, B. G. & Penalva, F. (2016). Accounting conservatism and firm investment efficiency. Journal of Accounting and Economics, 61(1), 221-238.
Lara, J.M.G., Osma, B.G., & Penalva, F. (2009a). Conservatism and corporate governance. Review of Accounting Studies, 14, 161-201.
Lara, J.M.G., Osma, B.G., & Penalva, F. (2009b). The economic determinants of conditional conservatism. Journal of Business Finance and Accounting, 36, 336-327.
Lennox, C. S., & C. W. Park. (2007). Audit firm appointments, audit firm alumni, and audit committee independence. Contemporary Accounting Research 24 (1): 235-258.
Liew, C. Y., Samad, F. A., Munir, S. A. & Alfan, E. (2011). Expropriation-Related Variables & Firm Performance: Evidence from Malaysian Family Firms. Retrieved from: or (accessed 12 April 2012).
Ling, L. (2007). Auditor-provided tax services and 'last-chance' earnings management: The importance of audit committees. In Auditing Section 2007 Midyear Conference. Charleston, South Carolina. American Accounting Association.
Lobo, G. J., & Zhou, J. (2006).Did conservatism in financial reporting increase after the Sarbanes-Oxley act: Initial evidence. Accounting Horizons, 20, 57-73.
Luo, J.-H., Wan, D.-F., Cai, D. and Liu, H. (2013). Multiple Large Shareholder Structure and Governance: The Role of Shareholder Numbers, Contest for Control, and Formal Institutions in Chinese Family Firms. Management and Organization Review. 9(2), 265-294.
Mangena, M., & R. Pike. (2005). The effect of audit committee shareholding, financial expertise and size on interim financial disclosures. Accounting & Business Research 35 (4): 327-349.
Mohammed, N. F., Ahmed, K., & Ji, X. D. (2010).Accounting conservatism, Corporate governance and political influence: Evidence from Malaysia. Working Paper.Melbourne, VIC. La Trobe University.
Myers, J. N., Myers, L. A., & Omer, T. C. (2003). Exploring the term of the auditor-Client relationship and the quality of earnings: A Case for mandatory auditor rotation? The Accounting Review 78 (3): 779-799.
Noland, T. G., D. L. Nichols, & D. L. Flesher. (2004). Audit committee effectiveness in the banking industry. Management Accounting Quarterly 5 (3): 1-4.
Pae, J., Thornton, D., & Welker, M. (2003).The Link between accounting conservatism in balance sheets and income statements: Empirical implications. Working paper of Queen’s University.
Pae, J., Thornton, D.B., & Welker, M. (2005).The link between earnings conservatism and the price-to-book ratio. Contemporary Accounting Research, 22, 693-717.
Poteshman, A. M. (2001). Underreaction, Overreaction, and Increasing Misreaction to Information in the Options Market. The Journal of Finance 6, 851-876.
Qiang, X. (2007). The effects of contracting, litigation, regulation, and tax costs on conditional and unconditional conservatism: Cross-sectional evidence at the firm level. The Accounting Review, 82, 759-796.
Rapani, N. H. A. (2011). Influence of Auditor Quality and Audit Committee Effectiveness on Earnings Conservatism of Malaysian Public Listed Firms. PhD Dissertation. Curtin University Australia.
Razzaq, N., Rui, Z. & Donghua, Z. (2016).  Accounting Conservatism Alleviates Firm’s Investment Efficiency: An Evidence from China. International Journal of Business and Economics Research. 5(4), 85-94.
Ren, Y. (2014). Corporate governance, conservatism and firm performance: Evidence from China. Doctoral Dissertation. Edith Cowan University. Retrieved from theses/1580
Roychowdhury, S., & Watts, R.L. (2007).Asymmetric timeliness of earnings, market-to-book and conservatism in financial reporting. Journal of Accounting and Economics 44, 2-31.
Ruddock, C., Taylor, S.J., & Taylor, S.L. (2006). Non audit services and earnings conservatism: Is auditor independence impaired? Contemporary Accounting Research, 23, 701-746.
Salter, S. B. (1998). Corporate financial disclosure in emerging markets: Does economic development matter? The International Journal of Accounting 33 (2): 211-234.
Song, J., & B. Windram. (2000). Benchmarking audit committee effectiveness in the UK. Working Paper. Edinburgh, Scotland. Edinburgh Napier University.
Steward, J., & Munro, L. (2007). The impact of audit committee existence and Audit committee meeting frequency on the external audit: Perceptions of Australianauditors. International Journal of Auditing 11 (1): 51-69.
Tabachnick, B. G., & Fidell, L. S. (2007). Using multivariate statistics (5th ed.). Boston: Allyn and Bacon.
Turley, S., & M. Zaman. (2007). Audit committee effectiveness, informal process and behavioural effects. Accounting, Auditing and Accountability Journal 20 (5): 765- 788.
Vafeas, N. (2005). Audit committee, boards and the quality of reported earnings. Contemporary Accounting Research 22 (4): 1093-1122.
Vera-Munoz, S. C. (2005). Corporate governance reforms: Redefined expectations of audit committee responsibilities and effectiveness. Journal of Business Ethics 62 (2): 115- 127.
Vichitsarawong, T., Eng, L. L., & Meek, G. K. (2010). The impact of the Asian Financial crisis on conservatism and timeliness of earnings: Evidence from Hong Kong, Malaysia, Singapore and Thailand. Journal of International Financial Management and Accounting, 21 (1), 32-61.
Watts, R. L., & Zuo L. (2011). Accounting conservatism and firm value: evidence from the global financial crisis. MA, United States: Massachusetts Institute of Technology, Sloan School of Management.
Watts, R.L. (2003a). Conservatism part 1: Explanations and implications. Accounting Horizons, 17, 207-221.
Watts, R.L. (2003b). Conservatism part II: Evidence and research opportunities. Accounting Horizons, 17, 287-301.
Wei, G. (2007). Ownership structure, corporate governance and company performance in China. Asia Pacific Business Review, 13(4), 519-545.
Whitaker, B. G., Dahling, J. J. &  Levy, P. (2007). The Development of a Feedback Environment and Role Clarity Model of Job Performance. Journal of Management, 33(4), 570-591
Wong, T. J., He, X., & Young, D. (2009). Challenges for implementation of fair value accounting in emerging markets: Evidence from IFRS adoption in China. Working paper.
Wu, Y. (2011). Research on the relationship between controlling shareholder and accounting conservatism in China. Applied Mechanics and Materials, 65, 579-584.
Yunos, R. M., (2011). The effect of ownership concentration, board of directors, audit committee and ethnicity on conservative accounting: Malaysian evidence. PhD Dissertation. School of Accounting, Finance and Economics Faculty of Business and Law Edith Cowan University, Perth Western Australia.