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Malayan Law Journal Articles/2012/Volume 5/An Offer Vis- -is an !nitation to "reat# A
$om%aratie Analysis wit& 'eference to Malaysia
[2012] 5 MLJ i
Malayan Law Journal Articles
2012
AN OFFER VI!"!VI AN INVI#A#ION #O #REA#$ A
%OM&ARA#IVE ANAL'I (I#) REFEREN%E #O MALA'IA
Adnan Trakic
LLB (Hons), MCL (IIUM), PhD Candidate in (AIKOL)(IIUM)
Lecturer, Suna! Uni"ersit! Business Schoo#, Ma#a!sia
IN#RO*+%#ION
An offer is an essential element for t&e formation of a contract( An offer) legally s%ea*ing) +in,s
t&e ma*er once it is acce%te, +y t&e ot&er %arty( -oweer) sometimes) t&e %arties in t&e eery,ay
course of +usiness woul, not li*e t&eir statements to +e +in,ing on t&em if t&eir offer is acce%te,
+y t&e ot&er %arty( !n ot&er wor,s) t&e %arties may want to initiate negotiations +y ma*ing certain
statements or ,eclarations w&ic& are not to +e regar,e, as offers( "&ose ty%es of statements are
i,entifie, +y t&e courts as an initation to treat( .rawing a clear ,istinction +etween an offer an,
an initation to treat is not an easy tas*( !n or,er to ,raw a line +etween t&e two) t&e courts &ae
resorte, to two ,ifferent a%%roac&es) ie t&e /conentional a%%roac&/ an, t&e /unconentional
a%%roac&/( 0ot& of t&ese a%%roac&es will +e ,ealt wit& in t&e following ,iscussion in t&is %a%er(
1urt&ermore) t&e courts &ae i,entifie, certain situations w&ic& can +e categorise, as an
initation to treat( "&ese situations will also +e e2%laine, in t&e %a%er wit& reference to ,eci,e,
cases in 3nglan, an, Malaysia(
#)E *I#IN%#ION ,E#(EEN AN OFFER AN* AN INVI#A#ION #O #REA#
!t is im%ortant to ,istinguis& an offer from an initation to treat( !n reality) it woul, +e almost
im%ossi+le to &ae all ty%es of statements +eing i,entifie, as offers( "&e statement w&ic&
amounts to an offer woul, +e ca%a+le of acce%tance) an, once an offeree acce%ts an offer) a
contract is conclu,e,( -oweer) strictly s%ea*ing) certain ty%es of statements ma,e +y t&e
contracting %arties are not meant to +e ,eeme, as offers) +ut rat&er as statements lea,ing
$ ML% i at ii
into) or in,icating t&e negotiations( "&ose statements are calle, an initation to treat) or an /offer/
to t&e ot&er %arty to ma*e a legally +in,ing offer( -oweer) t&e 4uestion %ose, is on &ow to
,istinguis& an offer from an initation to treat( Alt&oug& it is essential to ,raw t&e ,istinction
+etween an offer an, an initation to treat) in reality) it is a ery ,ifficult t&ing to ,o( "&e courts
&ae i,entifie, certain ty%es of statement as an initation to treat( -oweer) t&ese situations
i,entifie, +y t&e courts are not e2&austie(
1
!n fact) t&e courts &ae tra,itionally a%%lie, ,ifferent
ways of ,etermining situations w&ic& woul, amount to an initation to treat an, an offer(
!n general) t&e so calle, /conentional a%%roac&/ em%&asises on t&e manner of an offer ma,e +y
one %arty an, acce%tance +y t&e ot&er( !n ot&er wor,s) t&e conentional a%%roac& strictly
stresses on formalities an, calls for +asic re4uirements for t&e formation of contact to +e fulfille,(
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"&e conentional a%%roac& in ,etermining t&e %osition of an offer an, an initation to treat was
en,orse, +y t&e -ouse of Lor,s in &i'son " Manchester Cit! Counci#
2
an, later followe, +y t&e
Malaysian $ourt of A%%eal in (ckhardt Marine &MBH " Sheri))) Hi*h Court o) Ma#a!a, Sere+'an
, Ors
5
6u+se4uently) t&e -ig& $ourt in Hui %ia Hao " Perdana Park Cit! Sdn Bhd , Anor
7

referre, to t&e %rinci%les set out +y t&e $ourt of A%%eal in t&e former case(
On t&e ot&er &an,) t&e /unconentional a%%roac&/ in mar*ing out an initation to treat from an
offer was en,orse, +y t&e 3nglis& $ourt of A%%eal in two cases) ie &i'son " Manchester Cit!
Counci#
5
an, Storer " Manchester Cit! Counci#-
8
"&e /unconentional a%%roac&/ %laces t&e
em%&asis on corres%on,ence as a w&ole an, t&e con,uct of t&e %arties to ,etermine w&et&er a
statement was inten,e, to +e an offer or an initation to treat( 9nli*e t&e /conentional a%%roac&/)
t&e /unconentional a%%roac&/ ,oes not re4uire a strict analysis of an offer an, an acce%tance(
!n %rinci%le) +ot& an offer an, an initation to treat re%resent t&e e2%ression of t&e will of t&e %arty
to enter into a contract( !t can +e sai, t&at t&e fun,amental ,ifference +etween an offer an, an
initation to treat is in t&e legal effect t&at t&ey %ro%oun,( "&e legal effect of an offer is suc& t&at it
is +in,ing on t&e ma*er of t&e ,eclaration if an acce%tance is ma,e +y t&e ot&er %arty(
$ ML% i at iii
"&is is +ecause t&e contract is conclu,e, u%on t&e com%letion of an acce%tance( -oweer) t&e
legal effect of an initation to treat ,oes not legally +in, t&e ma*er of t&e ,eclaration( !t is sim%ly
an initation to t&e ot&er %arty to ma*e an offer( !t is only w&en an offer is acce%te, +y t&e ma*er
of an initation to treat t&at t&e contract is conclu,e,( "&e a,,ressee of an offer or an initation
to treat is of course at li+erty not to acce%t an offer or not to ma*e an offer in case of an initation
to treat( "&e a,,ressee can ma*e a counter offer or a counter initation to treat if t&e terms an,
con,itions of an offer or an initation to treat ,o not meet &is e2%ectations(
:
*IFFI%+L#IE IN *I#IN-+I)IN- AN OFFER FROM AN INVI#A#ION #O #REA#
"&ere is no ,ou+t t&at t&e ,istinction +etween an offer an, an initation to treat is essential(
-oweer) to ,etermine w&et&er t&e statement woul, amount to an offer or an initation to treat is
muc& &ar,er t&an it seems on t&e first instance( "&is ,ifficulty in ,rawing t&e ,istinction +etween
t&e two is &ig&lig&te, +y 'ic&ar, 6tone in one of &is wor*s w&ere+y &e com%are, t&e ,ecisions
of two 3nglis& cases) ie &i'son " Manchester Cit! Counci#
;
an, Storer " Manchester Cit!
Counci#
<
in illustrating t&is ,ifficulty(
10

!n &i'son " Manchester Cit! Counci# t&e issue t&at was ,iscusse, +y -ouse of Lor,s was in
relation to t&e nature of t&e letter sent +y t&e $ouncil to t&e res%on,ent) Mr =i+son( !n ot&er
wor,s) t&e court &a, to ,etermine w&et&er t&e letter constitute, an offer or was sim%ly a mere
initation to treat( !n t&is case) Mr =i+son was a tenant of t&e &ouse w&ic& was owne, +y t&e
$ouncil( "&e $ouncil ma,e t&e announcement t&at tenants renting t&eir %remises are allowe, to
+uy t&e same from t&e $ouncil( Mr =i+son was intereste, to +uy t&e &ouse w&ic& &e rente, an,
initiate, negotiations( "&e "reasurer of t&e $ouncil sent &im a letter stating t&at t&e $ouncil /+a!
'e .re.ared to se## the house to !ou at the .urchase .rice o) /0,10$ #ess 023 4 /0,562
()reeho#d)7- 1urt&ermore) t&e letter state,# /I) !ou ou#d #ike to +ake )or+a# a..#ication to 'u! !our
Counci# house .#ease co+.#ete the enc#osed a..#ication )or+ and return it to +e as soon as
.ossi'#e-7 Mr =i+son ,i, as &e was as*e,) +ut +efore t&e official e2c&ange of letters) t&e local
elections were &el, on w&ic& t&e control of t&e
$ ML% i at i"
$ouncil c&ange, from t&e $onseratie Party to t&e La+our Party( "&e La+our Party was against
t&e %olicy of selling t&e &ouses to t&e tenants an, t&ey refuse, to sell t&e &ouse to Mr =i+son(
"&e court of t&e first instance an, t&e $ourt of A%%eal
11
&el, t&at t&ere was a +in,ing contract( !n
fact) Lor, .enning M' of t&e $ourt of A%%eal argue, t&at contracts s&oul, not +e analyse, only
+y referring strictly to an offer an, an acce%tance) +ut rat&er t&e court s&oul, loo* into t&e
corres%on,ence as a w&ole an, t&e con,uct of t&e %arties( Lor, .enning sai, t&at#
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!f +y t&eir corres%on,ence an, t&eir con,uct you can see an agreement on all material terms) w&ic& was
inten,e, t&enceforwar, to +e +in,ing) t&en t&ere is a +in,ing contract in law een t&oug& all t&e
formalities &ae not +een gone t&roug&(
-oweer) t&e $ourt of A%%eal ,ecision was reerse, +y t&e -ouse of Lor,s
12
w&ic& state, t&at
t&e letter sent +y t&e treasurer of t&e $ouncil stating t&at t&e $ouncil /+a! 'e .re.ared to se##/
an, as*ing t&e ,efen,ant to /+ake )or+a# a..#ication to 'u!/ ,i, not amount to an offer +ut was a
mere initation to treat( "&erefore) t&ere was no +in,ing contract +etween t&e %arties( "&e -ouse
of Lor,s a%%roac& in ,etermining t&e %osition of an initation to treat an, an offer is +ase, on t&e
conentional a%%roac& w&ic& accor,ing to t&e -ouse of Lor,s >u,ge) Lor, .i%loc*) suggests t&at
in or,er to fin, out w&et&er t&ere is a contract +etween t&e %arties) it must +e ,etermine, w&et&er
t&ere is an offer ma,e +y one %arty w&ic& &as +een acce%te, +y t&e ot&er( "&is can +e seen from
t&e contractual ,ocuments t&at were relie, u%on +y t&e %arties(
On t&e ot&er &an,) t&e $ourt of A%%eal in &i'son " Manchester Cit! Counci# referre, to earlier
case of Storer " Manchester Cit! Counci#( "&e facts of t&e two cases are similar( !n Storer) t&e
"reasurer of t&e $ouncil sent a letter to Mr 6torer stating# /I understand !ou ish to .urchase
!our Counci# house and enc#ose the A*ree+ent )or Sa#e- I) !ou i## si*n the A*ree+ent and
return it to +e I i## send !ou the A*ree+ent si*ned on 'eha#) o) the 8counci#9 in e:chan*e-7 "&e
/A*ree+ent )or Sa#e/ was also attac&e, wit& t&e letter( Mr 6torer nee,e, to fill in t&e ,etails in t&e
Agreement for 6ale an, return it +ac* to t&e $ouncil) as &e rig&tly ,i,( -oweer) +efore t&e letter
was signe, +y t&e $ouncil an, sent +ac* to Mr 6torer) local elections were &el, w&ere+y t&e
control of t&e $ouncil c&ange, from t&e $onseratie Party to t&e La+our %arty( "&e new La+our
$ouncil refuse, to %rocee, wit& t&e sale(
$ ML% i at "
"&e $ourt of A%%eal &el, t&at t&e offer sent +y t&e "reasurer of t&e $ouncil amounte, to an offer
w&ic& was su+se4uently acce%te, +y Mr 6torer) an, as suc&) t&e contract was conclu,e,( Lor,
.enning M' of t&e $ourt of A%%eal o+sere, t&at t&e formalities of e2c&ange of contracts were
4uite unnecessary( ?&at was im%ortant was t&at t&e tenant signe, t&e letter an, returne, it to t&e
$ouncil) an, t&at +y itself amounte, to an acce%tance w&ic& conclu,e, t&e contract( -oweer)
from t&is %oint) it is o+sera+le t&at t&e -ouse of Lor,s ,ecision in &i'son ,iffers from t&e earlier
$ourt of A%%eal ,ecision in Storer( !n &i'son) t&e letter sent +y t&e $ouncil to Mr =i+son was &el,
to +e a mere initation to treat w&ile t&e letter sent +y t&e $ouncil to Mr 6torer was &el, to +e an
offer ca%a+le of acce%tance( "&ese two inter%retations gae rise to some ,ifficulties an,
uncertainties in formulating t&e ,ifference +etween an offer an, an initation to treat(
'ic&ar, 6tone argues t&at ,ecisions in &i'son an, Storer coul, &ae +een influence, +y %olitical
,imensions(
15
"&e $onseratie Party &a, a %olicy of allowing t&e tenants to +uy t&e &ouses
w&ic& t&ey rent w&ile t&e La+our Party &a, a contrary %olicy) ie not allowing t&e sale of t&e
&ouses to t&e tenants( 'ic&ar, 6tone e2%lains t&at t&ere was no ,irect in,ication in t&e wor,s of
t&e -ouse of Lor,s in &i'son7s case t&at t&eir ,ecision was influence, +y t&e %olitical matters)
&oweer) at t&e same time) &e state, t&at t&e >u,ges coul, &ae +een consciously or
unconsciously un,er t&e influence of t&e %olitical matters an, as suc& /((( it is %ossi+le t&at t&is
may &ae +een a factor ti%%ing t&e +alance against Mr =i+son/(
17

1urt&ermore) Jo&n @ A,ams an, 'oger 0rownswor, o%ine t&at t&e -ouse of Lor,s an,
,issenting >u,ge of t&e $ourt of A%%eal) =eoffrey Lane LJ in &i'son7s case en,orse, t&e
/conentional a%%roac&/ w&ic& is +ase, on formalist an, mar*et in,ii,ualist consi,erations(
15
!n
&i'son/s case) t&e -ouse of Lor,s was not willing to treat t&e case as an e2ce%tion to general
%rinci%les of t&e law of contract w&ic& em%&asise on t&e formalities in relation to an offer an,
acce%tance) an, in t&is way) t&eir a%%roac& was +ase, on formalist an, mar*et-in,ii,ualist
consi,erations( On t&e ot&er &an,) Jo&n @ A,ams an, 'oger 0rownswor,) argue t&at t&e
ma>ority in t&e $ourt of A%%eal inclu,ing Lor, .enning M' in t&e cases of &i'son an, Storer
a,o%te, t&e /unconentional a%%roac&/ w&ic& is +ase, on consumer-welfarism(
Page 5
$ ML% i at "i
18
"&e $ourt of A%%eal ,isregar,e, a strict a,&erence to an offer an, acce%tance an, t&e
formalities of a contract( An em%&asis was %ut on t&e corres%on,ence as a w&ole an, t&e
con,uct of t&e %arties as well as t&e li+eral inter%retation of an offer an, acce%tance +ase, on
consumer-welfarism(
"&e -ouse of Lor,s/ ,ecision in &i'son an, t&e $ourt of A%%eal ,ecision in Storer in,ee, s&ow
,is%arity in a%%roac&es towar,s an offer an, an initation to treat( -oweer) t&is ,is%arity ,oes
not e2ist in suc& a way if t&e $ourt of A%%eal ,ecisions in +ot& &i'son an, Storer are com%are,(
After all) Lor, .enning M' was one of t&e >u,ges sitting in t&e $ourt of A%%eal in +ot& cases w&o
,eliere, consistent >u,gments( !n +ot& instances) Lor, .enning state, t&at t&ere was a ali,
contract) alt&oug& in &i'son7s case) &e em%&asise, on t&e im%ortance of corres%on,ence as a
w&ole an, t&e con,uct of t&e %arties an, not so muc& on t&e strict analysis of an offer an,
acce%tance) w&ile in Storer) &e clearly o+sere, t&at t&e letter +y t&e $ouncil amounte, to an
offer ca%a+le of acce%tance w&ic& was acce%te, +y Mr 6torer +y &is signature an, returning of
t&e letter( @eert&eless) in Malaysia) it seems t&at t&e -ouse of Lor,s in &i'son &as +een
en,orse, +y t&e $ourt of A%%eal >u,ge) =o%al 6ri 'am J$A in (ckhardt Marine &MBH " Sheri)),
Hi*h Court o) Ma#a!a, Sere+'an , Ors-
1:
!n t&e Malaysian case of Hui %ia Hao " Perdana Park Cit! Sdn Bhd , Anor)
1;
learne, >u,ge)
-ami, 6ultan A+u 0ac*er state, t&at for a statement to +e regar,e, as an offer) it must +e t&e
su+>ect matter of imme,iate acce%tance) ot&erwise it will +e regar,e, +y most as an initation to
treat( "&is was w&at t&e learne, >u,ge sai,#
!n my iew) t&e test oug&t to +e /w&et&er t&e offer is imme,iately ca%a+le of acce%tance/( Anyt&ing less
may amount to in"itation to treat or mere %uff or general notice of intention etc (((
1<

1urt&ermore) t&e learne, >u,ge referre, to t&e earlier test for ,etermining t&e %osition of an
initation to treat an, an offer mentione, +y t&e $ourt of A%%eal >u,ge) =o%al 6ri 'am J$A in
(ckhardt Marine &MBH " Sheri)), Hi*h Court o) Ma#a!a, Sere+'an , Ors
20
w&o state,#
1irst) t&e general a%%roac& t&at is to +e a,o%te, +y a court in ,etermining w&et&er t&ere is an agreement
conclu,e, +etween t&e %arties is to see w&et&er t&ere is a ,efinite offer ma,e +y one %arty w&ic& &as
+een acce%te, +y t&e ot&erA in ot&er wor,s) w&et&er t&e agreement in 4uestion may +e resole, into an
offer
$ ML% i at "ii
an, a corres%on,ing acce%tance( "&at suc& an a%%roac& s&oul, +e generally a,o%te, was affirme, +y
t&e -ouse of Lor,s in &i'son " Manchester Cit! Counci# B1<:<C 1 All 3' <:2(
21
I#+A#ION %A#E-ORIE* A INVI#A#ION #O #REA#
"&ere are a num+er of tra,ing situations w&ic& &ae +een categorise, +y t&e courts as an
initation to treat an, not as offers( Many contract law +oo*s) in line wit& t&e >u,icial ,ecisions)
&ae ,iscusse, arious situations w&ere offers are not tra,itionally regar,e, as offers +ut rat&er
as an initation to treat(
22
6ome of t&e situations w&ic& coul, +e i,entifie, as an initation to treat
are as follows#
1a) auctionsA
1b) ,is%lay of goo,s in self-serice s&o%s an, s&o% win,owsA
1c) a,ertisementsA
1d) call for ten,ersA
1e) su%%ly of information/ %reliminary negotiationsA an,
Page 8
1f) an initation to %urc&ase s&ares(
A+%#ION
An auction is +asically t&e %rocess t&roug& w&ic& auctione, goo,s are +eing sol, an, %urc&ase,(
An auctioneer /inites/ +i,s from %otential +uyers w&om in return) woul, +e com%eting wit& eac&
ot&er in ma*ing t&e +i,s or /offering/ to +uy auctione, goo,s until t&ose offers are acce%te, +y t&e
falling of &ammer +y t&e auctioneer( "&e falling of t&e &ammer woul, also signify t&at a contract
of sale &as +een conclu,e,( "&erefore) t&e auctioneer/s call for +i,s is not an offer +ut an
initation to treat Doffer to %otential +uyers to ma*e an offerE( "&ere are a few cases to illustrate
t&is %oint( "&e case of Pa!ne " Ca"e
25
esta+lis&e, a %rinci%le t&at t&e auctioneers/ call for +i,s
constitutes a call for offers an, t&at t&e falling of t&e &ammer woul, constitute an acce%tance(
"&erefore) t&e court &el, t&at t&e +i,,er is allowe, to retract &is +i, at any time +efore t&e
&ammer is ,own( !n ot&er wor,s) an offer can +e reo*e, at any time +efore its
$ ML% i at "iii
acce%tance( 1urt&ermore) t&e court em%&asise, t&at /eery +i,,ing is not&ing more t&an an offer
on one si,e) w&ic& is not +in,ing on eit&er si,e till it is assente, to(/
27
!n t&e case of British Car Auctions Ltd " ;ri*ht)
25
Lor, ?i,gery $J reiterate, t&e a+oe %rinci%le
+y saying t&e following#
((( 0ut) of course) as a matter of strict law of contract) forgetting for t&e moment t&e collo4uial meaning of
t&e %&rase /offer for sale/) t&e auctioneer w&en &e stan,s in &is rostrum ,oes not ma*e an offer to sell t&e
goo,s on +e&alf of t&e en,orA &e stan,s t&ere ma*ing an initation to t&ose %resent at t&e auction
t&emseles to ma*e offers to +uy( !n t&e strict law of contract t&ere is no ,ou+t w&ateer t&at &as always
+een t&e law) t&at w&en an auction sale ta*es %lace) t&e offer comes from t&e +i,,er in t&e +o,y of t&e
&all an, t&e acce%tance is communicate, +y t&e fall of t&e auctioneer/s &ammer( !t is tec&nically incorrect
to ,escri+e an auctioneer as offering t&e goo,s for sale for t&at reason (((
1urt&ermore) t&e auctioneer is un,er no o+ligation to sell t&e su+>ect matter of sale to t&e &ig&est
+i,,er(
28
-oweer) t&e situation mig&t +e slig&tly ,ifferent in t&e case w&ere an auction is +eing
a,ertise, to +e &el, /wit&out reserations/(
2:
"&e %osition in 3nglan, is t&at w&ere an auction
/wit&out reseration/ &as +een a,ertise,))t&e auctioneer ma*es an offer to t&e &ig&est +i,,er( 6o)
if t&e auctioneer ,oes not acce%t t&e &ig&est +i,) t&en &e can +e sue, for +reac& of t&e se%arate
collateral contract an, t&e +i,,er coul, claim ,amages( "&us) t&e %romise +y t&e auctioneer to
con,uct /wit&out reseration/ auction is +asically an offer in t&e se%arate collateral contract an,
+enefit factor of &aing /wit&out reseration/ auction) ie +enefit to t&e auctioneer of ,riing u% t&e
%rice +i,) is a sufficient consi,eration(
2;
-oweer in Australia) t&e situation woul, not c&ange if
t&e auction is +eing a,ertise, to +e &el, /wit&out reseration/( !t woul, not amount to an offer +y
t&e auctioneer an, t&e auctioneer is still free not to acce%t t&e &ig&est +i,( !n ot&er wor,s) in t&e
case
$ ML% i at i:
of auctions wit&out reseration +eing a,ertise,) t&ere is no collateral contract(
2<

!n Malaysia) t&e common law cases &ae +een en,orse,( "&us) an auctioneer inites t&e +i,s
from %otential +uyers an, &is offers are regar,e, as an initation to treat or an offer to t&e +i,,ers
to ma*e an offer( 1urt&ermore) t&e sale of lan, in %u+lic auctions is a slig&tly more com%le2
transaction t&an t&e sale of goo,s( !n M , % <ro=en <ood Sdn Bhd , Anor " Si#and Sdn Bhd ,
Anor,
50
t&e court ela+orate, on t&e issue of t&e sale of lan, in %u+lic auctions( "&e court agree,
t&at a contract of sale is conclu,e, wit& t&e fall of t&e &ammer +ut /conclusion/ of t&e contract in
case of auctions inoling sale of lan, woul, not +e a+solutely com%lete only wit& t&e official
acce%tance +y way of t&e falling of t&e &ammer( ?&at is conclu,e, is only one as%ect of sale)
w&ere t&e auctioneer un,erta*es t&e o+ligation not to sell t&e lan, to ot&er +i,,ers) an, t&e +uyer
un,erta*es t&e o+ligation to %ay for t&e lan,( -oweer) t&e lan, &as not +een transferre, yet(
Pro%rietary rig&ts &ae yet to +e transferre, to t&e +uyer( "&e court o+sere, t&at +eneficial
Page :
interest on t&e lan, woul, +e transferre, to t&e +uyer only w&en t&e memoran,um of transfer is
e2ecute, an, full %ayment is %ai, +y t&e +uyer(
#)E *I&LA' OF -OO* IN ELF!ERVI%E )O& AN* )O& (IN*O(
"&e ,is%lay of goo,s in a self-serice s&o% an, s&o% win,ow ,oes not constitute to an offer +ut
rat&er an initation to treat( "&erefore) goo,s w&ic& &ae +een ,is%laye, in a self-serice s&o%
an, s&o% win,ow are not +eing offere, for sale +ut are only +eing ,is%laye, for %otential
customers to %ic* t&em u% an, to ma*e an offer( -ence) w&en t&e customer %ic*s u% goo,s from
self-serice, s&o%s an, mar*ets) an, +rings t&em to t&e cas&ier for %ayment) &e is t&e one
ma*ing an offer to t&e cas&ier an, once t&e cas&ier acce%ts t&e money) a contract of sale is
conclu,e,( !f t&e cas&ier ,eclines to sell t&e goo,s) t&e customer ,oes not &ae a ali, cause of
action to sue t&e s&o% for +reac& of contract as t&e contract &a, not +een conclu,e,( "&is can +e
illustrate, wit& a few ,eci,e, cases(
!n Phar+aceutica# Societ! o) &reat Britain " Boots Cash Che+ists Ltd)
51
t&e court &a, to
,etermine w&en t&e sale transaction was conclu,e,) ie w&et&er at
$ ML% i at :
t&e time t&e goo,s are %ic*e, from t&e s&eles or at t&e time of acce%tance at t&e cas& counter(
6ection 1;D1EDaEDiiiE of t&e P&armacy Poisons Act 1<55 %roi,e, t&at t&e sale of ,rugs liste, in t&e
Part ! of t&e Poisons List of t&e Act s&oul, only +e ,one un,er t&e su%erision of t&e registere,
%&armacist( "&e ,efen,ant was c&arge, un,er t&e P&armacy Poisons Act 1<55 for sale of t&e
,rugs liste, un,er Part ! of t&e Poisons List of t&e Act wit&out su%erision of t&e registere,
%&armacist(
An argument %ut forwar, +y t&e %rosecution was t&at t&e ,is%lay of goo,s at s&eles was an offer
an, t&at customers +y %ic*ing t&e goo,s from t&e s&eles &ae acce%te, an offer( As a result) t&e
contract of sale was conclu,e, at t&e time of customers/ %ic*ing of items from t&e s&eles wit&out
su%erision of t&e registere, %&armacist( On t&e ot&er &an,) t&e ,efen,ant conten,e, t&at a
mere ,is%lay of goo,s at t&e s&eles was an initation to treat an, t&at t&e contract was only
conclu,e, w&en t&e goo,s were acce%te, at t&e cas& counter un,er t&e su%erision of t&e
registere, %&armacist( "&e trial court ,eci,e, in faour of t&e ,efen,ant( ?&en t&e case went on
a%%eal) t&e $ourt of A%%eal u%&el, t&e ,ecision of t&e trial court) e2%laining t&at t&e ,is%lay of
goo,s in s&eles was only an initation to treat an, t&us) t&e contract was conclu,e, w&en t&e
goo,s were acce%te, at t&e cas& counter un,er t&e su%erision of t&e registere, %&armacist(
"&e ,ecision +y t&e trial court an, t&e $ourt of A%%eal was a ery useful ,ecision w&ic& goes in
line wit& t&e common %ractice un,erta*en to,ay in all self-serice s&o%s( !f t&e ,is%lay of goo,s in
s&eles is an offer an, not initation to treat) t&en t&e customers +y %ic*ing t&e goo,s woul,
conclu,e t&e contract an, will not &ae any c&ance to ins%ect t&e goo,s or eentually su+stitute
t&em wit& t&e ot&er goo,s( "&e free,om of customers to see an, ins%ect t&e goo,s +efore t&ey
ma*e an offer woul, +e com%letely ta*en away( "&is was one of t&e arguments w&ic& t&e learne,
>u,ge of Fueen/s 0enc& .iision) Lor, =o,,ar,G $J)
52
raise, as well as $ourt of A%%eal >u,ge)
6omerell LJ) en,orse, in Phar+aceutica# Societ! o) &reat Britain " Boots Cash Che+ists Ltd-
-oweer) 'ic&ar, 6tone argues t&at t&e $ourt of A%%eal/s ,ecision t&at t&e ,is%lay of goo,s in a
self-serice s&o% ,oes not amount to an offer +ut is a mere initation to treat) +ase, on t&e
argument t&at t&e customers s&oul, not /+ecome committe, too soon/ an, s&oul, +e gien t&e
c&ance to ins%ect t&e
$ ML% i at :i
goo,s an, c&ange t&eir min, was unnecessary(
55
1urt&er) &e argues t&at it woul, +e %ossi+le to
say t&at t&e ,is%lay of goo,s in a self-serice s&o% woul, amount to an offer) +ut t&at t&e
customer acce%ts an offer only w&en goo,s are %resente, to t&e cas&ier for %ayment(
57
!n t&is
way) t&e concern e2%resse, +y t&e $ourt of A%%eal for t&e customers /not +ecoming committe,
too soon/ woul, still +e %ro%erly a,,resse, an, t&ere woul, +e no nee, to ,eclare t&e ,is%lay of
goo,s in a self-serice s&o% to +e regar,e, as an initation to treat(
Page ;
!n anot&er 3nglis& case of <isher " Be##)
55
t&e s&o%*ee%er ,is%laye, in &is s&o% a /flic*-*nife/( "&e
%olice allege, t&at &e &a, committe, a statutory offence +y /offering to sell/ a flic*-*nife( Offering
to sell a flic*-*nife was an offence un,er s 1 of t&e 'estrictions of ?ea%ons Act 1<5< w&ic&
%roi,e, t&e following#
Any %erson w&o manufactures) sells or &ires or offers for sale or &ire) or len,s or gies to any ot&er
%erson -- DaE any *nife w&ic& &as a +la,e w&ic& o%ens automatically +y &an, %ressure a%%lie, to a
+utton) s%ring or ot&er ,eice in or attac&e, to t&e &an,le of t&e *nife) sometimes *nown as a flic* *nife
or flic* gunA ((( s&all +e guilty of an offence an, s&all +e lia+le on summary coniction in t&e case of a first
offence to im%risonment for a term not e2cee,ing t&ree mont&s or to a fine not e2cee,ing fifty %oun,s or
to +ot& suc& im%risonment an, fine) (((
58
"&e court &el, t&at t&e s&o%*ee%er ,i, not commit to t&e offence un,er s 1 of t&e 'estrictions of
?ea%ons Act 1<5< +ecause a mere ,is%lay of a flic*-*nife in &is s&o% ,oes not amount to an offer
to sell t&e same( !t was a mere initation to treat( -oweer) to claim t&at goo,s ,is%laye, in a
s&o% wit& t&e %rice attac&e, to it are not +eing offere, for sale seems to +e a ery ague an,
a+sur, argument for many %eo%le( "&e %resi,ing >u,ge) Lor, Par*er $J) a,mitte, t&is fact( -e
o+sere, t&at t&e laws w&ic& &a, +een legislate, +y Parliament must +e inter%rete, wit&
reference to ot&er general laws of t&e country( "&e court sai, t&at t&ere is a %resum%tion t&at
Parliament was aware of t&e general %rinci%les of law Die t&at t&e ,is%lay of goo,s in a s&o% wit&
a %rice tag is a mere initation to treatE at t&e time of %assing of t&e Act( "&erefore) Par*er $J
/reluctantly/ Das state, in &is ,ecisionE ,eci,e, t&at no offence was committe,(
!n <isher " Be##) t&ere was a reference ma,e +y one of t&e %arties to t&e case of Phar+aceutica#
Societ! o) &reat Britain " Boots Cash Che+ists Ltd)
5:

$ ML% i at :ii
,istinguis&ing it from <isher " Be##( 0asically) +ot& cases ,iscusse, t&e same issue +ut t&e
Phar+aceutica# Societ! o) &reat Britain " Boots Cash Che+ists Ltd case tal*s a+out a com%lete,
sale transaction w&ile <isher " Be## tal*s a+out an incom%lete transaction Die at t&e stage of an
offerE(
@eert&eless) t&e facts in +ot& cases in,icate t&at one of t&e main issues t&at t&e court &a, to
,etermine was w&et&er t&e accuse, %arties committe, t&e statutory offences) ie /selling of t&e
certain ,rugs wit&out t&e su%erision of t&e registere, %&armacist/ in Phar+aceutica# Societ! o)
&reat Britain " Boots Cash Che+ists Ltd) an, /offering to sell a flic*-*nife/ in <isher " Be##( At first
sig&t) t&ese statutory offences ,o not in,icate any contractual issues) +ut in or,er to ,etermine
w&et&er t&ese offences &ae +een committe,) t&e court &a, to ,iscuss firstly) w&at amounts to an
/offer/ to sell an, secon,ly) w&en a sale agreement is conclu,e, Dw&et&er at t&e time of %ic*ing of
goo,s from s&eles or at t&e time of acce%ting t&em at t&e counterE( !n ot&er wor,s) t&e 3nglis&
court too* a /tec&nical a%%roac&/ in ,eci,ing t&ese cases(
"&e 3nglis& a%%roac& can +e ,istinguis&e, from t&e Australian a%%roac& w&ere+y t&e Australian
courts were 4uite reluctant to follow t&e /tec&nical a%%roac&/ in ,eci,ing t&e case of similar
nature(
5;
"&us) for instance) in &oodin7s o) >eton Pt! Ltd " &urre!)
5<
t&e Australian court
o+sere, t&at t&e ,is%lay of teleision sets wit& t&e %rice tag in a s&o% amounte, to /offering
goo,s for sale/) contra,icting t&e 3arly $losing Act 1<28 D6AE) an, was not regar,e, as an
initation to treat( "&erefore) t&e ,efen,ant was &el, lia+le( Anot&er e2am%le w&ere t&e tec&nical
a%%roac& was ,isregar,e, is in relation to >u,icial inter%retation of s 58D2E of t&e "ra,e Practices
Act 1<:7( 6ection 58D2E of t&e "ra,e Practices Act 1<:7 %roi,es t&at#
A cor%oration t&at &as) in tra,e or commerce) a,ertise, goo,s or serices for su%%ly at a s%ecial %rice
s&all offer suc& goo,s or serices for su%%ly at t&at %rice for a %erio, t&at is) an, in 4uantities t&at are)
reasona+le &aing regar, to t&e nature of t&e mar*et in w&ic& t&e cor%oration carries on +usiness an,
t&e nature of t&e a,ertisement(
Page <
!n ot&er wor,s) t&is section ma*es it com%ulsory for a cor%oration a,ertising to su%%ly goo,s or
serices to /offer/ t&em for sale(
70
An a,ertisement Dw&ic& is also an initation to treat an, w&ic&
will +e ,iscusse, su+se4uentlyE is %ractically regar,e, as an offer( !n most of t&e Australian
cases) e2ce%t for one
$ ML% i at :iii
case)
71
t&e courts ,i, not re4uire cor%orations to ma*e a formal offer in /tec&nical contractual
sense/ in situations w&ic& are coere, un,er s 58D2E( Moreoer) t&e 1e,eral $ourt >u,ge) 6%en,er
J) in ;a##ace " Brodri'')
72
o+sere, t&e following#
-aing sai, t&at) it seems to me t&at reference to tec&nical ,istinctions +etween initations to treat an,
offers ca%a+le of imme,iate acce%tance intro,uces unnecessary ,ifficulties( 6ection 58 is inten,e, to
&ae a +roa, reac& an, no +enefit is secure, +y giing t&e %&rase /offer to su%%ly/ anyt&ing ot&er t&an its
or,inary an, non-tec&nical meaning (((
Malaysia follows t&e 3nglis& a%%roac&) an, t&e %rinci%les ,eci,e, in Phar+aceutica# Societ! o)
&reat Britain " Boots Cash Che+ists Ltd an, <isher " Be## are a%%lica+le in Malaysia(
A*VER#IMEN#
A,ertisements are yet anot&er e2am%le of an initation to treat( =enerally) ma*ers of statements
in a,ertisements ,o not inten, t&ose statements to +e regar,e, legally as offers +ut rat&er as
initations to treat( !n Partrid*e " Crittenden)
75
t&e 3nglis& court reaffirme, t&at an a,ertisement
,oes not constitute to an offer for sale +ut rat&er an initation to treat( !n t&is case) t&e a%%ellant
a,ertise, in a %erio,ical /cage an, Aiary 0ir,s/ t&e following statement /Fuality 0ritis& A0$' (((
0ram+lefinc& coc*s) 0ram+lefinc& &en) 25s eac&(/ 9%on seeing t&e a,ertisement Mr "&om%son
or,ere, a &en +y enclosing a c&e4ue of 50s( "&e a%%ellant was c&arge, for offering for sale a
certain wil, lie w&ic& was %ro&i+ite, un,er s 8D1E of) an, 6c&e,ule 7 to t&e Protection of 0ir,s
Act 1<57 w&ic& %roi,e, t&e following#
!f ((( any %erson sells) offers for sale ((( DaE any lie wil, +ir, ((( inclu,e, in 6c& 7 to t&is Act of a s%ecies
w&ic& is resi,ent in or isits t&e 0ritis& !sles in a wil, state) ot&er t&an a close-ringe, s%ecimen +re, in
ca%tiityA ((( &e s&all +e guilty of an offence ((( / 6c&e,ule 7 &as t&e &ea,ing# /?il, +ir,s w&ic& may not +e
sol, alie unless close-ringe, an, +re, in ca%tiity/ an, amongst t&e names in t&e sc&e,ule is
/+ram+ling/(
.eliering t&e >u,gement of t&e Fueen/s 0enc& .iision) As&wort& J) 4uas&e, t&e coniction an,
allowe, t&e a%%eal( "&e court o+sere, t&at in or,er to conict t&e a%%ellant un,er s 8 of t&e
Protection of 0ir,s Act 1<57)
$ ML% i at :i"
t&e *ey wor,s of t&e section w&ic& state t&at /any %erson sells) offers for sale or &as in &is
%ossession for sale/) must +e %roen( 1urt&ermore) t&e court &el, t&at an a,ertisement ,oes not
constitute an offer for sale +ut a mere initation to treat( "&e learne, As&wort& J referre, to t&e
rational in t&e earlier case of <isher " Be##
77
in ,eci,ing t&e case( "&us) it can +e seen t&at t&e
court a,o%te, t&e tec&nical a%%roac& t&at was ,iscusse, earlier(
!n t&e Malaysian case of (ckhardt Marine &MBH " Sheri)), Hi*h Court o) Ma#a!a, Sere+'an ,
Ors)
75
t&e s&eriff of t&e -ig& $ourt at 6erem+an arreste, a motor essel at Port .ic*son w&ic&
&a, +een su+se4uently a,ertise, for sale( "&e a%%ellant u%on seeing t&e a,ertisement) ma,e
an offer to +uy t&e essel su+>ect to two con,itions) ie t&at no re%airs were nee,e, to +e ,one +y
t&e %ort aut&ority on t&e essel) an, t&at t&e essel coul, leae on its own %ower wit& a %ro%er
certificate +eing issue, a+out its seawort&iness( 6u+se4uently) t&e a%%ellant ,e%osite, a +an*
,raft for 10H of t&e %urc&ase %rice( "&e s&eriff acce%te, t&e offer an, a%%lie, for t&e leae of t&e
>u,ge to conclu,e t&e sale( "&e >u,ge grante, t&e leae( -oweer) later on) t&e a%%ellant faile, to
Page 10
%ay t&e +alance of t&e %urc&ase %rice an, as a result) t&e ,e%osit was forfeite,( "&e a%%ellant
conten,e, +efore t&e >u,ge t&at t&e contract was neer conclu,e, an, t&at &is ,e%osit &a, to +e
returne, +ac* to &im( "&e learne, >u,ge re>ecte, t&e a%%ellant/s claim(
"&erefore) t&e a%%ellant a%%eale, +efore t&e $ourt of A%%eal( "&e learne, =o%al 6ri 'am J$A) in
,eliering t&e >u,gement of t&e $ourt of A%%eal &el, t&at t&e s&eriff/s a,ertisement was an
initation to treat an, t&at t&e a%%ellant ma,e a formal offer t&roug& letter w&ic& was acce%te, +y
t&e s&eriff( "&us) t&ere was a ali, contract +etween t&e %arties an, t&e a%%eal was ,ismisse,(
"&is $ourt of A%%eal ,ecision was later followe, +y t&e 1e,eral $ourt in Li+ S=e On , Ors "
S!arikat &unun* Se?ahtera Sdn Bhd-
78
"&e case of (ckhardt Marine &MBH " Sheri)), Hi*h Court o) Ma#a!a, Sere+'an , Ors was
su+se4uently referre, to +y t&e learne, -ig& $ourt >u,ge) -elilia& Mo&, Iusof J in >ai @au %uu "
Pasdec Cor. Sdn Bhd , Anor)
7:
w&ere t&e issue t&at was raise, was on w&et&er a circular
a,ertisement constitute, an offer or an initation to treat( !n t&is case) t&e %laintiff allege, t&at
t&e ,efen,ant +reac&e, t&e contract w&ic& was conclu,e, +etween t&e %laintiff an, t&e first
,efen,ant on 21 August 1<<5) w&ere+y t&e %laintiff %urc&ase, a
$ ML% i at :"
%iece of lan, from t&e ,efen,ant for 'M1);;0)000( As a result) t&e %laintiff a%%lie, for s%ecific
%erformance or) alternatiely) for t&e ,amages for +reac& of contract(
"&e -ig& $ourt in ,eci,ing t&e case consi,ere, t&ree releant e2&i+its( 1irstly) P1 inclu,e, a
letter of initation sent +y t&e first ,efen,ant to t&e %laintiff) w&ic& s&owe, t&at t&e %laintiff was
registere, as t&e intereste, +uyer) initation for +oo*ing) an, a %ayment of +oo*ing fee forn
'M5000) w&ic& s&oul, eentually +e t&e %art of t&e sale an, %urc&ase agreement( 6econ,ly)
e2&i+it P5 was an official recei%t w&ic& was issue, +y t&e first ,efen,ant to t&e %laintiff for t&e
%ayment of 'M5000 for +oo*ing fee( "&ir,ly) P7 was yet anot&er letter +y t&e first ,efen,ant to
t&e %laintiff in w&ic& t&e ,efen,ant inite, t&e %laintiff to enter into an official contract for t&e
%urc&ase of t&e %ro%erly for 'M250)000 at a certain %lace an, time(
-oweer) t&e %laintiff conten,e, t&at t&ere was alrea,y an agreement +etween t&e %laintiff an,
t&e first ,efen,ant for t&e sale of t&e %ro%erty for 'M 1;;)000) an, t&at t&e first ,efen,ant coul,
not increase t&e %rice su+se4uently( On t&e ot&er &an,) t&e first ,efen,ant conten,e, t&at t&ere
was no contract +etween t&e %arties an, t&at t&e first letter) P1) sent +y t&e first ,efen,ant to t&e
%laintiff was not an offer +ut rat&er an initation to treat( "&e learne, -ig& $ourt >u,ge) -elilia&
Mo&, Iusuf J) ,ismisse, t&e %laintiff/s a%%eal +y stating t&at t&e P1 e2&i+it ,i, not constitute an
offer an, t&at t&e %ayment of t&e +oo*ing fee of 'M 5000 +y t&e %laintiff ,i, not constitute to an
acce%tance( "&erefore) t&e contract was not conclu,e, +etween t&e %arties(
Anot&er case w&ic& reinstate, t&at an a,ertisement is not an offer +ut a mere initation to treat
is Leon* Mun Chie Anor Leon* Moon >ien " &#en+arie Co"e De"e#o.+ent Sdn Bhd-
7;
"&e
learne, -ig& $ourt >u,ge) @oraini A+,ul 'a&man J$) &el, t&at an a,ertisement t&at t&e %laintiff
&ear, oer t&e ra,io /was merely an initation to treat/(
!n a,,ition) a,ertisements a,ertising >o+ acancies are not offers( !n t&e Malaysian case of
Coe#ho " The Pu'#ic Ser"ices Co++ission)
7<
t&e learne, OngG J) &el, t&at an a,ertisement in
t&e Malay Mail a,ertising >o+ acancy was not an offer +ut a mere initation to treat(
-oweer) an e2ce%tion to t&e general rule t&at a,ertisements are not offers is a situation w&ere
a,ertisements &ae +een ma,e +y t&e manufacturer of
$ ML% i at :"i
goo,s( "&is can +e seen in Car#i## " Car'o#ic S+oke Ba## Co,
50
w&ere+y an a,ertisement of t&e
car+olic smo*e +all was ma,e +y t&e manufacturer( "&e a,ertisement was regar,e, as an offer
an, any su+se4uent acce%tance of t&e offer woul, conclu,e t&e legally +in,ing contract +etween
t&e %arties) as in t&is %articular case) it ,i,( 1urt&ermore) in Partrid*e " Crittenden)
51
t&e Lor,
Par*erG $J o+sere, t&e following#
Page 11
! agree an, wit& less reluctance t&an in <isher " Be##) to w&ic& As&wort& J &as referre,) an, t&e case of
Me##a " Monahan( ! say /wit& less reluctance/ +ecause ! t&in* t&at w&en one is ,ealing wit&
a,ertisements an, circulars) unless t&ey in,ee, come from manufacturers) t&ere is +usiness sense in
t&eir +eing construe, as initations to treat an, not offers for sale(
%ALL FOR #EN*ER
A ten,er is a %rocess in w&ic& eac& intereste, %arty may su+mit t&eir own +i,s w&ic& woul,
normally constitute to an offer( @ow) w&at is t&e ,ifference t&en +etween auction +i,s su+mitte,
+y t&e +i,,er an, t&e +i,s in a ten,er %rocessJ "&e main factor w&ic& ,istinguis&es t&e +i,s in a
ten,er %rocess from t&e auction +i,s is t&e fact t&at in a ten,er %rocess) eac& +i,,er is not aware
a+out t&e ,etails of t&e ot&er +i,s( 9sually) ten,er is +eing wi,ely use, +y goernments to
contract out some of t&eir %ro>ects li*e for instance) construction( As suc&) an a,ertisement or
call for ten,ers is consi,ere, as an initation to treat( As a result) ten,ers are legally regar,e, as
offers(
!n t&e 3nglis& case of S.encer and others " Hardin* and others)
52
t&e ,efen,ant sent out a
circular containing t&e following statement# /?e are instructe, to offer to t&e w&olesale tra,e for
sale +y ten,er t&e stoc* in tra,e of A() amounting) Kc() an, w&ic& will +e sol, at a ,iscount in one
lot# %ayment to +e ma,e in cas&# t&e ten,ers will +e receie, an, o%ene, at our offices)/ Kc(/
9%on seeing t&e statement) t&e %laintiff w&o ma,e a +i, an, w&ose +i, was su+se4uently
re>ecte, +y t&e ,efen,ant) conten,e, t&at t&ere was a contract +etween t&e %arties( "&e %laintiff
argue, t&at t&e ,efen,ant/s statement in t&e circular amounte, to a %romise to sell goo,s to t&e
&ig&est +i,,er( !n ot&er wor,s) t&e statement in t&e circular amounte, to an offer( -oweer) t&e
court &el, t&at t&e ,efen,ant/s statement ,i, not amount to an offer an, t&at t&ere was no
contract +etween t&e %arties(
-oweer) t&e court ma,e a ery im%ortant o+seration in relation to ten,ers( "&e learne, >u,ge of
t&e $ourt of $ommon Pleas) ?illes J) o+sere,
$ ML% i at :"ii
t&at /!f t&e circular &a, gone on) /an, we un,erta*e to sell to t&e &ig&est +i,,er)/ t&e rewar, cases
woul, &ae a%%lie,) an, t&ere woul, &ae +een a goo, contract in res%ect of t&e %ersons (((/ !n
ot&er wor,s) t&e %arties calling for ten,ers are free to sti%ulate any con,itions in relation to
ten,ers) suc& asA on w&ic& +asis a ten,er will +e con,ucte,) an, t&ey will +e o+lige, to follow
t&ose con,itions( "&erefore) if t&e en,or %romises to acce%t t&e &ig&est +i,s) t&en a call for
ten,ers woul, +e regar,e, as an offer if t&e &ig&est +i, is ma,e(
!n Har"e#a In"est+ents " Ao!a# Trust Co o) Canada (CI) Ltd and others)
55
t&e first ,efen,ant
Den,orE sent a letter initing two %arties) t&e %laintiff an, secon, ,efen,ant) to su+mit t&eir
written ten,ers to +uy certain s&ares( "&e first ,efen,ant e2%licitly state, in t&e letter of initation
t&at /we +in, ourseles to acce%t Bt&e &ig&estC offer/ receie, +y t&em w&ic& com%lie, wit& t&e
terms of t&e initation(/ 'elying on t&e statements %roi,e, in t&e letter of initation for +i,) t&e
%laintiff an, t&e secon, ,efen,ant ten,ere, t&eir +i,s res%ectiely( "&e %laintiff ten,ere, a sum of
L2)1:5)000 w&ile t&e secon, ,efen,ant ten,ere, a sum of L2)100)000 /or ((( L101)000 in e2cess
of any ot&er offer ((( e2%resse, as a fi2e, monetary amount) w&ic&eer is t&e &ig&er/( "&e secon,
,efen,ant) +y mentioning L101)000 in e2cess of any ot&er offer) trie, to ensure t&at &is ten,er +y
/+eing t&e &ig&est in any circumstances/ woul, amount to a ali, acce%tance) an, as suc&) t&e
contract woul, +e conclu,e, wit& &im( !n t&is way) t&e tra,itional rules a%%lica+le to ten,ers
woul, +e aoi,e, as t&e ten,ers in t&eir nature im%ly a strong confi,entiality) an, t&e %arty t&at
ma*es t&e &ig&est +i, woul, normally +e t&e successful one in conclu,ing t&e contract( "&e first
,efen,ant in t&is case acce%te, t&e secon, ,efen,ant/s +i, an, t&e %laintiff %roteste, against t&at
+y initiating %rocee,ings against t&e firsts an, secon, ,efen,ants(
"&e %laintiff conten,e, t&at t&ere was a ali, contract conclu,e, +etween t&e first ,efen,ant w&o
ma,e an offer an, t&e %laintiff w&o acce%te, it( "&e %laintiff/s contention was u%&el, +y -ouse of
Page 12
Lor,s( "&e court state, t&at t&e first ,efen,ant/s initation for +i, amounte, to a ali, offer an,
t&at t&e %laintiff/s +i, w&ic& was t&e &ig&est Dfi2e, +i,E was a ali, acce%tance) an, so t&e
contract was conclu,e,( 6trategy ta*en +y t&e secon, ,efen,ant in ensuring t&at t&eir +i, is
always &ig&er was not acce%te, +y t&e court as +i,s are e2%ecte, to +e fi2e, amounts of money(
"&erefore) t&is case ,emonstrate, an e2ce%tion to t&e general rule( "&e general rule is t&at an
initation for ten,ers woul, +e regar,e, as an initation to treat an, not an offer( -oweer) in t&is
$ ML% i at :"iii
case) +ecause of t&e first ,efen,ant/s %romise to acce%t t&e &ig&est +i, Dunilateral contractE) w&at
woul, normally +e regar,e, as an initation to treat &ere was regar,e, as an offer(
Anot&er e2am%le w&ere an initation to ten,er was regar,e, as an offer an, not as a mere
initation to treat is t&e case of B#ack.oo# , <!#de Aero C#u' " B#ack.oo# Borou*h Counci#)
57

w&ere+y 6toc*er LJ of t&e $ourt of A%%eal &el, t&at t&e format of an initation to ten,er is ery
significant in or,er to *now t&e real intention of t&e %arties( !n ot&er wor,s) in or,er to fin, out
w&et&er an initation to ten,er woul, +e regar,e, as an initation to treat or an offer) it woul,
,e%en, on t&e format of an initation to ten,er( "&e learne, 6toc*er LJ o+sere, t&at t&is
%articular case is an e2ce%tion to t&e general rule state, in S.encer " Hardin* t&at an initation to
ten,ers amount to a mere initation to treat( As a result) t&e $ourt of A%%eal in t&is case &el, t&at
an initation to ten,er was regar,e, as an offer an, an acce%tance was ma,e +y t&e com%lying
ten,er) ie t&e Aero $lu+s in t&is %articular case(
1urt&ermore) as mentione, earlier) t&e ten,er %rocess is often use, +y gtoernments in %rocuring
goo,s an, serices( @ormally) one of t&e main 4uestion from a legal %oint of iew) w&ic& coul, +e
raise, is) w&at is t&e legal %osition of goernment initations for ten,ers) ie w&et&er t&ey are
regar,e, as an initation to treat or as an offer( !n fact) t&e goernment/s call for ten,ers was
,iscusse, in many cases recently( "&ere is no clear-cut answer to t&is 4uestion as t&e answer
woul, ,e%en, on t&e in,ii,ual facts of eac& case( Alt&oug& t&e final answer woul, ,e%en, on
t&e facts of eac& case) generally) t&e courts in 3nglan, &ae &el, t&at t&ere is a %reliminary
contract t&at goerns t&e ten,er %rocess +etween t&e goernment an, t&e ten,erers(
55
"&is
%reliminary contract im%oses certain contractual ,uties on +ot& t&e goernment an, t&e
ten,erers(
!n t&e Malaysian case of Chen* Ken* Hon* " &o"ern+ent o) the <ederation o) Ma#a!a)
58
a
ten,er was not really an issue %er se) +ut rat&er t&e %arties &ae entere, into a contract t&roug&
t&e ten,er %rocess( "&e -ig& $ourt/s o+seration t&at t&e contract comes into e2istence +y way
of /uncon,itional acce%tance of a ten,er/ im%lies t&e fact t&at a ten,er +y itself is an offer an, t&at
an initation to ten,er is a mere initation to treat(
"&e ,ecision of t&e a+oe case was referre, to in anot&er interesting Malaysian case of Chin Ah
Keo B Chin Lai Sitt " An**un Pintas Sdn Bhd ,
$ ML% i at :i:
Ors(
5:
!n t&is case) t&e first ,efen,ant was t&e s&are&ol,er of t&e entire issue, an, %ai,-u%
ca%ital of 'a&man -y,raulic "in 6,n 0&,( "&e secon, an, t&ir, ,efen,ants were a%%ointe, as
&is li4ui,ators( "&e li4ui,ators a,ertise, an o%en ten,er initing t&e %otential +uyer to +uy t&e
first ,efen,ant/s s&ares in t&e com%any( 6u+se4uently) eig&t ten,erers su+mitte, t&eir +i,s)
among t&em %laintiff w&o su+mitte, 'M;(;28m an, t&e fourt& ,efen,ant w&o su+mitte, 'M15m
wit& con,ition t&at t&e licence w&ic& &a, +een grante, to t&e com%any +y t&e 6tate =oernment
is renewe,( -oweer) neit&er t&e %laintiff nor fourt& ,efen,ant initially manage, to get t&e ten,er)
+ut rat&er t&e ten,er was gien to one com%any) MP Asset Management 6,n 0&, D/MPAM/E)
w&ic& was t&e &ig&est +i,,er( Later on) t&e awar, of ten,er to MPAM was terminate, ,ue to t&e
MPAM/s +reac& of some con,itions of t&e agreement( As a result) t&e fourt& ,efen,ant/s ten,er
was acce%te, +y t&e li4ui,ators) after t&e fort& ,efen,ant/s %rior con,ition was wit&,rawn) an, t&e
contract was signe, +etween t&e first ,efen,ant an, fort& ,efen,ant(
"&e %laintiff was not &a%%y wit& t&e arrangement an, a%%lie, to t&e court for t&e contract
conclu,e, +etween t&e first an, fourt& ,efen,ant to +e ,eclare, as null an, oi,( "&e %laintiff/s
Page 15
contention regar,ing t&e ten,er %rocess was t&at wit&,rawal of t&e con,ition +y t&e fourt&
,efen,ant amounte, to a new an, fres& ten,er( !n ot&er wor,s) t&e new ten,er woul, mean a
com%letely new offer( -oweer) t&e learne, -ig& $ourt Ju,ge) 'amly Ali J) re>ecte, t&e %laintiff/s
contention t&at t&e wit&,rawal of t&e con,ition +y t&e fourt& ,efen,ant amounte, to a fres&
ten,er( At t&e time of wit&,rawal of t&e con,ition +y t&e fourt& ,efen,ant) t&e ten,er %rocess was
alrea,y close,( "&e court state, t&at#
t&e secon, an, t&ir, ,efen,ant were at li+erty to e2ercise t&eir ,iscretion an, ,iscuss wit& any ot&er
ten,er( "&ese %owers are conferre, u%on t&e li4ui,ators as %roi,e, in s 2 an, 8 of t&e information
memoran,um( "&erefore) t&ere is no issue of initial +i, an,/or su+se4uent +i, +y t&e fourt& ,efen,ant(
5;
1urt&ermore) t&e learne, -ig& $ourt >u,ge) 'amly Ali J in ,eli+erating on t&e law on ten,er in
Malaysia state, t&at# /"&e law on ten,er in Malaysia is similar to t&at of 3nglis& law is-a-is t&e
initation for ten,er is +asically initing offerrors an, unless an, until t&e offer is acce%te,) t&ere
is no conclu,e, contract +etween t&e offerer an, t&e offeree(/
5<
$ ML% i at ::
+&&L' OF INFORMA#ION.&RELIMINAR' NE-O#IA#ION
A mere su%%ly of information +y t&e contracting %arties a+out t&e su+>ect matter of a contract Die
%rice) s%ecifications) etcE woul, not amount to an offer) +ut rat&er woul, +e regar,e, as an
initation to treat( "&e free,om of t&e %arties to +argain wit& eac& ot&er must +e untouc&e, +y t&e
com%le2 contract regulatory framewor*( "&e law is not concerne, wit& t&e %rice of t&e +argain or
w&et&er t&e +argain is goo, for one %arty or not( !n ot&er wor,s) t&e %rice Dconsi,erationE must +e
sufficient an, nee, not +e a,e4uate( "&e law only loo*s at un,erlining t&e legal structure of
transactions +y ensuring t&at all necessary elements are %resent( "&us) a free,om to negotiate
an, su%%ly t&e releant information w&ic& will lea, to an offer must +e gien to t&e %arties( "&e
su%%ly of information is not an offer +ut it is meant to lea, t&e ot&er %arty to ma*e an offer(
"&e Priy $ouncil ,ecision in Har"e! " <ace!
80
is a won,erful illustration of a statement regar,e,
as a mere su%%ly of information an, not an offer( "&e +rief facts of t&e case are as follows#
t&e a%%ellants telegra%&e,) /?ill you sell us 0um%er -all Pen J "elegra%& lowest cas& %rice)/ an, t&e
res%on,ent telegra%&e, in re%ly) /Lowest %rice for 0um%er -all Pen M<00)/ an, t&en t&e a%%ellants
telegra%&e,) /?e agree to +uy 0um%er -all Pen for M<00 as*e, +y you( Please sen, us your title-,ee,
in or,er t&at we may get early %ossession)/ +ut receie, no re%ly(
"&e Priy $ouncil &el, t&at t&ere was no +in,ing contract +etween t&e %arties( "&e a%%ellant/s
final telegra%& stating# /?e agree to +uy 0um%er -all Pen for M<00 as*e, +y you( Please sen, us
your title-,ee, in or,er t&at we may get early %ossession/) is not an acce%tance +ecause an offer
was neer ma,e( !n fact) t&e a%%ellant/s final telegra%& coul, +e regar,e, as an offer to +uy t&e
0um%er -all Pen for M<00( Lor, Morris in ,eliering t&e >u,gement of t&e Priy $ouncil e2%laine,
t&at t&e a%%ellant %ose, two 4uestions to t&e res%on,ent in &is first telegra%&) ie /?ill you sell us
0um%er -all Pen) an, "elegra%& lowest cas& %riceJ)/ "&e res%on,ent re%lie, only t&e secon,
4uestion +y su%%lying t&e information a+out t&e %rice of t&e 0um%er -all Pen( "&erefore) an offer
was neer ma,e +y t&e res%on,ent(
!n t&e Malaysian case of Preston Cor.oration Sdn Bhd " (dard Leon* , Ors)
81
t&e a%%ellant) a
%u+lis&er) ma,e a +usiness arrangement wit& t&e res%on,ent) a firm of %rinters) in relation to t&e
%rinting of sc&ool te2t+oo*s( "&e res%on,ent sent to t&e a%%ellant two +ills) one +eing t&e %rinting
c&arges
$ ML% i at ::i
an, t&e ot&er +eing t&e e2tra +ill for re%ro,ucing film %osities( "&e issue arose in relation to t&e
Page 17
owners&i% of t&e film %osities( "&e a%%ellant %ai, t&e %rinting +ills +ut refuse, to %ay a,,itional
c&arges amounting to L500 alleging for t&e claim to +e oerc&arge,( "&e res%on,ent +roug&t t&e
case +efore t&e trial court an, -arun J ma,e a ,ecision in faour of t&e res%on,ents(
"&e a%%ellants were un&a%%y wit& t&e ,ecision) an, later on) t&e case was a%%eale, +efore t&e
1e,eral $ourt( "&e 1e,eral $ourt trie, to ascertain t&e issue in relation to owners&i% of t&e films(
"&e a%%ellants conten,e, t&at t&ey su%%lie, t&e res%on,ents wit& e2isting te2t+oo*s for t&em to
ma*e t&e %osities) an, for t&is wor*) t&e a%%ellants were c&arge, L2;)052( !n fact) t&ey %ai, t&is
sum willingly wit& t&e %resum%tion t&at t&e owners&i% of t&e film %osities +elongs to t&em(
-oweer) t&e res%on,ent re+utte, t&e a%%ellant/s contention +y claiming t&at t&e owners&i% of t&e
films +elonge, to t&em +ase, on /t&e e2%ress terms of t&e contract an, also tra,e usage/(
"&erefore) t&e 1e,eral $ourt &a, to ascertain w&en t&e contract came into e2istence(
"&e learne, 6alle& A+as 1J in ,eliering t&e >u,gment of t&e 1e,eral $ourt) o+sere, t&at t&e
contract +etween t&e %arties was conclu,e, /+y an e2c&ange of letters commencing wit& t&e
res%on,ents/ 4uotations an, en,ing wit& t&e %ayment for t&e %rinte, +oo*s(/
82
"&e res%on,ents
su+mitte, fie 4uotations to t&e a%%ellant +ase, on w&ic& t&e %rinting or,ers were issue, +y t&e
a%%ellant( "&e res%on,ent argue, t&at at least first t&ree 4uotations out of fie containe, film
owners&i% clause an, t&ese 4uotations were uncon,itionally acce%te, +y t&e a%%ellant( "&us) an
uncon,itional acce%tance +y t&e a%%ellant amounts to an acce%tance an, t&e +in,ing contract is
conclu,e,( "&e learne, 1e,eral $ourt Ju,ge) 6alle& A+as 1J &el, t&at t&e res%on,ent/s
contention woul, +e correct only if t&e 4uotations coul, +e regar,e, as an offer( "&e learne,
>u,ge o+sere, t&at t&e 4uotation ,i, not constitute an offer an, t&us) t&e contract coul, not
come into e2istence w&en t&e %rinting or,ers were issue, +y t&e a%%ellant( "&e contract came
into e2istence w&en t&e %rinting or,ers were acce%te, +y t&e res%on,ent( !n fact) t&e learne,
>u,ge a,,e, t&at t&e 4uotations /were not&ing more t&an a mere su%%ly of information +y t&e
res%on,ents in res%onse to t&e a%%ellants/ in4uiry as to t&e %rice of +oo*s to +e %rinte, an, t&eir
,eliery ,ates(/
85
$ ML% i at ::ii
AN INVI#A#ION #O &+R%)AE )ARE
One of t&e ways in w&ic& com%anies can raise ca%ital is +y issuing new securities Ds&ares or
,e+enturesE(
87
Only %u+lic liste, com%anies) liste, on 0ursa Malaysia may inite %u+lic to
su+scri+e to t&eir s&ares +ase, on t&e com%anies/ %ros%ectus( All com%anies liste, on 0ursa
Malaysia are %u+lic com%anies) +ut %u+lic com%anies may c&ose to +e unliste, as well(
85
9nli*e
%u+lic liste, com%anies) %riate com%anies are not allowe, fun,-raising actiities +ase, on t&e
issuing of %ros%ectus Die issuing of s&ares an, ,e+enturesE(
88
?&en a com%any ,eci,es to issue
more s&ares) it woul, inite t&e %u+lic to %urc&ase its s&ares +ase, on t&e com%any/s
%ros%ectus(
8:
A %ros%ectus &as +een ,efine, in s 228 of t&e $a%ital Mar*ets an, 6erices Act
200: D/$M6A/E as follows#
%ros%ectus means a notice) circular) a,ertisement or ,ocument initing a%%lications or offers to
su+scri+e for or %urc&ase securities) or offering any securities for su+scri%tion or %urc&ase an,) unless
e2%ressly s%ecifie,) inclu,es a su%%lementary %ros%ectus) re%lacement %ros%ectus) s&elf %ros%ectus)
s&ort form %ros%ectus) %rofile statement) su%%lementary s&elf %ros%ectus an, a+ri,ge, %ros%ectus
!n ot&er wor,s) a %ros%ectus is a ,ocument w&ic& contains necessary information a+out a
com%any an, an initation to t&e %u+lic su+scri+ing to t&e securities t&at inestors nee, to *now
in or,er for t&em to ma*e a soun, inestment ,ecision( Legally s%ea*ing) a %ros%ectus is not an
offer +ut a mere initation to treat( "&erefore) a com%any/s initation to t&e %u+lic to %urc&ase
s&ares or ot&er securities +ase, on its %ros%ectus is a mere initation to treat( An offer is ma,e +y
t&e %otential a%%licants an, t&e com%any is an offeree( "&ere is a logical reason for t&is +ecause
if a com%any/s initation to t&e %u+lic to %urc&ase its s&ares is regar,e, as an offer) t&en eery
Page 15
a%%lication ma,e +y t&e a%%licants woul, +e an acce%tance( ?&at woul, &a%%en t&en if t&ere are
more a%%lications t&en t&e s&ares allotte,J A com%any woul, +e oersu+scri+e, an, it woul, +e
%lace, in an im%ossi+le situation(
8;
$ ML% i at ::iii
%ON%L+ION
!t can +e conclu,e, t&at t&e rationale +e&in, t&e nee, for ,istinguis&ing an initation to treat from
an offer ca%a+le of acce%tance is %ractical an, necessary( !n,ee,) it woul, +e a+solutely
im%ractical if all ty%es of statements ma,e +y t&e %arties are regar,e, as offers ca%a+le of
acce%tance( "&e notion w&ic& ,isregar,s a clear ,istinction +etween an initation to treat an, an
offer woul, un,ermine t&e %arties/ free,om to negotiate t&e terms of t&e contract +efore its
conclusion( "&e courts in 3nglan, an, Malaysia) in %articular) &ae recognise, t&e im%ortance of
ma*ing a clear ,istinction +etween an offer an, an initation to treat( -oweer) to ,etermine w&at
woul, amount to an offer an, an initation to treat is not an easy tas*( "&is is w&y t&e courts &ae
a,o%te, ,ifferent a%%roac&es) ie t&e /conentional a%%roac&/ an, /unconentional a%%roac&/ in
,etermining t&e %osition of an offer an, an initation to treat( "&e /conentional a%%roac&/ focuses
on formalities an, loo*s into w&et&er a formal offer an, acce%tance &ae +een ma,e( On t&e
ot&er &an,) t&e unconentional a%%roac& em%&asises on a corres%on,ence as a w&ole an,
con,uct of t&e %arties in ,etermining t&e %osition of an offer an, an initation to treat( !t coul, +e
sai,) t&at t&e Malaysian courts ten, to follow t&e %reailing /conentional a%%roac&/ in ,etermining
w&et&er a statement amounts to an offer or an initation to treat( 1urt&ermore) t&e courts in
general) &ae i,entifie, a few situations w&ic& woul, amount to an initation to treat an, not an
offer( -oweer) as it coul, +e seen from t&e ,iscussion) sometimes ,ifficulties in ,istinguis&ing an
offer from an initation to treat arise een in t&ose situations(
1 "&e situations w&ic& &ae +een i,entifie, +y t&e court as initation to treat &ae +een ,iscusse, in ,etail in t&e
later %art of t&e %a%er(
2 B1<:<C 1 All 3' <:2(
5 B2001C 7 MLJ 7<B2001C 5 $LJ ;87(
7 B2012C ; MLJ 5;5B2011C 1 L@6 5<5(
5 B1<:;C 2 All 3' 5;5(
8 B1<:7C 5 All 3' ;27(
: 6ee Mic&ael =isler) Natarina 6tanoes*a-6la+ea an, Mar*us =reunO) Le*a# As.ects o) (#ectronic Contracts)
%a%er %resente, at t&e wor*s&o% on t&e !nfrastructure for .ynamic 0usiness-to-0usiness 6erice Outsourcing
D!.6O/00E) 6toc*&olm) 5-8 June 2000(
; B1<:<C 1 All 3' <:2(
< B1<:7C 5 All 3' ;27(
10 6ee 'ic&ar, 6tone) The Modern La o) Contract) D:t& 3,E) 'outle,ge-$aen,is&) Lon,on) 200;) at % 5:(
11 B1<:;C 2 All 3' 5;5(
12 B1<:<C 1 All 3' <:2(
Page 18
15 6ee 'ic&ar, 6tone) The Modern La o) Contract) D:t& 3,E) 'outle,ge-$aen,is&) Lon,on) 200;) at % 5<(
17 I'id-
15 6ee Jo&n @ A,ams an, 'oger 0rownswor,) Understandin* Contract La) D5t& 3,E) "&omson) 6weet an,
Ma2well) Lon,on) 200:) at %% 52-55(
18 I'id(
1: B2001C 7 MLJ 7<B2001C 5 $LJ ;87(
1; B2012C ; MLJ 5;5 B2011C 1 L@6 5<5(
1< I'id) %ara B15C(
20 B2001C 7 MLJ 7<B2001C 5 $LJ ;87(
21 I'id) at % ;8:(
22 6ee for instance) t&e classifications in 6ye, A&ma, Alsagoff) Princi.#es o) the La o) Contract in Ma#a!sia)
D5r, 3,E) Le2is@e2is) Malaysia) 2010) at %% 75-55( 6ee also Nris&nan Ar>unan an, A+,ul Ma>i, +in @a+i 0a*s&)
Contract La in Ma#a!sia) Le2is@e2is) Malaysia) 200;) at %% 50-85(
25 D1:;<E 100 3' 502(
27 I'id) at % 505(
25 B1<:2C 5 All 3' 782(
28 6ee A&C (Ad"ances) Ltd " Mc;hirter B1<::C 1 0P' <757( 6ee also Jeannie Paterson) An,rew 'o+ertson)
an, Arlen .u*e) Princi.#es o) Contract La) D5r, 3,E) "&omson 'euters) 200<) 6y,ney) Australia) at % 50(
2: "&e auction /wit&out reseration/ or /no-resere auction/ or /a+solute auction/ is t&e ty%e of auction w&ere t&e
su+>ect matter of t&e auction woul, +e sol, regar,less of t&e %rice( !t coul, +e a +eneficial factor for t&e
auctioneer +ecause more +i,,ers mig&t +e intereste, to +i, an, as a result of t&eir com%etition a +etter ,eals
coul, +e ac&iee,(
2; 6ee ;ar#o " Harrison <20A Barr! " Heathcote Ba## , Co (Co++ercia# Auctions) LtdD1;5<E 120 3'B2001C 1 All
3' <7( 6ee also Jeannie Paterson) An,rew 'o+ertson) an, Arlen .u*e) Princi.#es o) Contract La) D5r, 3,E)
"&omson 'euters) 200<) 6y,ney) Australia) at % 51(
2< 6ee A&C (Ad"ances) Ltd " Mc;hirter B1<::C 1 0P' <757( 6ee also Jeannie Paterson) An,rew 'o+ertson)
an, Arlen .u*e) Princi.#es o) Contract La) D5r, 3,E) "&omson 'euters) 200<) 6y,ney) Australia) at % 51(
50 B1<<7C 1 MLJ 2<7(
51 B1<52C 2 F0 :<5(
52 6ee t&e ,ecision +y t&e Fueen/s 0enc& .iision >u,ge) Lor, =o,,ar, $J in Phar+aceutica# Societ! o) &reat
Britain " Boots Cash Che+ists (Southern) LD 8B1<51C P @o 1715B1<52C 2 F0 :<5(
55 6ee 'ic&ar, 6tone) The Modern La o) Contract) D:t& 3,E) 'outle,ge-$aen,is&) Lon,on) 200;) at % 70(
57 I'id-
Page 1:
55 B1<81C 1 F0 5<7(
58 6ee s 1 of t&e 'estrictions of ?ea%ons Act 1<5<(
5: B1<55C 1 F0 701(
5; 6ee Jeannie Paterson) An,rew 'o+ertson) an, Arlen .u*e) Princi.#es o) Contract La) D5r, 3,E) "&omson
'euters) 200<) 6y,ney) Australia) at % 50(
5< B1<5<C 6A6' 2<5(
70 1or furt&er ,iscussion) see Jeannie Paterson) An,rew 'o+ertson) an, Arlen .u*e) Princi.#es o) Contract La)
D5r, 3,E) "&omson 'euters) 200<) 6y,ney) Australia) at % 50(
71 6ee t&e ,ecision of 6mit&ers J in t&e case of Aeardon " Mor#e! <ord Pt! Ltd D1<;0E 55 AL' 71:(
72 D1<;5E 5; AL' :5:(
75 B1<8;C 2 All 3' 721(
77 B1<81C 1 F0 5<7(
75 B2001C 7 MLJ 7< B2001C 5 $LJ ;87(
78 B200<C 7 MLJ :71B200<C 7 $LJ 78;
7: B2005C 5 MLJ 751B2005C 5 $LJ 507(
7; B200<C MLJ9 11<5B200<C 1 L@6 1758(
7< B1<87C MLJ 12(
50 B1;<5C 1 F0 258(
51 B1<8;C 2 All 3' 721(
52 D1;:0E L' 5 $P 581(
55 B1<;5C 2 All 3' <88(
57 B1<<0C 3?$A 15 B1<<0C 1 ?L' 11<5
55 1or furt&er ,etail) see Jeannie Paterson) An,rew 'o+ertson) an, Arlen .u*e) Princi.#es o) Contract La) D5r,
3,E) "&omson 'euters) 200<) 6y,ney) Australia) at % 52(
58 B1<88C 2 MLJ 55(
5: B2005C 7 MLJ :7:(
5; I'id) %ara B28C(
5< I'id) %ara B2<C(
80 B1;<5C A$ 552(
Page 1;
81 B1<;2C 2 MLJ 22(
82 I'id) %ara B12C(
85 I'id) %ara B17C(
87 1un,-raising actiities in Malaysia are goerne, +y t&e $a%ital Mar*ets an, 6erices Act 200: D/$M6A/E
e2ce%t for actiities w&ic& &ae +een e2%ressly e2clu,e, +y t&e $M6A( "&e regulatory +o,y t&at regulates t&e
fun,-raising actiities is t&e 6ecurity $ommission D/6$/E(
85 6ee Aiman @ariman Mo&, 6ulaiman) Ais&a& 0i,in) Pamela -anra&an) !an 'amsay) an, =eof 6ta%le,on)
Co++ercia# A..#ication o) Company Law in Ma#a!sia) D5r, 3,E) $$- Asia Pte Limite,) Malaysia) 200;) at % <<(
88 6ee s 15 of t&e $om%anies Act 1<85 DAct 125E(
8: 6ee Nris&nan Ar>unan an, A+,ul Ma>i, +in @a+i 0a*s&) Contract La in Ma#a!sia) Le2is@e2is) Malaysia) 200;)
at % 5;(
8; I'id-
Page 1<
Page 20
Malayan Law Journal Articles/2012/Volume 5/"&e 3ffectieness of $or%orate =oernance in
'e,ucing 3arnings Management in t&e Malaysian 1amily $ontrolle, Pu+lic Liste, $om%anies
[2012] 5 MLJ cl///0ii
Malayan Law Journal Articles
2012
#)E EFFE%#IVENE OF %OR&ORA#E -OVERNAN%E IN
RE*+%IN- EARNIN- MANA-EMEN# IN #)E MALA'IAN
FAMIL' %ON#ROLLE* &+,LI% LI#E* %OM&ANIE$ A
&ER&E%#IVE AF#ER #)E 2001 REFORM
Christine Khor Meo ;ei
Ad"ocate , So#icitor
LLB B Co++ (Acct , <in) (S!dne!)
Master o) <inance , <inancia# La (Merit) (London)
The .ur.ose o) this stud! is to test the e))ecti"eness o) the 0221 Ma#a!sian cor.orate *o"ernance
re)or+s in reducin* earnin*s +ana*e+ent, hich are o) .u'#ic concern a)ter incidences o) a
series o) accountin* )rauds and scanda#s occurred around the !ear o) 022C, des.ite the
i+.#antation o) the Ma#a!sian Code o) Cor.orate &o"ernance in 0225-
;e e:a+ine hether there are associations 'eteen certain as.ects o) cor.orate *o"ernance
and the earnin*s +ana*e+ent 'e)ore and a)ter the 0221 re)or+s- ;e then e:a+ine hether
certain as.ects o) cor.orate *o"ernance ha"e 'een i+.ro"ed a)ter the re)or+s, and hether the
as.ects o) the i+.ro"e+ent o) cor.orate *o"ernance ha"e re#ati"e#! #oer earnin*s
+ana*e+ent-
Our )irst )indin* is the o'ser"ation o) the .heno+enon that the #e"e#s o) earnin*s +ana*e+ent
ha"e *enera##! 'een increased a)ter the 0221 re)or+s- This is an interestin* )indin* *i"en that the
0221 re)or+s ere i+.#e+ented ith the ai+ o) i+.ro"in* earnin*s Dua#it! o) the #isted
co+.anies in Ma#a!sia- Ha"in* re*ard to the a)oresaid .heno+enon, e +a! there'! dra an
in)erence that the .ractice o) *ood cor.orate *o"ernance +a! not .re"ent earnin*s +ana*e+ent
durin* 'ad ti+es- Indeed the e"idence in)ers that a## co+.anies +ana*e their earnin*s hen
ti+es are 'ad-
Ae*ard#ess o) the a'o"e in)erences, our e+.irica# studies do re"ea# the )indin*s that certain
as.ects o) cor.orate *o"ernance are e))ecti"e in reducin* #e"e#s o) earnin*s +ana*e+ent- <irst#!,
e )ind that the co+.osition o) the Audit Co++ittee as +easured '! the .ro.ortion o) )a+i#!
re#ated +e+'ers o"er the tota# +e+'ers in the Audit Co++ittee, associates .ositi"e#! and
si*ni)icant#! ith the #e"e#s o) earnin*s +ana*e+ent in the our sa+.#e co+.anies- The 0221
re)or+s are dee+ed e))ecti"e on this as.ect o) cor.orate *o"ernance 'ecause (i) e o'ser"e an
o"era## reduction in the .ro.ortion o) )a+i#! re#ated +e+'ers in the Audit Co++ittee a)ter the
re)or+s, and (ii) our e+.irica# stud! su**ests that the co+.anies ith reducin* .ro.ortion o)
)a+i#! re#ated +e+'ers in the Audit Co++ittee e:.erience re#ati"e#! #oer earnin*s +ana*e+ent
in 0252-
Page 21
;e a#so o'ser"e a shar. reduction in the #e"e# o) directors7 shareho#din* in the Audit Co++ittee
a)ter the re)or+s, and our e+.irica# stud! su**ests that co+.anies ith decreasin* #e"e# o)
directors7 shareho#din* in the Audit Co++ittee e:.erience re#ati"e#! #oer earnin*s +ana*e+ent-
<ina##!, e o'ser"e an o"era## incre+ent o) 'oard si=e a)ter the re)or+s, and our e+.irica# resu#t
su**ests that co+.anies hich increase their 'oard si=e a)ter the re)or+s e:.erience re#ati"e#!
#oer earnin*s +ana*e+ent-
Ackno#ed*e+ents
The author ou#d #ike to thank Mr >ei# S+ith, Dr Lie @ueah Cin, Mr Ki+ Ten*, Mr Lee Hen* ;ei
and Ms &oh Mei Lin* )or assistin* ith the .re.aration and re"ie o) this dissertation-
IN#RO*+%#ION
"&e agency t&eory s%ells out t&at t&e se%aration of owners&i% an, management in mo,ern
cor%orations woul, gie rise to agency costs at t&e ,etriment of t&e inestors) %articularly t&e
minority s&are&ol,ers DJensen an, Mec*ling D1<:8EE(
One of t&e as%ects of agency costs is t&e incentie of t&e management to mani%ulate t&e
earnings eit&er for t&eir self interest or to mislea, t&e sta*e&ol,ers as to t&e un,erlying
%erformance of t&e com%anies D-utc&inson K ot&ers D200;EE( 3en t&oug& suc& a,>ustments of
earnings may +e acce%ta+le un,er t&e accounting stan,ar,s) suc& %ractice is un,esira+le gien
t&at t&e inestors &ae rig&t to t&e true an, fair iew of t&e com%anies/ financial %osition) w&ic&
are %resente, in t&e forms of financial re%orts(
1or t&e %ur%ose of t&is researc&) we treat /earnings management/ %ractices as negatie an,
un,esira+le) een t&oug& t&ere may +e ot&er %ositie as%ects of earnings management(
!n restraining t&e earnings management) cor%orate goernance mec&anisms &ae +een
intro,uce, into cor%orate %ractices mainly to im%roe t&e cre,i+ility) accounta+ility an, 4uality of
t&e financial re%orts( !n t&e Malaysian $o,e of $or%orate =oernance) t&e as%ects of cor%orate
goernance mec&anisms inclu,e im%osition of t&e esta+lis&ment of an Au,it $ommittee) an, t&e
recent ream% in 200: re4uires t&e Au,it $ommittee to consist only of non-e2ecutie ,irectors)
an, etc DPul*afli K ot&ers D2002EA 1inance $ommittee D2001EE( !n t&eory) t&e %ractice of effectie
cor%orate goernance s&oul, +e a+le to re,uce t&e agency costs) w&ic& arise as t&e result of t&e
se%aration of t&e managers an, t&e s&are&ol,ers in t&e com%anies(
"&e su+>ect matter on earnings management &as +ecome of worl, attention w&en cor%orate
giants in t&e 9nite, 6tates of America an, Australia suc& as 3nron) ?orl,com) -!- !nsurance
an, One "el colla%se, ,ue to accounting scan,als t&at too* %lace D0en*el K ot&ers D2008EE( !n
Malaysia) earnings management +ecame a %u+lic concern after a series of accounting frau,
cases were committe, +y "ransmile =rou%) 6out&ern 0an* 0er&a, an, ?elli Multi $or%oration
0er&a, in 2008( "&e cor%orate goernance reforms in 200: are t&e ,irect res%on, to t&e
aforesai, inci,ences of accounting scan,als(
"&is is t&e %ioneer %a%er in Malaysia t&at e2amines t&e relations&i% +etween cor%orate
goernance an, t&e leels of earnings management) using a sam%le com%anies w&ic& com%rises
fully of family controlle, com%anies t&at are liste, in 0ursa Malaysia( "&e em%irical stu,y
e2amines an, com%ares t&e sam%le ,ata in 2008 an, 2010 in or,er to conclu,e w&et&er t&e
reforms in 200: are effectie(
"&e results of our em%irical results are consistent wit& t&e foreign stu,y +y Mis&ra K ot&ers
D2001E t&at t&e +oar, in,e%en,ence is not an effectie goernance mec&anism in family
controlle, com%anies(
3arlier local stu,ies conclu,e, t&at t&e Anglo-6a2om mo,el is unsuita+le for our local institution
as t&ey coul, not ,etect significant associations +etween t&e goernance mec&anisms an, t&e
earnings management DA+,ul 'a&man K Ali D2008EE( Our fin,ings ,e%art from t&e general
Page 22
conclusions ,rawn from t&e local stu,ies) +ecause we ,o fin, significant associations of certain
as%ects of cor%orate goernance) &oweer only after our refinements of t&e conce%ts of +oar,
an, au,it in,e%en,ence in t&e conte2t of family firms(
1rom t&e em%irical stu,y oer our sam%le of family firms) we fin, t&at t&e %ro%ortion of family
relate, mem+ers in t&e Au,it $ommittee is %ositiely an, significantly associate, wit& t&e leels
of earnings management( ?e also fin, t&at t&e com%anies wit& ,ecreasing %ro%ortion of family
relate, mem+ers an, com%anies wit& t&e ,ecreasing leel of ,irectors/ s&are&ol,ing in t&e Au,it
$ommittee after t&e reforms &ae relatiely lower leels of earnings management in 2010(
?e also fin, t&at t&e com%anies t&at increase t&e +oar, siOe after t&e reforms &ae relatiely
lower leels of earnings management in 2010( "&is fin,ing im%lies t&at t&e +oar, siOe is an
effectie goernance mec&anism for some family firms(
!n t&at res%ect) we mo,ify t&e conclusion ,rawn +y t&e local sc&olars an, state t&at t&e Anglo-
6a2on mo,el is totally ina%%ro%riate s&oul, t&e as%ects of goernance mec&anism are correctly
i,entifie,( 1or instance) t&e assessment of au,it in,e%en,ence in t&e conte2t of family controlle,
com%anies s&all ta*e into account of its %ro%ortion of family relate, mem+ers(
"&e structures of our %a%er after t&is 6ection A of !ntro,uction) follow t&e se4uence as +elow#
6ection 0 # Literature 'eiew
6ection
$
# $&oice of !n,e%en,ent Varia+les
6ection
.
# -y%ot&esis .eelo%ment
6ection 3 # $&oice of $ontrolle, Varia+les
6ection 1 # Measurements of 3arnings Management
6ection
=
# 'esearc& .esign) Met&o,ology an, .ata Analysis
6ection
-
# .iscussions an, 1in,ings
6ection ! # 1uture 'esearc&
6ection J # $onclusions
E%#ION ,$ LI#ERA#+RE REVIE(
,2i3 %or4orate 5o0ernance re6or7s in Malaysia
!n Malaysia) a formal co,e of cor%orate goernance) t&e Malaysian $o,e of $or%orate
=oernance D/t&e Malaysian $o,e/E was only intro,uce, into our listing re4uirements for %u+lic
liste, com%anies in 2001 after t&e Asian 3conomic $risis in 1<<:) wit& its main %ur%ose to
encounter t&e instances of financial ,istresse, com%anies(
.es%ite arious comments +y sc&olars in relation to insufficiency an, ,eficiency of t&e Malaysian
$o,e DA+,ul AOiO K -arun D2001EE) t&ere &a, +een no reforms until t&e serial &a%%enings of
accounting frau,s an, cor%orate falls in Malaysia(
"&e s%ecific goernance reforms in 200: was an e2tension to t&e e2isting co,e) wit& aims to
strengt&en t&e +oar, of ,irectors an, Au,it $ommittees mainly +y s%elling out t&e eligi+ility
criteria for t&e a%%ointment of ,irectors an, Au,it $ommittee mem+ers( "&e reforms were
%ur%orte,ly effecte, in or,er to %lace &ig&er accounta+ility u%on t&e ,irectors) t&e nomination
committee an, t&e Au,it $ommittee( "&e amen,e, co,e also re4uires t&e Au,it $ommittee to +e
com%rise, only of non-e2ecutie ,irectors an, also to increase t&e num+er of au,it meetings wit&
t&e e2ternal au,itors to a minimum of twice a year(
,2ii3 #8e earlier stu9ies
Page 25
Loca# Studies
!n Malaysia) most stu,ies were con,ucte, in res%onse to t&e 1<<: Asian economic crisis an, t&e
issues were centre, on t&e e2amination of t&e association +etween cor%orate goernance an,
financial ,istresse, com%anies in MalaysiaA for instance) t&e stu,y +y A+,ul 6@ D2008E( "&e
earliest Malaysian stu,y on t&e association +etween t&e as%ects of cor%orate goernance
%ractice an, t&e leels of earnings management was carrie, out +y sc&olars A+,ul 'a&man K Ali
D2008E( !n t&eir stu,ies) t&e as%ects of cor%orate goernance suc& as +oar, siOe) +oar,
in,e%en,ence) Au,it $ommittee an, cultural c&aracteristics were teste, against t&e financial ,ata
collecte, from t&e financial re%orts from 2002-2005) using t&e sam%le of <: to% %u+lic liste,
com%anies in Malaysia( "&eir fin,ings reeale, no significant relations&i% +etween t&ese as%ects
of cor%orate goernance wit& t&e leels of earnings management(
@ot until recently) anot&er Malaysian stu,y +y ?an A?! K ot&ers Dwor*ing %a%er) .ec 200<E was
con,ucte, w&ic& was a similar em%irical stu,y +y using 200 firms liste, in t&e 0ursa Malaysia on
t&e fie year ,ata from year 2005-200:( !n running t&e tests) t&ey categorise, t&e sam%les into
state or goernment lin*e, com%anies an, non-goernment lin* com%anies( "&e em%irical results
s&owe, t&at out of t&e ten as%ects of cor%orate goernance only Au,it $ommittee siOe &as
consistent negatie an, significant association wit& t&e leels of earnings management( "&e
+oar, siOe was foun, to +e negatiely an, significantly associate, wit& leels of earnings
management in t&e sam%les of state or goernment lin*e, com%anies) +ut no significant
association was foun, in t&e sam%les of non-goernment lin*e, com%anies(
"&e only stu,y in t&e areas of cor%orate goernance an, earnings 4uality in t&e Malaysian
enironment after t&e 200: reforms was +y ?an @?- K A+,ulla& Dwor*ing %a%er) @o 200<E( !n
t&e stu,y) t&ey measure, arious attri+utes of Au,it $ommittee suc& as siOe) au,it actiities) etc
against t&e 4uality of financial re%orts in Malaysia( "&e two sc&olars foun, t&at t&at t&e s%ecific
cor%orate goernance reforms in 200: w&ic& t&e %olicy ma*ers +eliee woul, en&ance t&e
effectieness of t&e Au,it $ommittee in carrying out its res%onsi+ilities ,o not yiel, any inten,e,
result(
?e are neert&eless not conince, +y t&e conclusion of ?an @?- K A+,ulla& a+oe +ecause
we fin, t&eir researc& ,esign an, met&o,ology was unso%&isticate,( "&eir a%%roac& of
measurement for earnings management merely relying on t&e Nuala Lum%ur 6toc* 32c&ange
D/NL63/E cor%orate awar, lists an, re%riman,e, lists( "&ey too* t&e com%anies awar,e, +y t&e
NL63 as com%anies of goo, earnings 4uality) an, t&e com%anies fine, or re%riman,e, +y t&e
NL63 as com%anies of %oor earning 4uality( As far as we are concerne,) t&e measurements of
earnings 4uality re4uire muc& more tec&nical as%ects(
!n summary) %rior Malaysian stu,ies generate, a general conclusion t&at t&e Malaysian $o,e
w&ic& is +ase, after t&e Anglo-6a2on mo,el is ineffectie in t&e Malaysian conte2t(
"&e stu,ies ma,e on t&e Malaysian family controlle, %u+lic liste, com%any are in,ee, ery
limite,) to t&e e2tent of only one em%irical stu,y con,ucte, +y !+ra&im - K ot&ers Dwor*ing %a%er)
Oct 200;E) &oweer not in t&e areas of earnings management +ut cor%orate %erformance(
"&eir stu,y e2amine, t&e relations&i% +etween t&e +oar, structure an, t&e cor%orate
%erformance oer 125 Malaysian family owne, %u+lic liste, com%anies( "&ey foun, statistically
significant results t&at +ot& family an, non-family com%anies &a, +etter cor%orate %erformance
w&en ,uality e2ist) an, less cor%orate %erformance w&en +oar, siOe an, +oar, in,e%en,ence
increase(
"&e ,efinition of ,uality in t&e conte2t of cor%orate goernance carries t&e meaning t&at t&e same
%erson &ol,s +ot& %ositions of t&e c&ief e2ecutie officer D/$3O/E an, c&airman(
Anot&er Malaysian sc&olar) .r Lai D200; K 200<E) carrie, out e2tensie literature reiews oer
foreign an, local stu,ies on family firms in or,er to antici%ate t&e associations +etween DiE t&e
+oar, in,e%en,enceA DiiE t&e ,ualityA an, t&e financial %erformance of family owne, liste,
Page 27
com%anies( -e &a, t&e fin,ings t&at t&ese two as%ects of cor%orate goernance mec&anisms
&ae no significant associations wit& t&e financial %erformance in family owne, com%anies(
-e t&erefore e2%ects t&at t&e em%irical tests on Malaysian family controlle, %u+lic liste,
com%anies woul, also generate similar results +ecause all family controlle, com%anies are
similar +y cultureA for instance) t&ey woul, only inite t&eir frien,s to seat in t&eir +oar, as
in,e%en,ent ,irectors) t&us not +eing truly in,e%en,ent( -e also e2%laine, t&at t&e recommen,e,
%ractice of t&e se%aration of title in family controlle, com%anies is meaningless +ecause t&e %osts
of t&e $3O an, c&airman are li*ely to +e &el, +y t&e %arents an, c&il,ren(
Alt&oug& t&e stu,ies a+oe measure, t&e relations&i% +etween cor%orate goernance an,
cor%orate %erformance rat&er t&an leel of earnings management) t&ey are still a useful in,icator
for our current researc&) +ecause cor%orate %erformance an, t&e estimate, ,iscretionary
accruals Dw&ic& is t&e %ro2y re%resenting t&e aaila+le room for earnings managementE e2&i+it a
mec&anical relation DNot&ari D2005EE( !n anot&er wor,s) t&e earnings management an, cor%orate
%erformance are interrelate, in some ways( "&is coul, +e e2%laine, +y t&e use of reenue as t&e
main com%onent in measuring +ot& t&e cor%orate %erformance an, t&e leels of earnings
management( !t is sai, t&at t&e firms wit& e2treme %erformance are also li*ely to engage in
earnings management( 1or t&e %ur%ose of &y%ot&esis ,eelo%ment in our current researc&) we
ta*e +etter cor%orate %erformance as an in,icator for &ig&er leels of earnings management(
!f we +ase u%on t&e a+oe ,e,uctions) we may ,raw an inference from t&e Malaysian stu,ies +y
!+ra&im - K ot&ers Das in a+oeE t&at family controlle, com%anies wit& a larger +oar, siOe an,
greater +oar, in,e%en,ence &ae lower leels of earnings management) an, family controlle,
families wit& t&e %resence of ,uality &ae &ig&er leels of earnings management(
!n lig&t of t&e a+oe ,iscussions) we s&all on a later %art in t&e section of &y%ot&esis ,eelo%ment
focus u%on t&e ,eelo%ment of &y%ot&esis in t&e as%ects of t&e +oar, siOe an, +oar,
in,e%en,ence(
Foreign Studies
?it& regar, to foreign literature reiews in relation to cor%orate goernance) t&ey suggest t&at t&e
strengt&ening of cor%orate goernance mec&anisms woul, lower earnings management
D-utc&inson K ot&ers D2005EA 6&en K ot&ers D200:EE( -oweer) t&ese stu,ies were con,ucte,
+ase, on t&e mi2e, sam%les of family owne,) state-owne, or institutional owne,(
"&ere was &oweer one foreign stu,y w&ic& was ma,e s%ecifically on family owne, firms) +y
Mis&ra K ot&ers D2001E( "&ey con,ucte, a stu,y oer family controlle, com%anies in @orwegia
an, its result suggeste, t&at +oar, in,e%en,ence woul, not im%roe cor%orate goernance in t&e
foun,ing of family controlle, firms( "&ey &a, t&e o%inion t&at family alues suc& as trust) loyalty
an, commitments to t&e family mem+ers woul, +ring alue creation to t&e firm an, once t&e
alues are im%lante,) t&e contri+ution of t&e in,e%en,ent ,irectors +ecomes irreleant(
Mis&ra/s fin,ing furt&er reeale, t&at t&e family firms wit& smaller +oar, siOe &ae &ig&er
cor%orate alue( "&is em%irical result aligns wit& t&e logic of t&e t&eory t&at t&e com%anies wit&
smaller +oar, siOe are more efficient wit& ,ecision ma*ing( -oweer t&e same may gie an
in,irect inference t&at t&ese com%anies may engage in &ig&er leels of earnings management(
Anot&er foreign stu,y was con,ucte, +y American 6c&olar ?ang D2008E) w&o con,ucte, t&e
stu,ies against family owne, com%anies liste, on t&e 6tan,ar, K Poor 500( !ts stu,y reeale,
t&at on aerage) t&e foun,ing family owners&i% is associate, wit& &ig&er earnings 4uality( As
family firms are normally %erceie, as wea* cor%orate goernance) it is uncertain w&et&er t&is
fin,ing gies an inference t&at mec&anisms of cor%orate goernance ,o not im%act u%on earnings
4uality in family controlle, com%anies(
=ien t&e inconclusie foreign ei,ences) an, t&e lac* of local ei,ences in connection wit& t&e
associations of cor%orate goernance an, t&e leels of earnings management) we &ere+y
Page 25
,eelo% an, con,uct t&e original em%irical stu,y of family owne, or controlle, com%anies liste, in
0ursa Malaysia(
E%#ION %$ %)OI%E OF IN*E&EN*EN# VARIA,LE
"&e Malaysian $o,e com%rises %rimarily of internal an, e2ternal mec&anisms( "&e internal
mec&anisms inclu,e t&e com%osition of 0oar, of .irectors an, Au,it $ommittee( "&e e2ternal
mec&anisms encom%ass t&e %ro2ies re%resente, +y legal infrastructure) regulations an,
enforcement mec&anism D1inance $ommittee D2001EE( "&e stu,y of t&e e2ternal mec&anisms is
not feasi+le gien t&e ery few legal an, enforcement cases in Malaysia( "&erefore we confine
our stu,ies to t&e internal mec&anisms(
"&e reforms of t&e Malaysian $o,e w&ic& too* %lace in 200: are im%lemente, %rimarily for t&e
%ur%oses of strengt&ening t&e 0oar, of .irectors an, Au,it $ommittee) w&ile ot&er as%ects
remain largely t&e same D1inance $ommittee D200:EE( =ien our %ur%ose of ,issertation to
con,uct an em%irical stu,y oer t&e effectieness of t&e Malaysian cor%orate goernance reforms
in 200:) our %a%er focuses on t&e two as%ects of cor%orate goernance) namely t&e +oar, of
.irectors an, t&e Au,it $ommittee) w&ic& are t&e %ur%orte, ream%e, areas(
"&e earlier stu,ies in t&e relate, areas as ,iscusse, in section 0DiiE a+oe %roi,e for t&e
suggestions of t&e su+se4uent ,eelo%ments of t&e &y%ot&esis in our %a%er( "&e in,e%en,ent
aria+les w&ic& were i,entifie, in t&e earlier %a%ers as t&e %ro2ies for t&e as%ects of cor%orate
goernance %roi,e ery useful references for us( 1or instance) t&e +oar, in,e%en,ence an, its
effectieness may +e re%resente, +y t&e %ro%ortion of in,e%en,ent ,irectors) +oar, siOe) +oar,
structure) %resence of ,uality) e2ecutie ,irectors/ s&are&ol,ers) ,irectors/ remuneration an, etc
D-utc&inson K ot&ers D200;EA 0en*er K ot&ers D2008EA 6&en K $&in D200:EA Ali 6&a& K ot&ers
D200<EA Lai D200<EA A+,ul 'a&man D2008EA -su K No& D2005EA A+,ulla&) 6@ D2008EE( "&e %ro2ies
for t&e in,e%en,ence an, t&e effectieness of t&e Au,it $ommittee may +e re%resente, +y t&e
%ro%ortion of non-e2ecutie ,irectors) fre4uency of au,it actiities) com%etency an, 4ualifications
of t&e mem+ers in t&e Au,it $ommittee an, etc D-utc&inson K ot&ers D200;EA 0en*er K ot&ers
D2008EA 6&en K $&in D200:EA Ali 6&a& K ot&ers D200<EA Lai D200<EA A+,ul 'a&man D2008EA
A+,ulla&) 6@ D2008EE( !n Asian an, earlier Malaysian stu,ies) t&e as%ects of cultural
c&aracteristics were also ma,e as one of t&e %ro2ies to test t&e effectieness of t&e cor%orate
goernance mec&anisms DA+,ul 'a&man D2008EA Lai D200;EE(
?e are &oweer selectie wit& t&e use of %ro2ies ,ue to t&e time constraint an, limitation of
&uman resource in %re%aring t&is ,issertation( ?e were also cautious wit& ,efining an,
em%loying t&e rig&t %ro2ies) instea, of incor%orating irreleant aria+les w&ic& woul, t&en ,istort
t&e entire mo,el(
Preious stu,ies &a, reeale, a consistent irreleancy of t&e goernance as%ects) for instance
t&e com%etency an, 4ualifications of t&e ,irectors in t&e +oar, an, in t&e Au,it $ommittee an,
t&e fre4uency of internal au,it meetings DA+,ul 'a&man K Ali D2008EA ?an @?- K A+,ulla&
Dwor*ing %a%er) @o 200<EA -utc&inson K ot&ers D200;EE( ?e are also of t&e o%inion t&at t&ese
factors are of no significance in family controlle, %u+lic liste, com%anies gien t&at t&e new
generations w&om &ae now assume, t&e main %ositions in t&e com%anies are all well 4ualifie,(
?e t&erefore ,eci,e not to test u%on t&ese as%ects(
?it& res%ect to t&e aria+le /$ulture $&aracteristic/) alt&oug& A+,ul 'a&man K Ali D2008E &a,
em%&asise, t&e im%ortance of t&e inclusion of cultural elements gien t&e ,ifferent +usiness
cultures t&at are +eing %ractise, +y t&e Malays) $&inese an, !n,ians) we are of t&e iew t&at t&e
Malaysian +usiness enironment &as e2%erience, mo,ernisation in recent years an, &as in fact
+een mature,( 1urt&er to t&is) t&e literature researc& +y Lai D200;E s&owe, t&at t&at t&e elements
of et&nicity or culture &ae e2erte, muc& lesser or no significance to t&e +usiness %ractices in
Malaysia nowa,ays( ?e t&erefore also e2clu,e t&e element of culture c&aracteristics from our
test mo,el(
Page 28
1inally we also ,eci,e not to test u%on t&e as%ect of ,uality or se%aration of title as goernance
mec&anisms( "&e reason is t&at t&e family controlle, liste, com%anies in Malaysia is at t&e stage
of transition %erio, w&ere+y t&e foun,ers are in t&e mi,st of %assing ,own t&eir %owers to t&e
secon, generation) w&ereof we start to witness more se%aration of titles recently( ?e o%ine t&at
t&e stu,y on t&is as%ect will +e meaningless until an, unless t&e succession &as +ecome
sta+ilise, among family owne, com%anies( !n,ee, t&e literature reiew +y .r Lai &a, conince,
us t&at t&e se%aration of title in family owne, com%anies sere no meaningful %ur%ose as t&e
%ost of c&airman is normally &el, +y t&e %arent) an, t&e %ost of $3O +y t&e son) an, t&e foun,er
%arents are still &ol,ing on to t&e %owers(
=ien t&e noelty of our researc& to use only t&e sam%le t&at consist of family controlle,
com%anies) we re,efine t&e conce%ts of +oar, an, au,it in,e%en,ence) w&ic& ,e%art from t&e
general %erce%tions of +oar, an, au,it in,e%en,ence in t&e liste, com%anies(
E%#ION *$ *EVELO&MEN# OF )'&O#)EI
?e inter%ret t&e conce%t of /+oar, in,e%en,ence/ ery wi,ely to regar, factors suc& as +oar,
siOe) e2ecutors/ s&are&ol,ings to also im%act u%on t&e +oar, in,e%en,ence( "a*e for instance)
from t&e t&eoretical %oint of iew) t&e &ig&er num+ers of ,irectors in t&e 0oar, of .irector Die
+igger +oar, siOeE) woul, e2ercise t&e functions of c&ec* an, +alance +etter) an, t&us leel ,own
t&e instances of mani%ulating t&e +oar, ,ecision( Anot&er %oint) t&e ,irectors wit& &ig&er s&are
owners&i%s in t&e com%anies woul, &ae motiations to mani%ulate t&e ,ecisions to its own
faour an, t&us affect +oar, in,e%en,ence(
"&e conentional manner of assessing +oar, in,e%en,ence &as +een confine, into one conce%t
-- t&e %ro%ortion of non-e2ecutie ,irectors in t&e +oar,( ?e ,o not t&in* t&at is a sufficient
measurement in t&e case for family controlle, com%anies as non-e2ecutie ,irectors may also +e
family relate,( "&erefore asi,e from t&e conentional measurement met&o, suc& as calculating
t&e %ro%ortion of non-e2ecutie ,irectors in t&e +oar,) we e2%an, t&e conce%t of +oar,
in,e%en,ence) in a way w&ic& we ,eem fit an, necessary) ,es%ite t&e fact t&at t&ey are
un%rece,ente,) as we may see in +elow(
6ame a%%roac& a%%lies to our assessment on au,it in,e%en,ence( ?e inter%ret t&e conce%t of
au,it in,e%en,ence ery wi,ely to consi,er an, regar, &ig&er %ro%ortion of family relate,
,irectors in t&e Au,it $ommittee as less au,it-in,e%en,ent(
*2i3 :oar9 si;e
+oar, siOe &as +een seen as one of t&e crucial factors affecting t&e %erformance an, alues of
com%anies) wit& mi2e, results %ro,uce, from t&e earlier literature reiews DMis&ra K ot&ers
D2001EA A+,ul 'a&man K Ali D2008EA !+ra&im - K ot&ers Dwor*ing %a%er) Oct 200;EA ?an A?! K
ot&ers Dwor*ing %a%er) .ec 200<EE( "&e +oar, siOe is also regar,e, as a factor contri+uting to t&e
+oar, in,e%en,ence from t&e t&eoretical %oint of iew +ecause larger +oar,s ,ecentralise t&e
%owers of t&e e2ecutie ,irectors) an, e2ercises more effectie c&ec*s an, +alances(
More im%ortantly) t&e em%irical stu,y in a recent Malaysian %a%er at t&e stage of wor*ing %a%er
reerses earlier Malaysian stu,ies an, %resente, a conflicting iew on t&is cor%orate goernance
as%ect in monitoring leels of earnings management( "&e recent stu,y +y ?an A?! K ot&ers
Dwor*ing %a%er) .ec 200<E reeale, t&at t&e +oar, siOe is significantly an, negatiely associate,
wit& t&e leels of earning management) w&ile t&e earlier stu,y +y A+,ul 'a&man D2008E reeale,
an o%%osite an, contra,ictory result t&at a +oar, +ecomes less efficient w&en its siOe gets larger(
?e t&erefore inten, to re-e2amine t&is as%ect of cor%orate goernance in t&e conte2t of family
owne, com%anies( As most of t&e stu,ies) inclu,ing one foreign stu,y on t&e family firms +y
Mis&ra K ot&ers D2001E also im%licate, a significant an, negatie association +etween t&e +oar,
siOe an, t&e leels of earnings management) we set our &y%ot&esis as follows#
Page 2:
H5(a)E there is a ne*ati"e association 'eteen the 'oard si=e and the #e"e#s o) earnin*s
+ana*e+entF and
H5(')Ethere is a ne*ati"e association 'eteen the 'oard si=e and the #e"e#s o) earnin*s
+ana*e+ent )or )ir+s that increase 'oard si=e su'seDuent to s.eci)ic *o"ernance re)or+s-
*2ii3#8e le0els o6 e/ecuti0e 9irectors< s8are owners8i4
Most of t&e foreign stu,ies %ro,uce, an, reeale, %ositie associations +etween e2ecutie
,irectors/ s&are owners&i% an, t&e leels of earnings management D-utc&ison K ot&ers D200;EA
$&eng K ?arfiel, D2005EA .ec&ow K ot&ers D2007EA Par* K Par* D2001EE( -oweer t&e Malaysian
stu,y +y ?an A?! K ot&ers D?or*ing Pa%er) .ec 200<E s&owe, an insignificant relations&i%(
"&eir results were &oweer generate, from t&e mi2e, sam%les of family an, non-family
com%anies an, ,o not %roi,e an e2cellent reference to t&e current stu,y on family controlle,
com%anies( ?e neert&eless agree wit& t&e t&eoretical iew t&at &ig&er e2ecutor owners&i%s
woul, affect t&e +oar, in,e%en,ence +ecause t&ey %roi,e incenties for t&e ,irectors to
mani%ulate earnings for t&eir %ersonal interest( ?e t&erefore set t&e &y%ot&esis as follows#
H0(a)E there is a .ositi"e association 'eteen the e:ecuti"e directors7 share onershi. and the
#e"e#s o) earnin*s +ana*e+entF and
H0(')Ethere is a .ositi"e (ne*ati"e) association 'eteen the increasin*(decreasin*) #e"e# o)
e:ecuti"e directors7 share onershi. and the #e"e#s o) earnin*s +ana*e+ent su'seDuent to
s.eci)ic *o"ernance re)or+s-
*2iii3 #8e &ro4ortion o6 in9e4en9ent 9irector in t8e :oar9
Most of t&e foreign stu,ies reeale, or im%lie, negatie associations +etween t&e %ro%ortion of
in,e%en,ent ,irector an, t&e as%ect of cor%orate goernance an, t&e leel of earnings
management D-utc&inson K ot&ers D200;EA 0easley D1<<8EA Agrawal K $&a,&a D2005EA Persons
D2008EE( "&ese stu,ies were &oweer con,ucte, +ase, u%on t&e sam%les consiste, of t&e
mi2tures of family an, non-families an, also goernment-lin*e, com%anies( "&erefore) t&eir
im%lications coul, not +e ma,e as ,irect inference in our %a%er(
!n,ee,) t&e foreign stu,y con,ucte, +y Mis&ra K ot&ers D2001E w&ic& was +ase, u%on family
controlle, com%anies reeale, no significant relations&i% +etween t&e +oar, in,e%en,ence an,
t&e cor%orate financial %erformance( Mis&ra/s fin,ing %roi,e, an inference t&at t&e relations&i%
+etween +oar, in,e%en,ence an, t&e leels of earnings management is insignificant(
Most of t&e Malaysian stu,ies DA+,ul 'a&man K Ali D2008EA Lai D200<EE) e2ce%t for one +y !+ra&im
- K ot&ers Dwor*ing %a%er) Oct 200;E) also reeale, t&e results w&ic& im%licate, t&at t&e
relations&i% +etween +oar, in,e%en,ence an, earnings management is insignificant( !n contrary)
t&e em%irical stu,y +y !+ra&im - K ot&ers Dwor*ing %a%er) Oct 200;E in,icate, a significant an,
negatie association +etween +oar, in,e%en,ence an, cor%orate %erformance(
"&e stu,y +y !+ra&im - K ot&ers Dwor*ing %a%er) Oct 200;E a+oe was +ase, u%on family
controlle, com%anies liste, in 0ursa Malaysia( !t is t&us ma,e as our gui,ance for t&e setting of
t&is &y%ot&esis in relation to +oar, in,e%en,ence( "&e %olicy ma*ers in Malaysia w&o im%oses
t&e re4uirement of one t&ir, in,e%en,ent ,irectors in t&e 0oar, of .irectors are in su%%ort of t&e
t&eoretical iews t&at &ig&er %ro%ortion of in,e%en,ent ,irectors in t&e +oar, woul, en&ance
+oar, in,e%en,ence an, t&us re,uce t&e instances of earnings management(
!n lig&t of t&e a+oe gui,ance an, t&eoretical iews) we set out t&e &y%ot&esis as follows#
HG(a)E there is a ne*ati"e association 'eteen the .ro.ortion o) inde.endent director and the
#e"e#s o) earnin*s +ana*e+entF and
HG(')Ethere is a ne*ati"e association 'eteen the .ro.ortion o) inde.endent director and the
#e"e#s o) earnin*s +ana*e+ent )or the )ir+s that increase the .ro.ortion o) inde.endent director
Page 2;
su'seDuent to s.eci)ic *o"ernance re)or+s-
*2i03#8e 4ro4ortion o6 6a7ily relate9 9irector in t8e :oar9
"&is measurement %ro%ose, &erein is un%rece,ente, +ut it is ,eeme, im%ortant from t&e %u+lic/s
%ers%ectie( ?e are of t&e o%inion t&at t&e %ro%ortion of family relate, ,irector in t&e +oar,) in t&e
conte2t of t&e family controlle, com%anies) w&et&er +e it e2ecutie or non-e2ecutie woul, affect
t&e +oar, 4uality) in terms of its sensitiity towar,s earnings management(
?e e2%ect t&at t&e &ig&er %ro%ortion of family relate, ,irectors in t&e +oar, woul, &ae &ig&er
tolerance to t&e instances of earnings management) as t&e family mem+ers are generally
,ominate, +y t&e senior mem+er or em%owere, mem+er in t&e family( !n t&at res%ect) we e2%ect
a %ositie association +etween t&e %ro%ortion of family relate, ,irectors in t&e +oar, an, t&e
leels of earnings management( "&e &y%ot&esis is set as follows#
HH(a)E there is a .ositi"e association 'eteen the .ro.ortion o) )a+i#! re#ated director in the
'oard and the #e"e#s o) earnin*s +ana*e+entF and
HH(')Ethere is a .ositi"e (ne*ati"e) association 'eteen the increasin* (decreasin*) #e"e# o)
.ro.ortion o) )a+i#! re#ated director in the 'oard and the #e"e#s o) earnin*s +ana*e+ent
su'seDuent to s.eci)ic *o"ernance re)or+s-
*203 #8e Au9it %o77ittee i;e
"&eoretically) t&e larger t&e siOe of t&e Au,it $ommittee wit& more man%ower) t&e $ommittee
woul, +e a+le to carry out t&e &ig&ly te,ious au,it functions more efficiently) an, t&us im%roe t&e
4uality of financial re%orts( "&is t&eoretic iew is su%%orte, +y t&e stu,ies con,ucte, +y Iang K
Nris&nan D2005E an, Lin D2008E) an, also +y our local sc&olar ?an A?! K ot&ers Dwor*ing %a%er)
.ec 200<E( -oweer) t&e stu,ies +y t&e Malaysian sc&olars A+,ul 'a&man K Ali D2008E an, ?an
@?- K A+,ulla& Dwor*ing %a%er) @o 200<E ,i, not ,e,uce t&e same conclusion( "&eir results
s&owe, t&at t&e siOe of t&e Au,it $ommittee was an insignificant as%ect( "&e foreign sc&olar
Marini K ot&ers D200<E also arrie, at t&e same conclusion t&at t&e siOe of t&e Au,it $ommittee
was insignificant(
Alt&oug& t&e earlier literature reiews %ro,uce, mi2e, results) as t&e recent Malaysian stu,ies +y
?an A?! K ot&ers Dwor*ing %a%er) .ec 200<E im%lie, a negatie an, significant association
+etween t&e Au,it $ommittee siOe an, t&e leels of earnings management) of w&ic& t&e result
was contrary to t&e earlier Malaysian stu,ies) we set out &y%ot&esis as follows so as to erify
w&et&er t&e siOe of t&e Au,it $ommittee matters) %articularly after t&e reforms(
H$(a)E there is a ne*ati"e association 'eteen the Audit Co++ittee si=e and the #e"e#s o)
earnin*s +ana*e+entF and
H$(')Ethere is a ne*ati"e association 'eteen the si=e o) the Audit Co++ittee and the #e"e#s o)
earnin*s +ana*e+ent )or )ir+s that increase the si=e o) the Audit Co++ittee su'seDuent to
s.eci)ic *o"ernance re)or+s-
*20i3#8e 4ro4ortion o6 In9e4en9ent Non!E/ecuti0e *irector 2INE*3 in t8e Au9it %o77ittee
3arlier stu,ies im%lie, a negatie association +etween +oar, in,e%en,ence an, t&e leels of
earnings management D-utc&inson K ot&ers D200;EA Agrawal K $&a,&a D2005EE(
"&e 200: reforms +roug&t a+out t&e ,irect c&ange w&ic& re4uire, all mem+ers in t&e Au,it
$ommittee to +e non-e2ecutie( ?e &oweer notice, from A%%en,i2 ! -- "a+le !DcE t&at t&ere is a
s&ar% increment of non-in,e%en,ent non-e2ecutie ,irectors in t&e Au,it $ommittee after suc&
reforms( !n res%onse to t&e %&enomenon) we im%ose a stricter test +y categorising t&e non-
e2ecutie ,irectors into in,e%en,ent an, non-in,e%en,ent) an, run t&e test se%arately on t&ese
two categories of %ro%ortions( ?e are of t&e iew t&at t&e in,e%en,ent non-e2ecutie ,irectors
Page 2<
are more effectie t&an t&e non-in,e%en,ent non-e2ecutie ,irectors) in encountering t&e
instances of earnings management( ?e &ae t&us set our &y%ot&esis as follows#
HC(a)E there is a ne*ati"e association 'eteen the .ro.ortion o) I>(D in the Audit Co++ittee and
the #e"e#s o) earnin*s +ana*e+entF and
HC(')Ethere is a ne*ati"e association 'eteen the .ro.ortion o) I>(D in the Audit Co++ittee and
the #e"e#s o) earnin*s +ana*e+ent )or )ir+s ith increasin* .ro.ortion o) I>(D in the Audit
Co++ittee su'seDuent to s.eci)ic *o"ernance re)or+s-
*20ii3#8e 4ro4ortion o6 Non!In9e4en9ent Non!E/ecuti0e *irector 2NINE*3 in t8e Au9it
%o77ittee
"&e un%rece,ente, %&enomenal increment of @!@3. in t&e Au,it $ommittee su+se4uent to t&e
200: reforms creates ,ou+t on w&et&er suc& effect is %ositie or negatie( ?e are of t&e o%inion
t&at @!@3. in family controlle, com%anies are li*ely to +e family relate, an, t&us more tolerate to
t&e instances of earnings management( ?e t&us set our &y%ot&esis t&at &ig&er %ro%ortion of
@!@3. in t&e Au,it $ommittee results in &ig&er leels of earnings management(
H1(a)E There is a .ositi"e association 'eteen the .ro.ortion o) >I>(D in the Audit Co++ittee
and the #e"e#s o) earnin*s +ana*e+ent-
H1(')EThere is a .ositi"e (ne*ati"e) association 'eteen the .ro.ortion o) >I>(D in the Audit
Co++ittee and the #e"e#s o) earnin*s +ana*e+ent )or )ir+s ith increasin* (decreasin*)
.ro.ortion o) >I>(D in the Audit Co++ittee su'seDuent to s.eci)ic *o"ernance re)or+s-
*20iii3 #8e 4ro4ortion o6 6a7ily relate9 9irectors in t8e Au9it %o77ittee
?e o%ine t&at t&e %resence of t&e family relate, mem+ers in t&e Au,it $ommittee woul, create a
%u+lic %erce%tion t&at t&is Au,it $ommittee lac*s in,e%en,ence(
!n Malaysia) our regulator an, t&e enforcer) t&e securities commission &as t&e %ractice of still
a%%roing certain categories of t&e family relate, mem+ers as in,e%en,ent non-e2ecutie
,irector) w&om in,ee, is not in,e%en,ent( !n or,er to +e %recise wit& our a%%roac& of measuring
t&e au,it in,e%en,ence) we %ro%ose to also calculate an, test t&e %ro%ortion of family relate,
,irectors in t&e Au,it $ommittee) wit& t&e &y%ot&esis as follows#
H6(a)E there is a .ositi"e association 'eteen the .ro.ortion o) )a+i#! re#ated directors in the
Audit Co++ittee and the #e"e#s o) earnin*s +ana*e+entF and
H6(')Ethere is a .ositi"e (ne*ati"e) association 'eteen the increasin* (decreasin*) #e"e# o) the
.ro.ortion o) )a+i#! re#ated directors in the Audit Co++ittee and the #e"e#s o) earnin*s
+ana*e+ent su'seDuent to s.eci)ic *o"ernance re)or+s-
*2i/3#8e le0el o6 s8ares 8el9 :y t8e 9irectors in t8e Au9it %o77ittee
0efore t&e reforms too* %lace in 200:) t&e leels of s&ares &el, +y t&e ,irectors in t&e Au,it
$ommittee were ery &ig&) gien t&e fact of t&e %resence of family relate, e2ecutie ,irectors in
t&e Au,it $ommittee(
?e feel t&at t&is factor is %articularly crucial for family controlle, families w&o &ae t&e culture of
&aing t&eir close relaties or family frien,s +e seate, in t&e Au,it $ommittee( "&ese close
relaties or family frien,s are often offere, wit& s&ares owners&i% to ensure t&eir loyalty to t&e
family( As wit& any %ost) w&ateer name it may +e calle,) may +e assigne, to t&e family relate,
mem+ers) we feel t&at measurement of au,it in,e%en,ence may +e more effectie s&oul, we
assess using its leels of s&are&ol,ings &el, +y t&e relate, ,irectors in t&e Au,it $ommittee( "&e
&y%ot&esis is ,eelo%e, as follows#
HI(a)E there is a .ositi"e association 'eteen the directors7 share onershi. in the Audit
Page 50
Co++ittee and the #e"e#s o) earnin*s +ana*e+entF and
HI(')Ethere is a .ositi"e (ne*ati"e) association 'eteen the increasin* (decreasin*) #e"e# o)
directors7 share onershi. in the Audit Co++ittee and the #e"e#s o) earnin*s +ana*e+ent
su'seDuent to s.eci)ic *o"ernance re)or+s-
*2/3#8e 7u7:er o6 au9it 7eetin5s wit8 e/ternal au9itors
"&e earlier stu,ies &a, fre4uently teste, u%on t&e im%act of fre4uency of internal au,it meetings(
As far as we are concerne,) t&ey &a, all reeale, insignificant results( ?e are of t&e o%inion t&at
t&e internal au,it meetings are merely internal an, woul, not sere t&e %ur%ose of c&ec*ing u%on
t&e 0oar, of .irectors w&om are t&eir ,irect +oss) t&e case is %articularly true for family controlle,
com%anies( ?e t&erefore ,o not test again t&is goernance factor(
-oweer t&e amen,e, co,e after t&e 200: reforms re4uires a minimum of two meetings +eing
&el, wit& t&e e2ternal au,itors( ?e +eliee t&at t&is as%ect of c&ange w&ic& inoles t&e
%artici%ation of e2ternal %rofessional au,itors s&oul, +e more effectie in tac*ling t&e internal
frau,s( ?e t&erefore mo,ify t&e &y%ot&esis from earlier stu,ies) an, set t&e &y%ot&esis as
follows#
H52(a)E there is a ne*ati"e association 'eteen the nu+'er o) +eetin*s he#d ith e:terna#
auditors and the #e"e#s o) earnin*s +ana*e+entF and
H52(')E there is a ne*ati"e association 'eteen the nu+'er o) +eetin*s he#d ith e:terna#
auditors and the #e"e#s o) earnin*s +ana*e+ent )or )ir+s that increase the nu+'er o) +eetin*s
ith the e:terna# auditors su'seDuent to s.eci)ic *o"ernance re)or+s-
E%#ION E$ %)OI%E OF %ON#ROL VARIA,LE
?it& res%ect to t&e control aria+les) we fin, t&at t&e earlier literatures use a similar set of control
aria+les w&ic& t&ey consi,er will gie im%act on t&e leels of earnings management( 32am%les
of control aria+les +eing intro,uce, into t&eir mo,els in foreign an, local stu,ies are return on
asset) leerage leel) cas& flow) +oo* to mar*et alue ratio) growt&) +oar, siOe) +ig fie au,it firms
an, for t&e stu,ies on family firms) t&ey also inclu,e t&e firm/s age as control aria+les
D-utc&inson K ot&ers D200;EA -su K No& D2005EA 6&en K $&i& D200:EA Ali 6&a& K ot&ers D200<EE(
?e &oweer consi,er inclu,ing t&e control aria+les use, +y t&e recent Malaysian sc&olars ?an
@?! K A+,ulla& Dwor*ing %a%er) .ec 200<E an, !+ra&im - K ot&ers Dwor*ing %a%er) Oct 200;E
gien t&e similarities of t&e local +usiness enironments( "&e control aria+les incor%orate, in t&e
mo,els are firm siOe) return on assets) leerage an, growt&) an, for mo,el testing on t&e family
controlle, com%anies suc& as t&e one con,ucte, +y !+ra&im - K ot&ers) t&ey also use t&e firm/s
age as one of t&e control aria+les(
-oweer) t&e inclusion of all control aria+les in t&e mo,el may +e un,esira+le as statistics &ae
%roen t&at too many aria+les intro,uce t&e ran,om noise w&ic& will ,istort t&e final outcome
D$e1iM6) 'is* Management -- Princi%les an, A%%lications D200<EE( !n t&at res%ect) we &ae
,iscar,e, seeral control factors w&ic& we ,eem insignificant(
A controlle, factor w&ic& may +e ,eeme, im%ortant in foreign stu,ies on family firms is t&e firm/s
age( ?e ,i, not inclu,e it in our mo,el +ecause of t&e a+sent of t&e e2act age information in
most of t&e financial statements( -oweer we are of t&e iew t&at t&e non-inclusion of t&e age
factor woul, not affect our result +ecause most of t&e family controlle, firms in Malaysia are still
at infancy stage on t&e aerage of 50 years ol,) wit& foun,ers still %resent an, in control of t&e
com%anies( !f com%are, to t&e foreign countries wit& a longer com%any &istory) some of t&e
com%anies &ae +een %asse, ,own to at least t&e fift& generation) w&ile some at an early stage(
Our t&eory was in,ee, su%%orte, +y t&e recent Malaysian stu,ies on family firms +y !+ra&im - K
ot&ers Dwor*ing %a%er) Oct 200;E w&o &a, foun, t&at t&e age factor is insignificant(
Page 51
?e also ,o not inclu,e leerage as one of t&e control factors +ecause literature reiews reeale,
t&at most family controlle, com%anies incur generally lower ,e+t) if com%are, to non-family
controlle, com%anies D6&en K $&i& D200:EE(
!n iew of t&is) we ,eci,e to a,o%t t&e return of asset an, t&e natural log of t&e total asset as our
control aria+les(
E%#ION F$ MEA+REMEN# OF EARNIN- MANA-EMEN#
-aing regar, to t&e arious measurements of earnings management recommen,e, +y t&e
earlier literatures) we a,o%t t&e a%%roac& +y Not&ari D2005E namely %erformance-matc&e,
,iscretionary accruals( !ts met&o, a,>usts t&e tra,itional a%%roac& of ,iscretionary accrual
measures +y Jones an, mo,ifie,-Jones mo,el +y matc&ing t&e %erformance of t&e sam%le
com%anies +ase, on its return on assets( "&e em%irical results of Not&ari D2005E suggeste, t&at
%erformance-matc&e, ,iscretionary accrual measures en&ance t&e relia+ility of t&e inferences of
earnings management) w&en t&e teste, &y%ot&esis ,oes not im%ly t&at earnings management will
ary wit& %erformance) or w&ere t&e control firms are not e2%ecte, to &ae engage, in earnings
management(
As im%lie, +y -utc&inson K ot&ers D2005E) t&e Not&ari/s a%%roac& is a%%ro%riate for cross-
sectional stu,ies as it will ,etect t&e a+normal earnings Dw&ic& are not ,etecta+le +y tra,itional
a%%roac&E if t&e stu,ies is ma,e on a set of current or sna%s&ot ,ata collecte, from a year) rat&er
t&an across t&e ,ata w&ic& &as +een collecte, oer seeral years( "&e Australian 6c&olar
-utc&inson K ot&ers D200;E names an, terms t&e Not&ari/s a%%roac& as cross-sectional
%erformance-a,>uste, current ,iscretionary accruals D/PA$.A/E(
Alt&oug& Jones an, mo,ifie,-Jones mo,el &ae +een wi,ely a,o%te,) t&e same &a, also +een
criticise, recently as not effectie in ,etecting earnings management in a ,eelo%ing economy
D!slam A) Ali ' an, A&ma, P D2010EE( .ec&ow et al D1<<5E an, =uay et al D1<<8E w&o teste, on
t&e %owers of arious ,iscretionary-accrual mo,els conclu,es t&at t&e tra,itional mo,els woul,
not ,etect earnings management occurre, in sam%les of firms wit& e2treme financial
%erformance( Not&ari D2005E conclu,e, t&at +ot& Jones an, mo,ifie,-Jones mo,els are seerely
miss-s%ecifie, w&en a%%lie, to stratifie, ran,om sam%les of firms) for instance sam%les of firms
consist in %art of firms wit& e2treme %erformance from a ,ifferent in,ustry(
?e are of t&e iew t&at t&e a,>ustment is &ig&ly necessary in our researc& as our researc& is
cross-sectional) wit& o+serations in year 2010 for %ost reform ,ata an, 2008 for %re reform ,ata(
More so) our sam%les are ta*en from multi in,ustries wit& ,iffering in,ustry %erformance) wit&
furt&er economic im%acts from 96 su+%rime loan crisis for ,ata o+seration in year 2010(
-utc&inson K ot&ers D200;E w&o were also con,ucting a cross-sectional stu,y for effectieness of
its Australian cor%orate goernance reforms +y com%aring t&e earnings 4uality %re an, %ost
reform +ase, on financial ,ata on 2000 an, 20005) &a, a,o%te, t&is Not&ari/s PA$.A Mo,el(
=ien also our stu,ies as cross-sectional or sna%s&ot) an, for t&e reasons state, in t&e a+oe
%aragra%&) we ,o not follow Jones an, Mo,ifie,-Jones Mo,els w&ic& &a, +een wi,ely a,o%te, in
Malaysia) +ut instea, we a,o%t Not&ari/s Dor -utc&inson/sE a%%roac&(
Equation and Calculation of the PACDA
Not&ari D2005E an, -utc&inson K ot&ers D200;E suggeste, t&at t&e PA$.A are calculate, +y
inclu,ing t&e lagge, aria+le of return of asset D'OAE( "&e %arameters for calculation of e2%ecte,
current accruals D3$AE are estimate, +y using t&e following e4uation# --
"$A Q "otal current accruals is net income Dearnings +efore e2traor,inary items an, ,iscontinue,
o%erationsE %lus ,e%reciation an, amortisation minus o%erating cas& flows for firm i in t&e
year t
RS'3V Q $&ange in net reenue for firm i in t&e year t
RSA' Q $&ange in accounts receia+le for firm i in t&e year t
Page 52
'OA Q 'atio of @et income +efore e2traor,inary items to total assets for firm i in t&e year t-1
A" Q "otal assets for firm i in t&e year t
RT Q 3rror term for firm i in year t
"&e un*nowns aD0E) aD1E an, aD2E are generate, +y running t&e regression analysis on e4uation
D1E wit& in%uts of all ot&er %arameters of "$A inclu,ing actual "$A(
-oweer t&e regression mo,el &as a ery low ' s4uare im%lying t&at t&e mo,el ,oes not %re,ict
well t&e un*nowns of aD0E) aD1E an, aD2E( ?e t&us ma,e a,>ustments of t&e mo,el +y su+stituting
"$A wit& low ' s4uare) wit& t&e %re,icte, "$A( "&e a,>uste, mo,el to %re,ict un*nowns
+ecomes relia+le to t&e e2tent of <0H( "&is was only ,one for t&e %ur%ose of o+taining more
relia+le aD0E) aD1E an, aD2E) so t&at t&e su+se4uently calculate, 3$A w&ic& are ,e%en,e, u%on
t&e generate, aD0E) aD1E an, aD2E are relia+le(
After w&ic&) we ,e,uct t&e una,>uste, "$A from t&e 3$A to o+tain t&e PA$.A of all sam%les(
E%#ION -$REEAR%) *EI-N= ME#)O*OLO-' AN* *A#A ANAL'I
-2i3 a74lin5 collection
"&is stu,y a,o%ts a cross-sectional analysis on 100 family controlle, %u+lic liste, com%anies
liste, in 0ursa Malaysia) for t&e financial years en,ing 2008 an, 2010( "&e financial years en,ing
2008 an, 2010 are c&osen gien t&e timing of two im%ortant goernance reforms w&ic& too*
%lace in t&e year 2001 an, 200:(
?e %refer to &ae t&e ,ata collecte, from t&e financial year w&ereu%on t&e reforms &a, ta*en
%lace for a num+er of years an, its a%%lications &ae +een sta+ilise, to ensure t&at t&ese ,ata
are a+le to reflect t&e reality of t&e reforms( ?e t&us c&ose t&e ,ata in year en,ing 2008
w&ereu%on t&e first reform &a, ta*en %lace for a total ,uration of fie years(
?e c&ose t&e financial year en,ing 2010 w&ereu%on t&e secon, reform &a, ta*en %lace for t&e
,uration of t&ree years( ?e ,eci,e, to a,o%t t&e financial ,ata en,ing in 2010 ,es%ite t&e
occurrence of financial crisis in Malaysia in 200<) +ecause t&e ,ata t&at is too near to t&e year of
reform) eg t&e financial ,ata ta*en from t&e year en,ing in 200;) woul, +e una+le to reflect t&e
true an, fair iews of t&e reforms( ?e are also confi,ent t&at our testing mo,el ie t&e PA$.A)
woul, effectiely ,etect earnings management ,es%ite t&e stimulating eent triggere, +y t&e
American su+%rime loan(
"&e ,efinition of family owne, %u+lic liste, com%anies in t&is researc&) is consistent wit& t&e %rior
literature reiews on family relate, stu,ies) &as t&e meaning of t&ose com%anies wit& at least
20H of s&are&ol,ings &el, +y family or family relate, mem+ers D!+ra&im - K ot&ers Dwor*ing
%a%er) Oct 200;EA ?ang D2005EA Mis&a K ot&ers D2001EE(
?e initially i,entifie, 125 family controlle, %u+lic liste, com%anies out of t&e 500 liste,
com%anies in 0ursa Malaysia) +ut we omitte,# DiE t&ose com%anies wit&out sufficient financial ,ata
t&at are re4uire, to carry out t&e ,ata analysisA DiiE w&ere some families control more t&an one
liste, com%anies) we t&en use only one main liste, com%any controlle, +y t&ese families an,
e2clu,e t&e ot&ersA an, DiiiE t&ose com%anies in t&e finance an, utilities sector) +ecause +ot& are
&eaily regulate, in a ,ifferent manner(
32clu,ing t&ose) we &ae t&e leftoer of 100 sam%le com%anies( 1rom t&e com%anies/ annual
re%orts aaila+le on t&e 0ursa Malaysia we+site or its com%anies/ %u+lic relation we+site) we
&an,-collecte, all financial an, non-financial ,ata Die %rofit +efore ta2) %ercentage of s&are
owners&i%) num+er of in,e%en,ent ,irectors etcE) after w&ic& we ,e,uce t&em into t&e ,e%en,ent
aria+le PA$.A an, t&e in,e%en,ent aria+les in t&e format re4uire, in 6ections . an, 1 a+oe(
A total of 200 firm-year o+serations are collecte, for t&e %ur%ose of our ,ata analysis in t&is
,issertation(
Page 55
-2ii3 Researc8 Met8o9olo5y
?e ran t&e ,escri%tie statistics analysis on t&e ,ata t&en carrie, out t&e %aire, sam%les test to
,etect t&e aerage c&anges in t&e PA$.A as well as ot&er in,e%en,ent aria+les after t&e
reforms( As %aire, sam%les measure t&e ,irections using t&e means) w&ic& may +e mislea,ing
s&oul, any or few sam%les &ae a+normal c&anges) we also con,uct fre4uency test using t&e
e2cel software to fin, out t&e fre4uency of com%anies t&at correlate in t&e same ,irection after t&e
reforms(
?e also ran Pearson/s correlation test to fin, out t&e correlations in +etween t&e in,e%en,ent
aria+les( ?e t&en ran t&e or,inary least s4uare regression to test t&e association +etween t&e
,e%en,ent aria+le PA$.A an, cor%orate goernance mec&anisms) namely in,e%en,ent
aria+les in 6ections . an, 3 a+oe( !n regression tests) se%arate regressions are run for eac&
in,e%en,ent aria+le using t&e 6tatistical Pac*age for t&e 6ocial 6ciences D/6P66/E software to
test its association wit& t&e ,e%en,ent aria+le) PA$.A( 1inally) t&e com%lete mo,el is teste, to
,etermine t&e relatie significance of t&e goernance aria+les on t&e PA$.A( "&e c&ange mo,el
tests t&e association +etween t&e c&anges in goernance %ractices an, t&e PA$.A(
Equation (1)
PACDA = [#710][#382](0) + [#710][#382](1)BSize + [#710][#382](1)BEDSa! +
[#710][#382](3)B"n#$ + [#710][#382](%)B&D + [#710][#382](')ASize + [#710]
[#382](()A)ED + [#710][#382](7)A)")ED + [#710][#382](8)A&D + [#710][#382]
(*)ASa! + [#710][#382](10))A+ + [#710][#382](11) C,-A + [#710][#382]
(12)C,./A
Equation (2)
PACDA = [#710][#382](0) + [#710][#382](1)Di00 BSize + [#710][#382](1)Di00
BEDSa! + [#710][#382](3)Di00 B"n#$ + [#710][#382](%)Di00 B&D + [#710]
[#382](')Di00 ASize + [#710][#382](()Di00 A)ED + [#710][#382](7)Di00 A)")ED
+ [#710][#382](8)Di00 A&D + [#710][#382](*)Di00 ASa! + [#710][#382]
(10)Di00 )A+ + [#710][#382](11) C,-A + [#710][#382](12)C,./A
Dependent Variable
PA$.A Q A+solute alue of %erformance-a,>uste, current ,iscretionary accruals D'efer to t&e
6ection 0DiE a+oeE(
!ndependent Variables
06iOe Q "&e total num+er of ,irectors on +oar,
.iff 06iOe Q .ifference in t&e total num+er of ,irectors on +oar, in year 2010 com%are, wit& 2008
03.6&are Q Percentage of or,inary s&ares &el, +y t&e e2ecutie ,irectors
.iff
03.6&are
Q .ifference in t&e %ercentage of or,inary s&ares &el, +y t&e e2ecutie ,irectors in 2010
com%are, wit& 2008
0!n,% Q Percentage of !n,e%en,ent @on-32ecutie .irectors on +oar,
.iff 0!n,% Q .ifference in t&e %ercentage of !n,e%en,ent @on-32ecutie .irectors on +oar, in year
2010 com%are, wit& 2008
01. Q Percentage of family relate, ,irectors on +oar,
.iff 01 Q .ifference in t&e %ercentage of family relate, ,irectors on +oar, in year 2010 com%are,
wit& 2008
A6iOe Q "&e total num+er of ,irectors in Au,it $ommittee
.iff A6iOe Q .ifference in t&e total num+er of ,irectors on Au,it $ommittee in year 2010 com%are,
wit& 2008
Page 57
A@3. Q Percentage of in,e%en,ent ,irectors on t&e Au,it $ommittee
.iff A@3. Q .ifference in t&e %ercentage of in,e%en,ent ,irectors on Au,it $ommittee in year 2010
com%are, wit& 2008
A@!@3. Q Percentage of @on-!n,e%en,ent @on-32ecutie .irectors on t&e Au,it $ommittee
.iff A@!@3. Q .ifference in t&e %ercentage of @on-!n,e%en,ent @on-32ecutie .irectors on t&e Au,it
$ommittee in year 2010 com%are, wit& 2008
A1. Q Percentage of family relate, ,irectors on Au,it $ommittee
.iff A1. Q .ifference in t&e %ercentage of family relate, ,irectors on Au,it $ommittee in year 2010
com%are, wit& 2008
A6&ar Q Percentage of s&are&ol,ings &el, +y t&e ,irectors seate, on Au,it $ommittee
.iff As&ar Q .ifference in t&e %ercentage of s&are&ol,ings &el, +y t&e ,irectors seate, on Au,it
$ommittee in year 2010 com%are, wit& 2008
@AM Q @um+er of Au,it $ommittee meetings wit& e2ternal au,itors %er annum
.iff @AM Q .ifference in t&e num+er of Au,it $ommittee meetings wit& e2ternal au,itors %er annum
in 2010 com%are, wit& 2008
Control Variables
$V'OA Q 3arnings +efore interest / Dtotal assets less outsi,e e4uity interestsE
$V"A Q @atural log of "otal Assets
E%#ION )$*I%+ION ON FIN*IN-
Our ,iscussions on fin,ings are +ase, on t&e generate, results %resente, in t&e t&ree ta+les of
,escri%tie statistics res%ectiely in A%%en,i2 "a+le-!DaE) D+E K DcE) t&e ta+le of Pearson/s
correlation matri2 in A%%en,i2 !! an, t&e t&ree ta+les of regression results res%ectiely in
A%%en,i2 "a+le-!!!DaE) D+E K DcE(
A%%en,i2 "a+le-!!!DaE %resents t&e regression results for t&e association +etween t&e cor%orate
goernance aria+les an, t&e PA$.A +efore t&e goernance reforms in year 2008( A%%en,i2
"a+le-!!!D+E %resents t&e regression results after t&e cor%orate goernance reforms in year 2010(
A%%en,i2 "a+le-!!!DcE re%orts t&e leels of t&e PA$.A for t&e com%anies wit& res%ectie c&anges
in t&eir goernance %ractices following t&e reforms(
Our ,escri%tie statistics DA%%en,i2 !--"a+le !D+EE s&ows an interesting %&enomenon t&at earnings
management &ae increase, generally after t&e reforms in 200:) at a significant leel near to
10H wit& a large t-statistic of 1(575) inferring &ig&er earnings management( !n lig&t of t&e
in,icator aforesai,) we refer to t&e fre4uency ta+le DA%%en,i2 !--"a+le !DcEE w&ere we foun, t&at
5; com%anies in our sam%le e2%erience rise in t&e PA$.A( More im%ortantly) we o+sere t&at t&e
4uantum of increment in t&e PA$.A is large) com%aratiely to t&e 4uantum of re,uction in t&e
PA$.A in t&ose com%anies w&ic& e2%erience fall in t&e PA$.A(
?e are of t&e iew t&at t&is %&enomenon is attri+ute, largely +y t&e American su+%rime loan
crisis w&ic& s%rea, out in 200< wit& im%acts inflicte, u%on glo+ally( "&erefore t&e fin,ing a+oe
,oes not im%licate t&e failure of t&e 200: Malaysian cor%orate goernance) w&ic& our regulators
im%lemente, for t&e %ur%ose of im%roing earnings 4uality(
"&e regression analysis reeals t&at t&e 2010 Mo,el DA%%en,i2 !!!--"a+le-!!!D+EE an, t&e $&ange
Mo,el DA%%en,i2 !!!--"a+le-!!!DcEE e2%lain well t&e aria+ility in t&e PA$.A) as ei,ent in t&eir
acce%ta+le ' s4uare alue res%ectiely at 5:(<H an, 80H) wit& a significant leel at 1H(
"&e 2008 Mo,el DA%%en,i2 !!!--"a+le !!!DaEE &as a ery low an, unacce%ta+le ' s4uare an,
Page 55
ina,e4uate for use to e2%lain aria+ility in t&e PA$.AA neit&er ,oes its regressions test generate
any significant result( ?e are t&erefore not ,rawing any conclusions of w&et&er to su%%ort or to
re>ect t&e &y%ot&esis for t&e 2008 Mo,el(
Si*ni)icant Jaria'#es
?e fin, t&at t&ree out of t&e ten in,e%en,ent aria+les are statistically significant an, associate,
wit& earnings management) PA$.A(
!t is foun, t&at t&e %ro%ortion of family relate, ,irectors in Au,it $ommittee D/A1./E an, t&e leel
of ,irectors/ s&are&ol,ing in Au,it $ommittee D/A6&ar/E are significantly an, %ositiely associate,
wit& t&e leels of earnings management( !t is also foun, t&at t&e +oar, siOe is significantly an,
negatiely associate, wit& t&e leels of earnings management(
"&e Pearson/s correlation matri2 in A%%en,i2 !! s&ows t&at a,,ition to t&e non-e2ecutie ,irectors
in t&e Au,it $ommittee triggers re,uctions in t&ree in,e%en,ent aria+les) ie t&e %ro%ortion of
family relate, ,irectors in t&e Au,it $ommittee DA1.E) t&e leels of family relate, ,irectors in t&e
Au,it $ommittee DA6&areE an, t&e au,it siOe DA6iOeE) as ei,ent +y t&e t&eir statistically
significant an, negatiely correlate, relations&i%s(
$onsistent wit& t&e correlate, matri2) our ,escri%tie statistics DA%%en,i2 !--"a+le-!DaEKDcEE also
reflect a general re,uction in all t&ree in,e%en,ent aria+les after t&e reforms(
One of t&e c&anges of t&e goernance %ractices in 200: re4uires t&e Au,it $ommittee to
com%rise of only non-e2ecutie ,irectors( "&e imme,iate res%onse after im%lementation of t&e
reforms is t&e force, resignation of t&e e2ecutie ,irectors from t&e Au,it $ommittee( As ;2H of
t&e liste, com%anies in our sam%le &ae t&eir e2ecutie ,irectors as one of t&e mem+ers in t&e
Au,it $ommittee) t&ese com%anies eit&er re%lace t&e e2ecutie ,irectors wit& t&e non-e2ecutie
,irectors) or not re%lacing if t&ey alrea,y &ae enoug& mem+ers in t&e Au,it $ommittee( "&e
Au,it $ommittees w&ic& ,i, not re%lace t&e resigne, ,irectors are t&erefore re,uce, in its siOes(
"&e ,escri%tie statistics fre4uency test in,icates t&at 5< com%anies &ae re,uce, an, eig&t
&ae increase, its au,it siOe an, t&e rest remain wit& t&eir siOe(
As t&e e2ecutie ,irectors are mostly family relate, an, also &ol, su+stantie s&ares) we also
e2%ect re,uctions in t&e %ro%ortion of family relate, mem+ers in Au,it $ommittee DA1.E an,
leels of ,irectors/ s&are&ol,ings in t&e Au,it $ommittee DA6&areE(
"&e regression test on t&e 2010 Mo,el -;DaE s&ows t&at t&e %ro%ortion of family relate, ,irectors
in Au,it $ommittee DA1.E is %ositiely an, significantly associate, wit& t&e PA$.A wit& a
coefficient of (170 at a significant leel of 5H( "&e regression test using t&e 2010 1ull Mo,el
reeals t&e same outcome) wit& t&e coefficient of (188 at a significant leel of 5H( Alt&oug& t&e
2008 Mo,el lac*s of e2%lanatory %ower) we li*e to ,raw an attention t&at its 1ull Mo,el reeals
%ositie association +etween t&e %ro%ortions of family relate, ,irector in Au,it $ommittee DA1.E
wit& t&e PA$.A) wit& a large t-statistic alue of 1(5;<(
"&e regression test on t&e $&ange Mo,el -;D+E generates a significant an, negatie coefficient
of -(155 at a significant leel of 5H( "&e negatie coefficient carries t&e meaning t&at t&ere is a
negatie association +etween t&e %ro%ortion of family relate, ,irectors in Au,it $ommittee an,
earnings management for t&e com%anies wit& re,ucing %ro%ortion of t&e family relate, ,irectors
su+se4uent to s%ecific goernance reforms(
?e t&erefore ,raw two conclusions wit& regar, to A1. an, su%%ort t&e &y%ot&esis DiE -;DaE for
2010 t&at t&ere is a %ositie association +etween t&e %ro%ortion of family relate, ,irectors in t&e
Au,it $ommittee an, t&e leels of earnings management DiiE -;D+E t&at t&ere is a negatie
association +etween t&e ,ecreasing leel of %ro%ortion of family relate, ,irectors in t&e Au,it
$ommittee an, t&e leels of earnings management(
Page 58
?it& regar, to t&e leel of ,irectors/ s&are&ol,ings in t&e Au,it $ommittee DA6&arE) t&e regression
tests on t&e full mo,el of 2010 reeals t&at t&is aria+le is negatiely associate, wit& t&e PA$.A
at a significant leel of 10H) &oweer insignificant w&en t&is factor is run alone se%arately(
"&e fre4uency test s&ows t&at ma>ority of sam%le com%anies D8<HE &ae re,uce, leel of
,irectors/ s&are&ol,ings after t&e reforms DA%%en,i2 "a+le-!DcEE( "&e regression tests on t&e
$&ange as well as t&e 1ull $&ange Mo,el) neert&eless DA%%en,i2 !!!--"a+le-!!!DcEE reeals t&at at
a 5H leel of significance t&ere is a negatie association +etween t&e ,ecreasing leel of
,irectors/ s&are&ol,ings in t&e Au,it $ommittee an, t&e leels of earnings management
su+se4uent to s%ecific goernance reforms( !n,ee, t&e regression analysis on 1ull $&ange
Mo,el reeals t&at t&e c&ange in t&e leel of ,irectors/ s&are&ol,ings in t&e Au,it $ommittee
DA6&arE e2%lains t&e c&ange in t&e PA$.A far more significantly t&an t&e c&ange in t&e
%ro%ortions of A1.) Dw&ereu%on A1. was statistically insignificant in t&e 1ull $&ange Mo,elE(
"&e inferences ,rawn from t&e a+oe ,ifferences may +e t&at t&e in,e%en,ent aria+le on t&e
leels of ,irectors/ s&are&ol,ing in t&e Au,it $ommittee only +ecomes &ig&ly releant w&en t&e
,irectors concerne, are also family relate,(
=ien t&e insufficiencies a+oe) we ,o not strongly su%%ort -10DaE t&at t&ere is a %ositie
association +etween t&e leel of ,irectors/ s&are&ol,ing in t&e Au,it $ommittee DA6&arE an, t&e
leels of earnings management) &oweer we strongly su%%ort -10D+E t&at t&ere is a negatie
association +etween t&e ,ecreasing leel of ,irectors/ s&are&ol,ing in Au,it $ommittee DA6&arE
an, t&e leels of earnings management(
?it& regar, to t&e +oar, siOe) our fre4uency test result DA%%en,i2 "a+le-!DcEE s&ows no clear
,irection of c&ange in t&e siOe of t&e +oar, after t&e reforms) w&ere+y 78 com%anies in t&e
sam%le stay at t&eir e2isting +oar, siOe) 50 com%anies increase an, 27 com%anies re,uce t&eir
+oar, siOe(
"&e regression test on -1DaE for 2010 an, its 1ull Mo,el suggests t&at +oar, siOe is negatiely
associate, wit& t&e earnings management at a significant leel near to 10H( Alt&oug& it is
statistically insignificant) its relatiely &ig& t-statistic is an in,icator of t&e %ossi+le influence
+roug&t +y t&is aria+le( "&e ei,ence of its im%act is furt&er strengt&ene, w&en t&e regression
test for t&e $&ange Mo,el su%%orts -1D+E at a significant leel of 1H t&at t&ere is a negatie
association +etween +oar, siOe an, t&e leels of earnings management for com%anies t&at
increase t&e siOe of t&e +oar, su+se4uent to s%ecific goernance reforms(
Our em%irical result is %rinci%ally consistent wit& t&e recent stu,ies con,ucte, +y ?an A?! K
ot&ers Dwor*ing %a%er) .ec 200<E w&ic& su%%orte, t&e &y%ot&esis t&at t&ere is a negatie
association +etween +oar, siOe an, t&e leels of earnings management an, also consistent wit&
t&e stu,y +y !+ra&im - K ot&ers Dwor*ing %a%er) Oct 200;E w&o &a, t&e fin,ing t&at a larger +oar,
siOe woul, leel ,own t&e firm/s %erformance(
Insi*ni)icant Jaria'#es
"&e imme,iate im%acts from t&e reforms are eit&er t&e increase of t&e non-e2ecutie ,irectors in
t&e Au,it $ommittee or t&e re,uction of t&e siOe of t&e Au,it $ommittee among t&e sam%le
com%anies(
"&e Pearson/s correlation matri2 in A%%en,i2 !! results s&ow t&at a,,ition to t&e non-e2ecutie
,irectors in t&e Au,it $ommittee triggers increments in t&ree ot&er in,e%en,ent aria+les) ie t&e
%ro%ortion of non-in,e%en,ent non-e2ecutie ,irectors in t&e Au,it $ommittee DA@!@3.E) t&e
+oar, in,e%en,ence D0!n,%E an, t&e num+er of au,it meetings wit& e2ternal au,itors D@AME) as
ei,ent +y t&eir statistically significant %ositiely correlate, relations&i%s(
"&e ,escri%tie statistics fre4uency test in A%%en,i2 "a+le-!DcE also reeal une4uiocal res%onse
Page 5:
to all t&e fie in,e%en,ent aria+les a+oe(
"&e regression tests on -8DaEKD+E in relation to t&e audit inde.endence '! a! o) the .ro.ortion
o) I>(D in the Audit Co++ittee %roi,e no statistically significant results( 6imilarly also to
-:DaEKD+E in relation to t&e audit inde.endence 'ut '! a! o) the .ro.ortion o) nonKinde.endent
nonKe:ecuti"e directors (>I>(D) in Au,it $ommittees) -5DaEKD+E in relation to t&e 'oard
inde.endence an, -10DaEKD+E in relation to t&e au,it actiities) none of w&ic& associate wit& t&e
leels of earnings management(
Alt&oug& t&e results are inconsistent wit& general literatures on cor%orate goernance) t&ey are
consistent wit& t&e foreign literatures w&ic& &ae to ,o wit& t&e family( !n Mis&a K ot&ers D2001E
w&ic& stu,ie, family owne, com%anies liste, on 6tan,ar, K Poor/s an American financial
serices com%any D/6KP/E foun, t&at t&e factors of in,e%en,ent ,irectors are negligi+le for family
firms(
Malaysian 6c&olar Lai im%licate, t&at t&e re4uirement of in,e%en,ent ,irectors in family
controlle, com%anies woul, &ae no significance ,ue to t&e culture of family owne, com%anies to
engage t&eir frien,s as in,e%en,ent ,irectors( "&e in,e%en,ent ,irectors w&ic& are a%%ointe, to
come on +oar, are merely for com%liance %ur%ose +ut not as a %rofessional as seen in non-
family controlle, an,/or goernment-lin*e, com%anies(
"&e main reason for t&e increase on t&e num+er of meetings wit& e2ternal au,itors is t&e c&ange
of co,e t&at forme, %art of t&e reforms in 200:( -oweer as our co,e is not man,atory) we
o+sere incom%liance in some com%anies w&ere+y t&ey eit&er ,o not re%ort or satisfy t&e sai,
re4uirement( ?e may also ,raw an inference t&at a full fletc& of non-e2ecutie ,irectors in t&e
Au,it $ommittee &ae &ig&er ten,ency to o+sere t&e rule +etter) namely t&ey will meet u% t&e
e2ternal au,itors at least twice a year as re4uire, +y t&e co,e( -oweer t&at ,oes not a,,
su+stance to t&e com%anies) as ei,ential in t&e &y%ot&esis testing( "&e irreleancy of t&e
num+er of au,it meetings wit& e2ternal au,itors aligns wit& arious earlier stu,ies D?an @?- K
A+,ulla& Dwor*ing %a%er) @o 200<EE( ?e are of t&e o%inion t&at e2ternal au,itors are also t&e
%ai, %rofessionals w&o ,o not li*e to offen, t&eir %ay masters(
"&e regression test on t&e audit si=e -5DaE ,oes not su%%ort t&at t&e au,it siOe is negatiely
associate, wit& t&e earnings management( "&e result is not inconsistent wit& t&e local stu,y +y
?an A?! K ot&ers Dwor*ing %a%er) .ec 200<E t&at au,it siOe only matters for goernment lin*e,
or state, owne, enter%rises( ?e neert&eless inten, to &ig&lig&t t&at t&e regression analysis on
t&e 1ull $&ange Mo,el reflects t&at t&e au,it siOe is a significant in,e%en,ent aria+le at a leel
near to 10H) Dcoefficient of (122 an, t-statistic of 1(75:E an, is relatiely significant com%are, to
si2 ot&er insignificant aria+les( "&e ,ifferences may +e su%%ortie of an inference t&at t&ere
may +e %ositie association +etween t&e siOe of t&e Au,it $ommittee an, t&e leels of earnings
management for t&e firms t&at re,uce au,it siOe su+se4uent to s%ecific goernance reforms(
"&e ,escri%tie statistics as well as t&e fre4uency tests DA%%en,i2 !E s&ow general increment to
t&e .ro.ortion o) )a+i#! re#ated directors in the 'oard D01.E( "&e &y%ot&esis testing on -7DaEKD+E
&oweer ,oes not su%%ort t&at t&e %ro%ortion of family relate, ,irectors in t&e +oar, D/01./E is
%ositiely associate, wit& t&e leels of earnings management an, neit&er t&ere is %ositie
association +etween 01. an, t&e leels of earnings management for t&e com%anies wit&
increasing %ro%ortion of family relate, ,irectors in t&e +oar,( ?e are of t&e iew t&at Malaysian
family controlle, com%anies are still ,ominate, +y t&e foun,ers an, t&e new comers to t&e +oar,
&ae little if no %ower oer any +oar, matter( 3en if t&e %owers &ae +een %asse, ,own to t&e
secon, generation) t&e family controlle, com%anies &ae t&e culture of &aing t&e %owers
concentrate, in t&e &an,s of one family mem+er(
?it& regar, to t&e leel of e2ecutie ,irectors/ s&are&ol,ings) our ,escri%tie statistics as well as
t&e fre4uency tests DA%%en,i2 !E s&ow no clear ,irection of c&ange in t&e leel of e2ecutie
,irectors/ s&are&ol,ings(
Page 5;
Our result is not inconsistent wit& our local stu,y +y ?an A?! K ot&ers Dwor*ing %a%er) .ec 200<E
w&o teste, against sam%le on goernment an, non-goernment com%anies an, foun, t&at t&e
factor of e2ecutie owners&i%s is only &ig&ly significant an, negatiely associate, wit& earnings
management for goernment lin*e, an, state-owne, enter%rises) +ut insignificant in t&e non-
goernmental com%anies( "&e ma>ority of foreign stu,ies Dsuc& as 0ergstresser) -utc&insonE
reeal t&at t&e leel of e2ecutie ,irectors/ owners&i%s is significantly affecting on t&e earnings
4uality in t&e com%anies) &oweer t&ose researc& may not +e relie, u%on in our researc&
+ecause t&eir researc& was con,ucte, +ase, on t&e mi2e, sam%les) unli*e our current researc&
w&ic& is to focus only on family controlle, com%anies(
"&e outcomes of our analysis are >ustifie, gien our uni4ue sam%le of family controlle,
com%anies( 1amily controlle, com%anies %ossess certain uni4ue c&aracteristics w&ic& are not
generally seen in ot&er forms of enter%rises( "&e com%anies are &ig&ly concentrate, wit& t&e
lea,er of t&e family +eing ma,e accounta+le for &is or &er family mem+ers) an, t&e o%eration
mec&anisms are +ase, on t&e %rinci%les of fait& an, loyaltyA as suc&) t&e c&osen lea,er &as
isions for t&e long term well-+eing for t&e com%anies an, its mem+ers( !n t&at res%ect) t&ey are
unli*e t&e em%loye, $3O w&o may &i>ac* t&e future income if awar,e, wit& s&ares in t&e
com%anies) w&ose remunerations are +ase, u%on t&e earnings in t&e com%anies(
Incidenta# <indin*s
?e &ae t&e %erce%tions t&at non-in,e%en,ent non-e2ecutie ,irectors are li*ely to +e family
relate, an, &ol, su+stantial s&ares) &oweer t&e statistics results ,o not reeal so +ut in turn it
reeals t&at t&e %ro%ortion of @!@3. correlates significantly an, negatiely to t&e %ro%ortion of
family relate, ,irectors in t&e +oar, an, in t&e Au,it $ommittee) an, t&e leel of s&ares &el, +y
,irectors in t&e Au,it $ommittee(
Our statistic results also reeal an e2%ecte, outcome t&at an increment in non-in,e%en,ent non-
e2ecutie ,irectors woul, ,ilute t&e +oar, in,e%en,ence) an, furt&er reeals an interesting
fin,ing t&at non-in,e%en,ent non-e2ecutie ,irectors are generally a%%ointe, in t&e com%anies of
a smaller +oar, siOe( ?e sus%ect t&at it is easier to 4ualify as non-in,e%en,ent non-e2ecutie
,irectors t&an as in,e%en,ent ,irectors w&ereof t&e laws im%ose &ig&er ,uties on t&e latter( "&e
costs s&all +e &ig&er wit& t&e in,e%en,ent ,irectors an, t&us t&e smaller com%anies s&all +e
more incline, wit& non-in,e%en,ent non-e2ecutie ,irectors(
E%#ION I$F+#+RE REEAR%)
?e suggest t&at furt&er researc& +e con,ucte, to test against t&e in,e%en,ent aria+les w&ic&
&ae large t-statistic alues &oweer insignificant statistically) suc& as t&e leels of ,irectors/
s&are&ol,ing in Au,it $ommittees) +oar, an, au,it siOe as a%%eare, in our current researc&( "&e
reasons are t&at gien t&eir large t-alues an, t&eir significance leels near to 10H) t&ey may +e
influential to t&e earnings 4uality( "&e conce%ts of t&ese in,e%en,ent aria+les may +e refine,)
for instance to account only for family relate, mem+ers in ,etermining t&e +oar, or au,it siOe(
?e furt&er suggest to segmenting t&e sam%le com%anies accor,ing to its in,ustries) for instance
into t&e in,ustries of construction or in,ustrial %ro,uct) an, retest t&e segmente, sam%le
com%anies using t&e same regression met&o,s( "&e reason for ,oing so is t&at t&e current
measurements of earnings management ,e%en, u%on t&e return of assets an, total assets of t&e
com%anies) w&ic& inaria+ly ,iffer from one segment to anot&er( "&e insignificant statistic results
in 2008 may +e ,ue to t&e mi2e, sam%le com%anies from ,ifferent in,ustries(
?e also suggest t&at t&e future researc& +e con,ucte, in relation to t&e same as%ects of t&e
cor%orate goernance on family controlle, com%anies liste, on ot&er ca%ital mar*ets in t&e Asia
Pacific region( "&e results generate, t&ereof may gie a goo, com%arison oer family controlle,
Page 5<
com%anies in t&e region of Asia Pacific w&ic& %ossess similar cor%orate cultures(
E%#ION J$%ON%L+ION
"&e oerall researc& generates a conclusion t&at t&e Malaysian cor%orate goernance reforms
w&ic& too* %lace in 200: are effectie in re,ucing t&e leels of earnings management( "&e matter
of fact t&at t&e PA$.A) t&e %ro2y re%resenting earnings management) &as generally +een
increase, after t&e goernance reforms) t&e %&enomenon must not +e seen as t&e failure of
reforms( "&e general increments in t&e PA$.A are largely ,ue to t&e &it of crisis w&ere all
com%anies &ae t&ese ten,encies to /manage/ t&eir %rofits at +a, times(
Our current stu,y reeals t&at t&e %ro%ortion of t&e family relate, ,irectors in t&e Au,it $ommittee
&as significant im%act u%on t&e leels of earnings management in t&e family controlle,
com%anies( !t is an in,ication t&at t&e %ro%ortion of family relate, ,irectors in t&e Au,it $ommittee
is a releant as%ect of cor%orate goernance for t&e Malaysian family controlle, com%anies(
"&ere is no ,ou+t t&at we &ae refine, t&e conce%t of au,it in,e%en,ence in cor%orate
goernance Das t&e general %ers%ecties of t&e au,it in,e%en,ence accounts for t&e %ro%ortions
of non-e2ecutie ,irectors irres%ectie of w&et&er t&ey are family relate,E) our refinement ,i, not
inali,ate t&e inten,e, tests(
"&e local stu,ies +y a few researc&ers in relation to t&e same areas reeal t&at t&e Anglo-6a2on
Mo,el is not suita+le in Malaysia( -oweer t&e ei,ences ,rawn from t&is stu,y im%ly t&at t&e
Anglo-6a2on Mo,el of cor%orate goernance coul, +e mo,ifie, as necessary in or,er for it to +e
effectie in local conte2t( 1inally) we wis& to state t&at t&e 200: reforms &ae mo,ifie, t&e Anglo-
6a2on Mo,el in t&e rig&t ,irection) w&ic& %roi,es t&e green lig&t for continual use of t&e Anglo-
6a2on mo,el) &oweer wit& a,e4uate mo,ifications(
,i:lio5ra48y
A+,ul AOiO A) Mo&, -arun A) 2001) Toards &ood Cor.orate &o"ernance in Ma#a!siaE The >eed
)or La Ae)or+) Malayan Law Journal) Vol 5) %% !2iii-!22iii(
A+,ul Latiff 6N) 200: The Aecent De"e#o.+ent in Company Law The Co+.anies (A+end+ent)
Act 0221B) "&e Law 'eiew 200:) %% 5<5-755(
A+,ulla& 6@) 2008) Board Structure and onershi. in Ma#a!siaE the case o) distressed #isted
co+.anies) 0ra,for,) Vol 8 !ssue 5) % 5;2(
A+,ulla& 6@) 2008) Directors7 re+uneration, )ir+7s .er)or+ance and cor.orate *o"ernance in
Ma#a!sia a+on* distressed co+.anies) $or%orate =oernance) VolG 8 !ssue 2) %% 182-1:7(
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Jensen M$ an, Mec*ling ?-) 1<:8) Theor! o) the <ir+E Mana*eria# Beha"iour, A*enc! Costs,
and Onershi. Structure) Journal of 1inancial 3conomics) Vol 5) @o 7) %% 505-580(
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"&e Journal of 1inance) Vol 57) @o 2) %% 7:1-51:(
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Malaysia) Ca.ita# Market Master P#an) 2001# 6ecurities $ommission Malaysia) $a%ital Mar*et
Master Plan) 2001# 6ecurities $ommission
Mis&ra $6) 'an,oy ") Jenssen J!) 2001) The ())ect o) <oundin* <a+i#! In)#uence on <ir+ Ja#ue
Page 71
and Cor.orate &o"ernance) Journal of !nternational 1inancial Management an, Accounting) Vol
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Par* M6 an, Par* ") 2005) Insider sa#es and earnin*s +ana*e+ent) Journal of Accounting an,
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(+er*in* Markets) 0lac*well Pu+lis&ing Lt,) Vol 15) @o 5) %% <<<-1021(
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'esearc&) Vol 77) @o 5) %% 81<-858(
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!nternational Journal of Au,iting <D5E) % 201(