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Abstract: This study examines risk reporting in annual reports of Malaysian listed companies. The
mandatory and voluntary disclosures of risk information are analyzed and the authors examine whether a
relationship exists between company size, leverage, and industry type and risk disclosure levels. 150 listed
companies from five industries are selected as sample. Content analysis and risk disclosure index of dichotomous
measurement are used in data collection. Overall the results indicate that level of risk information disclosed in the
annual reports is still minimal. OLS (Ordinary least squares) regression analysis indicates that the level of risk
information disclosure is positively associated with size and not with leverage. However, a mixed result has been
found for industry type; where only property industry shows a significant relationship with level of risk disclosure,
and not for the other industries. This study contributes to financial reporting literature in relation to risk reporting,
particularly the practice of Malaysian companies. Findings from this study are also useful to regulators and
accounting standard setting body to assess the level of compliance to regulations and standards relating to risk
reporting by these companies. More studies are required to further understand the importance of risk information
disclosure, such as risk disclosure within specific industry, cross-country studies and usefulness of risk
information disclosure from the stakeholders perspectives.
Key words: risk; reporting; annual reports; listed companies; risk
1. Introduction
High-profile corporate failure caused by accounting misdeed around the globe including Malaysia has
increased concerns on the reliability and transparency of the information reported in the companys most
influential report, which is corporate annual report. Stakeholders required information on the risks affecting a
companys strategies and the actions management plans to capitalize on emerging opportunities as well as to
minimize the risk of failures are disclosed (Beretta & Bozzolan, 2004). Risk disclosure is a focal issue of
corporate communication but managers have been seen to omit this information in their reports (Thuelin,
Henneron & Touron, 2006). One common criticism of financial statements is that not sufficient disclosures about
risks and uncertainties (Schrand & Elliot, 1998). Companies are being less transparent if reporting their risks.
Risk information disclosures in annual reports become more crucial due to current trend of accounting
Ruhaya Atan, assoc prof, Ph.D. in accounting and finance (The University of Birmingham, UK), Faculty of Accountancy,
Accounting Research Institute, Universiti Teknologi MARA; research fields: financial accounting & reporting.
Enny Nurdin Sutan Maruhun, lecturer, Faculty of Accounting, Universiti Teknologi MARA; research field: financial reporting.
Wan Hasnah Wan Abdul Kadir, lecturer, Master in business administration (Phillits University, Oklahoma, USA), Finance
Department, Universiti Teknologi MARA; research field: finance.
Corresponding Author: Kamaruzaman Jusoff, professor, Ph.D. in forest engineering survey (Cranfield University), Universiti
Putra Malaysia; research field: forest surveying.
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irregularities involving high-profile companies such as Enron, Parmalat, WorldCom, and Xerox just to name a few.
Accounting irregularities has given an adverse impact on the trustworthiness of companys annual report. The
inclinations of accounting irregularities were also observed in Malaysia; Perwaja Steel, Sime Darby, Technology
Resources Industries Berhad, Malaysia Airline, and Transmile are few examples. People have lost confidence on the
reliability of information disclosed in annual report, therefore, companies need to regain peoples confidence through
greater disclosure and improve transparency that enable the users make appropriate judgments about a companys
performance (Linsley & Shrives, 2005). Good financial statements should include a clear identification of the major
risks facing the business and the steps that have been taken to deal with those risks (Anonymous, 2005).
Risk reporting and disclosures have become main concern of many international accounting standard-setters
and regulators. In October 2005, The International Accounting Standard Board (IASB) issued discussion paper
title Management Commentary (MC). The main objectives of this discussion paper are to enable investors to: (i)
interpret and assess the related financial statements in the context of the environment in which they operates: (ii)
assess what management views as the most important issues facing the entity and how it intends to manage those
issues; and (iii) assess the strategies adopted by the entity and the likelihood that those strategies will be
successful. Reporting on the key risks and uncertainties facing an entity, together with the commentary on
managements approach to them is a critical aspect of MC. IASB has also issued two standards, IAS 1:
Presentation of Financial Statement and IAS 32: Financial Instruments: Presentation, that require the company to
provide information on principal uncertainties faced and disclosure of information for some specific risks.
In the USA, legislator through the Sarbanes-Oxley Act (2002) emphasized disclosures on risks for quoted
companies. Companies are required to enhance financial disclosures of all material off-balance-sheet transaction,
arrangements, obligations and relationship between the issuer with others entities or persons that may have a
material current or future effect on financial conditions, changes in financial conditions, results of operations,
liquidity, etc. (Thuelin, et al., 2006).
Malaysian listed companies need to report risks following requirements by the regulators and accounting
body. Bursa Malaysia, Securities Commission (SC) and Malaysian Accounting Standard Board (MASB) are
bodies responsible in regulating financial reporting of Malaysian listed companies. Rule 15.26(b) of Listing
Requirements issues by Bursa Malaysia requires a listed company to ensure that its board of directors makes a
statement in its annual report about the state of internal control of the company. The board should disclose in the
internal control statement whether there is an ongoing process of identifying, evaluating and managing the
significant risks faced by them.
Over the last 30 years, number of researches conducted on corporate reporting has been increasing and
majority of these studies focus mainly in general perspective of corporate disclosure (Linsley, Shrives & Crumpton,
2006). Researchers are concentrating on disclosure issues such as corporate and social responsibility and voluntary
disclosure of company. Limited numbers of studies are conducted to examine risk and risk management disclosure
in companys annual report. Previous literatures have shown that risk information is very important and disclosure
of this information in companys annual report is beneficial especially for users who depend on this report to make
decision. Majority of risk disclosure studies were conducted in countries such as United Kingdom, United States,
Canada, Italy and others. Unfortunately, only a handful of research that dealt with risk disclosure by Malaysian
companies were conducted, mainly as part of the general voluntary disclosure studies.
As such, this study aims to examine the current practice of Malaysian companies in reporting risk
information in annual report. Specifically, the objectives of this study are to determine:
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2. Literature review
2.1 Risk reporting
Literature on risk reporting is somewhat limited because most of the studies focus on issues such as corporate
social responsibility disclosures and general disclosures. Stanton and Stanton (2002) conducted a survey
reviewing 70 corporate disclosures studies published in the period 1990 to 2000. They found that none of the
research was conducted specifically examines risk disclosures. One of the reasons highlighted for limited number
of research conducted in this area is the difficulty in defining risk. Risk is used very broadly in everyday
language, no standard definition of risk is generally accepted and components of risks differ from one company to
another. Risk is subjective and it depends on the specific company business environment. Generally risk is defined
as the uncertainty associated with both potential gain and loss (Solomon, Solomon & Norton, 2000). In another
study, Linsley & Shrives (2006) defined risk disclosure as any information discloses to reader on any
opportunities, prospect, hazard, harm, threat or exposure that has already impacted or may give an impact upon
the company or management in future.
Disclosing and communicating risk to users of the financial report is very important. Risk and risk
management disclosures are potentially useful to company stakeholders because it will reduce information
asymmetries, promote transparency, and improve disclosure quality (Lajili & Zeghal, 2005). Currently limited
amount of risk information is disclosed in the annual report of company. Lack of information on risks facing
companies is one of the main weaknesses in the accounting information disclosed by firms (Cabedo & Tirado,
2004). Firms do not provide sufficient information on risk and risk management. It is argued by many researchers
that information disclosed is too brief, not sufficiently forward looking and insufficient for decision-making
purposes (Abraham and Cox, 2007; Beretta and Bozzolan, 2004). In order to promote greater disclosure on risk
and risk management, accounting bodies are taking responsibility in oversight of risk reporting and ensuring firms
collect and disseminate a greater amount of risk information (Abraham & Cox, 2007).
2.2 Mandatory and voluntary information disclosure
Information disclosure has been defined as the communication of information, quantitative and qualitative by
firms whether statutorily required or voluntary that facilitates the users in making informed economics decisions
(Gray, Meek & Roberts, 1995). In general, accounting information disclosed by a company can be categorized as
mandatory and voluntary information disclosure. Statutory disclosure is legal and regulatory requirements made
mandatory by regulatory agencies specifying the types of information firms have to disclose, either in the annual
reports or in other documents. If companies choose to disclose information in excess of the mandatory requirements,
which include accounting and other information that managers deem relevant to the needs of various stakeholders,
then, the excess information is considered as the voluntary disclosure (Gray, et al., 1995).
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It is argued that companies are already providing some risk information subject to mandatory disclosures for
instance information about the use of derivatives instruments. However, the disclosure risk information is limited
to specific areas. The regulations impose on certain types of risk concern primarily on financial instrument use
and risk exposure to financial and market risk (Lajili & Zeghal, 2005). Research by Linsley, et al. (2006) shows
that companies have already provided some risk information through their adherence to accounting standards;
however, the difficulty with such standards cause them to provide risk disclosures only in discrete areas. The
annual report does not present a coherent discussion of the risks that challenge the company and the actions taken
by the directors to manage those risks. As such, what is needed is a coherent risk statement discussing material
risks that the company confronted with and how those risks are managed (Linsley & Shrives, 2005).
Dissatisfaction with mandatory financial reporting has led investors, financial markets and other key
stakeholders to demand companies voluntarily provide more comprehensive information on their long-term
strategies and performance (Boesso & Kumar, 2007). The decision to provide voluntary information is made for a
variety of reasons that vary across companies, countries and stock market and, considerations often dominate the
disclosure decision (Roberts, 1991). The company voluntarily discloses information in order to facilitate clarity
and understanding to investors. Lack of clear, precise and accurate information can lead to under-pricing of a
firms stock. Therefore, disclosing reliable and precise information can reduce information risks about a
companys stock which in turn reduces the required return. As such, firms voluntarily disclose information in an
effort to shape the perceptions of market participants and other stakeholders and, hence to benefit from improved
terms of exchange with these parties (Graham, Harvey & Rajgopal, 2005).
2.3 Corporate characteristics affecting risk information disclosure
2.3.1 Size
Previous studies on general and risk disclosures reporting often found that a positive relationship exists
between the size of the company and the number of disclosures in annual reports (see Linsley & Shrives, 2006;
Linsley, et al., 2006; Abd. Ghaffar, Ibrahim & Zain, 2001; Berreta & Bozzolan, 2004; Hashim & Saleh, 2007;
Mohd Ghazali & Weetman, 2006). It is argued that larger firms are motivated to provide higher financial
disclosures as compared to smaller firms due to several reasons such as firstly, larger firms are likely to have
broad-based ownership, which would require more comprehensive and detailed disclosure to meet the information
needs of diverse groups of investors. Secondly, large firms are generally well established and they can afford to
provide detailed comprehensive information without the fear of their information being misinterpreted, which could
result in negative investors reaction (Abd. Ghaffar, et al., 2001). Agency costs are higher for larger firms because
shareholders are widespread and as a result, additional disclosure might reduce this cost. On the other hand, large
firms might be motivated to reduce the level of disclosure, more specifically the level of forward looking
information to avoid litigation costs (Aljifri & Hussainey, 2007). Size is a strong driver of risk disclosures; Berreta
& Bozzolan (2004) confirmed the size risk disclosure association for sample of Italian companies. Linsley &
Shrives (2006) also found a positive correlation between the volume of risk disclosures and company size.
2.3.2 Leverage
Jensen & Meckling (1976) argued that highly leveraged firms incur more monitoring costs and they seek to
reduce these costs by disclosing more information to satisfy the need of creditors. Findings from previous studies
indicated that there is a positive association between gearing and level of firm disclosures. Firms with higher debts
are generally under greater scrutiny by creditors to ensure that the firms are not violating debt covenants as such
this scrutiny would result in disclosure of more comprehensive information (Abd. Ghaffar, et al., 2001). Aljifri &
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Hussainey (2007) found that firms with high debt ratio (leverage) disclose more information to reduce their
finance costs. Abraham & Cox (2007) studied the determinants of narrative risk information in UK FTSE 100
annual reports and found a weak positive association between leverage and the amount of disclosure.
A different scenario was observed in Linsley & Shrives (2005) where they found no significant association to
exist between the number of risk disclosures and the level of company leverage. Meanwhile, Hashim & Saleh
(2007) found that the leverage has not appeared to be significant in explaining voluntary annual report disclosure.
As such, there were mixed results on the association between the two variables.
2.3.3 Industry
Type of industry as the determinant of corporate disclosure has been investigated in prior studies. Berretta &
Bozzolan (2004) argued that in risk disclosure study, the industrys effect on the level of disclosures could be
further emphasized because the technological and market constraints exerted by the competitive, industrial
environment on business models significantly influence the risk profile of companies. Hackston & Milne (1996)
found a significant association between the amount of disclosure and industry type for the New Zealand
companies. Boesso & Kumar (2007) who examined the factors affecting the voluntary disclosure practises of
companies in Italy and in the United States found a weak association between level of disclosure and industry.
However, previous studies have also found that type of industry is insignificantly associated with level of
disclosure, such as Aljifri & Hussainey (2007), and Berretta & Bozzolan (2004).
3. Research methodology
3.1 Research framework and hypotheses
The review of literature indicates that various factors have influenced the level of disclosures of information
by companies. Three factors have been identified to influence the level of risk information disclosure. It is
hypothesized that the company size, type of industry and leverage influence the level of mandatory and voluntary
disclosure of risk information.
Size
Leverage
Type of industry
Figure 1
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RD Score =
One of the objectives of this study is to examine the possible association between the level of risk
information disclosures and firm characteristics; size, leverage and industry.
Previous literatures on risk information disclosures have used many proxies to measure the size of a company
such as turnover, total assets, employee numbers and market capitalization. Hackston & Milne (1996) argued that
there is no theoretical reason to favour one measure over another. Linsley, et al. (2006) used total assets and
market capitalization in examining risk disclosure practices within annual reports of Canadian and UK banks.
Other studies on risk information disclosure measured size by the natural logarithm of company turnover
(Abraham & Cox, 2007; Linsley & Shrives, 2006). As such, this study used the natural logarithm of company
turnover in 2006 as a proxy to measure firms size. The data are logged to minimise the impact of extreme values
(Abraham & Cox, 2007).
Leverage is also measured in several ways as evidenced in prior studies on financial disclosures. The most
common measurements used to measure leverage is gearing ratio defined as total debts divided by total assets
(Abd. Ghaffar, et al., 2001; Aljifri & Hussainey, 2007; Abraham & Cox, 2007; Abdelghany, 2005). Mohd Ghazali
and Weetman (2006) and Hashim & Saleh (2007) in their study measured leverage using debt ratio which was
defined as long-term loans to shareholders fund. This study measures leverage using proxy of debt ratio, defined
by long-term loans to shareholders fund.
Many empirical studies have demonstrated that the level of firm disclosure is highly influenced by industry
(for example, Berreta & Bozzolan, 2004). Hackston & Milne (1996) argued that companies, whose economic
activities modify the environment for instance extractive industries, are more likely to disclose information about
their environmental impacts than are companies in other industries. As such it is also expected that certain
industry would disclose risk information better than others. Manaf, Atan & Mohamed (2006) in their studies on
environmental disclosures, however, found that there is no significant difference in the mean ranks between
different industrial sectors.
4. Results
4.1 Descriptive analysis
Table 1 shows the descriptive statistics of the sample companies. On average, the level of disclosure of total
risk information (RD Score1) is 44.24%. This means that on average, companies disclosed less than fifty percent
of the risk information to the users of the annual reports. This percentage is relatively low considering the
importance of risk information for the users decision-making. The highest percentage of disclosure for this
category is 66.67% and the lowest is 26.98%.
Mandatory risk information disclosure (RD Score2) is expected to be high due to legal implication for
non-compliance. Table 1 shows a higher mean (59.9%) compared to voluntary risk information disclosures. The
highest level of mandatory disclosure is 82.76% and only three companies have achieved 80% and above. They
are Gamuda Berhad, UEM Builders Berhad and Sime Darby Berhad. On the other hand, voluntary risk
information disclosures (RD Score3) have a mean disclosure of 30.86%.
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Table 1
RD Score1
RD Score3
Size
Leverage
Mean
44.244
59.908
30.862
8.424
0.7377
Median
44.440
62.070
29.41
8.358
0.901
Maximum
66.67
82.76
64.71
10.305
1.187
Minimum
26.98
24.14
8.82
5.483
.000
Mode
39.68
58.62
35.29
6.974
.000
Std. Dev.
7.949
11.596
8.792
0.652
0.353
Skewness
0.360
-0.316
0.636
-0.353
-1.452
Kurtosis
-0.341
-0.207
1.299
2.439
0.505
0.002
0.004
0.002
K-S significance
Observations
150
150
150
150
150
Notes: RD Score1 is defined as total risk information disclosure index, RD Score2 is defined as mandatory risk information
disclosure index, RD Score3 is defined as voluntary risk information disclosure index, Size is measured by Natural Logarithm of
Total Sales (for year 2006), and Leverage is measured by Natural Logarithm of the ratio of long-term debts to total equity. Scores are
expressed in percentages.
Source: Descriptive statistics of 150 Malaysian listed companies for year 2006
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Table 2
Regression analysis
Dependent variables
RD Score1
RD Score2
RD Score3
0.224
0.107
0.193
Adjusted R
0.192
0.070
0.160
F-Statistic
6.899
2.855
5.715
Significance
0.000***
0.012**
0.000***
No. of observations
150
150
150
Independent Variables:
Size
Leverage
IND1
IND2
IND3
IND4
0.000***
0.000***
0.000***
(6.257)
(3.849)
(5.693)
0.928
0.884
0.970
(0.90)
(0.147)
(-0.038)
0.453
0.669
0.470
(0.752)
(0.429)
(0.725)
0.202
0.613
0.137
(1.281)
(0.506)
(1.496)
0.015*
0.067*
0.073*
(2.460)
(1.849)
(1.803)
0.481
0.952
0.221
(0.706)
(-0.061)
(1.230)
2008; Arshad, Taylor, Atan, & Darus, 2009) also obtained similar results of low level of information disclosure.
The result of multiple regressions indicates that to a certain extent disclosure of risk information is influenced
by the size of company, its leverage and type of industry, though there could be other variables that would explain
the level of risk disclosure. Size is found to be significantly related to level of risk information disclosures in
annual reports. Thus, hypotheses H1 is substantiated. The finding on size variable is consistent with other studies
on corporate disclosures and risk disclosures such as by Linsley & Shrives (2005); Beretta & Bozzolan (2004);
Abraham & Cox (2007) and Zain & Janggu (2006).
Leverage, on the other hand, is not found to significantly influence the level of risk information disclosed.
Therefore, hypotheses H2 is not statistically supported. The same finding has been found in various studies such
as Adbelghany (2005) who studied the disclosure of market risk or accounting measures of risk. The finding was
also confirmed by Linsley & Shrives (2006) where they found no correlation between gearing ratio and level of
risk disclosures.
Mixed result was found on the effect of industries to the level of risk information disclosures. Only one
industry (properties at 10% significant level) shows a positive association with level of risk information disclosed,
suggested that the level of risk information disclosed by properties sector is higher compared to trading and
services, which is the base industry. The other three industries demonstrate no significant association. Therefore,
hypothesis H3 is only partially supported. This is consistent with the result of a study on environmental
disclosures of environmentally sensitive companies by Manaf, et al. (2006).
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