The perceived importance and factors influencing disclosure in the financial reports of commercial banks in Malaysia

Abstract

There are relatively few studies conducted to examine the extent of disclosure practices in the annual financial reports of banking institutions. Besides, there is very minimal research observing professional opinion of the regulators and the practitioners on the importance and the usefulness of the disclosure items that were required to be disclosed in the annual financial report. Hence, three underlying objectives were determined in this study. First, the research will examine the perceptions of regulators and rating agencies of the importance of the disclosure items as disclosed in the financial reports of the Malaysian Islamic banking institutions and the conventional banks that provide Islamic banking products and services. The second objective is to examine the banks’ disclosure practices as required by the presentation of the disclosure requirements and guidelines issued by the Central Bank of Malaysia and applicable approved accounting standards such as AAOIFI and MASB i – 1. The third research objective then is to examine the factors influencing the disclosure practices in the Islamic banking institutions and conventional banks that offer the Islamic products and services. The research examines the regulators’ and the rating agencies’ perceptions of the importance of the disclosure items and subsequently assign the weight to the disclosure index items. The sample banks annual reports were scrutinized and were rated based on the weighted disclosure index result. Secondly, the research also examines the banks’ disclosure practices as required by the presentation of the disclosure requirements and guidelines issued by Central Bank of Malaysia and applicable approved accounting standards such as AAOIFI and MASB i – 1. The research then examines the relationship of firmspecific characteristics which are size, profitability, liquidity, composition of nonexecutive directors sitting in the board of directors and board of directors’ size on the extent of disclosure practices. The study shows that the respondents perceived all disclosure items in the index developed as important at 2.451 mean score out of 3.000 maximum score. However, lower scores were recorded for the disclosure on the Islamic related information. The finding also shows that large conventional banks such as Public Bank are leading in terms of the disclosure in the compared to the small banks including Islamic banks in the four consecutive years (2000 – 2003). Finally, all independent variables which are size, profitability, liquidity, composition of nonexecutive directors and board size show a positive relationship on the extent of disclosure. However, the finding indicates that only size and the higher composition of non-executive directors positively and significantly influence the disclosure level.