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Journal of Management & Governance

, Volume 22, Issue 1, pp 187–212 | Cite as

Related party transactions and audit fees: the role of the internal audit function

  • Redhwan Ahmed Al-Dhamari
  • Bakr Al-Gamrh
  • Ku Nor Izah Ku Ismail
  • Samihah Saad Haji Ismail
Article

Abstract

Related party transactions (RPTs) are viewed as genuine transactions that rationally fulfil other economic demands of a company. However, RPTs can also be used to transfer wealth from minority shareholders to controlling shareholders. The existence of such transactions may deteriorate financial reporting quality, increase audit risk, and as a result increase audit fees. This study examines the relationship between RPTs and audit fees in Malaysia, where ownership is often concentrated within a controlling family and corporate governance mechanisms are poor. It also investigates the moderating effect of the internal audit function (IAF) on this relationship. We find that external auditors base their fees on the types of RPTs undertaken. Specifically, our results show that audit fees are higher for firms that undertake RPTs involving the sale and purchase of assets, goods, and services. We also document that external auditors rely on the IAF, and thus their fees are lower for firms that undertake RPTs and that have made a large investment in an IAF. Our study is the first to provide evidence that RPTs in Malaysian firms may be abused as a channel to facilitate tunnelling and that the IAF plays a vital role in controlling such transactions.

Keywords

Audit fees Related party transactions Internal audit Malaysia 

Notes

Acknowledgements

We wish to thank Associate Professor Dr. Rohaida Abdul Latif, Professor Wan Nordin Wan Hussin, and Associate Professor Asghar Afshar Jahanshahi for their valuable comments and suggestions. We gratefully acknowledge the generous financial support from Universiti Utara Malaysia (UUM). Our gratitude also goes to the anonymous reviewers of this paper.

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Redhwan Ahmed Al-Dhamari
    • 1
  • Bakr Al-Gamrh
    • 1
    • 2
  • Ku Nor Izah Ku Ismail
    • 1
  • Samihah Saad Haji Ismail
    • 3
  1. 1.College of Business, Tunku Puteri Intan Safinaz School of AccountancyUniversiti Utara Malaysia (UUM)SintokMalaysia
  2. 2.Kulliyyah of Economics and Management SciencesInternational Islamic University Malaysia (IIUM)Kuala LumpurMalaysia
  3. 3.College of Arts and Sciences (CAS), School of General StudiesUniversiti Utara Malaysia (UUM)SintokMalaysia

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