Journal Screenshot

International Journal of Academic Research in Accounting, Finance and Management Sciences

Open Access Journal

ISSN: 2225-8329

The Effect of Board Characteristics on Internet Financial Reporting Quality: Evidence from Malaysia

Mathew Kevin Bosi, Mohd Noor Azli Ali Khan, Nelson Lajuni, Ag Kaifah Riyard

http://dx.doi.org/10.6007/IJARAFMS/v10-i3/7823

Open access

The emergence of digital technology has spurred utilization of internet financial reporting (IFR). However, without the initiative from a corporate board to address issues such as lacking vigorous regulations that prescribing best practices of online business reporting, IFR quality may not be elevated accordingly. The main objective of this study is to determine the extent of qualitative characteristics of IFR across Malaysian listed companies by examining the relationship between board characteristics and IFR quality (IFRQ), moderated by Effectiveness of Internal Audit Function (EIAF). Qualitative approach via non-probability purposive sampling was used to select the companies from 11 relevant industries in Malaysia, to which 160 companies were selected to examine these correlations. The data were analysed using Partial Least Squares Structural Equation Modelling (PLS-SEM) via WarpPLS version 7.0. The results prove that board size, independence of directors, and female directors significantly improve IFRQ. The EIAF appears to moderate only independent directors. This could be due to substitute effect between board quality and internal audit quality. This study provides a better understanding of the role of board characteristics towards improving IFRQ and enriching the literature on IFR measurement mechanism.

1. Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. (2015). Internal Audit Quality: The Joint Importance of Independence and Competence. Academy of Management Proceedings, 2015(1), 18444.
2. Alali, F., Romero, S. (2012). The use of the Internet for corporate reporting in the Mercosur (Southern common market): The Argentina case. Advances in Accounting, 28(1), 157–167.
3. Ahmed, A-D., Abbod, M. F., Hani, Al-Dmour H. (2017). Qualitative Characteristics of Financial Reporting and Non-Financial Business Performance. International Journal of Corporate Finance and Accounting, 4(2), 1–22.
4. Alebrahem, N. (2018). Corporate internet reporting, firm characteristics, corporate governance and firm financial performance of Saudi listed companies (Doctoral dissertation, University of Plymouth).
5. Ali Khan, M. N. A., & Ismail, N. A. (2012). An empirical study on the indexes of internet financial reporting: The case of Malaysia, African Journal of Business Management, 6(5), 2086-2100.
6. Ali Khan, M. N. A., & Ismail, N. A. (2011). The Level of Internet Financial Reporting of Malaysian Companies. Asian Journal of Accounting and Governance, 2(1), 27–39.
7. Almilia, L. S. (2015). Comparing internet financial reporting practices: Indonesia, Malaysia, Singapore, Japan and Australia. International Journal of Business Information Systems, 20(4), 477-495.
8. Aly, D., Simon, J., & Hussainey, K. (2010). Determinants of corporate internet reporting: evidence from Egypt. Managerial Auditing Journal, 25(2), 182-202.
9. Amin, H. M. G., & Mohamed, E. K. A. (2016). Auditors’ perceptions of the impact of continuous auditing on the quality of Internet reported financial information in Egypt. Managerial Auditing Journal, 31(1), 111–132.
10. Ariff, A. M., Bin-Ghanem, H. O., & Hashim, H. A. (2018). Corporate Ownership, Internet Penetration and Internet Financial Reporting: Evidence from the Gulf Cooperation Council Countries. Asian Journal of Business and Accounting, 11(1), 185–227.
11. Basuony, M. A. K., Mohamed, E. K. A., & Samaha, K. (2018). Board structure and corporate disclosure via social media: an empirical study in the UK. Online Information Review, 42(5), 595–614.
12. Basuony, M. A. K., & Mohamed, E. K. A. (2014). Board composition, ownership concentration, and voluntary internet disclosure by MSM-listed companies. Corporate Board Role Duties and Composition, 10(1), 60–70.
13. Beest, F. Van, Braam, G., And Boelens, S. (2009). Quality of financial reporting: measuring qualitative characteristics, NiCE Working Paper 09-108,1–41.
14. Bin-Ghanem, H., & Ariff, A. M. (2016). The effect of board of directors and audit committee effectiveness on internet financial reporting, Journal of Accounting in Emerging Economies. 6(4), 429-448.
15. Botti, L., Boubaker, S., Hamrouni, A., & Solonandrasana, B. (2014). Corporate governance efficiency and internet financial reporting quality. Review of Accounting and Finance, 13(1), 43–64.
16. Braam, G., & Van Beest, F. (2013). Conceptually-based financial reporting quality assessment. An empirical analysis on quality differences between UK annual reports and US 10-K reports. Working Paper.
17. Burritt, R., & Christ, K. (2016). Industry 4.0 and environmental accounting: a new revolution? Asian Journal of Sustainability and Social Responsibility, 1(1), 23–38.
18. Campbell, K., & Mínguez-Vera, A. (2007). Gender Diversity in the Boardroom and Firm Financial Performance. Journal of Business Ethics, 83(3), 435–451.
19. Cassar, C., Heath, D., & Micallef, L. (2019). What is digital economy? Unicorn, transformation and internet of things. Mriehel, Malta. Retrieved from https://www2.deloitte.com/mt/en/profiles/ dheath.html
20. Chadwick, W. E. (2000). Keeping internal auditing in-house. Internal Auditor, 57(3), 88.
21. Cheng, A., Hooper, K., & Davey, H. (2000). A Capital Gains Tax for New Zealand: A Comparative Study of the UK and Australian Models. Asian Review of Accounting, 8(2), 43–59.
22. Chin, W. W. (1998). The partial least squares approach to structural equation modeling. Modern methods for business research, 295(2) 295-336.
23. Clatworthy, M. A., & Peel, M. J. (2013). The impact of voluntary audit and governance characteristics on accounting errors in private companies. Journal of Accounting and Public Policy, 32(3), 1–25.
24. Coetzee, P., Erasmus, L. J., & Plant, K. (2015). Global assessment of internal audit competence: Does one size fit all? Southern African Business Review, 19(2), 1-21.
25. CPA Australia. (2020). The CPA Australia Asia-Pacific Small Business Survey 2019-20. CPA Australia’s 11th Annual Report on Small Business Issues and Sentiment Across Eleven Economies in the Aisa-Pacific. Retrieved from https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/ professional-resources/business-management/small-business-survey/small-business-survey-2019-market-summary-malaysia.pdf?la=en&rev=2fc2a71a61084558b8e348538e457373
26. Cumming, D., Johan, S., & Schweizer, D. (2017). Information systems, agency problems, and fraud. Information Systems Frontiers, 19(3), 421–424. doi:10.1007/s10796-017-9761-3
27. Davey, H., & Homkajohn, K. (2004). Corporate internet reporting: an Asian example. Problems and Perspectives in Management, 2(2), 211-227.
28. Das, S. (2015). An Investigation of Corporate Internet Reporting in an Emerging Economy: A Case Study of Bangladesh. Ph.D Thesis. University of Sunderland; 2015.
29. Desai, N. K., Gerard, G. J., & Tripathy, A. (2011), Internal audit sourcing arrangements and reliance by external auditors, Auditing: A Journal of Practice & Theory, 30(1,) 149-171.
30. Dharmadasa, P., Gamage, P., & Herath, S. K. (2014). Corporate governance, board characteristics and firm performance: Evidence from Sri Lanka. South Asian Journal of Management, 21(1), 7-31.
31. Diamantopoulos, A., Sarstedt, M., Fuchs, C., Wilczynski, P., & Kaiser, S. (2012). Guidelines for choosing between multi-item and single-item scales for construct measurement: a predictive validity perspective. Journal of the Academy of Marketing Science, 40(3), 434–449.
32. Diamantopoulos, A., & Siguaw, J. A. (2006). Formative Versus Reflective Indicators in Organizational Measure Development: A Comparison and Empirical Illustration. British Journal of Management, 17(4), 263–282.
33. Dickins, D., & O’reilly, D. (2009). The qualifications and independence of internal auditors. Internal Auditing, 24(3), 14-21.
34. Dolinsek, T., & Lutar-Skerbinjek, A. (2018). Voluntary disclosure of financial information on the internet by large companies in Slovenia. Kybernetes, 47(3), 458–473.
35. Dyczkowska, J. (2014). Assessment of quality of internet financial disclosures using a scoring system. A case of Polish stock issuers, Accounting and Management Information Systems, 13(1), 50–81.
36. Efimova, O., & Rozhnova, O. (2018). The Corporate Reporting Development in the Digital Economy. Digital Science, 71–80.
37. Ege, M. S. (2014). Does Internal Audit Function Quality Deter Management Misconduct? The Accounting Review, 90(2), 495–527. doi:10.2308/accr-50871
38. Ezat, A., & El?Masry, A. (2008). The impact of corporate governance on the timeliness of corporate internet reporting by Egyptian listed companies. Managerial Finance, 34(12), 848–867.
39. FASB. (2013). Proposed Accounting Standards Update – Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”FASB.org. Financial Accounting Standards Board.
40. Fuchs, C. & Diamantopoulos, A. (2009). Using single-item measures for construct measurement in management research: Conceptual issues and application guidelines. Die Betriebswirtschaft, 69(2), 195-210.
41. Gajewski, J.-F., & Li, L. (2015). Can Internet-based disclosure reduce information asymmetry? Advances in Accounting, 31(1), 115–124.
42. Ganesan, Y., Hwa, Y. W., Jaaffar, A. H., & Hashim, F. (2017). Corporate governance and sustainability reporting practices: the moderating role of internal audit function. Global Business and Management Research, 9(4s), 159-179.
43. Garson, G. D. (2016). Partial Least Squares (PLS-SEM): 2016 Edition.
44. Geisser, S. (1974). A predictive approach to the random effect model. Biometrika, 61(1), 101–107.
45. Hair, J. F., Hult, G. T. M., Ringle, C. M., Sarstedt, M., & Thiele, K. O. (2017). Mirror, mirror on the wall: a comparative evaluation of composite-based structural equation modeling methods. Journal of the Academy of Marketing Science, 45(5), 616–632.
46. Hair, Jr, J. F., Sarstedt, M., Hopkins, L., & Kuppelwieser, G. V. (2014). Partial least squares structural equation modeling (PLS-SEM). European Business Review, 26(2), 106–121.
47. Hanafi, S. R., Kasim, M. A., Ibrahim, M. K., & Hancock, D. R. (2009). Business Reporting on the Internet: Development of a Disclosure Quality Index, International Journal of Business and Economics, 8(1), 55–79.
48. Hashim, F., Ahmed, E. R., & Huey, Y. M. (2019). Board Diversity and Earning Quality: Examining the Role of Internal Audit as a Moderator. Australasian Accounting, Business and Finance Journal, 13(4), 73-91.
49. Hassan, O. A., & Marston, C. (2010). Disclosure measurement in the empirical accounting literature-a review article, Accountancy Discussion Paper, Accountancy Research Group, Heriot Watt University, 1-50.
50. Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management review, 28(3), 383-396.
51. Ho, S. S., & Wong, S. K. (2001). A study of the relationship between corporate governance structures and the extent of voluntary disclosure. Journal of International Accounting, Auditing and Taxation, 10(2), 139–156.
52. International Accounting Standards Board. (2018). The Conceptual Framework for Financial Reporting 2018. Retrieved from https://www.iasplus.com/en/standards/other/framework
53. James, K. L. (2003). The Effects of Internal Audit Structure on Perceived Financial Statement Fraud Prevention. Accounting Horizons, 17(4), 315–327.
54. Jensen, M. C. (1993). The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems. The Journal of Finance, 48(3), 831–880.
55. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.
56. Johl, K. S., Kaur Johl, S., Subramaniam, N. & Cooper (2013). Internal audit function, board quality and financial reporting quality: evidence from Malaysia, Managerial Auditing Journal, 28(9), 780–814.
57. Jonas, G. J., & Blanchet, J. (2000). Assessing quality of financial reporting. Accounting Horizons, 14(3), 353-363.
58. Kamalluarifin, W. F. S. W. (2016). The Influence of Corporate Governance and Firm Characteristics on the Timeliness of Corporate Internet Reporting by Top 95 Companies in Malaysia. Procedia Economics and Finance, 35, 156–165.
59. Keliwon, K. B., Abdul Shukor, Z., & Hassan, M. S. (2017). Measuring Internet Financial Reporing (IFR) Disclosure Strateg. Asian Journal of Accounting and Governance, 8(Special Issue), 7–24.
60. Keliwon, K. B., Abdul Shukor, Z., & Hassan, M. S. (2018). Internet Financial Reporting (IFR) Disclosure Position and Firm Value. Asian Journal of Accounting and Governance, 9, 111–122.
61. Kent, P., & Stewart, J. (2008). Corporate governance and disclosure on the transition to IFRS. Journal of Accounting and Finance, 48(1), 649–671.
62. Khadaroo, I. (2005). Corporate reporting on the internet: some implications for the auditing profession. Managerial Auditing Journal, 20(6), 578–591.
63. Khan, T. (2007). Internet Financial Reporting: Disclosure about Companies on Websites. Journal of Business Systems, Governance and Ethics, 2(2), 37-46.
64. Kim, H. J., Mannino, M., & Nieschwietz, R. J. (2009). Information technology acceptance in the internal audit profession: Impact of technology features and complexity, International Journal of Accounting Information Systems, 10(4), 214-228.
65. Kelton, A. S., & Yang, Y. (2008). The impact of corporate governance on Internet financial reporting. Journal of Accounting and Public Policy, 27(1), 62–87.
66. Kock, N. (2017). WarpPLS user manual: Version 6.0. ScriptWarp Systems: Laredo, TX, USA.
67. Kock, N. (2016). Advantages of nonlinear over segmentation analyzes in path models, International Journal of e-Collaboration, 12(4), 1-6.
68. Kock, N., & Lynn, G. (2012). Lateral Collinearity and Misleading Results in Variance-Based SEM: An Illustration and Recommendations. Journal of the Association for Information Systems, 13(7), 546–580.
69. Krishnan, G. V., & Parsons, L. M. (2008). Getting to the bottom line: An exploration of gender and earnings quality, Journal of Business Ethics, 78(1–2), 65–76.
70. Kumar, N., & Singh, J. P. (2013). Effect of board size and promoter ownership on firm value: some empirical findings from India. Corporate Governance: The International Journal of Business in Society, 13(1), 88–98.
71. Latan, H., & Ghozali, I. (2016). Partial Least Square Concepts, Methods and Applications Using WarpPLS 5.0.
72. Leung, S., Parker, L., & Courtis, J. (2015). Impression management through minimal narrative disclosure in annual reports. The British Accounting Review, 47(3), 275–289.
73. Lückerath-Rovers, M. (2011). Women on boards and firm performance. Journal of Management & Governance, 17(2), 491–509.
74. Lymer A., Debreceny, R., Gray, G., & Rahman, A. (1999). Business reporting on the internet. London: International Accounting Standard Committee.
75. Malaysian Accounting Standards Board. (2018). The Conceptual Framework for Financial Reporting. Available athttp://www.masb.org.my/pdf.php?pdf=BV2018_revised_CONCEPTUAL%20FRAME WORK.pdfandfile_path=pdf_file (accessed 18 April 2019)
76. Malaysian Securities Commission (2017). Malaysian Code of Corporate Governance. Available at https://www.sc.com.my/wp-content/uploads/eng/html/ cg/mccg2017.pdf (accessed 18 April 2019)
77. Mbobo, M. E., & Ekpo, N. B. (2016). Operationalising the qualitative characteristics of financial reporting. International Journal of Finance and Accounting, 5(4), 184-192.
78. Mokhtar, E. S. (2017). Internet financial reporting determinants: a meta-analytic review. Journal of Financial Reporting and Accounting, 15(1), 116-154.
79. Mousa, G. A., Desoky, A. M., & Sanusi, Z. M. (2012). The association between internal governance mechanisms and corporate value: Evidence from Bahrain. Asian Academy of Management Journal of Accounting and Finance, 8(1), 67-92.
80. Mubako, G. (2018). Internal Audit Outsourcing: A Literature Synthesis and Future Directions. Australian Accounting Review, 29(3), 532–545.
81. Nel, G. F. (2016). Internet investor relations, information asymmetry and the cost of capital: Evidence from JSE listed companies (Doctoral dissertation, Stellenbosch: Stellenbosch University).
82. Nunnally, J. C. (1967). Psychometric Theory, (1 st Ed.). New York: McGraw-Hill.
83. Ojah, K., & Mokoaleli-Mokoteli, T. (2012). Internet financial reporting, infrastructures and corporate governance: An international analysis. Review of Development Finance, 2(2), 69–83.
84. Peni, E., & Vähämaa, S. (2010). Female executives and earnings management. Managerial Finance, 36(7), 629–645.
85. Pina, V., & Torres, L. (2019). Online transparency and corporate governance in Spanish governmental agencies. Online Information Review, 43(4), 653–675. doi:10.1108/oir-03-2018-0102
86. Pirchegger, B., & Wagenhofer, A. (1999). Financial information on the Internet: a survey of the homepages of Austrian companies. European Accounting Review, 8(2), 383–395. doi:10.1080/096381899336113
87. Prawitt, D. F., Smith, J. L., & Wood, D. A. (2009). Internal Audit Quality and Earnings Management. The Accounting Review, 84(4), 1255–1280.
88. Public Oversight Board. (1993). In the public interest: A special report by the public oversight board of the SEC practice section, AICPA. Stamford, CT: POB.
89. Raiborn, C., Butler, J. B., Martin, K., & Pizzini, M. (2017). The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting & Finance, 28(2), 10-21.
90. Roldán, J. L., & Sánchez-Franco, M. J. (2012). Variance-Based Structural Equation Modeling. Research Methodologies, Innovations and Philosophies in Software Systems Engineering and Information Systems, 193–221.
91. Sandhu, A., & Singh, B. (2019). Board composition and corporate reporting on internet: Indian evidence. Journal of Financial Reporting and Accounting, 17(2), 292–319.
92. Sherman, H. D., & Young, S. D. (2016). Where financial reporting still falls short. Harvard Business Review, 94(7), 77-84. Available https://dialnet.unirioja.es/servlet/articulo?codigo=5554603 (accessed 31 May 2020)
93. Sholihin, M., & Ratmono, D. (2013). “Analisis SEM-PLS dengan WarpPLS 3.0 untuk Hubungan Nonlinier dalam Penelitian Sosial and Bisnis [Analysis of SEM-PLS with WarpPLS 3.0 for Nonlinear Relationships in Social and Business Research]”, Yogyakarta: ANDI
94. Sia, C. J., Brahmana, R., & Memarista, G. (2018). Corporate internet reporting and firm performance: Evidence from Malaysia. Contemporary Economics, 12(2), 153-165.
95. Srinidhi, B., Gul, F. A., & Tsui, J. (2011). Female Directors and Earnings Quality*. Contemporary Accounting Research, 28(5), 1610–1644.
96. Terjesen, S., Couto, E.B. & Francisco, P.M. (2016). Does the presence of independent and female directors impact firm performance? A multi-country study of board diversity. Journal of Management & Governance, 20(3), 447-483.
97. Torchia, M., & Calabro, A. (2016). Board of directors and financial transparency and disclosure. Evidence from Italy. Corporate Governance: The International Journal of Business in Society, 16(3), 593–608.
98. Van Peursem, K. A. (2005). Conversations with internal auditors: The power of ambiguity. Managerial Auditing Journal, 20(5), 489-512.
99. Wahid, A. S. (2018). The Effects and the Mechanisms of Board Gender Diversity: Evidence from Financial Manipulation. Journal of Business Ethics, 159(3), 705–725.
100. Wen, Y., Rwegasira, K., & Bilderbeek, J. (2002). Corporate Governance and Capital Structure Decisions of the Chinese Listed Firms. Corporate Governance, 10(2), 75–83.
101. Westphal, J. D., & Bednar, M. K. (2005). Pluralistic ignorance in corporate boards and firms' strategic persistence in response to low firm performance. Administrative Science Quarterly, 50(2), 262-298.
102. Xiao, J. Z., Yang, H., & Chow, C. W. (2004). The determinants and characteristics of voluntary Internet-based disclosures by listed Chinese companies. Journal of Accounting and Public Policy, 23(3), 191–225.
103. Yassin, M. M. (2017). The determinants of internet financial reporting in Jordan: financial versus corporate governance. International Journal of Business Information Systems, 25(4), 526.

To cite this article: Bosi, M. K. (2020). The Effect of Board Characteristics on Internet Financial Reporting Quality: Evidence from Malaysia, International Journal of Academic Research in Accounting, Finance and Management Sciences 10 (3): 81-96.