Internal Audit, Board of Director and Environmental, Social, and Governance (ESG) Disclosure among Public Listed Companies in Malaysia
Keywords:
Environmental, Social, and Governance (ESG), Internal Audit, Board of Directors, Public Listed Company, ESG DisclosureAbstract
This study examined ESG disclosure among Public Listed Companies (PLCs) in Malaysia for 2022, with three objectives: measuring ESG disclosure levels, assessing links between internal audit and board dimensions, and identifying key variables affecting ESG disclosure. Data from annual reports covering 241 companies on Bursa Malaysia’s Main Market (2020-2022) were analysed, with 148 companies meeting ESG reporting criteria and disclosure levels assessed via a Dichotomous Method Index. Findings revealed that most companies achieved high levels of environmental, social, and governance transparency. Positive relationships were observed between ESG disclosure and internal audit factors (independence, incentives, efficiency) and board variables (size, independence, leadership structure). Internal Audit Efficiency emerged as the most influential variable, reinforcing its role in transparency, with Leadership Structure also showing a positive impact. Using Agency Theory, this study underscored the importance of internal audit effectiveness and governance structures in promoting robust ESG disclosure. Recommendations include enhancing corporate commitment to ESG transparency, improving audit processes, and establishing clear governance structures. Emphasis on the Dichotomous Method Index highlighted the systematic measurement of disclosure, providing valuable insights for policy improvements and sustainable practices.
References
Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40
Abdelsalam, Omneya, & Street, Donna (2007). Corporate governance and the timeliness of corporate internet reporting by U.K. listed companies. Journal of International Accounting, Auditing and Taxation, 16, 111-130.
Abdullah, Haslinda & Valentine, Benedict (2009). Fundamental and Ethics Theories of Corporate Governance. Middle Eastern Finance and Economics. 4(4), 88-96.
Ahmad, H., Yaqub, M., & Lee, S. H. (2023). Environmental-, social-, and governance-related factors for business investment and Sustainability: A scientometric review of global trends. Environment, Development and Sustainability, 26(2), 2965-2987. https://doi.org/10.1007/s10668-023-02921-x
Albitar, K., Abdoush, T., & Hussainey, K. (2022). Do corporate governance mechanisms and ESG disclosure drive CSR narrative tones? International Journal of Finance & Economics, 28(4), 3876–3890. https://doi.org/10.1002/ijfe.2625
ALshbiel, S. O., & AL-Zeaud, H. A. (2012). Management support and its impact on performance of internal auditors at Jordanian public industrial shareholding companies. Global Journal of International Business Research, 5(5), 52.
Anderson, Francis, J.R. & Stokes, D.J. (1993), “Auditing, directorships and the demand for monitoring”, Journal of Accounting and Public Policy, 12(4), 353-375.
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt. Journal of Accounting and Economics, 37(3), 315-342.
Arayssi, M., Jizi, M., & Tabaja, H. H. (2019, October 28). The impact of board composition on the level of ESG disclosures in GCC countries. Sustainability Accounting, Management and Policy Journal. https://doi.org/10.1108/SAMPJ-05-2018-0136
Arouri, H., Hossain, M., & Muttakin, M. B. (2011). Ownership structure, corporate governance and bank performance: evidence from GCC countries. Corporate Ownership and Control, 8(4 D), 365-372.
Badara, M. S. (2012). The relationship between Risk Management and internal audit effectiveness at local government level. Journal of Social and Development Sciences, 3(12), 389–396. https://doi.org/10.22610/jsds.v3i12.727
Bank Negara Malaysia. (2024). 2024 Climate Risk Stress Testing Exercise. https://www.bnm.gov.my/documents/20124/3770663/DP_2024_CRST.pdf
Baxter, R., Bedard, J. C., Hoitash, R., & Yezegel, A. (2013). Enterprise risk management program quality: Determinants, value relevance, and the financial crisis. Contemporary Accounting Research, 30(4), 1264-1295. https://onlinelibrary.wiley.com/doi/10.1111/j.1911-3846.2012.01194.x
Beasley, M. S. (1996). An empirical analysis of the relation between the board of director composition and financial statement fraud. Accounting Review, 443-465.
Bebczuk, R. N. (2005). Corporate governance and ownership: measurement and impact on corporate performance and dividend policies in Argentina. Documentos de Trabajo.
Bermudez Cuevas, J., Mörtsjö, A., & Änilane, V. (2015). The Process of Internal Audit‘s Involvement with Enterprise Risk Management: The Influence on Internal Audit‘s Objectivity and Independence.
Carpenter, M.A., & Westphal, J. D. (2001). The strategic context of external network ties: Examining the impact of director appointments on board involvement in strategic decision making. Academy of Management Journal, 44, 639-660. http://dx.doi.org/10.2307/3069408
Chebbi, K., & Ammer, M. A. (2022). Board composition and ESG disclosure in Saudi Arabia: The moderating role of Corporate Governance Reforms. Sustainability, 14(19), 12173. https://doi.org/10.3390/su141912173
Cohen, A., & Sayag, G. (2010). The effectiveness of internal auditing: an empirical examination of its determinants in Israeli organisations. Australian Accounting Review, 20(3), 296-307.
Daily, C., Dalton, D., & Cannella, A. (2003). Corporate governance: Decades of dialogue and data. Academy of Management Review, 28(3), 371-382.
DeFond, M.L., Hann, R.N. & Hu, X. (2005), “Does the market value financial expertise on audit committees of boards of directors?”, Journal of Accounting Research, 43(2), 153-193.
Dicuonzo, G., Donofrio, F., Ranaldo, S., & Atti, V. D. (2022). The effect of innovation on environmental, social and governance (ESG) practices. Meditari Accountancy Research, 30(4), 1191–1209. https://doi.org/10.1108/medar-12-2020-1120
Dr Negin Vaghefi. (2023, July 26). ESG Disclosures among Public-listed Companies Based in Penang. Penang Institute. https://penanginstitute.org/publications/issues/esg-disclosures-among-public-listed-companies-based-in-penang/
Endaya, K. A., & Hanefah, M. M. (2016). Internal auditor characteristics, internal audit effectiveness, and moderating effect of senior management. Journal of Economic and Administrative Sciences, 32(2), 160-176.
Farrakhova, I. (2022). How CEO affects ESG and the Financial Performance of Companies. Journal of Corporate Finance Research, 16(4), 93–118. https://doi.org/10.17323/j.jcfr.2073-0438.16.4.2022.93-118
Garcia-Meca, Emma., Martínez-Ferrero, Jennifer., & Sanchez, Isabel., (2015). Board diversity and its effects on bank performance: An international analysis. Journal of Banking & Finance. 53. 202-214. 101016/j.jbankfin.2014.12.002.
Ghosh, S. (2006). Do board characteristics affect corporate performance? Firm-level evidence for India. Applied Economics Letters, 13(7), 435-443.
Handajani, L., Muhsyaf, S. A., & Sokarina, A. (2023). The effectiveness of corporate governance and whistleblowing system on fraud disclosure. Jurnal Ilmiah Akuntansi Dan Bisnis, 18(1), 29. https://doi.org/10.24843/jiab.2023.v18.i01.p03
Hayes, A. (2023, July 27). How to tell if a company has high ESG scores. Investopedia. https://www.investopedia.com/company-esg-score-7480372#citation-1
Holt, T. P. (2012). The effects of internal audit role and reporting relationships on investor perceptions of disclosure credibility. Managerial Auditing Journal, 27(9), 878-898.
Holtz, L., & Sarlo Neto, A. (2014). Effects of board of directors’ characteristics on the quality of accounting information in Brazil. Revista Contabilidade & Finanças, 25(66), 255–266. https://doi.org/10.1590/1808-057x201412010
Jennings, R. (1987). Unsystematic security price movements, management earnings forecasts, and revisions in consensus analyst earnings forecasts. Journal of Accounting Research, 25(1),90-110.
Jonsdottir, B., Sigurjonsson, T. O., Johannsdottir, L., & Wendt, S. (2022). Barriers to using ESG data for Investment Decisions. Sustainability, 14(9), 5157. https://doi.org/10.3390/su14095157
K. Johl, S., Kaur Johl, S., Subramaniam, N., & Cooper, B. (2013). Internal audit function, board quality and financial reporting quality: evidence from Malaysia. Managerial Auditing Journal, 28(9), 780-814.
Kamaludin, K., Ibrahim, I., Sundarasen, S., & Faizal, O. (2022). ESG in the boardroom: Evidence from the Malaysian market. International Journal of Corporate Social Responsibility, 7(1). https://doi.org/10.1186/s40991-022-00072-2
Kang, H., Cheng, M., & Gray, S.J. (2007). Corporate governance and board composition: Diversity and independence of Australian boards. Corporate Governance: An International Review, 15(2), 194-207. http://dx.doi.org/10.1111/j.1467-8683.2007.00554.x
Kelton, A. S., & Yang, Y. W. (2008). The impact of corporate governance on Internet financial reporting. Journal of Accounting and Public Policy, 27(1), 62-87.
Khanchel, I., & Lassoued, N. (2022). ESG disclosure and the cost of capital: Is there a ratcheting effect over time? Sustainability, 14(15), 9237. https://doi.org/10.3390/su14159237
Kinney, W. (2000). Information Quality Assurance and Internal Control. Boston, MA: Irwin McGraw-Hill.
Klein, A. (2002). Audit committee, board of director characteristics, and earnings management. Journal of Accounting and Economics, 33(3), 375-400.
Kuen, Y. L. (2022, December 16). How Malaysia scores on ESG. The Star. Retrieved January 24, 2023, from https://www.thestar.com.my/business/business-news/2022/08/02/how-malaysia-scores-on-esg
Kyereboah-Coleman, A., & Biekpe, N. (2006). The relationship between board size, board composition, CEO duality and firm performance: Experience from Ghana. Corporate Ownership and Control, 4(2), 114-122.
Lee, B. (2023, June 9). Promoting Malaysia’s ESG Agenda. The Star. https://www.thestar.com.my/news/nation/2023/06/09/promoting-malaysias-esg-agenda
Lin, S., Pizzini, M., Vargus, M., & Bardhan, I. R. (2011). The role of the internal audit function in the disclosure of material weaknesses. The Accounting Review, 86(1), 287-323.
Martinek, P., (2005). SOX ‗Catch 22: Certifying Controls Later Found Weak, Compliance Week, February 22.
Mehran, H., & Adams, R. (2003). “Is corporate governance different for bank holding companies?”, Economic Policy Review, 9(1), 123-142.
Mihret, D. G., & Grant, B. (2017). The role of internal auditing in corporate governance: A Foucauldian analysis. Accounting, Auditing & Accountability Journal, 30(3), 699–719. https://doi.org/10.1108/aaaj-10-2012-1134
Moon, E. (2023, October 27). Research: Firms with diverse boards achieve higher ESG ratings. Harvard Business Review. https://hbr.org/2023/10/research-firms-with-diverse-boards-achieve-higher-esg-ratings
Okafor, C. A., & Ogiedu, K. (2011). Investors assessment of the credibility of management disclosures. JORIND, 9(2), 366-376.
Onay, A. (2021). Factors affecting the Internal Audit Effectiveness: A research of the Turkish Private Sector Organizations. Ege Akademik Bakis (Ege Academic Review), 1–15. https://doi.org/10.21121/eab.873867
Peasnell, K. V., Pope, P. F., & Young, S. (2005). Board monitoring and earnings management: Do outside directors influence abnormal accruals?. Journal of Business Finance & Accounting, 32(7‐8), 1311-1346.
Rahman, N., & Post, C. (2012). Measurement issues in environmental corporate social responsibility (ECSR): Toward a transparent, reliable, and construct valid instrument. Journal of Business Ethics, 105(3), 307-319.
Romano, M., Cirillo, A., Favino, C., & Netti, A. (2020, November 9). ESG (environmental, social and governance) performance and Board Gender Diversity: The moderating role of CEO Duality. Sustainability, 12(21), 9298. http://dx.doi.org/10.3390/su12219298
Sanchez, I. M. G., & Noguera-Gámez, L., (2017). Integrated reporting and stakeholder engagement: The effect on information asymmetry. Corporate Social Responsibility and Environmental Management, 24(5), 395-413.
Sawyer, L. B. (1988). Internal Auditing, The Institute of Internal Auditors, Altamonte Springs.
Schneider, A., & Wilner, N. (1990). A test of audit deterrent to financial reporting irregularities using the randomized response technique. Accounting Review, 668-681.
Sekaran, U. & Bougie, R. (2014) Research Methods for Business: A Skill-Building Approach. 6th Edition, John Wiley & Sons, Haddington.
Sunarti, Halid., Radziah, Mahmud., Mohd, Taufik., Mohd., Suffian., & Rahayu, Abdul., Rahman., (2022). Does firm’s board affects ESG? Malaysian evidence. International Journal of Academic Research in Accounting, Finance and Management Sciences, 12(1). https://doi.org/10.6007/ijarafms/v12-i1/11609
Tai, V. W., Lai, Y.-H., & Yang, T.-H. (2020). The role of the Board and the Audit Committee in corporate risk management. The North American Journal of Economics and Finance, 54, 100879. https://doi.org/10.1016/j.najef.2018.11.008
Wahjono, Iswanto, A. C., Kefi, B. S., & Subchan. (2023). Study of the timeliness of annual financial reporting for public companies on the Indonesia Stock Exchange during the COVID-19 pandemic. Asian Journal of Economics, Business and Accounting, 31–38. https://doi.org/10.9734/ajeba/2023/v23i3923
Wang, W., Yu, Y., & Li, X. (2022, September 1). ESG performance, Auditing Quality, and investment efficiency: Empirical evidence from China. Frontiers in Psychology, 13, https://doi.org/10.3389/fpsyg.2022.948674
Wilowski, M. (2023, September 27). Three-quarters of firms globally aren’t ready for ESG Assessments, KPMG says. Investopedia. https://www.investopedia.com/up-to-three-quarters-of-firms-globally-are-not-ready-for-esg-requirements-kpmg-says-7974771#citation-5
Wong, W. C., Ahmad, A. H., Mohamed-Arshad, S. B., Nordin, S., & Adzis, A. A. (2022, March 22). Environmental, social and governance performance: Continuous Improvement Matters. Malaysian Journal of Economic Studies. https://doi.org/10.22452/MJES.vol59no1.3
Zhang, Y., & Wei, L. (2022). Philanthropy, Audit Firms Culture and Auditor Independence. Plos One, 17(11). https://doi.org/10.1371/journal.pone.0277567
Zhao, Y., Elahi, E., Khalid, Z., Sun, X., & Sun, F. (2023, January 12). Environmental, social and governance performance: Analysis of CEO power and corporate risk. Sustainability, 15(2). https://doi.org/10.3390/su15021471
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Farah Fatirah Zainal, Mahadir Ladisma @ Awis
This work is licensed under a Creative Commons Attribution 4.0 International License.
