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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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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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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.
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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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.
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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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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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.
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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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
772
MAJ
30,8/9
Table VI.
Correlation analysis
Variables OICD INCD EXCD HCD ACS ACI ACM ACFE BSIZE IND DOWN IOWN Size ROA
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
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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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.
776
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extent of IC
Table VIII.
Panel least square –
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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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
G Personnel
38 Human resources (number)
39 Employee satisfaction
Table AI. 40 Employee retention
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