The relationship between corporate governance, political influence and financial reporting quality of Malaysian listed firms

In the institutional settings of an emerging economy such as Malaysia, political connection is a dilemma that plagued the business environment. The study examines the relationship between corporate governance, political influence and financial reporting quality of Malaysian listed firms based on 643 firms continuously listed from 2010 to 2104. Political influence towards Malaysian listed firms varies from politician director, Bumiputera (1) director and government ownership. The current study is divided into two proxies of financial reporting quality, the occurrences of real earnings management (REM) and accounting misstatement (AM). The first part of the study focuses on the probable determinants for the occurrences of real earnings management, while the second part of the study focuses on the consequence of earnings management which is the accounting misstatement. The findings show that Malaysian listed firm practices earnings management despite having a stringent and extensive corporate governance policies. Nevertheless, earnings management does intervene in the relationship between corporate governance, political influence and accounting misstatement. In particular, politics does have influence over the corporate governance mechanisms in relation to financial reporting quality. The current findings show that politician director and Bumiputera director have a negative relationship with several corporate governance mechanisms and financial reporting quality. Between politician director and Bumiptera director, the latte may exert more political dominance in the Boardroom. On the other hand, findings on government ownership are more likely to exhibit higher financial reporting quality. This indicates that government ownership among Malaysian listed firms may help boost the corporate governance's effectiveness and this is reflected in higher financial reporting quality and lower financial misreporting. (1) Bumiputera refers to the Malays and other indigenous ethnics in Malaysia as specified in Article 153 of the Constitution.