Journal of Business Administration and Management Sciences Research Vol. 2(7), pp.

172-177, July, 2013

Available online athttp://www.apexjournal.org
ISSN 2315-8727© 2013 Apex Journal International

Full Length Research Paper

Risk management disclosure in Malaysian public listed

companies
Rosnadzirah Ismail* and Rashidah Abdul Rahman

Accounting Research Institute and Faculty of Accountancy, Universiti Teknologi MARA Malaysia, 40450 UiTM Shah
Alam, Malaysia.
Accepted 17 April, 2013

The purpose of this study is to examine the risk management disclosure level among top 150 public
listed companies in Malaysia. A score sheet checklist consists of mandatory and voluntary items have
been developed to examine the disclosure level. Based on the total final sample of 122 listed companies
for three years (2006 to 2008) the result show that risk management disclosure is relatively low
irrespective of the importance of this information. This result indicates that further action must be taken
by regulatory bodies to ensure more disclosure and information disclosed to the public.

Key words: Management, risk, public, Malaysia, companies.

INTRODUCTION

Corporate scandals and diminished confidence in 2007. MCCG was formed to restructure the corporate
financial reporting among investors and creditors have governance guidelines as one effort in assisting the
renewed corporate governance as a top priority for corporation to recover. The aim of MCCG is to set out
boards of directors, management, auditors and principles and best practices as guidance for the
stakeholders (Raber, 2003). The annual report was companies in running their business operations towards
seen to have weaknesses due to the lack of important achieving optimal governance framework. The develop-
information such as risk facing companies (Cabedo and ment of MCCG is one of the major efforts that have
Tirado, 2003). Such weaknesses have led to an influence Malaysian companies’ risk management
increased demand for more disclosures, particularly in system and disclosure level. Bursa (formerly known as
the non-financial segment of the annual report (Amran, KLSE) Revamp Listing Requirement 2007 has also
Abdul Manaf and Che Haat, 2009) to ensure they are shared the same view as MCCG on the importance of
free from accounting fraud. internal control and risk management. The listing
In Malaysia, many companies have collapsed during requirement has consistently requested the board of
the Asian financial crisis in 1997 and the situation was directors to make disclosure in line with MCCG.
even worst in world global crisis which driven by US Therefore, the objective of this study is to examine the
subprime problems in 2007. Lack of corporate level of risk management disclosure in Malaysian public
governance, weak internal control and risk management listed companies.
system were viewed as the roots of internal problems
that eventuated companies to collapse.
In response to Asian Financial crisis, the government LITERATURE REVIEWS
in Malaysia has quickly moved forward by establishing
the Malaysian Code of Corporate Governance (MCCG) Background of risk management
which was initiated in 2000 and was later revised in
The importance of risk management was initiated when
Cadbury Report in 1992 highlighted the code of best
practiced requiring companies to establish audit
*Corresponding author. Email: committee and make disclosure on the effectiveness of
[email protected] internal control. The main issue being pointed out in the
 Ismail and Rahman 173

report was on the need for a company to review their related to financial instruments. According to Paragraph
internal control system and reporting risk to their 58, FRS 132, a company needs to describe its financial
shareholders. The Hampel Report in 1998 further risk management objectives and policies, including its
emphasised on the whole system of internal control policy for hedging each main type of forecast
which led to the requirement on risk management transaction and its accounting treatment. Paragraph 58,
disclosure as part of the internal control in Combined FRS 132 has also specified the need to have a separate
Code (The London Stock Exchange Limited, 1998). The disclosure for designated fair value hedges, cash flow
Turnbull Report in 1999 also responded in line with the hedges and hedges of a net investment in a foreign
Combined Code by emphasising the whole system of operation (as defined in FRS 139) disclosed in the
internal control that risk management should be around financial statement.
that system. However, FRS 132 does not stipulate either the
In 2002, the Risk Management Standard was format of the information required to be disclosed or its
published in UK to guide the companies on the location within the financial statements. The standard
terminology, process, organisation structure and noted that a company could either present it on the face
objective for risk management. The standard defined of financial statement or include it in the notes to the
risk as “the combination of the probability of an event accounts. The reporting approach could also include a
and its consequences”. Solomon et al. (2000) defined combination of narrative descriptions and quantified
risk as “the uncertainty associated with both potential data, as appropriate to the nature of the instruments
gain and loss” (p.449). Linsley and Shrives (2006) and their relative significance to the entity.
provided more specific definition of risk disclosure as
any information disclosed to reader on any opportunity,
RESEARCH DESIGN
prospect, hazard, harm, threat or exposure that has
already impacted or may give an impact upon the Sample selection
company or management in future. In general, risk
refers to any uncertainty that faced by the organisation This study focuses on the disclosure made by companies listed
that could lead to gains or losses. on the Bursa Malaysia. Consistent with previous studies (Abdul
Wahab, 2007; Che Haat et al., 2008 and Abdul Jalil, 2008) one
hundred and fifty companies listed on the main board of Bursa
Malaysia based on the market capitalisation ranking on 31
Financial reporting standard disclosure in Malaysia December 2007 (Bursa Malaysia Top Public Listed Companies by
Market Capitalization, 2007) are chosen as the sample study.
Malaysia Accounting Standard Board (MASB) is the However, companies that are in the financial industry such as
responsible accounting body that sets the accounting banking, insurance, trust, closed-end funds and securities are
excluded from the sample due to their nature of business
standards in Malaysia. MASB was established under (Berretta and Bozzolan, 2004; Linsley and Shrives, 2006;
the Financial Reporting Act 1997 and act as an Abraham and Cox, 2007) being governed by the additional
independent authority to develop and issue accounting regulation.
and financial reporting standard in Malaysia. The Consistent to previous studies, content analysis was performed
objective of MASB is to develop and promote high in collecting and analysing the level of risk management
quality accounting and reporting standard that are disclosure in the annual reports (Lajili and Zeghal, 2005; Linsley
and Shrives, 2006; Amran et al., 2009).
consistent with the international practices for the benefit
of users, prepares, auditors and the public in Malaysia
(MASB, 2005) Risk management disclosure checklist
As for risk reporting, MASB had issued two main
standards that require the company to provide Three levels of risks to classify the extent of disclosure were used.
disclosure. The two standards are Financial Reporting This study used a 3-point scale to determine the extent of risk
management disclosure. Such scale would provide more details
standard (FRS) 101: Presentation of Financial
on the extent of risk disclosure rather compared to using
Statement and FRS 132: Financial Instruments: dichotomous measurement.
Disclosure and Presentation. The score checklist covers two sections: mandatory disclosure
Under FRS 101: Presentation of Financial Statement, and voluntary disclosure. The Mandatory Risk Disclosure which
Paragraph 105 (d) (ii) requires a company to disclose has been required by FRS 132: Financial Instruments: Disclosure
notes to assist users in understanding the financial and Presentation is divided into two main attributes:
statement on non-financial disclosures such as entity's
financial risk management objectives and policies. i. Risk related to financial instrument
ii. Financial Risk Management Policies
While under FRS 132: Financial Instruments:
Disclosure and Presentation, Paragraph 52 requires a
On the other hand, voluntary disclosure score checklist consists of
company to provide information to assist users of nine main attributes, namely, risk assessment, control
financial statements in assessing the extent of risk environment, control activities, information and communication,
 174 J. Bus. Admin. Manage. Sci. Res.

Table 1. Descriptive statistics of firm’s risk management disclosure level by year.

Types Year Mean Med Min Max

2006 52.71 53.57 32.14 78.57
2007 52.82 51.78 32.14 78.57
Total risk
2008 53.85 53.57 32.14 78.57
Overall 52.79 53.57 32.14 78.57

2006 71.56 75.00 25.00 100.00

2007 70.56 75.00 25.00 100.00
Mandatory
2008 70.56 75.00 25.00 100.00
Overall 70.56 75.00 25.00 100.00

2006 49.73 50.00 25.00 79.17

2007 49.86 50.00 25.00 79.17
Voluntary
2008 49.89 50.00 25.00 79.17
Overall 49.83 50.00 25.00 79.17

monitoring, operation risk, integrity risk, information processing and regulatory bodies to ensure compliance with the
technology and strategic risk. All these attributes were obtained standards (Othman and Ameer, 2009). It is because the
from the Statement of Internal Control as well as recommendation
current guidelines just provide the general rules on risk
by previous studies (Berreta and, 2004 and Linsley and Shrives,
2006). reporting but do not provide the details of the item that
should be disclosed by the company.
With regards to voluntary disclosure, the mean
RESULTS AND FINDINGS percentage of voluntary risk management disclosure is
50%. Such results are considered relatively low
considering the importance of risk management to the
As indicated in Table 1, the overall mean score for risk
users for decision-making. The results also show that
management disclosure among the public listed
the highest and lowest percentage of voluntary risk was
companies is 52.79%. Such results indicate that more
79.17% and 25% respectively. The highest disclosure
efforts are needed to improve the level of risk disclosure
was made by British America Tobacco Berhad and
in ensuring the stakeholders to have sufficient
Tenaga Malaysia Berhad. The fact that the highest
information about the risk facing companies.
score companies have comprehensive risk
The results also show that the risk disclosure has management disclosure could be attributed by the
slightly increased from year 2006 to 2008. Table 1 establishment of the Enterprise Risk Management
shows that the total risk management disclosure has a (ERM) which provides full review of risk information to
mean range from 52.71% to 53.85% indicating that the the users.
trend of providing risk disclosure among the companies
is increasing. This finding implies that companies have
started to perceive risk management disclosure as
being important. Mandatory disclosure
The result in Table 1 also shows that the highest and
lowest percentage of total risk management disclosure Based on Table 3, the overall mean percentage results
is 78.57% and 32.14% respectively. Table 2 shows the show that 62.90% of the risk disclosure was made by
top 5 companies that score the highest risk public listed companies is related to financial
management disclosure instrument. Such results are consistent with the result of
Table 1 also shows the mean value for mandatory risk Amran et al. (2009) where they found financial risk
management disclosure. The results show that the disclosure of 100 public listed companies at 64%. The
mandatory risk disclosure is high (70.56%). Such results results also indicate that overall, 78.36% disclosure was
are expected due to the legal requirements by the made in respect of risk management objectives and
accounting bodies whereby non-compliance of the legal policies. This is considered quite high as most
requirements would lead to legal implication. The results companies seem to comply with the requirement in FRS
indicates that there is a need for some standardised 132 to provide financial risk management objectives and
reporting format or guidelines from the standard setting policies.
 Ismail and Rahman 175

Table 2. Top 5 Companies based on risk management score.

Companies Risk score (%)

British America Tobacco Berhad 78.57
Tenaga Nasional Berhad 78.57
Telekom Malaysia Berhad 75.00
Proton Holdings Berhad 75.00
Tanjong Public Limited Company 71.43

Table 3. Distribution Mean Percentage Scores for each Mandatory disclosure attributes from 2006 to 2008.

Mandatory risk management disclosure Percentage

Risk related to financial instrument: 62.90
i. Currency risks 71.47
ii. Interest rate risks 84.5
iii. Price risks 33.15
iv. Credit risks 66.85
v. Liquidity risks 80.71

Financial risk management policies: 78.36

i. Financial risk management objectives and policies 97.54
ii. Discussion on financial instrument used 49.18

The results show that the highest score is 84.51% for regarded important for the plantation companies to
the interest rate risk. The results are consistent with the have assessment on the commodity price changes so
results shown in Othman and Ameer (2009). Othman that the companies are aware of the risk impact.
and Ameer found that interest rate risk as the most The second attribute of mandatory risk disclosure is
highest type of market risk disclosed by top 500 the Risk Management policies. The two main areas
companies in Bursa Malaysia. However, the recorded examined are:
interest rate risk was shown at 37.06%. The main
reason for the results variation between this study and i. Financial risk management objectives and policies
Othman and Ameer’s (2009) study is that this study (Paragraph 56 of FRS 132)
used top 150 companies listed on main board based on ii. Discussion on financial instrument used (Paragraph
market capitalisation whereas their study used 500 58 of FRS 132)
companies listed in main board, second board and
MESDAQ. Therefore, it could be argued that top The results of the first area of risk management
companies have higher compliance level towards the objective and policies show that disclosure is 97.54%.
requirement by the regulatory bodies since they are The results are consistent with the findings in Othman
more likely to be subjected to public and regulatory and Ameer (2009) where they found 329 out of 428
scrutiny. companies (76.89%) have provided the objectives and
Furthermore, the results indicate that the lowest level policies of risk management. Such findings indicate that
of risk disclosure is represented by the price risk most companies have complied the requirements in
(33.15%). Based on the risk scoresheet, plantation FRS 132. On the contrary, the second area related to
industry was the most highest industry that disclosed disclosure on discussion on financial instrument, used
the price risk. The possible explanation to such results only 49.18%. Such results are similar to Othman and
of plantation industry is subjected to changes in the Ameer (2009) whereby they found reletively low number
commodity price which exposed the companies to of companies disclosed qualitative and quantitative
uncertain risk regarding their financial instrument. The disclosure on hedge instrument for each types of risk.
existence of another market, Crude Palm Oil (CPO) that One possible reason for such results is that many
allows them to trade in their own market could reflect companies did not engage in any financial instrument
the changes in the global market prices. Therefore it is associated with the risk.
 176 J. Bus. Admin. Manage. Sci. Res.

Table 4. Distribution Mean Percentage Scores for each voluntary disclosure

attributes from 2006 to 2008

Voluntary risk management disclosure Percentage

Risk assessment 53.76
Control environment 64.85
Control activities 46.57
Communication 51.21
Monitoring 55.91
Operation risk 64.65
Technology risk 18.68
Integrity risk 10.75
Strategic risk 65.86

Voluntary disclosure contributing factor to the irregularities (Cabedo and

Tirado, 2003). Such scenario has led public demanding
For voluntary disclosure, there are 9 main attributes for more detailed corporate disclosure particularly on
examined in this study. Table 4 provides the results of non-financial aspect (Amran et al., 2009). This is to
these attributes. The results show that the highest ensure that the companies are free from accounting
attribute disclosed was “Strategic Risk” (65.86%), fraud. The corporate disclosure particularly on risk
followed closely by “Operation Risk” (64.65%). Such reporting is important because it provides information on
results correspond with the findings of Linsley and the effects of risks on the firm’s future financial position.
Shrives (2006) and Amran et al. (2009) that reported The results from shows the overall score for risk
strategic risk and operation risk as the most mentioned management disclosure among public listed companies
risks in the annual report. According to Amran et al. in Malaysia is 53%, demonstrating that there are more
(2009), the reason behind this is due to the requirement room for improvement on the level of risk disclosure.
of Bursa Malaysia requiring companies to discuss More critical findings show that the level of risk
industry trends, development, group performance and management disclosure in Malaysia from the year 2006
the material factors underlying results and financial to 2008 are quite consistent each year suggesting that
position in their annual report. Although there is no most of the companies perform the same level of risk
specific requirement for risk disclosure, most of the management disclosure practices from year to year.
discussions presented the risks that are affecting the The risk disclosure index consists of two main
companies. sections (a) mandatory disclosure and (b) voluntary
The least score is “Control Activities” (46.57%). One disclosure. For mandatory risk management disclosure,
possible reason to such results could be due to the fact the disclosure is considered high (71.11%) whereas for
that this attribute focuses on the companies’ policies on voluntary risk management disclosure is only 49.98%.
the action and response to risk. Of consequence, most However, the results for mandatory disclosure are
companies did not provide the details of their attributed by the legal requirement although there are
procedures and their ability to reduce the risk. The still companies that did not comply with the regulatory
results are paralleled with the findings by Othman et al. requirement. There is a need for the regulatory bodies
(2009) in which they reported “Control activities” and to identify the reasons for non-compliance since risk
“Risk response” as the least mentioned element of disclosure deems important for stakeholders. On the
ERM. other hand, voluntary risk disclosure is relatively low
considering the importance of risk management to the
users’ decision-making.
DISCUSSION AND CONCLUSION This study is subject to several limitations. This study
used a three-year period (2006-2008) to examine the
The growing number of irregularities incidents in the risk disclosure level. Therefore, the findings of this study
corporate world has received much attention from the may not be generalised to other settings.
public. Many parties have put the blame on the lack of Furthermore, the final sample in this study consists of
corporate disclosure on the position of companies. The the top 122 companies listed on the main board of
lack of important information such as risk information in Bursa Malaysia. As such, the results of this study
the annual reports produced by the companies was a represent large and established companies which may
 Ismail and Rahman 177

not be the same if other sample such as small Che Haat M.H., Abdul, R.R., Mahenthiran, S. (2008).
companies are used. Corporate governance, transparency and performance
The studies provide assistance in establishing a of Malaysian companies. Manag. Audit. J., 23(8): 744-
preliminary point to empirically examine the risk 778.
management disclosure level in Malaysia especially Dobler, M. (2008). Incentives for risk reporting - A
those which listed in Bursa Malaysia. Further research discretionary disclosure and cheap talk approach. Int.
should be conducted to know the factors that affecting J. Acc., 43(2): 184–206.
the disclosure level in Malaysia. Finance Committee on Corporate Governance (2000).
Malaysian Code of Corporate Governance (MCCG).
Ministry of Finance, Malaysia.
REFERENCES Lajili, K., Zeghal, D. (2005). A content analysis of risk
management disclosures in Canadian annual reports.
Abdul, J.A. (2010). Institutional Ownership And Earnings Can. J. Admin. Sci., 22(2): 125-142.
Management: Malaysian Evidence. J. Fin. Repor. Linsley, P.M., Shrives, P.J. (2006). Risk reporting: A
Acc., 8(2): 110-127. study of risk disclosures in the annual reports of UK
Abdul, W.E.A., How, J.C.Y., Verhoeven, P. (2007). The companies. Br. Acc. Rev., 38(4): 387–404.
Impact of the Malaysian Code on Corporate MASB (2005). Financial Reporting Standard FRS 132
Governance: Compliance, Institutional Investors and Financial Instruments: Disclosure and Presentation,
Stock Performance. J. Contemp. Acc. Econ., 3(20): 1- Malaysian Accounting Standard Board, Kuala Lumpur.
35. Muda, A.S., Yazid, M.S. (2006). The role of foreign
Abraham S., Cox P. (2007). Analysing the determinants exchange risk management in Malaysia. Irish J.
of narrative risk information in UK FTSE 100 annual Manage., 2(2): 45-63.
reports. Br. Acc. Rev., 39(3): 227–248. Othman, R., Ameer R. (2009). Market risk disclosure:
Amran, A., Abdul, M.R., Che Haat M.H. (2009). Risk evidence from Malaysian listed firms. J. Fin. Regul.
reporting: An exploratory study on risk management Compliance. 17(1): 57-69.
disclosure in Malaysian annual reports. Manag. Audit. Raber, R.W. (2003). The role of good corporate
J., 24(1): 39-57. governance in overseeing risks. Corporate Gov.
Beretta, S., Bozzolan, S. (2004). A framework for the Advisor. 11(2): 11-16.
analysis of firm risk communication. Int. J. Acc., 39(3): Solomon, J.F., Solomon, A., Norton, S.D., Joseph, N.L.
265– 288. (2000). A Conceptual Framework For Corporate Risk
Cabedo, J.D., Tirado, J.M. (2003). The disclosure of risk Disclosure Emerging From The Agenda For Corporate
in financial statements. Acc. Forum 28(2): 181–200. Governance Reform. Br. Acc. Rev., 32(4):447–478.