ADDITIONAL ANALYSES RESULTS 1 DESCRPTIVE STATISTICS

405 The results suggest that as board independence increases the sample firms report higher earnings quality, consistent with the agency theory prediction. However, when board independence reaches beyond 43 percent, a negative association between board independence and earnings quality emerges. In other words, the results suggest that firms with board independence greater than 43 percent will begin to report lower earnings quality.

4.4.2 Alternative Measurement for Board Financial Expertise

The Bursa Malaysia listing requirements require that at least one member of the audit committee is a member of the Malaysian Institute of Accountants. Additionally, the listing requirements stipulate that if they are not a member of the Malaysian Institute of Accountants, they must have at least three years working experience and must have passed the examinations specified in Part 1 of the 1 st Schedule of the Accountants Act 1967 or must be a member of one of the associations of accountants as specified in Part 11 of the 1 st Schedule of the Accountants Act 1967. To carry out additional analysis, this study uses a dummy variable to represent firms with a qualified accountant. Consistent with the prior study by Abdul Rahman and Mohamed Ali 2006, the variable board financial expertise is measured using an indicator variable with the value of one if at least one member is a qualified accountant and 0 otherwise. As for the results regarding the board financial expertise as shown in Panel C, treating the board financial expertise variable as a dummy variable does not influence earnings quality significantly. Specifically, the results show no significant coefficient with regards to the association between board financial expertise BDFINEXP_DUM and earnings quality. This suggests that at least one member of the board being a member of an accounting association or body is not an effective measure to achieve board financial expertise.

5. CONCLUSION, LIMITATIONS AND SUGGESTIONS FOR FUTURE RESEARCH

This paper examines the effect of board independence and board expertise on the financial reporting quality in Malaysia. Using an accrual quality as a measure of earnings quality, this study finds that board expertise is one of the most important determinants of financial reporting quality. Specifically, this study finds a positive significant relationship between additional board directorship and average tenure of 406 independent directors that capture governance and firm-specific expertise and financial reporting quality. Larger additional directorships of board members and longer average tenure of independent directors enhance the boards monitoring role to produce higher quality financial reporting. While board governance and firm-specific expertise is found significantly related to earnings quality, this study does not find any support for board financial expertise. Since the revised Code 2007 gives greater concern for audit committees to be all financially literate, future study could examine the effect of having more board members with financial literacy, using a more current sample, to see the effectiveness of this recommendation towards enhancing financial reporting quality. A more refined measure for financial expertise is needed to provide evidence of the relationship between financial expertise and earnings quality. Furthermore, this study only focuses on the board members who are qualified accountants. Each director comes from a different professional category that could add value to the firm Choi et al., 2007. Perhaps, investigation on the different professional background of directors will provide an interesting avenue for future research. Corresponding with observations by Barton et al. 2004, and a recent empirical study by Garg 2007, this study documents that having a majority of independent directors does not have any impact on earnings quality. In fact, the evidence suggests that the impact of board independence on earnings quality is non-linear. The results of the additional analyses raise concern regarding the appropriateness of policy directives that call for a majority independent directors in countries with a concentrated ownership structure, especially when it is in the hands of family members Cheung and Chan, 2004; Barton et al., 2004; Klein et al., 2005; Ibrahim and Abdul Samad, 2007. As suggested by Machuga and Teitel 2009, policy makers should consider both firm characteristics and the institutional environments before they implement additional corporate governance reforms especially in countries that are characterized by controlling family ownership and weak legal protection of property rights. Thus, further investigation is needed to assess the effectiveness of the independent directors‘ monitoring role due to unsatisfactory results from this study.