CORPORATE FINANCIAL REPORTS IN MALAYSIA
5. Summary and Conclusions
This study attempts to investigate the extent to which corporate governance, namely the composition of the board of directors and audit committee and CEO duality play an important role in promoting corporate transparency, defined as the number of days taken to issue their audit reports. The shorter the number of days taken, it is argued, the greater the level of transparency. Transparency is not merely about providing information but it is all about providing relevant information in a timelier manner. The findings show that the 1997 financial crisis was found to have significant impact on the timeliness of
financial reports where more companies during the crisis failed to issue their annual audited accounts within four months compared to the period after the crisis. This evidence leads to the conclusion that the 1997 crisis had adversely affected timeliness of reporting among Malaysian listed companies.
The results, with respect to the composition of the board of directors are generally consistent with the arguments that properly constituted boards and audit committees lead to effective governance (Weisbach, 1988; Cadbury, 1992; Beasley, 1996;
Malaysian Code, 2001; Bursa Malaysia Listing Requirements, 2001). The evidence should support the contention that corporate governance is associated with corporate transparency. Having more outside directors on boards should bring independent views to the company. This should result in the company maintaining proper internal control systems, which will enable the board to manage the risk. Having a sound check and balance mechanism should support the outside directors’ reputation as decision experts, as argued by Fama and Jensen (1983). However, the findings seem to suggest that non-executive directors’ effectiveness in issuing annual financial statements is found to be more pronounced during the financial crisis period. Thus, during crisis, there is a strong incentive for non-executive directors to act more closely in the interest of shareholders, supporting Kosnik’s contention (1987 and 1990).
Results from the regression analyses also indicate that the separation of the board chairman and the CEO leads to financial reports being issued much earlier than those firms whose boards are dominated by a single person. The evidence could be interpreted as the separation of these roles reduces the likelihood of the board being dominated by one person. Thus, this should enable the board to effectively monitor the performance of the management (i.e. the CEO). Accounting information is commonly used to measure the performance of the management. Hence, the separation of the roles leads the board to require more timely information to monitor the management as the board chairman relies on the financial reports when assessing the management performance due to his or her not having personal access to the firm’s accounting information system compared to when the board chairman is also the CEO. Effective monitoring requires timely information that, among others, involves assessing management performance based on un-audited monthly financial statements.
Producing un-audited monthly financial statements requires proper accounting and internal control systems to be in place. If the firm maintains proper accounting and internal control systems, the annual audit process is expected to be short. Thus, this shortens the time taken to issue audited annual financial statements. The evidence should support the concerns raised in the Cadbury Report, the
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Hampel Report and the Malaysian Code, which recommend the separation of the two roles. As in the case of board independence, the role of CEO duality is more pronounced during financial crisis. Thus, as it seems, corporate governance plays important roles during financial crises.
Another variable of interest, namely audit committee independence, is not important in explaining the pattern of reporting timeliness. Two reasons could explain the insignificant influence.
First, audit committees in Malaysia have not reached maturity, as they were only required to be formed by the Bursa Malaysia in 1994. Thus, they are still developing. Second, the fact that audit committee formation is mandatory might have also contributed to the ineffectiveness. This is because it is a matter of satisfying the listing requirements rather than maintaining the audit committees to improve the firm’s financial reporting processes.
This study documents that only two control variables, namely the level of gearing and ROA, to have a consistent and significant influence on the reporting timeliness. The direction of the influence indicates the higher the gearing levels, the longer the days lapsed to issue the annual audited accounts.
This finding is consistent with the findings in the previous studies (e.g. Carslaw and Kaplan, 1991).
High gearing requires more careful audit investigation, as it could be associated with high financial risks. The significant influence of ROA on
the timeliness of reporting supports information signaling theory, as the more profitable the firm is, the quicker the time is to issue the audited annual accounts.
Finally, there are several limitations that should be noted in this study. First, this study has been carried out in a setting that is quite different from that in developed countries, such as U.K. or U.S.
Furthermore, compared to these developed countries, the public awareness of corporate governance in Malaysia has only been seen to improve significantly following the 1997 crisis. Thus, this might have confounded the findings. Second, this study focuses only on three aspects of corporate governance: board independence, CEO duality, and audit committee independence. Other equally important corporate governance variables, such as ownership pattern, could be investigated as well. For instance, a study examining the role of foreign shareholders or large shareholders might be examined because these shareholders could apply pressure to firms to issue audited financial statements more timely. Finally, it will be fruitful to examine other less investigated corporate governance issues, such as the independence of the nominating committee. The independence of the nominating committee has been found to have significant bearing on firm’s performance as documented by Brown and Caylor (2004).
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