The impact of governance mechanisms on audit fees and non-audit fees in Islamic banks in Malaysia

Abstract

This study aims to examine whether corporate governance mechanisms affect the audit process in terms of audit fee pricing and also non-audit fee for regulated companies. The governance mechanisms are the characteristics of board of directors (size and independence), the characteristics of audit committee (size, expertise, independence and meetings) and the characteristics of Shariah committee (size and expertise). The study first reviews prior literature and identifies factors within the categories of client size, audit risk and corporate governance mechanisms that are likely to influence audit fees and non-audit fees of Islamic banks. It then regresses these variables on audit fees and non-audit fees using panel data regression model for a sample of Islamic banks in Malaysia. From 112 observations of the study sample, this study finds that audit committee independence and Shariah committee expertise have significant association with audit fees. It also finds that audit committee size, audit committee independence and audit committee meetings have significant association with non-audit fees. However, most corporate governance variables lack significant relationships with audit fees. It shows that internal governance agents in a regulated industry do not demand a more extensive audit. It could be because of the overlap between regulatory oversight and audit monitoring. This study also provides support for the step up practice recommended in MCCG 2017 regarding the importance of establishing audit committee that consists of solely independent directors that could not only guarantee proper monitoring function but also reduce control risk and subsequently will be charged with lower audit fees by the external auditors. It also suggested that the Shariah committee with accounting qualification/background could not only ensure the Shariah compliance of Islamic banking and finance business but also decrease the external audit fees. Apart from contributing to the literature on corporate reporting and governance system, this study provides feedback to the regulatory bodies on governance practices in Islamic banking institutions in Malaysia.