Risk management and internal control disclosures and its relation with ownership structure and internal audit activities : evidence from Malaysia

Abstract

Disclosure of risk management and internal control (DRMIC) is an essential characteristic to promote investors’ confidence in the capital market and to enable them to make decisions. Disclosing more of risk management and internal control would make financial information more useful as it is relevant to business operations. In addition, the revised regulation for reporting the statement of risk management and internal control in the annual reports proposed by Bursa Malaysia activates the idea of this study to extend the literature on disclosure of risk management and internal control. Thus, the main objective of this study is to examine the impact of ownership structures and internal audit activities on disclosure of risk management and internal control among Malaysian public listed companies. The disclosure of risk management and internal control is measured based on a disclosure index. The kinds of ownership structures are managerial ownership, institutional ownership, and foreign ownership. On the other hand, internal audit activities comprise of risk-based audit plan, approval of audit charter, quality assurance on internal audit performance and compliance to internal audit standards. The agency theory is used to clarify the study’s framework and to test a sample of 204 Malaysian listed non-financial companies for the financial year end of 2010 and 2017. The results show that the risk based audit plan, the approval internal audit chart by the audit committee and the quality assurance on internal audit activities are highly significant and positively related with DRMIC at one percent level of significant. While, profitability, liquidity, and leverage are found to have negative and significant relationships with the DRMIC but the level of foreign ownership has a positive relationship at five percent level. However managerial ownership, institutional ownership, the compliance of internal audit activities on international standards of internal auditing and firm size have no significant relationship with DRMIC. The study adds value to the current empirical studies in the DRMIC and suggests the importance of the DRMIC in the annual reports of the public listed firms as Malaysia leads the Asian countries on the disclosure level of RMIC.