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CEO, CFO and Audit Committee Competencies towards Enhancing Financial Disclosure Transparency by Government Linked Companies in Malaysia: Pilot Study.


The existence of an effective CEO, CFO and audit committee as the foundation of good corporate governance (henceforth CG) has become prevalent agenda globally including in emerging economies. Malaysia being no exception. The need for sound CG practices including transparency and full disclosure was sparked off since the Asian financial turbulence in 1997 and in the aftermath of various corporate collapses (Alzeban and Sawan, 2015). According to a report undertaken by Malaysian Institute of Corporate Governance in 2017 on assessing transparency in corporate reporting among top 100 PLCs, the disclosure practices and levels of transparency among corporations are still below satisfactory level and far reaching from the expected standards. The report revealed that only 15 companies scored 50% or more in overall criteria including organisational transparency (Yusof, 2017). The financial reporting improprieties and corporate collapses have brought CEO, CFO and audit committees under continuous enquiry on their existence as a monitoring mechanism and attributes to an effective of CEO, CFO and audit committee, including indicators that constitute competencies. The Malaysian Government has a direct controlling stake in GLCs through the government's proxies, namely Government-linked Investment Companies (henceforth GLICs) that allow the government to exercise control including on the appointment of board members (Nasir, 2017; Putrajaya Committee on GLC High Performance, 2005). This significant government ownership in PLCs reflects a strong involvement of the government in the corporate level, thus, it may explain why improvement on corporate disclosure transparency especially in GLCs does not appear to be a priority (Elfeky, 2017). Apart from that, according to Megginson, Nash and Randenborgh (1994), the authors mentioned that the position of directors in GLCs are frequently occupied by high-level servants or politically-affiliated individuals who may not possess sufficient competencies to run a business entity. Recently, the political tussle and financial failures in several GLCs in Malaysia including Felda Global Ventures Holdings Berhad (FGV) is due to the heavy political presence on GLCs boards (The Star, 2017). This goes against the GLCs' transformation program and other good governance practices which calls for board positions or audit committee members particularly to be nominated and selected according to the specified competencies. Therefore this study is conducted in order to provide thorough understanding regarding CEO, CFO and the audit committee competencies in enhancing financial disclosure transparency among GLCs in Malaysia.

Literature Review

Transparency and Disclosure

Basically, corporate disclosure transparency can be translated as the availability of relevant information particularly on firm specific information to those internal or external users (Han, Kang and Yoo, 2012). With the terms of quality and transparency used jointly and alternatively, Salehi, Moradi and Paiydarmanesh (2017, p. 35) interpreted disclosure quality as "the degree of reliability, relevancy and correctness of the information disclosed that increased by independent audit". In assessing the quality of financial reporting, the transparency has been described as one of the approaches which is more direct and observable (Han et al., 2012). Transparency in financial disclosure is important to various users in order to assist them in making their judgements and decisions about a company (Rahman, 1998).

Alfraih and Almutawa (2017) described the importance of financial disclosure to ensure the functioning of efficient stock markets. The financial disclosure also plays a pivotal role in fulfilling the rights and interests of outside investors and market participants in general as the adequacy of reported information by the company could direct the decisions makers towards the right and logical decisions (Salehi et al., 2017). Failure on providing financial reporting transparency would mislead and give an adverse effect towards to the wealth of these investors and other stakeholders (Salehi et al., 2017).In Malaysia, the financial reporting and disclosure is governed by the relevant sections of the amended Companies Act, 2016, the revised Bursa Malaysia Listing Requirement (henceforth BMLR) and the accounting standards approved by the Malaysian Accounting Standard Board (henceforth MASB). The amended Companies Act, 2016 requires all companies incorporated in Malaysia to comply with the approved accounting standards. It also requires the annual account to be audited by certified auditors before being presented to the shareholders during annual general meeting. Besides, Bursa Malaysia also required all Malaysian PLCs to adhere with the BMLR.

CEO, CFO and Audit Committee Competencies

CEO, CFO and audit committee competencies have gained the attention of regulators and academics around the world in recent years (Kusnadi, Leong, Suwardy and Wang, 2016). The terms competence and expertise are often used interchangeably in prior research (Christ, Masli, Sharp and Wood, 2015), yet these concepts could create a positive impact towards companies by enhancing transparency of their corporate reporting as well as financial reporting (Madi et al. 2014). According to BMLR, every listed corporation, management company or trustee-manager must ensure that each of its directors, chief executive or chief financial officer has the character, experience, integrity, competence and time to effectively discharge his role as a director, chief executive or chief financial officer, as the case may be, of the listed corporation, or the collective investment scheme. This competencies of CEO, CFO and audit committee is important because it will prevents from financial scandals.

CEO, CFO and Audit Committee Competencies Experience

In relation to CEO, CFO and audit committee competencies, most prior research generally used financial expertise or working experience in accounting or finance as proxy to measure CEO, CFO and audit committee competencies (Mohammad, Wasiuzzaman, Morsali and Zaini, 2018). In fact, merely having working experience may inadequate to carry out their role as well as to be categorised as competent members (Nelson, 2010). As such, this study attempts to rectify this situation by introducing new measures on competencies such as advanced academic qualification, training and multiple directorships. Several researchers have linked the contributions of CEO, CFO and audit committee members possessing competencies in terms of experience to audit committee effectiveness, specifically on their potential in overseeing the transparency and good quality of the financial assessment of the firm (MCCG, 2017). However, as has been noted, many members have inadequacy of experience and expertise in pertinent oversight areas especially where the case frequently occurred among GLCs. Many politicians who may be incompetent are still found to occupy key positions in the board of directors, and the audit committee is no exceptional (Bilal, Chen and Komal, 2018). The revised Malaysian Code on Corporate Governance (henceforth MCCG) requires CEO, CFO and all audit committee members to be financially literate (MCCG, 2017) purposely to ensure that they are able to understand and interpret financial reporting accurately (Mohammad et al., 2018) as well as improve compliance with regulatory requirements (Chukwunedu et al. 2015).

CEO, CFO and Audit Committee Competencies Advance Academic Qualification

As stated earlier, academic qualification has been clearly emphasised in the BMLR Practice Note 13 (2015) as one of the criteria in the CEO, CFO and audit committee composition. Subsequently, a few academic literatures used academic qualification as a new measure of competencies to explore on its ability in enhancing the boards and audit committee effectiveness in Malaysian context (Nelson, 2010). The directors with academic qualification are potentially unique in their capacity for knowledge, availability and independence as postulated by White et al. (2014). In addition, the issuance of new accounting standards by MASB as well as the revisions and adoptions of international accounting standards become a normal sense in accounting and business community. Hence, there is a need to promote continuous education and lifelong learning among directors and particularly audit committee to aid them in adapting and updating with the environmental changes and in furtherance of the sound CG as suggested in the Blueprint 2011 and by Rahmat et al. (2009). The BMLR details the training requirement for directors and officer as well as the recommendations under the Blueprint 2011 and new MCCG 2017 of which they highlight on the need of CEO, CFO and audit committee to undertake continuous training to keep abreast of developments in relevant accounting and auditing knowledge, and other related development of standard and practices.

CEO, CFO and Audit Committee Competencies with Multiple Directorship

Multiple directorships can be described as the directors holding and serving a number of other directorships (Chandren et al., 2015). Proponents suggest that the number of other directorships held by the CEO, CFO and audit committee members would be a valuable source of experience and an opportunity to import best practices and knowledges from other firms (Chukwunedu et al. 2015). Thus, some suggest that the multiple directorships can be used as one of the measurements for the boards and audit committee competencies (Barua et al., 2010), which can be found from the studies conducted by Ghafran and O'Sullivan (2017). However, there is comparatively little evidence with respect to this competency measurement and such attribute remains sparse, and the evidence from prior research on this matter is inconclusive (Barua et al., 2010).

Theoretical Framework and Hypothesis Development

CEO, CFO and Audit Committee Experience with Financial Disclosure Transparency

Kusnadi et al. (2016) highlighted on the importance of having boards and audit committee members with adequate experience as an effective means to monitor management's financial reporting practices in order to produce more transparent corporate disclosure. Normally, the experience refers to and highly depends on the proportion of boards and audit committee members who have accounting and/or finance expertise as they are more effective to detect anomalies in corporate reporting compared to members without such expertise (Appuhami and Tashakor, 2017). On the other hand, the supervisory experts may not fully grasp and understand the accounting complexities, but they possess industry specific business knowledge which could promote better financial disclosure transparency (Cohen et al., 2013). Hence, the CEO, CFO and audit committee experience can be decomposed into three specific types and considered in this study, namely accounting financial experts and non-accounting financial experts which further segregated into finance experts and supervisory experts.

Regarding the non-accounting financial experts, Ghafran and O'Sullivan (2017) found that the proportion of non-accounting financial experts are associated with higher audit quality, due to their role in improving the transparency of financial reporting especially in the case of smaller listed firms. Goh (2009) indicated that the role of non-accounting financial experts as a valuable component of the governance expertise of the boards and audit committee members. However, some of the studies revealed that the presence of finance or supervisory experts have no significant impact on quality of disclosure. For example, it is reported that such expertise does not lead to better accruals quality (Kusnadi et al., 2016). Therefore, this study come up with these hypotheses:

H1: All being equal, CEO, CFO and audit committee members with accounting expertise is positively associated with financial disclosure transparency.

H2: All being equal, CEO, CFO and audit committee members with finance expertise is positively associated with financial disclosure transparency.

H3: All being equal, CEO, CFO and audit committee members with supervisory expertise is positively associated with financial disclosure transparency.

CEO, CFO and Audit Committee Advanced Academic Qualification with Financial Disclosure Transparency

Prior literature specifically in education lends support in using academic qualification as one of the measures of CEO, CFO and audit committee competencies. The educational attainment would allow directors to learn in holding broader views and develop a greater breadth of understanding (Post, Rahman and Rubow, 2011). Anderson et al. (2004) elucidated that the independent-audit committee and boards of directors employment characteristics including academic would provide superior oversight of the financial accounting processes, ultimately lead to improvement in transparency and reliability of financial reporting. Further, Francis et al. (2015) documented that the academic directors who sit on audit committees exert a positive impact on earnings quality and information quality, and confirming that academic directors are less likely to involve in managing earnings through discretionary accruals. Therefore, this study postulates that the CEO, CFO and audit committee members in Malaysian GLCs with advanced academic qualification are effective monitors, as such, have a stronger effect towards more transparent financial disclosure. Accordingly, this study proposes the following hypothesis:

H4: All being equal, CEO, CFO and audit committee members with advanced academic qualification is positively associated with financial disclosure transparency.

CEO, CFO and Audit Committee Training with Financial Disclosure Transparency

The revised BMLR, the latest MCCG 2017 and the Blueprint 2011 have emphasised on the need of CEO, CFO and audit committee members to undertake continuous training as one of the initiatives to improve transparency of information disclosed in the annual reports. Although there is no study that directly links the relationship between CEO, CFO and audit committee training and financial disclosure transparency, there are some studies that have investigated on the impact of training on the other areas such as level of firm performance, audit fees and board or audit committee effectiveness. In order to find the 'effective board characteristics', a recent study by Borlea, Achim and Mare (2017) found that no significant relationship between training the member's competences and financial performances for Romanian companies represented either by Tobin's Q or Return on Assets (ROA). This study argues that the more the training provided to the CEO, CFO and audit committee members, the more competent these members in monitoring the management's financial reporting practices which lead to a higher transparency of financial disclosure in GLCs. Accordingly, the following hypothesis is conjectured:

H5: All being equal, CEO, CFO and audit committee members' training is positively associated with financial disclosure transparency.

CEO, CFO and Audit Committee with Multiple Directorships with Financial Disclosure Transparency

According to Hundal (2017), the directors who serve on other corporate boards may add valuable resources within organisation in the form of human capital (education, experience, skills, reputation) and relational capital (a network of ties to other firms, external organisation and external contingencies). For this context, the CEO, CFO and audit committee members who is attached either as a board member or any committee member may gain additional contextual background which is useful for performing their monitoring responsibilities and subsequently would affect the transparency of corporate disclosure (Madi et al., 2014). Consistently, some Malaysian empirical evidence supports this expectation. For example, Madi et al. (2014) reported that multiple directorship of audit committee is associated with corporate voluntary disclosure. In addition, Haniffa and Cooke (2002) also documented a positive impact of multiple directorships in enhancing the financial disclosure practices. In fact, prior empirical evidence supports this counter-argument where the key officer or boards director especially audit committee members with high multiple directorships would affect the propensity for voluntary disclosure and less effective in constraining real earnings management (Sun et al., 2014). Hence, the hypothesis can be formulated as follows:

H6: All being equal, CEO, CFO and audit committee members with multiple directorships is positively associated with financial disclosure transparency.


The Presentation of the Sample

The hypotheses are tested using a sample of GLCs listed on the Bursa Malaysia and involved in GLC Transformation Program (GLCT). The list of companies involved in the GLCT was obtained from Menon (2017). The list initially comprised of top 20 listed GLCs, known as the G20 but currently totals 17 due to mergers, demergers and other corporate restructuring exercises. Out of 17, two GLCs which do not have complete data were excluded from the study sample. Further, five GLCs in financial industry were also removed from the population as they are governed by different compliance and regulations. The final 10 listed GLCs for the year 2017 were analysed. At the time of conducting this study, 2017 annual reports were the most recent annual report available online.

Development of a Financial Disclosure Index (Dependent Variable)

A starting point in developing the disclosure index is the selection of reliable items which could be expected to be disclosed in all annual reports. As such, a detailed review of a set of indices from the previous studies by Alfraih and Almutawa (2017), Elfeky (2017), Barros et al. (2013), Akhtaruddin and Haron (2010), Akhtaruddin (2005) and Haniffa and Cooke (2002), was performed. To be more relevant in the Malaysian context, some modifications were carried out to a list of information items drawn from these studies. In Malaysia, financial reporting and disclosure practice is mainly governed by the accounting standards, the revised Bursa Malaysia Listing Requirements and amended Companies Act 2016. In total, a complete list of 95 items were identified that makes up the final financial disclosure index. To further enhance the validity of this disclosure index, it was reviewed by two professional accountants from Ernst and Young. The level of financial disclosure is identified and calculated based on disclosure score index. An unweighted approach was employed on a basis that each item in the disclosure index is considered equally important (Hawashe, 2014), thus given the same scores (Jaafar et al., 2013). The items of information are numerically scored on a dichotomous basis either by assigning one (1) score if an item is present in the annual report or zero (0) score if it is not disclosed. If a particular item is not relevant to a sample company, a non-applicable (NA) score is given. Once the scores for financial disclosure items were identified, the total financial disclosure transparency index score (FIDTRA) for each company was calculated. It represents the ratio of the total actual scores to the maximum expected disclosure scores. This approach has been adopted in several prior studies (Sellami and Fendri, 2017; Akhtaruddin and Haron, 2010) and the equation is as follows:



FIDTRA = The value of the financial disclosure transparency for each firm.

ACTD = The number of items each firm actually disclosed.

MXTD = The expected maximum number of items disclosed by each firm (= 95).

Measurement of Independent Variables

Data on CEO, CFO and audit committee competencies were collected from the profile of directors, senior management team and audit committee report section in the annual report. Firstly, the CEO, CFO and audit committee experience was classified into three different categories, namely, the CEO, CFO and audit committee with accounting financial experts (ACCEX), finance experts (FINEX) and supervisory experts (SUPEX). The proxy used for all three different categories is the proportion of the CEO, CFO and audit committee members with the respective experiences to total number of members. Consistent with studies by Ghafran and O'Sullivan (2017), and Kusnadi et al. (2016), the ACCEX was referred to the CEO, CFO and audit committee members who have previously held or currently have work experience as CPA, CFO, CAO, auditors, vice presidents of finance, financial controller or any other major positions either in accounting or auditing field. It was also included those who are being a member of any professional accounting body (such as MICPA, MIA, etc.). Meanwhile, the criteria of FINEX as proposed by Ghafran and O'Sullivan (2017), and Kusnadi et al. (2016), was referred to those members with prior work experience as an investment banker, chief investment officer, financial analyst or any other corporate finance role. Similar to Ghafran and O'Sullivan (2017), Kusnadi et al. (2016), this study was classified those members as SUPEX if he or she has previously held or currently have work experience as CEO, general partner, managing directors, COO or chairman of the board in a for-profit corporation.

Secondly, the CEO, CFO and audit committee advanced academic qualification (ADVAQ) was measured through the proportion of members with tertiary education academic qualification (master's degree or doctorates) to total numbers members. The measurement is consistent with Nelson and Devi (2013). Thirdly, the CEO, CFO and audit committee training (TRAIN) was identified by calculating the average of all trainings attended by the CEO, CFO and audit committee members during the financial year. This is consistent with the previous research by Azmi et al. (2013). Lastly, the CEO, CFO and audit committee with multiple directorships (MULDI) was measured as the average number of outside directorships held in other corporations by the CEO, CFO and audit committee members, which is in line with measurement employed by Sun et al. (2014) and Othman et al. (2014).

Three control variables were included in this study that could affect firms' disclosure behaviour and have been frequently studied in the past. These variables are firm performance (FIRPE), firm financial leverage (FILEV) and firm size (FISIZ). This study uses return on assets (ROA) as a measure of FIRPE (Alfraih, 2018; Appuhami and Tashakor, 2017). FILEV is based on the ratio of total liabilities and total assets (Appuhami and Tashakor, 2017; Ferchichi and Skanji, 2017), while FISIZ is measured as the natural logarithm of book value of total assets (Appuhami and Tashakor, 2017; Sellami and Fendri, 2017).


Table 1 reports descriptive statistics for the sample firms in 2017. The results for financial disclosure transparency (FIDTRA) indicate the highest score achieved by a firm is 72% and the lowest score is 88% with the standard deviation of 4%. The overall levels of financial disclosure scores are generally high, which is 82% out of the 95 items, indicating most of the GLCs complied with the requirements of financial reporting and disclosure practice. The mean score for accounting financial experts (FINEX) and finance experts (FINEX) are 45% and 18%, respectively. These companies complied with the requirement set in the revised BMLR, revised MCCG and the Green Book to have CEO, CFO and audit committee member with financially literate.

Meanwhile, the mean score for the supervisory experts (SUPEX) is 53%, which indicates that a significant number of CEO, CFO and audit committee members have supervisory expertise. The average training (TRAIN) attended by CEO, CFO and the audit committee members is 4 with maximum and minimum training attended are 7 and 1 respectively. The total multiple directorships (MULDI) held by the CEO, CFO and audit committee members ranged from 1 to 6 directorships, with an average of 2.61, suggesting full compliance with the recommendation of the BMLR to hold and serve of less than five directorships. In terms of control variables, the mean of the firm performance (FIRPE) is only 4%, ranging from 1% to 8%. The percentage of firm financial leverage (FILEV) ranged from 40% to 69%, averaging 56%, whilst the firm size (FISIZ) has the mean value of 10% and fall between the range of 9% to 11%.

The p-value of advanced academic qualification is 0.024. This indicates that the ADVAQ is significant in predicting the financial disclosure transparency as the p-value is less than 0.05. As the ADVAQ has a 0.700 correlation with FIDTRA, there is no evidence to reject the fourth hypothesis. Hence, it can conclude that there is a positive association between the CEO, CFO and audit committee advanced academic qualification with financial disclosure transparency.

The other variables namely accounting financial experts (ACCEX), supervisory experts (SUPEX), firm performance (FIRPE) and firm size (FISIZ) have an insignificant (p-value >0.05) positive relationship with financial disclosure transparency. Meanwhile, the rest of the variables namely finance experts (FINEX), training (TRAIN), multiple directorships (MULDI) and firm financial leverage (FILEV) have an insignificant (p-value >0.05) negative relationship with the financial disclosure transparency.

Discussion and Conclusion

The findings are somewhat surprising given the fact that where only CEO, CFO and audit committee members with advanced academic qualification was found to be correlated to the extent of financial disclosure transparency. This is consistent with Yasin and Nelson (2012) and Anderson et al. (2004). The presence of these people with advanced academic qualification can be an effective monitor which would have a stronger effect towards more transparent corporate disclosure. It also supported by Malaysian Istitute of Accountant (MIA) on its competencies framework for CFO in public interest (2018), state that CFO need to have advanced knowledges and application of accounting standards in order to represent the organisation's progress on strategic goals to external shareholder for enhancing transparency. No positive correlation was found between the financial disclosure transparency and other explanatory variables.

There are a number of limitations in this study as well. First, this study is limited to only top listed GLCs in Malaysia. The results may not extend across the other firms in Malaysia. Second, the study focuses only one year of data, which is 2017 which may limit the generalisation of the findings. It should be noted the results may differ across different years if considering multiple years for analysis. Third, this study only considered the annual reports in order to collect the relevant data without investigating the other useful medium. Therefore, a number of suggestions for possible further research are highlighted by the results of this study. First, further study needs to be extended by taking newly updated list of GLCs in Malaysia. They may focus on all GLCs regardless whether they are categorised under listed or non-listed in Bursa Malaysia. Next, future research should be carried out longitudinally by incorporating many years of study purposely to get better understanding of the research issue. In addition, future researchers are encouraged to investigate the extent of financial disclosure transparency published in quarterly financial reports or information provided though the GLCs' websites.


We thank the Ministry of Higher Education (MOHE) for the Fundamental Research Grant Scheme (FRGS/1/2016/SS01/UNITEN/03/4) fund awarded.


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Nur Shuhada Ya'acob (*)

College of Business Management and Accounting, Universiti Tenaga Nasional, Malaysia


Muhammad Iqmal Bin A Manap

Bakhtiar Al-Razi

College of Business Management and Accounting, Universiti Tenaga Nasional, Malaysia

(*) Corresponding Author
Table 1: Descriptive Statistics for All Variables

Criteria                         Mean       Standard   Minimum  Maximum

Financial Disclosure
Transparency                                                      .8804
(FIDTRA)                           .815402   .0468168   .7158
Accounting Financial Experts       .446548   .1806253   .2000     .6667
(ACCEX)                            .179524   .1792463   .0000     .4286
Finance Experts (FINEX)            .532381   .1514322   .4000     .8333
Supervisory Experts (SUPEX)        .315595   .1862346   .0000     .6000
Advanced Academic Qualification   4.263690  1.6631733   .7143    7.0000
(ADVAQ)                           2.605119  1.5274889  1.3750    6.3333
Training (TRAIN)
Multiple Directorships (MULDI)
Firm Performance (FIRPE)           .041430   .0189884   .0149     .0774
Firm Financial Leverage (FILEV)    .562864   .0856873   .4009     .6863
Firm Size (FISIZ)                10.231939   .6560610  8.9352   11.1523

Table 2: Pearson Correlation Coefficient between the CEO, CFO and Audit
Committee with Financial Disclosure Transparency

Financial Disclosure Transparency        Shapiro-Wilk
(FIDTRA)                                 Pearson
                                         Correlation  Sig. (2-tailed)

Accounting Financial Experts (ACCEX)      .490        .151
Finance Experts (FINEX)                  -.571        .237
Supervisory Experts (SUPEX)               .043        .905
Advanced Academic Qualification (ADVAQ)   .700 (*)    .024
Training (TRAIN)                         -.332        .349
Multiple Directorships (MULDI)           -.174        .630
Firm Performance (FIRPE)                  .032        .930
Firm Financial Leverage (FILEV)          -.199        .581
Firm Size (FISIZ)                         .606        .063
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Author:Ya'acob, Nur Shuhada; Manap, Muhammad Iqmal Bin A; Al-Razi, Bakhtiar
Publication:Global Business and Management Research: An International Journal
Article Type:Report
Geographic Code:9MALA
Date:Apr 1, 2018
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