TiBÉC III Terengganu International Business and Economics Conference 2012 174 The Practice of Director-Auditor Link in Malaysia: Some Issue of Auditor's Independence Mazrah Malek* & Saidatunur Fauzi Saidin Universiti Putra Malaysia, Malaysia Saeidah Malik Universiti Teknologi MARA (Perlis), Malaysia *mazrah80@gmail.com Abstract The purpose of this study is to examine the practice of director-auditor link among listed companies in Malaysia and the characteristics of these companies. In addition, a discussion of the possible impairment of auditor's independence from the practice is also provided. Based on 759 non-financial companies listed on the Main Market of Bursa Malaysia in 2007, the possible effect of director-auditor link on audit quality was found towards auditor’s independence. The results of the t-test show that director-auditor link companies pay significantly higher audit fees and purchase significantly more non-audit services than non director-auditor link companies. However, no significant distribution difference among sample is found based on audit opinion type. While highly paid auditors and by providing non-audit services to audit clients are believed to may impair auditor's independence, the results suggest that the practice of director-auditor link may be the cause of auditor's independence impairment. Keywords: Practice of Director-Auditor Link, Among Listed Companies in Malaysia, Auditor's Independence 1. INTRODUCTION While audit quality is jointly determined by auditors' competence and independence (DeAngelo, 1981), close relationship between auditor and auditee is argued to impair auditors' independence. One form of close relationship between auditor and auditee is director-auditor link, whereby an interlocking director employs the same auditor across their interlocking companies. The existence of this practice have been shown by Davison et. al. (1984) and Jubb and Houghton (1998) in Australia. Therefore, the objectives of this study are (i) to examine the existence of director-auditor link among listed companies in Malaysia and the characteristics of these director-auditor link (interlink) companies and (ii) provide discussion of possible effect of director auditor link on auditor's independence focusing on audit fees, non-audit services fee and audit opinion. 2. LITERATURE REVIEW Interlocking directorships Interlocking or multiple directorships can be considered as a common practice across countries. In Malaysia, a director of listed companies is only allowed to hold a maximum of 10 directorships in listed companies and 15 in non-listed companies. Interlocking directorships occur when a director of one corporation sits on the board of directors of another corporation and it has been considered as an interpersonal linkage between corporations at the board level (Heracleous and Murray, 2001). Two theories have been proposed by researchers on the existence of interlocking directorships. In the organizational theory (resource dependency theory), interlocking directorships are viewed as a means for