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The effect of corporate governance and firm-specific characteristics on the

incidence of financial restatement

Article in Journal of Financial Crime · August 2020

DOI: 10.1108/JFC-06-2020-0103

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Incidence of
The effect of corporate financial
governance and firm-specific restatement

characteristics on the incidence of

financial restatement
Suhaily Hasnan, Mardhiahtul Huda Mohd Razali and
Alfiatul Rohmah Mohamed Hussain
Faculty of Accountancy, Universiti Teknologi MARA (UiTM),
Shah Alam, Malaysia

Abstract
Purpose – This paper aims to examine the effects of corporate governance and firm-specific characteristics
on the incidence of financial restatement among Malaysian public listed firms.
Design/methodology/approach – The elements of corporate governance consist of board size, board
independence, multiple directorships, audit committee expertise, external audit quality and executive
compensation. Meanwhile, the firm-specific characteristics consist of firm age, firm performance, firm
leverage and firm liquidity. The agency theory has been used to guide the study. This study used a matched-
pair sample that consisted of a sample of 49 restatement firms and 98 non-restatement firms between the
years 2011 and 2016. Univariate (t-test and Pearson correlation) and multivariate (logistic regression)
statistical techniques were used to test the hypotheses.
Findings – The results show that there is a negative and significant relationship between
executive compensation and firm performance, and the incidence of financial restatement. In addition, there is
a positive and significant relationship between firm leverage and the incidence of financial restatement.
However, the other corporate governance and firm-specific characteristic variables included in the study were
found to be insignificant with the incidence of financial restatement. This paper provides evidence that some
form of corporate governance mechanisms and firm-specific characteristics, particularly executive
compensation, firm performance and firm leverage, may influence the direction and magnitude of the
incidence of financial restatement. The findings indicate that optimal executive incentives may align
management interests with those of shareholders. In addition, greater performance and lower leverage levels
minimise firms’ financial pressure and debt covenant violation risk, which may reduce the management
tendency to misstate the financial statement, and consequently, minimise the likelihood of financial
restatement.
Originality/value – The main value of this paper is the effect of corporate governance and firm-specific
characteristics on the likelihood of financial restatement in Malaysia. The findings of this study provide
useful insights for regulators to improve and reconsider the current regulations on corporate governance
mechanisms.
Keywords Corporate governance, Firm characteristics, Financial restatements, Malaysia
Paper type Research paper

Funding: ARI HICoE Grant (600-IRMI/ARI 5/3(029/2019)

The authors would like to express their gratitude to the Accounting Research Institute, Universiti
Teknologi MARA and Ministry of Education of Malaysia for funding the research project through Journal of Financial Crime
the ARI HICoE Grant (600-IRMI/ARI 5/3(029/2019). Our appreciation also goes to the Faculty of © Emerald Publishing Limited
1359-0790
Accountancy, Universiti Teknologi MARA for facilitating this research project. DOI 10.1108/JFC-06-2020-0103
JFC Introduction
A financial statement is a report that summarises a firm’s operations, activities, financial
position and business performance. Fundamentally, the financial statement is the main
source of information that various parties in the financial market use to analyse firms’
activities (Anderson and Yohn, 2002; Kim and Koo, 2014) and make decisions. Because of
that, a fraudulent or erroneous financial statement can cause a wrongful judgment or
decision to be made. As a restatement indicates that the preceding financial information
reported contains an error and is inaccurate, the previous decisions made by users of the
financial statement may also be affected. Indirectly, it can affect the efficiency of the market.
To overcome such problems, it is important for a company to produce high-quality financial
statements (Herath and Albarqi, 2017).
According to the Companies Act 2016 (Act 777), the preparation of financial statements
should follow the accounting standards. However, the Generally Accepted Accounting
Principles (GAAP) offer flexibility to companies with several accounting policy options,
which then creates the opportunity for them to window-dress their financial statements, and,
in turn, increase the incidence of restatement at a later period (Albring et al., 2013; Qasem
et al., 2017). According to Schroeder (2001), the Securities and Exchange Commission in the
USA mentioned that the most noticeable indicator for inappropriate accounting is through
restatement. A restatement is also an obvious signal that a company’s prior financial
statements were unreliable and of relatively lower quality (Anderson and Yohn, 2002).
Impliedly, the occurrence of financial restatement indicates a serious failure of financial
reporting, and evidently, can significantly affect many organisations, institutions, investors,
markets and regulators (Chi and Sun, 2014).
According to Rasyid and Ardana (2014), corporate governance implementation can help
to minimise the incidence of financial restatement. Hence, it is necessary for all companies
that are publicly listed to implement the concept of corporate governance (Rasyid and
Ardana, 2014). Corporate governance provides a control mechanism framework that can
help companies to achieve their goals while preventing undesirable conflicts (Securities
Commission Malaysia, 2017). However, despite all the corporate governance mechanisms
introduced by the regulators, the ability of companies to manipulate financial statements
still persists. Ultimately, such manipulation leads to the occurrence of financial restatement.
This has been proven through the discovery and announcement of several Malaysian cases,
such as the CSM Corporation Berhad, OilCorp Berhad and Aktif Lifestyle Berhad (Abdullah
et al., 2010). These companies were required to amend and reissue their financial statements
after they were known to be involved in financial statement manipulation.
Apart from corporate governance practices, companies vary in many ways. As such, it is
worth considering how such differences among companies may influence the incidence of
financial restatement. The study by Rezaei and Mahmoudi (2013) suggested that firm size and
firm losses in the year before the restatement have a relationship with financial restatement,
while other scholars suggested that there are associations between company characteristics and
earnings management (Waweru and Riro, 2013; Swai, 2016; Alareeni, 2018). Thus, it is believed
that firm-specific characteristics may also contribute to the occurrence of financial restatement.

Conceptualisation
Financial restatement
A financial restatement is defined as the adjustment of the financial statement because of
the failure to comply with the GAAP requirements (Abdullah et al., 2010; Wan Mohammad
et al., 2018). Basically, the occurrence of financial restatement happens when financial
statements are found to contain a material misstatement. A misstatement is a manipulation
of financial statement disclosure, where the reported item is not according to the established Incidence of
accounting standards and does not fairly present the firm’s actual financial position and financial
performance (Ettredge et al., 2010; Dechow et al., 2011). Therefore, several studies (Abbott
et al., 2004; Abdullah et al., 2010) used “restatement” and “misstatement” terms
restatement
interchangeably (Mohamed Hussain et al., 2014). This is because it is sensible to assume that
restatement firms are firms that are involved with the manipulation of earnings deliberately,
as restatement only takes place when misstatements are discovered (Richardson et al., 2003).
Eilifsen and Messier (2000) identified four states that must be fulfilled for the audited
financial statements to be subsequently restated. Firstly, a material misstatement must occur
because of some type of inherent risk. For example, it is caused by aggressive accounting
practices by management, misapplication of the GAAP and others. Secondly, the misstatement
is neither stopped nor discovered by the internal control of the company. Thirdly, the
misstatement fails to be detected by the external auditor, and hence, causes the financial
statement to be issued. Lastly, the misstatement is later discovered and requires amendment,
restatement and reissuance of the earlier financial statement, if it is deemed material.

Corporate governance
There are various interpretations of corporate governance. Some authors defined it as a term
that refers to private and public institutions, which includes laws, regulations and business
practices that govern the relationship between corporate managers and stakeholders (Oman,
2001, as cited in Khan, 2011). Meanwhile, other authors described corporate governance as a
mix of different mechanisms that direct and control the company (Kim et al., 2005; Hassan,
2008). All in all, corporate governance can be seen as a set of mechanisms that can help the
stakeholders to protect themselves from the opportunistic behaviours of the corporate
managers. Corporate governance suggests that a company should balance the interests of
the owners with other stakeholders’ interests at all levels of the organisation (Khan, 2011).
Over time, various corporate governance mechanisms have been studied in relation to
financial statement problems, such as earnings management, fraudulent financial reporting
and financial restatement (Heninger et al., 2009; Abdullah et al., 2010; Rasyid and Ardana,,
2014; Hasnan and Marzuki, 2017; Shi et al., 2017). Board size, board independence, chief
executive officer (CEO) duality, audit committee expertise and others are some of the
mechanisms that have been used to examine the prominence of corporate governance in
mitigating such issues. One of the common beliefs regarding corporate governance is that
good corporate governance leads to high-quality financial statements.
However, there are also studies that suggested that there is no correlation between such
relationships. For instance, Iqbal et al. (2015) found that there is an insignificant relationship
between board size and managerial ownership with earnings management. Aziz et al. (2017)
also discovered that there are no relationships among government ownership, institutional
ownership and family ownership with financial restatement in Malaysia.
Nonetheless, Abbadi et al. (2016) discovered that earnings management was adversely
affected by most types of governance index, such as the board of directors, board meetings,
audit committee, nomination committee and compensation committee. Moreover, Wan
Mohammad et al. (2018) identified that audit committee characteristics are essential in
corporate governance mechanisms. Their study revealed that the independence, size,
expertise and activities of the audit committee were significantly associated with the
incidence of restatement. Hence, the inconclusive findings motivate the current study to
examine the relationship between corporate governance and the incidence of financial
restatement in Malaysia.
JFC Firm-specific characteristics
In addition to the firm’s corporate governance, the key determinants for the incidence of
financial restatement that are worth investigating are the firm-specific characteristics. There
are several elements of firm attributes, such as demographic characteristics (Al-Dmour et al.,
2018), structural characteristics, monitoring characteristics and performance characteristics
(Wallace et al., 1994; Chen and Jaggi, 2007; Olowokure et al., 2016).
According to Olowokure et al. (2016), structural characteristics are a firm’s unique
features, such as the firm’s capital structure, which is also referred to as firm size and firm
leverage. Al-Dmour et al. (2018) claimed that apart from the firm size, firm age is another
characteristic that can influence financial reporting quality. This is because the firm size will
determine the structure of the firm’s internal control system, type of audit service
engagement and motivation of the managers to engage in earnings management. Such
elements are expected to influence the quality of the financial reports. Meanwhile, with
experience (firm age), firms are more likely to have a better system that can improve their
reporting quality and internal control.
Burns and Kedia (2006) found that restating companies are more likely to have a higher
level of leverage. Fountaine and Phillips (2016) added that the firm debt level can contribute
to the temptation for the managers to manage earnings. In sum, it is inferred that firm-
specific characteristics are associated with the incidence of financial restatement in this
study. As such, this study is motivated to assess the influence of firm-specific characteristics
with the incidence of financial restatement to provide a further empirical study in the
Malaysian context.

Factors that influence financial restatements

Corporate governance
Board size. Generally, it is expected that companies with a larger board size have lower
earnings management practices and better financial reporting quality because of the higher
degree of inspection and monitoring function performed by the board. From the agency
perspective, larger boards may support an effective monitoring function by deploying a
substantial number of experienced directors (Kiel and Nicholson, 2003) and reducing CEO
dominance (Singh and Vinnicombe, 2004; Al Azeez et al., 2019). However, prior studies have
shown contradictory findings concerning the association between board size and financial
statement quality.
Al Azeez et al. (2019) revealed that the size of the board does not have any influence on
the reduction of earnings management. The researchers claimed that a larger board is less
efficient in its oversight function as having too many directors on the board will make it
harder for them to observe the management. Similarly, Uwuigbe et al. (2018) identified that
there is an insignificant negative relationship between the number of directors who sit on
the board and the timeliness of financial reports. The results from Mohd Fadzilah (2017) also
rejected the hypothesis, which claimed that board size has a negative and significant
association with the activity of earnings management among Malaysian family owned
companies.
Conversely, Aygun et al. (2014), who investigated the impact of corporate ownership
structure and board size on earnings management, proved that board size has a negative
significant effect on earnings management. In the same vein, Bala and Kumai (2015) and
Obigbemi et al. (2016) documented that there is an inverse relationship between board size
and earnings management among Nigerian firms. In addition, Hasnan and Marzuki (2017),
who studied the impact of the board of directors’ characteristics and financial restatement,
found that the size of the board is significantly associated with the incidence of financial
restatement. Referring to the agency perspective and the above discussion, the following Incidence of
hypothesis is developed: financial
H1. There is a significant negative relationship between board size and the incidence of restatement
financial restatement.
Board independence. As described in the agency theory, Al Azeez et al. (2019) contended
that board independence is primarily associated with the number of independent directors.
The theory suggests that the presence of a large percentage of non-executive directors on the
board can enhance control effectiveness. This is because the existence of independent
directors can diminish the conflict of interests between the principal and the agent, and
preserves the independence of the board to control, which leads to a fair and impartial
judgement by the management (Al Azeez et al., 2019). Additionally, independent directors
may also ensure balanced decision-making, particularly to protect the minority shareholders
and other relevant parties (Nugroho and Eko, 2011). As such, it is assumed that boards with
more independent directors can improve financial reporting quality and minimise the
likelihood of financial restatement.
Nevertheless, Nugroho and Eko (2011) posited that board independence did not influence
earnings management practices in companies listed on the Indonesian Stock Exchange. In
addition, Uwuigbe et al. (2018) affirmed that board independence did not affect the
timeliness of financial reports in the listed Nigerian banks. In contrast to the agency theory,
Mohd Fadzilah (2017) revealed that board independence is significantly and positively
associated with the activities of earnings management among the Malaysian family owned
companies, thus suggesting that board independence might not be effective in controlling
earnings management for such types of companies.
On the other hand, Holtz and Sarlo Neto (2014) claimed that earnings informativeness is
positively affected by board independence. They suggested that the relevancy of accounting
information is greater for companies with more independent directors because they develop
a more efficient monitoring function. In addition, Talbi et al. (2015) found that board
independence plays a significant role in controlling earnings management activities.
Similarly, Iraya et al. (2015) confirmed that board independence, board size and ownership
concentration have a negative relationship with earnings management. Based on the
arguments, the following hypothesis is generated:

H2. There is a significant negative relationship between board independence and the
incidence of financial restatement.
Multiple directorships. Mohd Fadzilah (2017) defined multiple directorships as when a
director holds a board position in other companies. This has been a common practice among
directors because of the limited number of outside directors, especially in Asia (Mohd
Fadzilah, 2017). Two opposing schools of thought have emerged regarding the effect of
multiple directorships on the board oversight function. Multiple directorships can either
provide directors with greater experience, thus enhancing their monitoring effectiveness or
making the directors too busy to effectively monitor management (Emmanuel et al., 2014).
Because of such contrasting arguments, extensive research has considered the impact of
multiple directorships on a firm’s financial reporting. Prior literature has documented that
the presence of multiple directorships can influence the board oversight function and a
firm’s financial reporting quality. The survey research conducted by Emmanuel et al. (2014)
found that multiple directorships by audit committee members impacted the quality of the
corporate financial reporting in Nigeria. Baatour et al. (2017) who examined the impact of
JFC multiple directorships on accrual and real-based earnings management found that multiple
directorships had a positive and significant effect on real earnings management, but an
insignificant impact on accrual-based earnings management in the Kingdom of Saudi
Arabia.
Meanwhile, Hasnan and Marzuki (2017) found that multiple directorships are negatively
and significantly associated with the incidence of financial restatement in Malaysia, thus,
suggesting that the presence of multiple directorships can help the board to effectively
monitor the management. This is consistent with the prior study by Fama and Jensen (1983),
who mentioned that the directors’ quality can be symbolised by holding multiple
directorships as it may help them to develop their decision-making skills. Hence, it is
believed that multiple directorships can reduce the incidence of financial restatement among
the Malaysian public listed companies (PLCs). Because of this argument, this study has
developed the following hypothesis:

H3. There is a significant negative relationship between multiple directorships and the
incidence of financial restatement.
Audit committee financial expertise. A plethora of research has examined the effects of
financial experts’ monitoring on the audit committee and financial reporting since the
implementation of the Sarbanes–Oxley Act. Prior literature on the agency theory argued
that the important part of a decision control system for internal monitoring by the board is
the audit committee (Fama, 1980; Fama and Jensen, 1983). However, without the presence of
directors who possess relevant expertise, it is hard for audit committees to discharge their
responsibilities in protecting the stakeholders.
Baatwah et al. (2016) examined the audit committee’s financial expertise in four groups:
the audit committee with accounting and non-accounting expertise, and audit committee
chair with financial and accounting expertise. They reported that the audit committee chair
with financial expertise enhanced the financial reporting timeliness, both for the accounting
and non-accounting financial expertise. The association was more pronounced when the
audit committee chair had accounting expertise. Kibiya et al. (2016), who investigated the
characteristics of the audit committee and their effects on the quality of the financial reports,
found that financial literacy in accounting, finance or financial management can improve the
quality of the company’s financial reports.
Victor and Edwin (2019) also found that board financial expertise is negatively and
significantly related to financial restatement for Nigerian banks. However, they found an
insignificant result for Malaysian banks. Agreeing with such a finding, Shafie and Zainal
(2016) found that the relationship between the accounting background of the chairman of the
audit committee and the financial expertise of the audit committee members was not
statistically significant in the Malaysian context.
Nevertheless, the study conducted by Wan Mohammad et al. (2018) on the influence of
audit committee characteristics and the likelihood of financial restatement in Malaysia
revealed that audit committee expertise is statistically significant in explaining the financial
restatement incidence. Bilal et al. (2018) added that audit committee financial expertise had a
positive association with earnings quality, and that the association is stronger for
accounting-related than non-accounting expertise. Such a finding highlights the importance
of financial experts on the effectiveness of board oversight function. From the previous
literature, this study proposes the following hypothesis:

H4. There is a significant negative relationship between audit committee financial

expertise and the incidence of financial restatement.
External audit quality. As confirmation by an external auditor enhances the integrity of the Incidence of
financial statements (Alzoubi, 2017), it is important to ensure that a high-quality audit is financial
performed by the external auditor. A number of studies reported relationships between
audit quality and financial reports. For example, Chen et al. (2016) found that firms that were
restatement
not audited by the Big 4 had a higher possibility of restating their financial reports because
of accounting type errors. Alzoubi (2016) documented that the earnings management level is
significantly lower among companies that hired Big 4 audit firms as compared to the non-
Big 4 audit firms. In addition, Alzoubi (2017) suggested that audit quality, such as audit
tenure, size, specialisation and independence may reduce the likelihood of earnings
management and enhance the quality of the financial report.
Gumanti et al. (2015) reported that high-quality auditors were related to less earnings
management in the period prior to the initial public offering. This is consistent with Ahmad
et al. (2016) who found that audit quality and earnings management is negatively related. In
the same vein, Affes and Smii (2016) suggested that the size of the audit firms and sector-
biased specialisation improved the quality of the accounting earnings.
Based on the past studies, it is suggested that firms with higher audit quality are less
likely to manage their earnings, which, consequently, produces higher-quality financial
reports. As such, this study offers the following hypothesis:

H5. There is a significant negative relationship between audit quality and the incidence
of financial restatement.
Executive compensation. As leaders are capable of managing their company’s results, they
are more likely to do earnings manipulation (Gaver et al., 1995). Hence, to maintain a
constant level of bonuses and maximise the variable compensation value, they might
manage the results of the company to look more favourable than the actual performance,
which may also influence the incidence of financial restatement.
From the perspective of the agency theory, it is assumed that managers of high-profit
firms use information to gain a personal advantage (Inchausti, 1997), such as including a
stable position and maximum compensation arrangement (Inchausti, 1997; Waweru and
Riro, 2013). According to Chu and Song (2012), in an efficient market, the mechanisms of the
capital market can directly influence the compensation of management. Furthermore, in a
severe information asymmetry environment, executives may manage the firm’s earnings to
boost the company’s short-run share price, which is closely associated with their
compensation packages (Chu and Song, 2012). Hence, it is believed that the executive
compensation may influence the behaviour of managers.
Uygur (2013) who empirically examined the association between the incentives of bank
executives and earnings management discovered that the stock options of the bank
executives were significantly and positively associated with earnings management. This
suggested that, as the level of stock options of top executive increased, their motivation to
manage earnings also increased.
Nonetheless, Hassen (2014) provided evidence that executive compensation is determined
by the requirement of earnings management. Such a finding confirms the idea that leaders
who receive a high salary are inclined to be less opportunistic. This view is supported by
Zhou et al. (2018) who found that CEOs and chief financial officers with relatively low pay
are more likely to commit fraud irrespective of whether or not there is a pressure to delist.
They also mentioned that CEOs with high total compensation acts as a deterrent against
fraud for firms with no pressure to delist, while the effect vanishes for firms under pressure
to delist. Such studies suggest that lower compensation levels may lead to the occurrence of
JFC fraud activities. Based on the above discussion, this study develops the following
hypothesis:

H6. There is a significant negative relationship between executive compensation and

the incidence of financial restatement.

Firm-specific characteristics
Firm age. Firm age has been identified in prior studies as an attribute that affects the quality
of the financial statements. According to past researchers, as time passes, firms gain more
experience (Waluyo, 2017) and are more likely to improve their internal control procedure
(Iyoha, 2012) and governance systems (Olowokure et al., 2016). Such benefits are believed to
be able to naturally guarantee the quality and integrity of the financial reports, which
include minimising the incidence of financial restatement.
Kibiya et al. (2016) revealed that their study’s control variables – firm age and firm size –
significantly affected the quality of the financial reporting among the non-financial
companies listed on the Nigerian Stock Exchange. Consistently, Waluyo (2017) found that
firm size, firm age and firm growth had simultaneous significant effects on the corporate
social responsibility (CSR) disclosure. CSR disclosure also determined the quality of the
financial reports; thus, it is implied that firm age is significantly related to the quality of the
financial statements. Debnath (2017) also witnessed a similar finding that firm age is
significantly and positively related to discretionary accruals. This implies that older firms
are more involved in earnings management as compared to new firms.
However, some studies suggest that older firms produce financial statements of greater
quality. Even so, many studies have proven that firm age is associated with better control
and financial reporting quality. For instance, Echobu et al. (2017) found that firm age has a
positive relationship with the financial reporting quality. Alzoubi (2017) added that firm age
is significantly and negatively related to earnings management. These studies have proven
the assertion made by previous researchers who claimed that older firms have well-
established and sound controls that can enhance the quality of their financial statements.
From this observation, the following hypothesis is formulated:

H7. There is a significant negative relationship between firm age and the incidence of
financial restatement.
Firm performance. Several studies have been conducted to provide confirmation regarding
the association between firm performance and the company’s financial statement. However,
the empirical findings yielded mixed results. For example, Mahboub (2017) found that firm
profitability is not statistically significant in explaining the financial reporting quality of the
banking sector in Lebanon. Meanwhile, Omoye and Eragbhe (2014) reported that the
profitability ratio is significantly associated with the likelihood of fraud in financial
statements.
The agency theory proposes that to stabilise their positions and maximise their
compensation levels, the managers of profitable companies will exploit the information that
is available to them (Waweru and Riro, 2013). Such a claim suggests that companies with
higher performance possess a higher tendency to manage the companies’ earnings. This is
proven in Das et al. (2018) who found that firm performance, measured using return on
assets (ROA), influenced both the accrual-based earnings management and real earnings
management for 268 listed Indian manufacturing firms. Aygun et al. (2014) also revealed
that the ROA is statistically positive significant with earnings management among Turkish Incidence of
firms. financial
However, based on the elements of the “Fraud Triangle Theory”, Amara et al. (2013)
found that performance issues exerted on the manager are the pressure factors that led them
restatement
to commit financial statement fraud. The results of their study implied that poorly
performing firms tend to commit fraud because of the existence of the pressure to perform.
Additionally, Adi et al. (2018) found that higher profit could reduce the risk of financial
distress, which is deemed to be the motivating factor for managers to commit financial
statement fraud. It is believed that firm’s poor performance promotes greater pressure for
management to engage in financial misstatements. Such an argument leads to the following
hypothesis:

H8. There is a significant negative relationship between firm performance and the
incidence of financial restatement.
Firm leverage. Firm leverage is defined as the ratio of a firm’s debt to its assets (Shirzad and
Haghighi, 2015; Abbadi et al., 2016; Wakaisuka-Isingoma et al., 2016). Based on the agency
theory, firms with high leverage levels are motivated to raise the level of their corporate
reporting voluntarily to their stakeholders through conventional financial statements
(Jensen and Meckling, 1976). This is because, financial information disclosure can help to
reduce agency costs and facilitate creditors to evaluate the company’s volatility and to
safeguard their resources (Botosan and Plumlee, 2002; Fathi, 2013). Shirzad and Haghighi
(2015) also claimed that enterprises that use financial leverage rarely manage their earnings
as they are closely monitored by their creditors. Thus, with less probability of earnings
management practices, companies with higher leverage levels are expected to have a lower
tendency to announce financial restatements. In addition, Alzoubi (2017) found that low debt
financing reduces the earnings management potential among 72 industrial companies in
Jordan. Such an association is in line with the agency theory, which argues that the
voluntary disclosure of corporate reporting increases when the level of firm leverage is high
(Jensen and Meckling, 1976).
Nonetheless, Echobu et al. (2017) posited that there is a significant and positive
association between leverage and financial reporting quality. In addition, there is evidence
from East Africa that shows that a firm’s leverage ratio has a significantly positive
correlation with accrual-based earnings management, thereby suggesting that an increase in
firm leverage encourages the management to manipulate earnings (Swai, 2016). Nalarreason
et al. (2019) found that firm leverage positively and significantly influences earnings
management. The empirical finding suggests that firm leverage provides incentives for
managers to manipulate earnings. From this argument, the study offers the following
hypothesis:

H9. There is a significant positive relationship between firm leverage and the incidence
of financial restatement.
Firm liquidity. Firm liquidity is an indication of a firm’s healthy financial performance and
gives signs to investors and creditors about its continuity in the future (Echobu et al., 2017).
According to the agency theory, less liquid firms are expected to reveal more information to
their investors, particularly creditors (Birjandi et al., 2015) in justifying their liquidity status
(Wallace et al., 1994). As such, firms with low liquidity are believed to be associated with a
lower incidence of financial restatement as the disclosure level can act as a control
JFC mechanism to reduce the tendency of earnings manipulation and conflict of interest (Lakhal,
2015).
However, extant literature reports varying interactions between firm liquidity and a
firm’s financial reporting. Amara et al. (2013) and Somayyeh (2015) did not find any
statistical relationship between firm liquidity and fraud firms. Amara et al. (2013) reported
that firm liquidity is not related to fraud detection. Similarly, Somayyeh (2015) posited that
there is no significant difference in the mean value of the firm liquidity ratio between
fraudulent and non-fraudulent firms. In contrast, Ferdinand and Santosa (2018) found that
firm liquidity significantly impacts the fraudulent financial statement report of retail
companies listed on the Indonesian Stock Exchange. Hence, the study proposes the
following hypothesis:

H10. There is a significant negative relationship between firm liquidity and the
incidence of financial restatement.

Research methodology
Sample selection
The sample selected for this study covers all Malaysian non-financial PLCs that made
amendments to their financial reports from the year 2011 to 2016, which fulfilled the
description under the US General Accounting Office (GAO). The details of these companies’
annual reports were obtained from the Bursa Malaysia website. These companies were then
screened to identify the availability of the appropriate corporate governance and firm-
specific characteristics’ information.
The final sample in this study excluded companies that had been delisted and companies
with incomplete information. Each restatement sample in this study is matched with two
samples of non-restatement firms, which was identified as the control sample. According to
Buzby (1975) and Beasley (1996), a matched-pair sampling that uses firm size, firm financial
year-end and firm industry classification as the basis of similarity in selecting high-quality
and low-quality reporting can help to eliminate the possible effects of the reporting quality
that is being investigated. Thus, the control sample is matched using the firm size, financial
year-end and industry.
After the selection process, this study consisted of 49 PLCs that had restated their
financial statements and 98 control samples, which resulted in 147 final samples. The
methodology used in this study is similar to recent studies in the Malaysian context, such as
Shafie and Zainal (2016) and Wan Mohammad et al. (2018).

Data collection
The corporate governance data were extracted through a content analysis of corporate
annual reports, while DataStream was used to collect the financial data of the sampled firm
for the 2011–2016 period. The period was considered because of the fact that the Malaysian
Code on Corporate Governance (MCCG) guidelines was revised in 2017. The restatement
samples were identified using the keywords of “restate”, “restated”, “restatement” and “prior
year adjustment”, which were in accordance with the GAO category (Hasnan and Mohamed
Hussain, 2015; Wan Mohammad et al., 2018).
For comparison purposes, each sample of the restatement firms was matched with two
control firms of the non-restatement firms. According to Dechow et al. (2011), two sets of
control firms are used to adequately confirm the generalisation of the finding about the real
financial restatement situation, leading to 147 firm observations (49 restatement firms and Incidence of
98 control samples) in this study. financial
restatement
Variables measurement

Variable Description(s)

RESTATE The dichotomous variable, which is coded 1 for the restatement sample and 0 for the non-
restatement sample (Abdullah et al., 2010; Hasnan and Mohamed Hussain, 2015; Wan
Mohammad et al., 2018)
BODSIZE The total number of directors that sit on the board (Jamaludin et al., 2015)
BODIND Ratio of independent non-executive directors to the total number of board members (Al
Azeez et al., 2019)
MULTIPLE Ratio of directors possessing multiple directorships to the total number of board members
(Hasnan and Marzuki, 2017)
ACEXPERT The total number of audit committee members who possess financial or accounting
background (Baatwah et al., 2016)
AUDQ The dichotomous variable, which is coded as 1 for Big 4 auditor, otherwise coded as 0 (Chen
et al., 2016)
COMP The natural logarithm of the total remuneration of the directors which includes the sum of
salaries, bonuses, benefits in kind and fees (Zhou et al., 2018)
AGE The natural logarithm of the firm’s years (Kibiya et al., 2016)
PERFORM Ratio of ROA (Das et al., 2018) Table 1.
LEVERAGE Ratio of firm’s total debt to the firm’s total assets (Swai, 2016) Measurement of the
LIQUID Ratio of firm’s current assets to the firm’s liabilities (Somayyeh, 2015) variables

Model and analysis

To test the hypotheses, this study used a logistic regression model to identify the influence
of corporate governance and firm-specific characteristics on the incidence of financial
restatement. The model is consistent with the recent studies conducted by Shafie and Zainal
(2016), Hasnan and Marzuki (2017) and Wan Mohammad et al. (2018), who examined the
direct relationships between the dependent and independent variables. The model used in
this study is as follows:

RESTATE ð0; 1Þ ¼ a þ b 1 BODSIZE þ b 2 BODIND þ b 3 MULTIPLE

þ b 4 ACEXPERT þ b 5 AUDQ þ b 6 COMP þ b 7 AGE
þ b 8 PERFORM þ b 9 LEVERAGE þ b 10 LIQUID þ «
(1)

Results and discussions

The results of the descriptive analysis for the continuous and the dichotomous variables are
presented in Table 2. The results in the table reveal that only the mean difference of the
PERFORM variable is statistically significant at the 1% level (t = 3.305). The mean value is
0.004 for restatement firms, and 0.063 for non-restatement firms. This indicates that the
average performance of the restatement firms is lower than the non-restatement firms. The
result is consistent with Amara et al. (2013) who proposed that firms with poor performance
JFC Panel A: Continuous variables
Restatement firms (n: 49) Non-restatement firms (n: 98)
Variable Mean SD Mean SD Mean diff. t-value
BODSIZE 7.65 2.146 7.57 2.031 0.082 0.225
BODIND 0.480 0.150 0.456 0.126 0.024 1.036
MULTIPLE 0.547 0.220 0.528 0.254 0.019 0.456
ACEXPERT 1.67 0.801 1.54 0.661 0.133 1.068
COMP 12.753 4.588 14.057 2.378 1.305 1.869
AGE 3.291 0.813 3.238 0.647 0.053 0.429
PERFORM 0.004 0.081 0.063 0.112 0.059 3.305***
LEVERAGE 0.450 0.229 0.387 0.182 0.063 1.800
LIQUID 3.863 7.915 3.119 3.571 0.744 0.627
Panel B: Dichotomous variable
Frequency Frequency Mean Mean
Variable with “0” with “1” Restatement Non-restatement Mean diff. t-value
Table 2. AUDQ 71 (48%) 76 (52%) 0.450 0.550 0.102 1.165
Descriptive statistics
and t-test results Notes: *, ** and *** denote significance at 0.10, 0.05 and 0.01 levels, respectively

have a higher probability of committing financial statement fraud because of the pressure to
perform on the management.
There is no statistically significant difference in the mean value of the other variables.
Nonetheless, it is worth assessing the composition of the corporate governance and firm-
specific characteristics among the Malaysian PLCs. Table 2 shows that, on average, seven
directors sat on the board of the sampled firms. The average number of board members for
the restatement firms is 7.65 and 7.57 for the non-restatement firms. According to Jensen
(1983), the optimum number of board members is from seven to eight. This suggests that the
average size of board members for the sample firms is ideal.
With regards to the BODIND variable, the mean values are 0.480 (48%) and 0.456
(45.6%) for restatement and non-restatement firms, respectively. This finding shows that
the proportion of independent board members among the Malaysian PLCs is less than half
of the board members. Hence, recommendation 4.1 of the MCCG 2017 requires that at least
half of the directors are independent. And, regarding the MULTIPLE variable, a comparable
mean value is reported between restatement and non-restatement firms with 0.547 (54.7%)
and 0.528 (52.8%), respectively. This result shows that about half of the sampled firms’
board members held positions as directors for more than one company. According to Fama
and Jensen (1983) and Hasnan and Marzuki (2017), multiple directorships can have a
positive impact on the board monitoring function as they possess extra experience that may
offer more valuable advice.
In relation to the ACEXPERT variable, the mean value for restatement and non-
restatement firms is 1.67 and 1.54. This indicates that the audit committee of Malaysian
PLCs only comprises one to two members with accounting or financial expertise. Thus, this
could be the reason for the new requirement in MCCG 2017 that all audit committee
members should be financially literate. Next, for the COMP variable, the mean value for
restatement firms is 12.753, which was slightly lower than the control firms with 14.057.
According to Hassen (2014), an optimal amount of executive pay is necessary to align the
management interest with the shareholders’ interest.
The mean value of the AGE variable for restatement firms is 3.291 and 3.238 for the non-
restatement firms. Upon transforming the log number into the actual age number, the
average age for restatement firms is about 50 years, while the average age for the non- Incidence of
restatement firms is about 25 years. On average, the age of all the sampled firms in this financial
study comprises firms with more than 20 years of experience in the industry. According to
Khanh and Khuong (2018), to defend their reputations, older firms become more
restatement
conservative to engage with the activities of earnings manipulation.
For the LEVERAGE variable, the mean value for the restatement and non-restatement
firms is 0.450 and 0.387, respectively. This shows that the capital structure of the sampled
firms consists of more equity than debt. According to Nalarreason et al. (2019), companies
with lower debt levels are less likely to be associated with earnings manipulation. This is
because they are not threatened with bankruptcy pressure as much as the high leverage
firms.
For the LIQUIDITY variable, Table 2 shows that the mean value of the restatement firms
is 3.863, while the mean value for the restatement firms is 3.119. Hence, suggesting an
average current ratio of 3:1. This means that, on average, the firms that were listed on the
Main Market of Bursa Malaysia have three times more current assets than their current
liabilities.
For the dichotomous AUDQ variable, the variable is measured by “0” or “1”. The table
indicates that 52% of the sample firms engaged Big 4 audit firms while the remaining 48%
engaged non-Big 4 audit firms. Thus, the mean value between restatement and non-
restatement firms is comparable.
The relationships among the independent variables are investigated using Pearson’s
correlation analysis with the aim of explaining the strength among the variables and the
direction of the linear relationship between two variables. According to Cohen (1988), the
value of 0.10–0.29 shows a small correlation, 0.30–0.49 shows a medium correlation and
0.50–1.0 indicates a large correlation. Nevertheless, Pallant (2010) warns that
multicollinearity is likely to occur when independent variables are highly correlated, having
an r-value of 0.9 and above.
As presented in Table 3, the highest significant correlation exists between LIQUID and
LEVERAGE variables at the 1% level (0.514). The negative correlation suggests that, as
the liquidity of the firm increases, the level of the firm’s financial leverage decreases. This

1 2 3 4 5 6 7 8 9 10

1 1.00
2 0.425** 1.00
3 0.076 0.186* 1.00
4 0.091 0.023 0.002 1.00
5 0.189* 0.085 0.055 0.067 1.00
6 0.140 0.218** 0.060 0.195* 0.042 1.00
7 0.040 0.046 0.041 0.246** 0.042 0.090 1.00
8 0.107 0.019 0.008 0.052 0.142 0.068 0.070 1.00
9 0.181* 0.074 0.089 0.065 0.043 0.221** 0.042 0.076 1.00
10 0.118 0.169* 0.000 0.016 0.139 0.250** 0.134 0.028 0.514** 1.00

Notes: i. (1) BODSIZE: number of board members; (2) BODIND: percentage of independent directors on Table 3.
board; (3) MULTIPLE: ratio of directors with multiple directorships; (4) ACEXPERT: ratio of audit Pearson correlation
committee members with financial expertise; (5) AUDQ: dummy coded as 1 for Big 4 auditor; (6) COMP:
amount of directors compensation; (7) AGE: firm age; (8) PERFORM: ratio of ROA; (9) LEVERAGE: ratio of matrix among the
firm leverage; and (10) LIQUID: ratio of firm assets to liabilities ii. * and ** denotes the significance at the independent
0.05 and 0.01 levels, respectively variables
JFC result is similar to the finding by Šarlija and Harc (2012) who found that firm liquidity is
negatively related to firm leverage. This is because high liquidity firms finance their
businesses by their internal resources, which causes the level of the firm leverage to reduce
(Lipson and Mortal, 2009).
This is followed by the correlation between BODIND and BODSIZE variables, which is
significant at the 1% level (0.425). The negative correlation indicates that the presence of
independent directors is lower on larger boards. In addition, BODSIZE is also significantly
correlated with the AUDQ (0.189) and LEVERAGE (0.181) variables at the 5% level. This
suggests that larger boards tend to have better audit quality but possess a higher level of
financial leverage. According to Beasley (1996), board size significantly affects the risk of
financial statement fraud. As a result, high audit quality is required to diminish such risk.
With regards to the BODIND variable, there is also significant correlation with the
MULTIPLE (0.186), COMP (0.218) and LIQUID (0.169) variables. The results suggest that
boards with a greater number of independent directors tend to have a higher number of
multiple directorships and liquidity level but lower executive compensation. Perhaps, most
of the independent directors hold multiple directorships because of the limited number of
outside directors, as mentioned by Mohd Fadzilah (2017). In addition, firms with more
independent directors who are deemed to provide better monitoring oversight roles help to
boost the firms’ liquidity level. The negative correlation between the BODIND and COMP
variables suggests that the amount of total executive compensation is lower in firms with
more independent directors. As the number of independent directors increases, there are
fewer non-independent executive directors on the board, thus reducing the total amount of
executive compensation paid.
There are also significant correlations between COMP and ACEXPERT (0.195), and
between AGE and ACEXPERT (0.246) at the 5% and 1% levels, respectively. The
negative correlations suggest that older firms possess less financially literate audit
committee members and that these members are associated with lower executive
compensation. Probably, older firms fail to upgrade their audit committee members with
adequate and relevant knowledge, and thus, lower compensation is paid. Table 3 also
illustrates that both the LEVERAGE (0.221) and LIQUID (0.250) variables are
significantly correlated with COMP at the 1% level. The results indicate that firms with
higher amounts of executive compensation have higher leverage and lower liquidity levels.
The result of the logistic regression analysis concerning the impact of corporate
governance and firm-specific characteristics on the incidence of financial restatement is
shown in Table 4. The result of the chi-square value from the Omnibus Test of Model
Coefficients shows that the overall indication of the goodness-of-fit test is highly significant
at x2 (10, n = 147) = 23.88, p < 0.05. This means that the model is able to distinguish between
the restatement and non-restatement firms. The set of independent variables explained
20.8% (Nagelkerke R2) of the variance in the financial restatement incidence, and the model,
as a whole, correctly classified 71.4% of the cases into two groups: restatement firms
(36.7%) and non-restatement firms (88.8%). In addition, the results from the Hosmer and
Lemeshow’s test also support our model as being worthwhile as the chi-square value for the
test is 8.168 with a significance level of 0.264. As the value is larger than 0.05, it indicates
support for the model.
Referring to Table 4, three of the independent variables, namely, executive
compensation, firm performance and firm leverage, made unique statistically significant
contributions to the model, and hence, support H6, H8 and H9. A negative and significant
relationship is found between the COMP variable and the incidence of financial restatement
at the 5% level. The result indicates that lower executive compensation contributes to a
Variable B SE Wald p-value Exp (B) VIF
Incidence of
financial
BODSIZE 0.083 0.108 0.597 0.440 1.087 1.377 restatement
BODIND 1.312 1.639 0.641 0.423 3.712 1.365
MULTIPLE 0.166 0.844 0.039 0.844 0.847 1.088
ACEXPERT 0.084 0.284 0.087 0.768 1.087 1.169
AUDQ 0.321 0.390 0.677 0.411 0.725 1.080
COMP 0.122* 0.062 3.927 0.048 0.885 1.202
AGE 0.147 0.292 0.255 0.614 1.159 1.132
PERFORM 6.111* 2.271 7.244 0.007 0.002 1.054
LEVERAGE 2.69* 1.180 5.219 0.022 14.811 1.470
LIQUID 0.058 0.050 1.349 0.246 1.059 1.478
Constant 1.758 1.941 0.820 0.365 0.172
Nagelkerke R2 0.208
n 147
Classification rate 71.4%
Restatement firms 36.7%
Non-restatement firms 88.8%
Hosmer and Lemeshow test 0.417
Table 4.
Notes: All p-values are two-tailed. * and ** denote significance at 0.05 and 0.01 levels, respectively. Logistic regressions
SE = standard error; VIF = variance inflation factor analysis

higher incidence of financial restatement. According to Hassen (2014), one plausible

justification for such a finding is that a high compensation level may help to reduce the
opportunistic behaviour of management, and thus, reduce the tendency for the managers to
manipulate the results of the company. The results confirm the findings of previous
literature that discovered a negative relationship between total executive compensation and
earnings management (Hassen, 2014).
With regards to the PERFORM variable, the result shows that there is a negative and
significant relationship between firm performance and the incidence of financial restatement
at the 5% level. This result is consistent with the findings of Debnath (2017) who found that
firm performance is negatively associated with the discretionary accruals. The negative
relationship indicates that firms with good performance are less likely to engage in financial
restatement than the suffering firms. The existence of pressure that is caused by the
performance factor might be a possible explanation for such a finding. According to Amara
et al. (2013), managers of poor performance firms have a greater tendency to commit fraud
because of the pressure to perform put on them.
In relation to the LEVERAGE variable, Table 4 also depicts that there is a statistically
significant positive relationship between firm leverage and financial restatement at the 5%
level. The results suggest that high-level debt firms increase the likely incidence of financial
restatement. According to Nalarreason et al. (2019), firm leverage increases the management
incentive to manipulate earnings because firms are threatened with bankruptcy. Abbadi
et al. (2016) claimed that firms with high levels of debt are inclined to commit earnings
manipulation and distort their financial statements because they want to safeguard their
margin with the creditors and to avoid debt covenant violations. In addition, they want to
show strong performance to their existing and potential creditors regarding their
capabilities in paying their obligations and fulfilling their debt agreements, as well as
improving their bargaining value during debt negotiations. Consequently, firms with higher
levels of leverage possess a higher possibility of committing financial restatement. In the
Malaysian context, the result is consistent with the earlier study by Abdullah et al. (2010)
JFC who found a positive association between the firm gearing ratio (measured by the firm’s
total debts to firm’s total assets) and the occurrence of financial restatement.
Other variables – BODSIZE, BODIND, MULTIPLE, ACEXPERT, AUDQ, AGE and
LIQUID – show an insignificant relationship with financial restatement. It is worth
mentioning that the MULTIPLE and AUDQ variables show a consistent sign of coefficient
as predicted. The insignificant relationship between multiple directorship and financial
restatement is parallel to the study conducted by Jamaludin et al. (2015) who examined
earnings management. They concluded that greater experience and knowledge of directors
who sit on multiple boards do not significantly influence their monitoring function in
ensuring the quality of the financial statements. Moreover, the insignificant impact of the
AUDQ variable indicates that whether the company is audited by a Big 4 or non-Big 4 audit
firm, the incidence of financial restatement may occur. This might be caused by the
company’s desire to make the financial performance look more desirable than the actual
performance to potential investors. The finding is in line with the work of Alexander and
Hengky (2017) who found that audit quality has no effect on earnings management.
The insignificant finding for the BODSIZE variable may be explained by the presence of
many non-independent directors on the board. This can be seen from the results of the
descriptive analysis (Table 2) that show that more than half of the directors that sit on the
board consist of non-independent directors. Topak (2011) argued that the domination of non-
independent directors makes the board size irrelevant in the decision-making process. In
addition, according to Dube and Pakhira (2013), board independence is critical to ensure that
the board fulfils its role objectively and holds the management accountable to the firm.
Therefore, it is difficult to establish a consistent relationship between financial restatement
and board size because of the existence of more non-independent directors than independent
directors on the board. This finding is in line with the studies by Jamaludin et al. (2015) and
Mohd Fadzilah (2017) who also reported insignificant findings in examining financial
statement quality in Malaysia.
Regarding the BODIND variable, the result is consistent with the prior study by
Abdullah et al. (2010), who found an insignificant association between board independence
and financial restatement in Malaysia. They mentioned that firms simply comply with the
requirement of MCCG in the form rather than the substance, thus, leading to insignificant
findings in comparing between good and poor governance. In paragraph 15.02(1), all PLCs
must have at least two independent directors or one-third of the board must consist of
independent directors, whichever is higher. Such a requirement has resulted in insignificant
statistical relationships as both the restatement and non-restatement firms have more than
33.33% independent directors. This can be evidenced from the results of the descriptive
analysis in Table 2 that show that both the restatement and non-restatement firms have
approximately 45–48% of independent directors sitting on the board. Additionally,
Abdullah et al. (2010) also claimed that the primary role of the independent board in
providing independent views to the board rather than providing an oversight function in
monitoring the management may have contributed to such a finding.
With regards to the ACEXPERT variable, the finding suggests that this type of audit
committee characteristic is insufficient on its own to address the financial restatement
problem. According to Zgarni and Fedhila (2019), financial expertise among the audit
committee is undoubtedly necessary, but this type of characteristic alone is not enough to
guarantee financial reporting quality. Indeed, the committee must be small, independent and
active to increase the effectiveness of the audit committee. Shafie and Zainal (2016) also
found an insignificant relationship between the financial expertise of the audit committee
members and financial restatement among Malaysian PLCs. The possible explanation for
the insignificant result may be caused by the condition of paragraph 15.09(1) of MLMR that Incidence of
requires at least one member of the audit committee to be an expert in accounting matters. financial
Because of that, the result of the analysis shows an insignificant result as most of the sample
firms had one to two members on the audit committee with financial expertise.
restatement
For the AGE variable, the insignificant result indicates that firm age does not affect the
incidence of financial restatement. The positive coefficient, however, seems to suggest that
older firms have a higher tendency to restate their financial statements than younger firms.
This is contradictory to the assumption that older firms have a better quality of financial
report because of better experience (Waluyo, 2017), control (Iyoha, 2012) and governance
(Olowokure et al., 2016). Lisboa (2019), who found that younger firms engaged less with
earnings management, claimed that the reason why older firms engaged more in earnings
management is to maintain a good relationship with the stakeholders. To fulfil the
performance expectations of the stakeholders, firms with longer establishment have a
greater desire to manage the financial results than the younger firms. Nonetheless, the result
is consistent with the findings of Chalaki et al. (2012), Olowokure et al. (2016) and Alexander
and Hengky (2017), who found an insignificant association between firm age and the quality
of financial reporting.
Finally, for the LIQUID variable, the insignificant relationship between firm liquidity
and the incidence of financial restatement suggests that the level of firm liquidity may not
have the capacity to influence the incidence of financial restatement. Similarly, Amara et al.
(2013) and Somayyeh (2015) failed to find a statistical relationship between firm liquidity
and fraud firms. Somayyeh (2015) concluded that firm liquidity merely reveals the ability of
a company to pay its short-term obligation, but not the total obligation. Thus, it is not
considered as a focus of good news for the company. Hence, high or low levels of firm
liquidity do not influence the incidence of financial restatement.

Conclusion
The main objective of the study is to examine the relationships between corporate
governance and firm-specific characteristics in respect of the incidence of financial
restatement in Malaysia. This study examined 147 Malaysian PLCs over the period 2011–
2016 using a matched-pair sample of 49 restatement firms and 98 non-restatement firms. In
summary, the findings from this study reveal that executive compensation, firm
performance and firm leverage are significant predictors for the incidence of financial
restatement among Malaysian PLCs.
The significant negative relationship between executive compensation and the incidence
of financial restatement indicates that lower executive compensation increases the likelihood
of financial restatement. In other words, a higher amount of compensation among executive
directors may reduce the chance of financial restatement. Hassen (2014) posited that a high
incentive amount can minimise the management’s opportunistic behaviour, and hence,
lessen the propensity for them to manipulate the financial reporting. In the same study,
Hassen (2014) also mentioned that leaders with higher pay are better at performing
contracts in accordance with the shareholders’ expectations than leaders with low pay.
Hence, it can be concluded that optimal executive compensation is essential to align the
interests of the managers to those of the shareholders. Eventually, it can reduce the
incidence of financial restatement.
Furthermore, the regression analysis result reveals that there is a statistically significant
inverse relationship between firm performance and the incidence of financial restatement of
Malaysian PLCs. This suggests that the firms with good performance have a lower
tendency to be involved in financial restatement than poorly performed firms. This might be
JFC explained by the existence of the pressure to perform put on the management of less
profitable firms. According to Amara et al. (2013), this types of pressure increases the
likelihood of fraudulent activities among companies with deprived performance. As a result,
they might be prone to become involved in financial restatement compared to firms with
outstanding performance.
Last but not least, the findings in this study also reveal that there is a significant positive
relationship between firm leverage and the incidence of financial restatement. This means that
firms with high levels of debt increase the likelihood of financial restatement. This is probably
because firms with high-leverage levels are inclined to commit earnings manipulation to
safeguard their margin and avoid debt covenant violations (Abbadi et al., 2016). Consequently,
the high-leverage firms have a higher probability of committing financial restatement.
Based on the previous discussion and analysis, it could be concluded that both corporate
governance and firm-specific characteristics are important in determining the incidence of
financial restatement. The results have shown that high levels of executive compensation, good
firm performance and low levels of financial leverage can reduce the incidence of financial
restatement. As such, enhancing the effectiveness of corporate governance by providing optimal
compensation packages, planning ideal levels of capital structure, as well as ensuring a decent
level of firm profitability is necessary to minimise the incidence of financial restatement.
With regards to other independent variables (i.e. board size, board independence, multiple
directorships, audit committee financial expertise, audit quality, firm age and firm liquidity),
there is no evidence that these variables significantly influenced the incidence of financial
restatement among Malaysian PLCs. As a result, this study concludes that only executive
compensation, firm performance and firm leverage influence the incidence of financial
restatement in Malaysia, particularly the sampled firms.

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restatement in Malaysia”, Pertanika Journal of Social Sciences and Humanities, Vol. 25,
pp. 255-263.

Corresponding author
Suhaily Hasnan can be contacted at: suhaily77@gmail.com

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