The Influence of Audit and Risk Management Committees on Financial Distress Among Public Listed Firms in Malaysia

Wong, Seow Sze (2024) The Influence of Audit and Risk Management Committees on Financial Distress Among Public Listed Firms in Malaysia. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

Corporate governance plays a significant role in mitigating the risk of financial distress. Therefore, all companies should adopt corporate governance principles and practices, such as the composition requirements of the audit committee and other audit committee characteristics. This paper investigates the influence of internal audit committees (i.e., audit committee independence, audit committee size, audit committee meeting frequency, and audit committee gender diversity) and financial distress for 83 public listed firms in the Malaysian Main Market from 2018 to 2023. Besides that, this paper analyses the moderating role of the risk management committee (i.e., risk management committee independence, risk management committee size, risk management committee meeting frequency, and risk management committee gender diversity) on the relationship between the audit committee and financial distress. The pooled ordinary least squares method and random effect model are used in this research to carry out the analyses. Based on the analyses, this study concludes that there is a significant and positive relationship between audit committee independence and financial distress. The result revealed that the presence of independent members in audit committees does not prevent a company from experiencing financial distress. On top of that, the audit committee size is significantly and negatively related to financial distress, in line with resource dependence theory. Besides that, audit committee meeting frequency has a positive and statistically significant relationship with financial distress. The results indicate that frequent audit committee meetings do not reduce the likelihood of a company undergoing financial distress. Moreover, the results show the association between audit committee gender diversity and financial distress is insignificant. Subsequent analyses suggested that among the RMC characteristics, only RMC independence positively moderate the relationship between audit committee and financial distress. Besides that, RMC size does not has a moderating effect on the relationship between audit committee and financial distress. The empirical findings have several implications such as policymakers should mandate the presence of RMCs in listed companies' governance structures and the regulator bodies should ensure the company complies with listing requirements to prevent the public listed firms in Main Market from experiencing financial distress and safeguard shareholders’ interests. Furthermore, firms should comply with listing requirements, including the establishment of audit committees with the necessary characteristics, as well as take the recommendations outlined in the MCCG to establish RMC, enhancing firms' risk management frameworks and policies. Finally, the findings of this research could assist investors in evaluating the financial health and risk profiles of public listed firms in Malaysia to make more informed investment decision