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Managerial Auditing Journal

The role of audit committee attributes in intellectual capital disclosures:


Evidence from Malaysia
Abdifatah Ahmed Haji,
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Abdifatah Ahmed Haji, (2015) "The role of audit committee attributes in intellectual capital
disclosures: Evidence from Malaysia", Managerial Auditing Journal, Vol. 30 Issue: 8/9, pp.756-784,
https://doi.org/10.1108/MAJ-07-2015-1221
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MAJ
30,8/9
The role of audit committee
attributes in intellectual capital
disclosures
756 Evidence from Malaysia
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Abdifatah Ahmed Haji


SCICOM (MSC) BHD, Kuala Lumpur, Malaysia

Abstract
Purpose – This study aims to examine the role of audit committee attributes in non-financial
information releases, with a focus on intellectual capital (IC) disclosures, following significant policy
changes, mandating the audit committee function in Malaysia. The study argues that, given the
changing informational needs of stakeholders and the ongoing discussion on integrated reporting, the
role of the audit committee should extend to ensuring the overall quality of corporate reporting.
Design/methodology/approach – The study draws evidence from a sample of leading Malaysian
companies based on their market capitalisation over a three-year period (2008-2010), a period
subsequent to the recent policy changes. The extent and quality of IC information, as a surrogate of
non-financial information, was measured and regressed against several audit committee attributes,
such as audit committee size, independence, financial expertise and meetings, controlling the overall
governance and firm-specific variables.
Findings – The findings show a strong positive role of the audit committee function in the overall
amount of IC information as well as all three subcomponents of IC information (internal, external and
human capital). The results are robust to controls for the overall governance and firm-specific attributes
as well as different measures of IC information.
Practical implications – The results suggest that the role of the audit committee function extends to
non-financial information communication such as IC. Policymakers in Malaysia should, therefore, build
on the recent regulatory changes and encourage audit committees to ensure that the overall quality of
corporate reporting processes include social, environmental, intellectual as well as financial capital of a
firm.
Originality/value – This study considers the role of the audit committee in the wider corporate
reporting process – drawing attention to its potential role in the espoused integrated business reporting.
It also challenges the taken-for-granted assumption that restricts the role of the audit committee
function to the traditional financial reporting process.
Keywords Malaysia, Integrated reporting, Intellectual capital, Audit committee,
Regulatory changes
Paper type Research paper

Managerial Auditing Journal The author sincerely acknowledges many insightful comments made by two anonymous
Vol. 30 No. 8/9, 2015
pp. 756-784 reviewers of this journal in the development of this paper. Special thanks to also the special editors
© Emerald Group Publishing Limited
0268-6902
of the journal, Associate Professor Wendy Green and Dr Maria Balatbat, who went the extra mile
DOI 10.1108/MAJ-07-2015-1221 for this study to materialise. Needless to say, any remaining errors are those of the author.
1. Introduction Role of audit
Research on corporate reporting has raised concerns over the usefulness of traditional committee
financial statements to users for decision-making purposes (Francis and Schipper, 1999;
Amir and Lev, 1996; Gray, 2006; Liu and Wang, 2012). Financial statements alone
attributes
provide, at best, incomplete information, and have been heavily criticised for their
historical orientation (Gray, 2006). This has led to a demand for an alternative corporate
reporting framework that can blend financial and non-financial information. More 757
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recently, “integrated reporting” is being increasingly embraced to balance various


forms of information of a company (Adams and Simnett, 2011; Arvidsson, 2011;
Abeysekera, 2013). The ongoing discussion on wider organisational reporting,
instituted by the International Integrated Reporting Council (IIRC), places emphasis on
a comprehensive reporting framework that integrates social capital, environmental
issues and intellectual capital (IC) of a firm, with a view to connect an organisation’s
vision, values, social, environmental and IC to its financial capital (Abeysekera, 2013,
IIRC, 2013). In this regard, IC information has been cited as one of the most important
non-financial information items to be included in the corporate reporting domains
(Guthrie and Petty, 2000; Abeysekera, 2013). The underlying argument is that IC
resources represent a substantial amount of a firm’s market value in the modern
economy (Edvinsson, 2013), and therefore, disclosure of IC information reveals “the
‘true’ value of a firm by identifying new or hidden relations between various forms of
assets” (Liu and Wang, 2012, p. 37).
Despite the significance and relevance of IC information, its reporting is largely a
voluntary initiative in most regulatory reporting requirements and, therefore, is
disclosed unsystematically (Guthrie et al., 2006). However, a growing number of recent
studies in several countries have shown an increasing trend of reporting non-financial
information, particularly IC-related disclosures in corporate information outlets
(Abdolmohammadi, 2005; Ahmed Haji and Mohd Ghazali, 2012). Consistent with this
increasing trend, studies have suggested IC information benefits shareholder as well as
market value (Abdolmohammadi, 2005; Tayles et al., 2007). For example, IC information
narratives are used to explain the widening gap between the market capitalisation of a
firm and the reported book value (Whiting and Miller, 2008). Capital market participants
such as investors and financial analysts also highly value IC information for various
reasons (Abhayawansa and Guthrie, 2010; Merkley, 2014). Therefore, there is a growing
demand for a wider organisational reporting that integrates financial and non-financial
information of a firm.
The role of corporate governance mechanisms such as audit committees in aiding the
quality of non-financial information is scarcely studied. This study intends to examine
the role of the audit committee in the pursuit of an integrated reporting, with a focus on
IC information, following significant policy changes in the Malaysian business
environment. The policy changes through the revised Malaysian Code on Corporate
Governance (MCCG), while also concerned with the wider corporate governance
practices, mandated the audit committee function in 2007. Corporate governance
attributes have been suggested as key determinants of IC development (Keenan and
Aggestam, 2001; Burgman and Roos, 2007), with recent empirical studies showing a
strong link between governance attributes and the release of IC information (Cerbioni
and Parbonetti, 2007; Li et al., 2008; Ahmed Haji and Mohd Ghazali, 2013). However,
prior literature seems to have exhausted the role of traditional governance indicators
MAJ (board composition and size) towards IC development (Li et al., 2008; Abeysekera, 2010;
30,8/9 Abdul Rashid et al., 2012; Sanni and Ahmed Haji, 2014), with very few studies
examining the role of board-level committees such as audit committees in disclosure of
non-financial information (Ho and Wong, 2001; Li et al., 2012). In a departure from prior
studies, the focus of this study is to examine the role of the audit committee in the
disclosure of IC information in the context of policy changes.
758 The scarcity of research examining the role of audit committees in IC information
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disclosure practices, and integrated reports generally, could be due to two main reasons.
First, the formation of audit committees within the corporate governance structure is a
relatively new initiative, especially in developing countries (Vanasco, 1994; Ika and
Mohd Ghazali, 2012), with the initiative being largely voluntary in nature (Ho and
Wong, 2001). Second, due in part to the widely held assumption that the primary
function of audit committees is to oversee the financial reporting quality (Abdul
Rahman and Ali, 2006; Dellaportas et al., 2012), the role of audit committee mechanisms
in disclosure of non-financial information has been neglected. However, recent studies
have shown that an audit committee is an effective governance mechanism including its
role in detection of internal control weaknesses, strengthening the role of independent
directors and coordinating internal and external auditors’ roles (Bedard et al., 2004;
Bronson et al., 2009; Sun et al., 2012). Similarly, recent studies have also shown that the
function of an audit committee extends to the release of non-financial information of a
firm, including IC information (Akhtaruddin and Haron, 2010; Li et al., 2012).
In line with this research, the findings of this study, based on panel data analyses of
153 observations from leading Malaysian companies over a three-year period
(2008-2010), show a strong positive association between the overall amount of IC
information and audit committee attributes (i.e. audit committee size, independence,
financial expertise and board meetings). The results also reveal that the audit committee
attributes have a significant relationship with all three IC disclosure components of
internal, external and human capital information. The results, which are robust to
controls for various measures of IC information and firm-specific characteristics,
suggest that the audit committee function can essentially enhance the quality of
non-financial information disclosure practices and should, therefore, be considered as an
essential element in the ongoing discussion towards integrated corporate reporting.
This study contributes to the extant IC and audit committee literature in several
ways. First, the existing literature restricts the role of the audit committee in monitoring
the quality of financial reports such that its role in disclosure of non-financial
information, or integrated reports generally, is seen as irrelevant. The results of this
study, and some other recent studies (Li et al., 2012), suggest that the scope of an audit
committee can be extended to offer assurance in non-financial information as well,
particularly in the context of the modern economy when information beyond the
traditional financial statements is seen as critical (Gray, 2006; Abeysekera, 2013).
Second, prior studies usually examined the role of a voluntary audit committee in
corporate reporting, with studies in Malaysia showing poor performance of audit
committees in financial reporting (Abdul Rahman and Ali, 2006; Mohamad et al., 2012).
In a departure from previous studies, this study examines the role of a mandatory audit
committee in disclosure of IC information following policy changes. The strong positive
link between IC information and audit committee attributes reported in this study could
be due to the mandatory exercise in Malaysia, thereby showing the importance of
mandating the audit committee function. Finally, in Malaysia, there have been ongoing Role of audit
developments towards wider organisational reporting to include non-financial committee
information as part of “excellence in corporate reporting” initiatives, promoted in
several national reporting awards as well as by Bursa Malaysia. These initiatives more
attributes
often frame the corporate governance function into organisational reporting practices to
enhance the quality of corporate reporting. Hence, the audit committee function, given
its allegiance towards corporate reporting, is expected to respond to these local 759
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initiatives following the mandatory exercise. This study draws evidence in relation to
these developments in the Malaysian environment and represents an interesting case to
other emerging economies.
The remainder of the study proceeds as follows. The next section puts the Malaysian
business environment in perspective to highlight recent developments in governance
and corporate reporting. The ensuing section reviews prior literature, whereas Section 4
discusses relevant theories and presents the hypotheses of the study. Section 5 details
the methodology of the study, whereas Section 6 presents the research findings. Section
7 concludes the study.

2. Putting the study into context


The pursuit of wider organisational reporting to include voluntary non-financial
information, given the inherent costs of such information, is a complex matter, and its
advances require regulatory reforms and education, as well as willingness from
companies to integrate such information. In Malaysia, from a regulatory perspective,
there have been continuous corporate governance developments, first, in the year 2000,
then in 2007 and more recently in 2012. The governance reforms are essentially aimed to
encourage best practice in governance and corporate transparency. The first corporate
governance code in 2000 was derived from the Hampel Report in the UK, with the recent
amendments being developments to the first code. There are, however, significant
differences between the Malaysian corporate environment and that of the UK, with some
of the obvious differences arising from the ownership structure, government
involvement and business culture (Haniffa and Hudaib, 2006, p. 1,035), seemingly
leading the regulatory authorities to trigger changes in the first (and the second)
corporate governance code to better suit the Malaysian business culture. In addition to
the regulatory changes, the business environment experiences an ongoing development
in corporate reporting to adapt global initiatives in business reporting, leading to the
introduction of a plethora of reporting awards that promote excellence in corporate
reporting practices. Hence, these developments indicate that there are regulatory
reforms as well as educational endeavours towards wider organisational reporting in
Malaysia.
The motivation of this study stems from two major areas. First, the evidence which
suggests that audit committee attributes improve organisational performance and
reporting quality largely prevails in the economically developed countries, where
governance structures enjoy continuous oversight due to the more diffused ownership
structure in those countries. Therefore, there is an inherently high demand of voluntary
disclosures to reduce information asymmetry between the insiders and outsiders. In
such a widely held background, the audit committee function is under pressure to meet
certain expectations including ensuring all relevant information is communicated to the
outsiders. In contrast, emerging economies (e.g. Asian countries) have a different type of
MAJ governance and institutional structures, as most firms are family-owned where the
30,8/9 ownership structure is highly constrained (Haniffa and Hudaib, 2006; Akhtaruddin and
Haron, 2010). The release of non-mandatory disclosures such as IC information becomes
less pertinent in a closely held environment, as controlling shareholders can obtain the
information they require through informal internal channels. Therefore, minority
shareholders, as well as other stakeholders, remain in the dark on critical issues that
760 non-financial information would have otherwise explained.
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Empirical studies in closely held environments, such as Malaysia, reveal a passive


role of audit committees and other corporate governance attributes in financial
reporting misstatements (Abdul Rahman and Ali, 2006; Abdullah et al., 2010; Mohamad
et al., 2012). Following this, the Revised Codes[1] in 2007 and more recently in 2012,
highly stress the role of audit committees in strengthening accountability and best
governance practices of public listed companies. For example, the Revised Code in 2007,
unlike the preceding code in 2000, mandates the audit committee function and requires
listed companies to have at least three audit committee members, all of whom should be
non-executive directors and with a majority of independent directors. It also requires all
members of audit committees to be financially literate and at least one should be a
member of an accounting association body such as the Malaysian Institute of Certified
Public Accountants. However, limited research has been undertaken to assess the role of
the audit committee function in voluntary disclosures. Hence, it is unknown whether the
installation of a mandatory audit committee can encourage disclosures of voluntary
information such as IC in a closely held environment, given that the existing evidence
had largely been undertaken in a widely held environment (Li et al., 2012). It is this
background that this study intends to provide a rare empirical assessment of the role of
audit committees in disclosure of non-financial information.
Second, although Malaysian corporate ownership is highly concentrated (Haniffa
and Hudaib, 2006), there have been ongoing initiatives encouraging inclusion of
non-financial information in corporate reporting domains. For instance, Bursa Malaysia
has mandated listed companies to report information on their corporate social
responsibility practices, effective from December 2007 (Ahmed Haji, 2013). Similarly,
the introduction and continuity of the National Annual Corporate Report Awards
(NACRA), a body that promotes “excellence in corporate reporting”, is another
testament of the importance attached to corporate reporting quality, both from
organisational as well as investor perspectives. The NACRA award equally emphasises
the quality of financial and non-financial information, as evidenced by its five major
categories[2]. Studies conducted subsequent to these developments in Malaysia have
already shown an improved relationship between voluntary disclosures and
governance attributes (Ahmed Haji and Mohd Ghazali, 2013). In this study, the
expectation is that the regulatory changes surrounding audit committees and the
ongoing developments in integrated corporate reporting would enhance the role of audit
committees in non-financial information disclosures.

3. Prior literature
There is a growing literature embracing the qualities of an integrated corporate
reporting framework that complement the financial position, IC, social and
environmental aspects of a firm (Adams and Simnett, 2011; Arvidsson, 2011;
Abeysekera, 2013; IIRC, 2013). This literature builds on the background that the
traditional financial reports are no longer regarded useful by investors and other users Role of audit
(Francis and Schipper, 1999; Amir and Lev, 1996; Gray, 2006), with stakeholders committee
demanding information beyond the financial aspects of a firm to have a comprehensive
view of a firm’s capabilities. IC information narratives have been viewed as critical to
attributes
investors’ decision-making (Petty et al., 2008; Abhayawansa and Guthrie, 2010;
Merkley, 2014), as such information can reveal other hidden matters that can potentially
explain the financial position of a firm (Liu and Wang, 2012). 761
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A growing body of empirical evidence shows that corporate governance mechanisms


enhance IC information disclosure practices (Cerbioni and Parbonetti, 2007; Li et al.,
2008; Abeysekera, 2010; Ahmed Haji and Mohd Ghazali, 2013), especially following the
introduction of a mandatory code of corporate governance (Abeysekera, 2010; Ahmed
Haji and Sanni, 2012). The existing research, however, focuses on certain aspects of
corporate governance attributes such as board composition and size (Cerbioni and
Parbonetti, 2007; Abdul Rashid et al., 2012). Little is known about the formation of
subcommittees in the governance structure and their impact on IC disclosure practices
of a firm. The need for such examination emanates from the belief that IC disclosures are
important in the value creation process of a firm (Abdolmohammadi, 2005; Tayles et al.,
2007; IIRC, 2013), and revealing the drivers of such disclosures are important to users of
corporate reports such as investors and other stakeholders (Petty et al., 2008; Merkley,
2014). The formation of an audit committee in the governance structure of a firm has
been signalled as a potential driver for quality and timely financial reporting (Abbott
et al., 2000; Bedard et al., 2004; Lary and Taylor, 2012; Ika and Mohd Ghazali, 2012).
However, despite its decorated role in financial reporting quality, the role of audit
committee mechanisms in integrated corporate reporting initiatives, and IC information
in particular, is unfortunately scarcely studied (Ho and Wong, 2001; Li et al., 2012). For
example, Ho and Wong (2001) assessed the impact of a voluntary audit committee on
voluntary disclosures of firms in Hong Kong. They found that the existence of a
voluntary audit committee is a significant driver of voluntary disclosures. Using
Malaysian data, Akhtaruddin and Haron (2010) examined the effects of audit committee
independence and expertise on voluntary disclosures of 124 Malaysian listed
companies. The study revealed that more independent directors and expertise within
the audit committee function result in higher levels of voluntary disclosures. Of
particular relevance to this study is the study by Li et al. (2012), who have undertaken a
rare empirical investigation of the effects of audit committee characteristics on IC
disclosure practices of firms in the UK. Their investigation involved testing the
relationship between a number of audit committee characteristics and the level of IC
disclosures of a sample of 100 IC-intensive companies in 2005. Their findings show that
certain aspects of audit committee attributes such as size and frequency of meetings
determine IC disclosures.
Although these studies reveal that the role of an audit committee extends to releases
of non-financial information, including IC information, they do not assess the role of a
mandatory audit committee in IC information following significant policy changes.
Building on this line of research, this study examines the role of audit committee
characteristics in IC disclosure practices of firms experiencing regulatory changes
concerning audit committee mechanisms. The current study argues that the role of audit
committee mechanisms, in addition to monitoring the quality of the financial reporting
process, can and should extend to releases of strategic non-financial information, given
MAJ the importance attached to such information by investors and other key stakeholders.
30,8/9 Hence, the findings of this study present initial insights as to whether mandating audit
committee mechanisms in the corporate governance structure can aid the push for an
integrated corporate reporting framework.

762 4. Theory and hypotheses development


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Recent empirical studies in the emerging economies provide support to theories with
origins in the economically developed Western countries. Agency and legitimacy
theories are among a number of theoretical perspectives that were found to be applicable
to corporate governance and disclosure practices of firms in the developing economies
including Asian firms (Mohd Ghazali and Weetman, 2006; Mustapha and Ahmad, 2011;
Chu et al., 2013). The secrecy culture embedded in family-owned firms in Asia compared
to the more diffused ownership structure in the West, which inherently requires more
disclosures and tighter governance principles, seems to represent two contrasting
institutional and cultural settings. However, this requires further empirical grounding
to ascertain whether these theories, in actual terms, explain accounting practices in
closely held cultural settings. This study, therefore, adopts agency and legitimacy
theories in seeking whether these originally Western theories explain the connection
between non-financial information disclosure practices and audit committee attributes.
As a case in point, the present study draws evidence from the Malaysian corporate
environment following significant policy changes.
Although the two theories build on different perspectives, the aim of these two
theoretical perspectives is essentially the same: to reduce information asymmetry.
Agency theory is generally based on the assumption that there are owner-manager
conflicts which mainly arises from the pursuit of personal gain (Jensen and Meckling,
1976). The higher the managerial ownership, the lower the agency-principal conflicts
and the higher the information asymmetry between the insiders and outsiders. Agency
theory maintains that a way to reduce the information asymmetry level is to appoint
independent directors as part of the management, to monitor the actions of the executive
directors and ensure all relevant and useful information are released on time. Modern
corporate governance codes encourage the function of audit committees to supposedly
enforce the role of independent directors, amongst other areas, in monitoring internal
control weaknesses and the quality of corporate reporting.
On the other hand, legitimacy theory views the agency-principal conflict largely as
an internal matter and postulates that organisations deal with, in addition to this
problem, greater scrutiny from various powerful stakeholder groups with different
needs (Deegan et al., 2000). Organisations strive to meet the social expectations to obtain
social acceptance. This is accomplished through engaging in acceptable business
practices and also undertaking socially friendly activities through sound and effective
governance structures. Legitimacy theory also propounds that firms would adopt
significant governance and disclosure changes to respond to changes in the business
environment to deflect the attention of the divergent interests of the many stakeholder
groups from questionable business practices. Voluntary disclosures are used to signal
companies’ response to changes in the business environment. For instance, companies
would release increased disclosures to discuss their specific response to regulatory
reforms and other matters of public interest (Chu et al., 2013). Given the surrounding
regulatory changes following the Revised Code in Malaysia, this study argues that the
newly mandated audit committee function would encourage the disclosure of financial Role of audit
and non-financial information to avert the attention of the public. The following committee
subsections present the individual hypotheses of the study.
attributes
4.1 Audit committee size
The effectiveness of an audit committee largely arises from the available resources: the
number of members forming the committee (DeZoort et al., 2002; Bedard et al., 2004; 763
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Abbott et al., 2004). Although there is no precisely recommended size for an audit
committee, most previous studies and regulatory requirements seem to suggest three to
five members, preferably with a majority of independent directors (DeZoort et al., 2002;
Abbott et al., 2004; Bronson et al., 2009). The revised Malaysian Code of corporate
governance, for instance, recommends firms to have at least three audit committee
members, fully non-executive directors (The Revised MCCG, 2007). The extant literature
offers both arguments for and against larger groups, with one view suggesting that
larger groups can share different knowledge and expertise and can, therefore,
potentially mitigate individual deficiencies (Lipton and Lorsch, 1992; Cornett et al.,
2009). On the hand, larger groups can have dispersed opinions in decision-making
(Lipton and Lorsch, 1992; Jensen, 1993). As a result, it is propounded to have “a
committee not so large as to become unwieldy, but large enough to ensure effective
monitoring” (Bedard et al., 2004, p. 18). Thus, there is a need for further empirical
grounding to solicit whether audit committee size matters in the quality of corporate
reporting, particularly in the case of non-financial information narratives.
Empirical studies provide mixed results on the role of audit committee size in various
aspects of organisational endeavours. While a number of studies found size to be a
significant determinant of financial reporting quality (Lin et al., 2006; Cornett et al.,
2009), other studies reported insignificant impact on the financial reporting process
(Abbott et al., 2004; Bedard et al., 2004; Lary and Taylor, 2012). Using Malaysian data,
Ahmad-Zaluki and Wan-Hussin (2010) found a positive association between larger
audit committee size and financial reporting quality. In the case of IC disclosures, Li et al.
(2012) documented a significant positive association between IC disclosures and audit
committee size in the UK. The present study examines the role of audit committee size in
IC disclosure practices of Malaysian companies following the recent policy changes
which mandate the audit committee function. Building on the preceding discussion, this
study predicts a positive role of audit committee size in disclosure of IC information in
formulating the following hypothesis:
H1. There is a significant positive relationship between IC disclosure practices and
audit committee size.

4.2 Audit committee independence


The single most cited feature of an effective audit committee as an essential monitoring
governance mechanism is its independence (Abbott et al., 2000; Bronson et al., 2009).
Abbott et al. (2000), for instance, contend that the ability to effectively monitor the
insiders (management) is a function of director independence. The notion to favour
independent audit committees is based on the assumption that the outside directors play
a supervisory role and have no relationship with the inside management (Carcello and
Neal, 2003), thereby collectively resulting in improved management. While studies
disagree on how much independence is enough (Bedard et al., 2004; Bronson et al., 2009),
MAJ a common ground is to have a higher proportion of outside directors within the audit
30,8/9 committee function. However, owing to insufficient relevant industry knowledge, lack
of real independence and busy schedules, the role of outside directors have recently been
subjected to criticisms on whether they can really perform their perceived monitoring
role effectively (Abdul Rahman and Ali, 2006; Annuar, 2012). It is this background that
regulators emphasise the responsibilities of outside directors in facilitating best
764 corporate governance practices (The Revised MCCG, 2007).
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Empirically, the role of audit committee independence in corporate reporting quality


is inconclusive. For instance, studies have shown a significant positive relationship
between higher audit committee independence and financial reporting quality (Kang
et al., 2011; Lary and Taylor, 2012), and this is consistently achieved when audit
committees comprise fully independent directors (Abbott et al., 2000; Bedard et al., 2004;
Bronson et al., 2009). Other studies, however, reported no significant relationship
between audit committee independence and financial reporting quality (Lin et al., 2006;
Mohamad et al., 2012). In the Malaysian context, the evidence gathered so far on the role
of audit committee independence in corporate reporting quality is disappointing. For
instance, Abdullah et al. (2010) as well as Ahmad-Zaluki and Wan-Hussin (2010) found
that higher audit committee independence results in higher financial reporting
misstatements, whereas Abdul Rahman and Ali (2006) and Mohamad et al. (2012) both
reported no significant impact of audit committee independence on earnings
management practices. These studies, however, predate the Revised Code of corporate
governance in Malaysia issued in 2007, and thus, their examination involved a
voluntary audit committee.
Limited studies have been undertaken to examine the role of audit committee
independence in non-financial information. Li et al. (2012) reported no significant
association between IC disclosures and audit committee independence in the UK. Using
Malaysian data, Akhtaruddin and Haron (2010) found a significant positive association
between audit committee independence and voluntary disclosures.
The current study examines the role of audit committee independence on IC
disclosure practices following the revised Malaysian code of corporate governance in
2007. Although the independence of outside directors in Malaysian companies have
been repeatedly questioned (Abdul Rahman and Ali, 2006; Annuar, 2012), studies that
were undertaken subsequent to the regulatory changes revealed an improved role of
outside directors in voluntary disclosure practices(Ahmed Haji and Mohd Ghazali,
2013). As a result, owing to the changes detailed within the Revised Code and the
surrounding public attention towards the effectiveness of the independent directors,
especially in the circles of the audit committee function, this study predicts a positive
relationship between IC disclosures and audit committee independence. Hence, the
following directional hypothesis is developed:
H2. There is a significant positive relationship between IC disclosures and audit
committee independence.

4.3 Audit committee financial expertise


The Malaysian Security Commission through the Revised Code mandates listed
companies to have at least one audit committee member who has accounting or financial
expertise and that all members are to be financially literate. A financial expert within the
audit committee is defined as a director having accounting, auditing or finance
background or relevant experience (Iyer et al., 2013). Research shows that financial Role of audit
experts within the audit committee curb internal control weaknesses (Krishnan, 2005; committee
Zhang et al., 2007) and ensure high financial reporting quality (Bedard et al., 2004;
Abbott et al., 2004; Kang et al., 2011; Lary and Taylor, 2012; Sun et al., 2012). In contrast,
attributes
using Malaysian data, Abdul Rahman and Ali (2006) found no relationship between
financial reporting quality and the presence of financial experts. Mohamad et al. (2012)
reported that the presence of financial expertise is associated with high levels of 765
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earnings management in Malaysia. However, these studies in the Malaysian context


predate the Revised Code of corporate governance in 2007.
Limited studies have been undertaken to examine the role of financial experts on
non-financial information disclosure practices. For instance, Li et al. (2012) found no
significant association between IC disclosures and financial expertise in the UK. Using
Malaysian data, Akhtaruddin and Haron (2010) showed a significant positive
association between the level of voluntary disclosures and presence of financial experts
within the audit committee.
Although it is logical to relate the presence of financial experts to the quality of
financial reporting, the role of financial experts in non-financial information including
IC can be questioned. However, studies revealed that investors and other key
stakeholders in the capital markets such as financial analysts find IC information
narratives informative (Petty et al., 2008; Merkley, 2014), as they seek explanation of the
widening gap between the market and book value of a firm. As a result, given the
structure of the firms in the modern economy which can have huge hidden values, it is
sensible to examine whether the role of financial experts in an audit committee extends
to managing the quality of non-financial information. This study argues that given the
emphasis detailed in the Revised Code concerning the role of financial experts in
overseeing the overall corporate reporting quality and the discussion on integrated
reporting, such expert presence can be pivotal in the communication of strategic
disclosures such as IC information, given their understanding of the information capital
markets value and the nature of the modern economy. Hence, the following directional
hypothesis is developed:
H3. There is a significant positive relationship between IC disclosures and the
proportion of financial experts within the audit committee.

4.4 Audit committee meetings


Board meetings signal the effectiveness and commitment of the board committees
including audit committees (Abbott et al., 2000; DeZoort et al., 2002; Yin et al., 2012). In
particular, Abbott et al. (2000) argue that the frequency of audit committee meetings
shows their desire to fulfil their responsibilities. However, as most audit committees
largely comprise outside directors, they tend to have significantly less meetings, given
their other responsibilities in other firms (Yin et al., 2012). Those who still hold frequent
meetings, despite their busy schedules, emerge as an effective committee in enhancing
corporate financial reporting quality (Abbott et al., 2000; Kang et al., 2011). On the other
hand, other studies found no association between audit committee meetings and
financial reporting quality (Bedard et al., 2004; Abbott et al., 2004). In the Malaysian
context, both Abdul Rahman and Ali (2006) and Mohamad et al. (2012), who used data
before the Revised Code, found no relationship between the frequency of audit
committee meetings and financial reporting quality.
MAJ With respect to voluntary disclosures, Li et al. (2012) documented a significant
30,8/9 positive association between IC disclosures and audit committee meetings in the UK.
Building on the findings by Li et al., this study argues that the regulatory changes in
Malaysia should ensure that an audit committee will perform their responsibilities
effectively. Hence, this study expects a similar positive relationship between IC
disclosures and the frequency of audit committee meetings of Malaysian listed
766 companies. The following directional hypothesis is thus formulated:
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H4. There is a significant positive relationship between IC disclosures and


frequency of audit committee meetings.

4.5 Control variables


The potential interaction between IC disclosure practices and audit committee attributes
can be influenced by other organisational elements including the ownership structure,
company size, profitability and other governance-related indicators such as the overall
board independence. As a result, in addition to audit committee attributes, this study
controls for several other variables such as board size, board independence, director
ownership, institutional ownership, firm size and profitability. The selection of these
variables is largely determined by prior research and the institutional context of the
Malaysian corporate environment.

5. Research method
5.1 Sample selection
The sample of this study is drawn from the largest companies listed on Bursa Malaysia,
based on market capitalisation, for the years 2008, 2009 and 2010. The selection of this
time frame is motivated by corresponding recent events of a global and contextual
nature, including policy changes and the relatively recent global financial crisis.
Contextually, the Malaysian Security Commission released the Revised Code of
corporate governance in October 2007. The Revised Code of corporate governance, in
addition to intending to improve the quality of governance practices of public listed
companies, emphasises the importance of audit committees in discharging their role
effectively, following criticisms over the efficacy of the then existing code (Abdul
Rahman and Ali, 2006; Abdullah et al., 2010). This includes monitoring the quality of
corporate information to allow investors and other stakeholders to assess a company’s
performance and governance practices, and respond in an informed way (The Revised
MCCG, 2007, p. 3). Globally, the Malaysian business environment was not spared by the
recent financial turmoil, with the crisis having a notable impact on the voluntary
disclosure practices of Malaysian firms (Ahmed Haji, 2013). Companies could use
non-financial information narratives to address the ongoing economic uncertainty and
ensure stakeholders possible ways to overcoming the crisis. During a recession, use of IC
information can be particularly advantageous to companies in signalling their hidden
capabilities. This study argues that the audit committee function can assist companies
to communicate useful information particularly in the context of financial turmoil and
the changing nature of the modern economy.
To examine the role of the audit committee function in disclosure of non-financial
information following the mandatory exercise and the ongoing financial turmoil, the
largest Malaysian companies were targeted for two main reasons. First, large
companies are more visible and sensitive to changes in the business environment, and
thus, they tend to quickly respond to changes in the market place, particularly Role of audit
regulatory reforms, due to their visibility. Second, owing to a relatively low level of IC committee
information reported in most prior studies, especially those in the developing countries,
large companies are more likely to possess and disclose high levels of IC information in
attributes
their annual reports (Guthrie and Petty, 2000). Hence, a relationship (if any) between IC
information and audit committee attributes can be detected.
Annual reports were the source of IC information as well as the measures of audit 767
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committee characteristics. The use of annual reports in investigating the level of IC


information is justified in the extant IC literature because annual reports continue to be
an important mechanism for corporate disclosures (Islam and Deegan, 2010; Li et al.,
2012). The initial sample consisted of 60 companies in seven sectors (construction,
finance, consumer products, industrial products, plantation, property and trading and
services). Owing to the amount of missing data due to the longitudinal coverage of the
study, the final sample comprises 51 companies, producing a total firm-year of 153
observations in the three-year period (51 ⫻ 3 ⫽ 153 observations).

5.2 The IC disclosure instrument


The IC disclosures were captured using a content analysis approach. Content analysis,
a widely used approach, is defined as a method of codifying the text or content of a piece
of writing into various categories (Krippendorff, 1980).Disclosure studies traditionally
use this method to retrieve disclosures of relevant information in the annual reports.
This is attained through cross-checking a pre-defined disclosure checklist against the
published annual report information. In this study, an IC disclosure checklist developed
by Ahmed Haji and Mohd Ghazali (2012) was adopted to measure the IC disclosure
practices of the sample firms. This checklist was used for two reasons. First, the
checklist is comprehensive and covers the three IC categories of internal, external and
human capital elements. Second, the checklist was developed to more suit the Malaysian
environment. In addition, the checklist was developed from several sources including
the IC disclosure literature and the annual reports of Malaysian companies with
reporting awards. It contains 40 IC items of which 9 are internal capital items, 17 are
external capital items and the remaining 14 are human capital items. Appendix presents
the full IC disclosure index.
In scoring the disclosure checklist, a detailed scoring scheme of 0-3 was used. A value
of 0 was assigned if the item did not appear in the annual report; a value of 1
was assigned if a company provided narrative or general information; a value of 2 was
assigned if the items were disclosed in numerical terms; and the highest score of 3 was
denoted if the items were disclosed monetarily (currency). This approach is consistent
with prior studies (Guthrie et al., 2006). Given the greater degree of subjectivity involved
in content analyses studies, this study addressed the reliability concerns of the coding
process by reading a selected sub-sample of annual reports twice. The first and second
scoring of the selected annual reports were compared, and any arising differences
between the first and second reading were subjected to further examination[3].

5.3 Data analyses


The usual preliminary tests such as descriptive statistics and correlation analyses were
undertaken in determining the distribution of the data and the correlation of the
independent variables. In addition, to test the relationship between the dependent
MAJ (IC disclosures) and the independent variables (audit committee characteristics) over the
30,8/9 three-year period, panel data analyses were performed. Unlike cross-sectional data
analyses, panel data controls for heterogeneity problems (Moulton, 1987) and allows
more data points. A number of preliminary tests were conducted to choose the most
appropriate regression model for the data of this study between the two common
approaches of “fixed effects model” and “random effects model”. The difference between
768 these two main models arises from their assumptions about the error term. While the
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fixed effects model assumes that the individual effect terms are constant, the random
effects model is based on the assumption that the individual terms are random
disturbances obtained from some probability distribution (Greene, 2003). In choosing
the most appropriate test for the data of this study, the literature suggests the use of
Hausman test. Hence, the Hausman specification test was conducted to identify the most
suitable model between the two. The Hausman specification test results confirm that the
random effect models are suitable for the data of this study. As a result, the following
equation is formulated:
ICDt ⫽ ␤0 ⫹ ␤1ASIZEit ⫹ ␤2ACINDit ⫹ ␤3ACFEit ⫹ ␤4ACMEETINGSit
⫹ ␤5BSIZEit ⫹ ␤6INDit ⫹ ␤7DIROWNit ⫹ ␤8IOWNit ⫹ ␤9SIZEit
⫹ ␤10ROAit ⫹ ␧it
The definition and measurement as well as data source of each variable is detailed in
Table I.

6. Research findings
6.1 Descriptive statistics
Table II shows descriptive results of IC disclosure practices of the sample companies
over the three-year period, using a detailed scoring scheme using a 0-3 scale to measure
how the information was disclosed. The quality of the overall amount of IC disclosures
ranges from 3.33 to 50 per cent, with a mean score of 21.16 per cent over the sample
period. In terms of the IC components, external capital disclosures show a mean score of
24.21 per cent, with internal capital information having a mean score of 19.24 per cent,
whereas human capital disclosure score is 18.69 per cent.
Table III presents the actual scores and percentage accounted for by each IC
component. The results indicate that external capital disclosures is the highest disclosed
category in all three years examined, accounting for 51, 49 and 47 per cent of the overall
amount of IC disclosures in 2008, 2009 and 2010 respectively, followed by human capital
disclosures with 28, 31 and 33 per cent for the respective years. Internal capital
disclosures, being the least disclosed category, accounts for 21, 20 and 20 per cent for the
years 2008, 2009 and 2010, respectively.
The low level of IC disclosures, as well as the dominance of external capital
disclosures, is consistent with several prior studies (Guthrie and Petty, 2000; Guthrie
et al., 2006), particularly when the quality, rather than the presence of IC information, is
measured. Notwithstanding the low level of IC disclosures, Table IV shows encouraging
results, as the quality of the overall amount of IC disclosures, and human capital
disclosures in particular, increased significantly over the three-year period at the 5 and
1 per cent significance levels, respectively, suggesting a growing awareness towards IC
disclosures. The substantial increase in the overall amount of IC information, and
human capital information in particular, is a reflection of the Malaysian economy’s
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Acronym Definition Type Operationalization Source of data

OICD Overall intellectual Dependent Number of items in the checklist (40) (based on the scale of 0-3) Annual reports
capital disclosures disclosed divided by the maximum possible score (i.e. 40 ⫻ 3 ⫽ 120)
INCD Internal capital Dependent Number of items in this category (9) (based on the scale of 0-3) Annual reports
disclosed divided by the maximum possible score (9 items ⫻ 3 ⫽ 27)
EXCD External capital Dependent Number of items in this category (17) (based on the scale of 0-3) Annual reports
disclosed divided by the maximum possible score (17 items ⫻ 3 ⫽ 51)
HCD Human capital Dependent Number of items in this category (14) (based on the scale of 0-3) Annual reports
disclosed divided by the maximum possible score (14 items ⫻ 3 ⫽ 42)
ACSIZE Audit committee size Independent Total number of board directors on audit committee Annual reports
ACIND Audit committee Independent Proportion of independent directors to total number of audit committee Annual reports
independence
ACFE Audit committee Independent Proportion of audit committee members with accounting/finance Annual reports
financial expertise qualification or experience to the total number of audit committee
members
ACMEETING Audit committee Independent Total number of audit committee meetings held during the year Annual reports
meetings
BSIZE Board size Independent Total number of directors on the board Annual reports
INDs Board independence Independent Proportion of independent directors to total number of directors Annual reports
DIROWN Director ownership Independent Percentage of shares held by executive and non-independent directors Annual reports
including their deemed interests
IOWN Institutional ownership Independent Percentage of shares owned by institutional investors with equity of Annual reports
5% or more
SIZE Company size Control variable Total assets (log of total assets) Annual reports
ROA Return on assets Control variable Total assets to net income Annual reports
769

variables
Table I.
Role of audit

measurement of
Definition and
attributes
committee
MAJ transformation into a knowledge-based one through human capital developments. The
30,8/9 significant increasing trend also showcases the recent developments in non-financial
information disclosure practices in the Malaysian business environment.
In terms of the independent variables, the results in Table V indicate that the size of
audit committees range from 3 to 6 members with a mean score of 3.63. This is in line
with the calls for firms to form an audit committee of at least three members. Similarly,
770 firms also seem to have met the requirements in the Revised Code for audit committee
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independence, with the sample companies’ audit committee independence ranging from
60 to 100 per cent. In addition, the results show that the frequency of audit committee
meetings ranges from 3 to 21 meetings, with a mean score of 6.3 meetings. The average
score of financial expertise within the audit committee of the sample firms is 39 per cent,
with further analysis showing that only one company did not meet the requirements
embedded in the Revised Code for firms to have at least one financial expert within their
audit committee structure for the years 2008 and 2009. Overall, the results show that the
sample companies comply with the audit committee mandatory requirements detailed
in the 2007 Revised Code of corporate governance. The next section examines the role of
these audit committee characteristics in IC disclosure practices.

Average scores of IC disclosures over a three-year period (2008-2010)


IC information Mean Median Maximum Minimum SD

Overall IC disclosures (%) 21.16 20.83 50.00 3.33 9.04


Table II. Internal capital (%) 19.24 18.52 55.56 0.00 10.97
Descriptive statistics External capital (%) 24.21 21.57 50.98 0.00 10.11
of IC disclosures Human capital (%) 18.69 16.67 59.52 0.00 13.03

Year 2008 Year 2009 Year 2010


IC categories (Actual scores) Score (%) Score (%) Score (%)

Internal capital 259 21 259 20 277 20


External capitala 630 51 625 49 634 47
Human capital 354 28 404 31 443 33
Table III. Total 1,243 100.00 1,288 100.00 1,354 100.00
IC disclosure scores
by category Note: a The highest disclosed category

IC disclosures overtime
Dimension 2008 2009 2010 p-value
Table IV. Overall IC disclosure 20.31 21.05 22.12 0.013**
One-way repeated Internal capital 18.81 18.81 20.12 0.124
measures ANOVA: External capital 24.22 24.03 24.38 0.874
differences in IC Human capital 16.53 18.86 20.68 0.006***
disclosures over a
three-year period Notes: ** Increased at the 5% level; *** increased at the 1% level
Variables Mean Median Maximum Minimum SD
Role of audit
committee
ACSIZE 3.63 4.00 6.00 3.00 0.73 attributes
ACIND 0.87 1.00 1.00 0.60 0.14
ACFE 0.39 0.33 1.00 0.00 0.18
ACMEETING 6.30 5.00 21.00 3.00 3.25
BSIZE 9.03 9.00 15.00 5.00 2.19
771
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IND 0.45 0.43 0.71 0.09 0.11


DIROWN 14.55 0.25 64.56 0.00 21.01
IOWN 38.11 34.53 92.14 0.00 27.41
SIZE (mill) 27,100 8,830 337,000 593 53,100
ROA 0.08 0.06 0.55 ⫺0.14 0.09

Notes: ACSIZE ⫽ audit committee size; ACIND ⫽ audit committee independence; ACFE ⫽ audit Table V.
committee financial expertise; ACMEETING ⫽ audit committee meetings; BSIZE ⫽ board size; IND ⫽ Descriptive results –
independent non-executive directors; DIROWN ⫽ director ownership; IOWN ⫽ institutional independent
ownership; SIZE ⫽ company size; ROA ⫽ return on assets; mil ⫽ million variables

6.1 Empirical results: panel regression results


Before conducting the panel regression analyses, a correlation analysis was performed,
with the results shown in Table VI. The correlation analyses were performed to detect
the potential existence of multicollinearity problems among the independent variables.
The correlation results displayed in Table VI show that there are no multicollinearity
problems in the data of this study, as the highest correlation coefficient, which is
between director ownership and institutional ownership, is only ⫺0.587, which is well
below the proposed cut-off point of 0.7 of multicollinearity concerns (Tabachnick and
Fidell, 2001). Hence, the independent variables in the regression equation can be
included in the same regression models. Correlation analyses, however, are not good
indicators of how a set of independent variables explain the dependent variable.
Therefore, panel data regression analyses were conducted to determine the relationship
between IC disclosures and audit committee characteristics.
The panel regression results are presented in Table VII which contains four separate
models. The first model (Model 1) presents the relationship between the overall amount
of IC disclosures and audit committee characteristics, whereas Models 2, 3 and 4 show
the association between audit committee characteristics and IC disclosure categories of
internal, external and human capital disclosures, respectively.
The findings reveal that audit committee size (ACSIZE) is positive and significant at
the 5 per cent level in determining the overall amount of IC disclosures, with external
capital and human capital disclosures similarly having a significant positive association
with audit committee size at the 1 per cent level. However, audit committee size is shown
to have a negative association with internal capital disclosures at the 1 per cent level.
The results largely support H1 of a positive relationship. The findings are also
consistent with prior empirical observations that audit committee size is a significant
determinant of both financial reporting quality (Ahmad-Zaluki and Wan-Hussin, 2010)
as well as IC disclosure practices (Li et al., 2012). The significant positive association
between audit committee size and the overall amount of IC information, as well as IC
components of external and human capital disclosures, indicates that large groups are
able to share different knowledge and expertise about the potential benefits of releasing
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772
MAJ
30,8/9

Table VI.
Correlation analysis
Variables OICD INCD EXCD HCD ACS ACI ACM ACFE BSIZE IND DOWN IOWN Size ROA

ACS 0.335 0.161 0.262 0.330 1.000


ACI 0.035 ⫺0.077 0.058 0.057 ⫺0.166 1.000
ACM 0.506 0.282 0.474 0.405 0.384 0.024 1.000
ACFE 0.245 0.151 0.333 0.090 0.094 ⫺0.104 0.191 1.000
BSize 0.097 0.092 ⫺0.007 0.149 0.428 0.107 0.032 ⫺0.169 1.000
IND 0.289 0.189 0.277 0.210 0.227 0.119 0.412 0.257 ⫺0.284 1.000
DOWN ⫺0.355 ⫺0.259 ⫺0.209 ⫺0.367 ⫺0.081 0.134 0.026 ⫺0.217 0.059 ⫺0.138 1.000
IOWN 0.339 0.106 0.311 0.323 0.034 ⫺0.065 0.139 0.258 ⫺0.051 0.164 ⫺0.587 1.000
SIZE 0.477 0.274 0.574 0.258 0.326 ⫺0.014 0.552 0.212 0.139 0.237 ⫺0.073 0.352 1.000
ROA ⫺0.155 0.032 ⫺0.271 ⫺0.068 ⫺0.183 ⫺0.189 ⫺0.248 ⫺0.065 ⫺0.218 ⫺0.216 ⫺0.077 ⫺0.257 ⫺0.526 1.000

Notes: ACS ⫽ audit committee size; ACI ⫽ audit committee independence; ACM ⫽ audit committee meetings; ACFE ⫽ audit committee financial
expertise; BSIZE ⫽ board size; IND ⫽ independent non-executive directors; DIROWN ⫽ director ownership; IOWN ⫽ institutional ownership; SIZE ⫽
company size; ROA ⫽ return on assets
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Overall IC disclosures (Model 1) Internal capital (Model 2) External capital (Model 3) Human capital (Model 4)
Variables Coefficient Significance Coefficient Significance Coefficient Significance Coefficient Significance

ACSIZE 1.179902 0.0304** ⫺1.91374 0.000*** 1.294981 0.0062*** 3.02845 0.0017***


ACIND 6.943659 0.0487** ⫺5.33283 0.1154 9.280271 0.1132 11.99924 0.000***
ACFE 3.094696 0.000*** 2.85949 0.0016*** 9.424921 0.000*** ⫺4.43917 0.0075***
ACMEETING 0.9015 0.000*** 0.586001 0.000*** 0.600167 0.000*** 1.470537 0.000***
BSIZE 0.262727 0.3919 1.090543 0.000*** ⫺0.41198 0.1815 0.550152 0.152
IND 2.982873 0.6402 16.07335 0.0007*** ⫺2.23854 0.8135 0.911964 0.8424
DIROWN ⫺0.13138 0.000*** ⫺0.16296 0.000*** ⫺0.06775 0.000*** ⫺0.18836 0.000***
IOWN 0.01225 0.4038 ⫺0.07097 0.0269** 0.007801 0.6067 0.07115 0.000***
SIZE 1.706113 0.000*** 25.61725 0.000*** 2.987026 0.000*** ⫺0.209 0.6043
ROA 11.55312 0.0431** 2.264514 0.000*** 1.625694 0.8088 14.56572 0.2868
R2 0.461 0.24 0.442 0.369
Adjusted R2 0.423 0.186 0.403 0.325
F-statistic 12.136 4.477 11.242 8.321
Probability (F-statistic) 0.000 0.000 0.000 0.000

Notes: ACSIZE ⫽ audit committee size; ACIND ⫽ audit committee independence; ACFE ⫽ audit committee financial expertise; ACMEETING ⫽ audit
committee meetings; BSIZE ⫽ board size; IND ⫽ independent non-executive directors; DIROWN ⫽ director ownership; IOWN ⫽ institutional ownership;
SIZE ⫽ company size; ROA ⫽ return on assets; *** significant at the 1% level; ** significant at the 5% level
773

quality of IC
Table VII.
attributes
committee
Role of audit

committee attributes
disclosure and audit
Panel least square –
MAJ information towards hidden values of a firm. In addition, large groups tend to be
30,8/9 resourceful and are able to cover individual weaknesses, thus resulting in an enhanced
monitoring role. One possible explanation for the negative association between internal
capital disclosures and audit committee size is that perhaps the focus of the committee
was to enhance the outside outlook of the companies to address the surrounding
regulatory attention, hence opting to release more external and human capital-related
774 disclosures at the expense of internal capital information.
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Audit committee independence (ACIND) is shown to have a significant positive


relationship with the overall amount of IC disclosures and human capital disclosures at
the 1 and 5 per cent significance levels, respectively. Audit committee independence is
neither associated with external nor internal capital disclosures. The results, therefore,
provide partial support for H2 and are consistent with prior research (Akhtaruddin and
Haron, 2010). However, the results are not consistent with the findings by Li et al. (2012)
who reported no significant association between audit committee independence and IC
disclosure practices in the UK, seemingly due to the policy changes in Malaysia which
could have improved the role of audit committee independence in IC information. Prior
studies in Malaysia predating the Revised Code showed audit committee independence
as a significant determinant of financial reporting misstatements (Abdullah et al., 2010),
with others showing no significant impact in the financial reporting process (Abdul
Rahman and Ali, 2006; Mohamad et al., 2012). The improved significant role of audit
committee independence in the overall amount of IC disclosures, and human capital
disclosures in particular, reported in this study is encouraging and consistent with the
expectations of the Revised Code that the role of audit committee is to disseminate useful
information to stakeholders. Following recent criticisms towards the role of outside
directors in terms of their actual independence and passive role in corporate reporting
quality in the Malaysian corporate environment (Abdul Rahman and Ali, 2006;
Abdullah et al., 2010; Mohamad et al., 2012), the independent directors might have
become alert in these surrounding criticisms and regulatory changes and seem to be
performing their monitoring role to perhaps legitimise their perceived role.
A relatively new audit committee feature is the mandatory requirement of financial
expertise within the audit committee structure. Financial expertise (ACFE) is shown to
have a significant positive relationship with the overall amount of IC disclosures,
internal capital as well as external capital disclosures at the 1 per cent significance
levels, but the association is shown to be negative in relation to human capital
disclosures. The negative sign between financial expertise and human capital
disclosures aside, the results, overall, provide support to H4. The positive association
between financial expertise and the overall IC disclosures, internal and external capital
disclosures is consistent with the findings by Akhtaruddin and Haron (2010) who
showed a positive association between the presence of a financial expert within the audit
committee and the level of voluntary disclosures in Malaysia, but is inconsistent with
the observations by Li et al. (2012) in the UK who reported a negative relationship
between financial expertise and only internal capital disclosures.
Turning to audit committee meetings (ACMEETINGS), the findings reveal that the
frequency of audit committee meetings have a significant positive relationship with the
overall IC disclosures as well as all three IC disclosure categories at the 1 per cent
significance level. The findings provide strong support to H3 and are consistent with the
observations by Li et al. (2012) in the UK. The results, however, are not in line with the
findings by Abdul Rahman and Ali (2006) and Mohamad et al. (2012) who found no Role of audit
association between audit committee meetings and financial reporting quality in committee
Malaysia before the Revised Code. As a result, audit committees seem to have become
aware of the recent public attention towards their commitment in discharging their roles
attributes
effectively, which could have resulted in an improved role of audit committees in
corporate reporting quality.
In terms of the control variables, board size (BSIZE) and board independence (IND) 775
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are positive and significant at the 1 per cent level, but with only internal capital
disclosures. Director ownership (DIROWN) is negative and significant at the 1 per cent
level in relation to the overall as well as all IC disclosure categories. The negative
association between director ownership and voluntary disclosures is consistent with
most previous research (Mohd Ghazali and Weetman, 2006), as most owner-managed
companies tend to disclose less information due to the owners’ ability to gain
information through informal channels. Institutional ownership (IOWN) is negative and
significant at the 5 per cent level in explaining internal capital disclosure while the
association is positive and significant at the 1 per cent level in relation to human capital
disclosures, suggesting that institutional ownership encourages additional human
capital disclosures. Firm size (SIZE) is shown to be positive and significant at the 1 per
cent level in relation to the overall as well as internal and external capital disclosures,
consistent with most previous studies. Profitability (ROA) is also positive and
significant at the 1 and 5 per cent level in association with the overall IC information and
internal capital disclosures, respectively.

6.2 Robustness tests and discussion of results


The previous regression models showed that the quality of IC information, using a
detailed scoring scheme of IC information, has a strong positive association with audit
committee characteristics, with the results holding largely for IC disclosure components
of internal, external and human capital. To ascertain such an association, the same audit
committee attributes were regressed against the extent (presence/absence) of IC
information, this time using an alternative measure of IC information. The results
tabulated in Table VIII are largely similar to the previous models when the detailed
scoring scheme (quality of IC information) was used, with the findings showing that all
audit committee characteristics have a strong positive association with the overall
amount of IC information. In terms of IC disclosure categories, the results also reveal
that audit committee attributes are genuine determinants of the extent of IC information.
The results are robust to controls for other impact factors such as the overall board size
and independence, institutional and director ownership as well as firm size and
profitability.
This study reveals interesting findings compared to prior studies in Malaysia and
elsewhere. The results indicate that the audit committee function is strongly linked with
IC information disclosure practices. Although Li et al. (2012) provided some preliminary
insights into the role of audit committee attributes in IC information in the UK, their
findings revealed that only certain aspects of audit committee such as size and meetings
enhance IC disclosures. Similarly, studies in Malaysia predating the Revised Code
showed a passive role of audit committee attributes in corporate reporting quality
(Abdul Rahman and Ali, 2006; Mohamad et al., 2012). This study, which examines the
role of audit committees in IC information following policy changes, shows that all audit
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776
MAJ
30,8/9

extent of IC
Table VIII.
Panel least square –

disclosure and audit


committee attributes
Overall IC disclosures (Model 1) Internal capital (Model 2) External capital (Model 3) Human capital (Model 4)
Variables Coefficient Significance Coefficient Significance Coefficient Significance Coefficient Significance

ACSIZE 2.526754 0.0007*** ⫺0.88937 0.3623 3.090587 0.0003*** 4.038828 0.0007***


ACIND 13.85716 0.0051*** 7.807468 0.0747* 16.90038 0.0809* 14.04804 0.000***
ACFE 5.025028 0.0587* 7.219538 0.0169** 18.13098 0.000*** ⫺12.2986 0.000***
ACMEETING 1.704068 0.000*** 1.049963 0.000*** 1.518081 0.000*** 2.350667 0.000***
BSIZE 1.120382 0.0037*** 2.785283 0.000*** ⫺0.23821 0.5481 1.699755 0.0017***
IND 11.31438 0.1074 18.87825 0.000*** ⫺0.2769 0.9844 20.52913 0.000***
DIROWN ⫺0.28156 0.000*** ⫺0.3201 0.000*** ⫺0.19263 0.000*** ⫺0.36477 0.000***
IOWN 0.058412 0.0984* ⫺0.04188 0.4747 0.035847 0.1669 0.150303 0.0025***
SIZE 3.324211 0.000*** 3.23781 0.000*** 5.32759 0.000*** 0.947633 0.139
ROA 26.79134 0.0009*** 41.00633 0.0011*** 9.925641 0.3985 38.14143 0.1527
R2 0.502 0.284 0.505 0.379
Adjusted R2 0.467 0.234 0.469 0.335
F-statistic 14.319 5.637 14.466 8.657
Probability (F-statistic) 0.000 0.000 0.000 0.000

Notes: ACSIZE ⫽ audit committee size; ACIND ⫽ audit committee independence; ACFE ⫽ audit committee financial expertise; ACMEETING ⫽ audit
committee meetings; BSIZE ⫽ board size; IND ⫽ independent non-executive directors; DIROWN ⫽ director ownership; IOWN ⫽ institutional ownership;
SIZE ⫽ company size; ROA ⫽ return on assets; *** significant at the 1% level; ** significant at the 5% level; * significant at the 10% level
committee attributes have a strong positive link with the overall amount of IC Role of audit
information, suggesting that the mandatory exercise may have improved the role of the committee
audit committee function in disclosure of non-financial information. The improved role
of audit committees can also be attributed to the ongoing developments towards
attributes
non-financial information disclosure practices in the Malaysian business environment.

777
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7. Conclusion
The objective of this study is to examine the role of audit committee attributes in the
communication of non-financial information over a three-year period (2008 to 2010),
with a focus on IC information. The time frame examined corresponds to “soon after”
significant policy changes in the Malaysian corporate environment in which the audit
committee function was mandated. The study was motivated to examine whether the
audit committee function, particularly following the mandatory exercise, extends to
disclosure practices of non-financial information. This study argues that, given the
structure of the modern knowledge economy and investors’ dissatisfaction over the
traditional financial statements, the audit committee function can have an assurance
role in non-financial information disclosure practices. The examination involved
analyses of corporate annual reports to capture IC information as well as audit
committee attributes.
The results reveal a significant increasing trend of the overall amount of IC
disclosures over the three-year period. In terms of IC subcomponents, although external
capital information is the highest disclosed category, only human capital disclosures
increased significantly over time, showing a gradual shift towards reporting
information on human capital developments seemingly due to the government’s
strategies to transform the country’s economy into a knowledge-based one through
human capital capacity building. In terms of the role of audit committee function in
disclosure of IC information, the findings, robust to various IC information measures
and controls for ownership structure and firm-specific characteristics, showed a strong
relationship between the audit committee function and the overall amount of disclosed
IC information as well as the subcategories of IC disclosures.
The findings of this study provide a number of interesting implications for
policymakers and academics. For policymakers, the findings suggest that the role of
audit committees can be extended to ensure the quality of non-financial information, and
not just the financial reporting process. Internationally, an integrated corporate
reporting initiative, aimed to balance financial and non-financial information (i.e.
Integrated Reporting), is commended, with some emerging economies such as South
Africa already mandating listed companies to produce an integrated annual report
(Abeysekera, 2013) with a view to enhance the usefulness of business reporting
practices. Policymakers in Malaysia should, therefore, build on the recent regulatory
changes and encourage audit committees to ensure the quality of the overall reporting
process to include social, environmental, intellectual as well as financial capital of a firm.
For academics and accounting educators, contrary to the widely held assumption
that the audit committees’ function is to detect financial reporting misstatements, the
results of this study show that audit committees’ role extends to disclosures of
non-financial information such as IC. This implies that audit committees can play an
integral role towards the recent calls for a comprehensive corporate reporting.
Therefore, the results suggest that perhaps accounting educators should start to
MAJ broaden students’ views towards the scope of corporate reporting, such that corporate
30,8/9 reporting is not necessarily only financial capital but also extends to cover other aspects
of organisational capital such as social and IC. In terms of theoretical implications, the
findings seem to support the grounds of both agency and legitimacy theories in
regulatory reforms settings. Agency theory propounds that the audit committee
function offers a monitoring role that can potentially enhance the quality of corporate
778 reporting, with legitimacy theory suggesting that companies adopt different disclosure
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and governance strategies to respond to changes in the marketplace. Hence, these


theories, originally found to be applicable in a widely held ownership structure setting,
explain the disclosure and governance practices in closely held environments such as
the Malaysian business environment.
The practical implications notwithstanding, the study is subject to a number of
limitations. First, the focus of this study is restricted to the role of audit committee
characteristics in only disclosure of IC information, and not other non-financial
information disclosure practices, such as environmental and social capital. Future work
should examine the role of the audit committee function in the process of integrated
corporate reporting. Future studies should also include additional audit committee
attributes such as governance and industry expertise of the audit committee members.
A second limitation arises from the use of content analysis. Although this study made
attempts to substantially reduce the subjectivity concerns of content analysis through
reading several annual reports twice as well as involving another researcher in the
coding process, this approach is still inherently subject to a plethora of subjectivity
problems. Future studies should consider undertaking case studies, rather than the
cross-sectional approach, to deeply investigate the role of audit committee in IC
disclosures, or perhaps the overall corporate reporting quality. Finally, while this study
relied on empirical findings of prior literature, the study did not provide a “before and
after” the policy changes assessment to ascertain whether the observed strong
association between audit committee attributes and IC disclosures in this study is due to
the recent policy changes. An opportunity for future research, therefore, arises from
examining the role of audit committee function in non-financial information disclosure
practices before and after the Revised Code of corporate governance in Malaysia.

Notes
1. The Revised Code in 2007 has strengthened the audit committee and internal audit functions
of public listed companies. For instance, to ensure the effectiveness of the audit committees,
executive directors are no longer allowed to become members of the audit committee. In
addition, continuous engagement between the chairman of the audit committee and senior
management of the company is greatly emphasized to address relevant issues affecting the
company in a timely manner (The Revised MCCG, 2007, p. 16).
2. The five categories of the NACRA award are Overall Excellence Awards, Industry Excellence
Awards for Listed Companies, Presentation Awards, Corporate Social Responsibility Awards
and the Special Award for Non-Listed Organisations.
3. Results of the reliability tests did not show major differences between the first and second
reading of the selected annual reports. Another researcher was also involved in the coding
process, and any arising discrepancies were subjected to further scrutiny.
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Appendix Role of audit
committee
attributes
Section 1 Internal capital
A Intellectual property
1 Patent
2 Copyright 783
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3 Trademarks
B Corporate culture
4 Corporate culture
5 Management philosophy
6 Information systems
7 Leadership
8 Innovation
9 Research and development

Section 2 External capital


C Information on brands
10 Brand
11 Brand recognition
12 Brand development
13 Goodwill
D Customer base
14 Information relating to customers
15 Customer satisfaction
16 Customers loyalty
17 Customer appreciation
18 Customer retention
19 Customer service/support
20 Customer feedback system
21 Special care counters for old/disabled customers
22 Distribution channels
23 Customer market share
E Partnership
24 Business collaboration
25 Licensing agreements
26 Joint venture

Section 3 Human capital


F Competence
27 Employee know-how
28 Education
29 Vocational qualification
30 Work-related knowledge Table AI.
31 Knowledge sharing The IC disclosure
(continued) index
MAJ 32 Motivation
30,8/9 33 Employee expertise
34 Expert teams
35 Specialist
36 Training
37 Cultural diversity
784
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G Personnel
38 Human resources (number)
39 Employee satisfaction
Table AI. 40 Employee retention

About the author


Abdifatah Ahmed Haji holds MSc degree in Accounting from the International Islamic University
Malaysia. His research interests are in the areas of intellectual capital and developments in
corporate reporting. He has published several articles in international journals such the
International Journal of Disclosure and Governance, Journal of Intellectual Capital, Journal of
Human Resource Costing & Accounting, Journal of Humanomics, Asian Review of Accounting,
Managerial Auditing Journal, Journal of Banking Regulation and others. Abdifatah Ahmed Haji
can be contacted at: fitka7@hotmail.com

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