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Risk reporting: An exploratory study on risk management

disclosure in Malaysian annual reports

Article  in  Managerial Auditing Journal · November 2008

DOI: 10.1108/02686900910919893 · Source: RePEc

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Risk reporting
Risk reporting
An exploratory study on risk management
disclosure in Malaysian annual reports
Azlan Amran, Abdul Manaf Rosli Bin and 39
Bin Che Haat Mohd Hassan
School of Management, Universiti Sains Malaysia, Penang, Malaysia

Abstract
Purpose – The purpose of this paper is to explore the availability of risk disclosures in the annual
reports of Malaysian companies by focusing on the non-financial section of the reports. In addition, the
paper aims to empirically test the sampled companies’ characteristics and to compare the levels of risk
faced by these companies with the disclosures made.
Design/methodology/approach – The method used in this study is content analysis. A total of 100
listed companies’ annual reports were analyzed in order to trace the extent of risk disclosure and the
relationship against firm characteristic and diversification strategy were tested. Stakeholder theory
was used in explaining the linkages between the variables.
Findings – The total number of sentences dedicated for discussion of risk information by the
sampled Malaysian companies is very much less when compared to a 2006 study done by Lisley and
Shrives in the UK. Size does matter and proven significant by the regression results. This finding is
expected and explainable from stakeholder theory.
Research limitations/implications – Future research is encouraged to look deeper into the
different variables that may be involved. The development of a local risk measurement checklist will
help researchers to better reflect on the findings in the local context.
Practical implications – Findings in regards of the current state of risk disclosure should be of
concern to relevant reg ulatory bodies.
Originality/value – This paper provides an initial understanding of risk management disclosure
practices in Malaysia. The government, through various relevant parties, should devise the means to
enhance companies’ involvement in risk management disclosure practices.
Keywords Annual reports, Risk management, Disclosure, Malaysia
Paper type Research paper

Introduction
Comprising both financial and non-financial components, the annual report of a
company has been the chief means of conveying useful information for rational
investment, credit and other decisions over the years. Of late, however, in the wake of
major corporate scandals and fraudulent accounting practices exemplified notably by
the infamous Enron and WorldCom scandals, there has been an increased demand for
more disclosures, particularly in the non-financial segment of the annual report
(Cole and Jones, 2005). Spearheading this call for greater transparency were the five
(now “big” four) accounting firms, which in December 2001, submitted a petition to
the US Exchange and Securities Commission requesting issuance of an interpretive
release to provide guidance to public companies on preparing expanded disclosures for Managerial Auditing Journal
Vol. 24 No. 1, 2009
inclusion in the annual reports. These developments have sparked interest among pp. 39-57
researchers to look into the disclosure practices of companies – in areas such as social q Emerald Group Publishing Limited
0268-6902
and environmental responsibility, intellectual property and risk management. In the DOI 10.1108/02686900910919893
MAJ main, risk management appears to be the least researched among the three (Linsley
24,1 and Shrives, 2005).
Risk is an inescapable element of any business venture. In addition to financial risk,
a company is also susceptible to business risk or changes in the overall economic
climate that can adversely affect the price of its securities. Hence, it is in the
stakeholders’ best interest that risk be disclosed in a timely manner. Given the
40 importance of risk disclosure and the scarcity of research done on it, there is a pressing
need for this issue to be addressed.
This paper seeks to explore the availability of risk disclosures in the annual reports
of Malaysian companies by focusing on the non-financial section of the reports. The
primary objective is to undertake a content analysis of the non-financial section for the
existence and types of risk being disclosed, as well as the extent of such reporting. In
addition, the paper aims to empirically test the sampled companies’ characteristics and
to compare the levels of risk faced by these companies based on the disclosures made.
This study aims to influence the understanding and thus the practice in relation to the
extent of risk disclosure in the Malaysian annual reports.
The organization of this paper is as follows. The first part deals with the
background of the study, the definition of risk management and the development of
risk management disclosure. The second part reviews extant literature on risk
management disclosure followed by the theoretical framework and the development of
hypotheses. This is followed by discussion of the methodology and results. The final
part of the paper summarises the conclusions from the study.

Background
The annual report is a document that is mandated to be produced every year and
expected to provide useful information to users for better decision-making. Yet, due to
changes in business models, the traditional financial section alone has been found to be
inadequate (Maines et al., 2002) to meet the information needs of stakeholders.
Consequently, various individuals and groups are now advocating the use of the
non-financial section to provide the needed additional disclosures.
Among the many new areas of interest that require disclosure in the annual report
are matters relating to social and environmental obligations and the intellectual
property of the company. Currently, such disclosures are still left to the discretion of
the company in many countries and under varying guidelines issued by the authorities
and accounting bodies. According to Linsley and Shrives (2005), studies into various
aspects of voluntary disclosure have taken place in the last 20-30 years. Yet, it is only
recently that the subject of risk and risk management has been seriously examined.
This paper is an attempt at addressing this shortage of studies on risk reporting by
focusing on the Malaysian experience.
It is essential at the outset to explain the meaning of risk management before we
discuss the relevance of risk management strategies and the need for their disclosure in
the annual report. Driven by the increasing complexity of doing business, risk
management has become an important and integral part of the company’s internal
control and governance in order to achieve its plans and objectives. Briefly, risk
management refers to the methods and processes used by organizations to manage
risks (or seize opportunities) related to the achievement of their objectives. A risk
management framework typically involves a few processes. Firstly, there is the careful
identification, measurement, and assessment of risk types and contingencies that a Risk reporting
company might face. Secondly, it involves the formulation of a response model or
strategic action to tackle the risks (both threats and opportunities). This includes
determining capacity for bearing risk, risk reduction or mitigation procedures and
other strategies to benefit from the impact of the potential risk. Finally, it requires the
monitoring and checking of the implementation of all the actions planned as proposed
by the response model (Lajili and Zeghal, 2005). By identifying and proactively 41
addressing risks and opportunities, the company protects and creates value for their
stakeholders, including owners, employees, customers, regulators, and society overall.
Such risk management has been mandated to be disclosed by the accounting standard
boards in some developed countries. However, risk management disclosure is still very
much voluntary in many parts of the world.

Development of risk management disclosure

Debate on the importance of risk reporting commenced as early as 1998 when the
Institute of Chartered Accountants in England and Wales (ICAEW) published a
discussion paper entitled “Financial Reporting of Risk – Proposals for a statement of
Business Risk.” The ICAEW proposed that directors provide risk management
information in the annual report to facilitate informed decision making in the
marketplace (Linsley and Shrives, 2006). According to Linsley and Shrives (2006)
current annual reports do provide some form of risk disclosure but not in a
comprehensible manner for the shareholders to understand. In fact, the annual report
does not present a coherent discussion of the risks that challenge the company and the
actions the directors are planning to mitigate the risks.
To date, reviews on the status of risk reporting in terms of the regulatory
perspective is piecemeal in nature, where it focuses predominantly on the market risk
associated with the use of derivatives (e.g. IAS 32 and IAS 39) (Beretta and Bozzolan,
2004). In the USA, Financial Reporting Release No. 48 (FRR 48) issued in 1997,
requires SEC registrants to disclose both qualitative and quantitative information on
market risks in the notes to the accounts and also in the Management, discussion,
and analysis (MDA) section. The same regulatory principles are also applied in
Canada where the Exchange requires the companies to disclose risk information
in the MDA section. In the UK, the operating and financial review (OFR), the
equivalent of MDA, was introduced in 1993 for listed companies and is still
non-mandatory. The OFR recommends a company to disclose its review of key risks
and strongly encourages the inclusion of a clear discussion of trends affecting the
future. In Germany, GAS5 requires information on risks to be presented in a separate
section of the management report that accompanies the consolidated financial
statement. In Australia, the Australia’s ASX Corporate Governance Principles and
Recommendations issued Principle 7 on risk management and recognition. This
shows the increasing importance of risk management as part of good corporate
governance practices.
In Malaysia, discussion on risk management and its requirement for disclosure can
be explicitly found in the Financial Reporting Act 1997 and Bursa Malaysia listing
requirements which stipulate that the company is required to disclose its financial
position, management, and operations in order to enable shareholders and investors to
assess its performance for the financial period. In addition to this overarching
MAJ requirement, Bursa Malaysia also lists the following additional specific statements to
24,1 be included by listed companies in their annual reports:
(1) A statement on Corporate Governance as being practiced by the company.
(2) A statement of the state of the internal control, risk control and risk management.
(3) A statement by the chairman that discusses the overall achievement and
42 prospect of the company.

The Exchange further requires listed companies to report in the Chairman’s statement
in the annual report, a brief description of industry trends and developments and a
discussion and analysis of the group’s performance during the year and the material
factors underlying its results and financial position. The said discussion and analysis
should emphasize trends and identify significant transactions or events during the
year under review. The provisions above are drawn to engender more effective
corporate governance practices that would promote transparency, accountability and
integrity of financial information on a timely, material and relevant basis to
shareholders, investors and people having an interest in the local company.

Literature review
To date, research on risk disclosure has been undertaken mostly in the western setting.
A general review of the relevant literature indicates that there are two groups of
research approaches. The first group looks at the whole annual report as the source for
content analysis of risk disclosure and the other group focuses on the MDA. According
to Linsley and Shrives (2006), a large number of disclosure studies have been
performed in the last 30 years, particularly in countries like the USA, UK, Canada, and
Germany. This is perhaps due to the mandatory measures being imposed on the
companies in these countries to disclose their risks.

Usefulness of risk management disclosure

Studies conducted in the USA to determine the usefulness of risk management
disclosure are mostly market-based in nature. Examples of such studies are Linsmeir
et al. (2002) and Venkatachalam (1996). These studies investigate the relationship
between risk disclosure and the interest rates, foreign currency exchange rates and
commodity prices. The study by Linsmeir et al. (2002) provides strong evidence of the
usage of risk disclosure by investors. The researchers found that risk disclosure has
the impact of reducing investors’ uncertainty and the diversity of opinions on the
market valuations of firms. In another study, Rajgopal (1999) examined the association
between commodity price risk disclosure and market view of oil and gas price
sensitivity. The study concluded that such disclosure proves to be reliable indicators of
price sensitivity that can help investors make wise judgments.
There are also a number of studies that look specifically at MD&A and whether it
provides information that is valuable to the stakeholders, specifically investors.
The study of the retail industry by Cole and Jones (2004), for example, found that
disclosure in the MDA is useful in forecasting future revenues and returns. In this
regard, historical information on capital expenditure and store openings can help
investors make informed decisions regarding the firm’s future. Additionally, the
researchers found that store sales growth information has the power to predict future
incremental sales and stock returns.
 In concluding this part of the discussion on the usefulness of risk management Risk reporting
disclosure, it is worthwhile to consider the views of Beretta and Bozzolan (2004) to the
effect that recent surveys conducted among institutional investors have revealed a
strong demand for increased corporate risk management disclosure to improve
investment decisions.

Extent of risk management disclosure 43

There are a number of studies that had explored the extent of risk management
disclosure in western countries. A study by Lajili and Zeghal (2005) examined the annual
reports of TSE 300 Canadian companies. Employing content analysis, the researchers
found that 85.09 percent of the sampled companies made disclosures in the MDA only;
82.46 percent disclosed in the notes to the accounts only; and 67.55 percent disclosed in
both sections. They also found that financial risk is the most frequently disclosed risk by
the companies and include information relating to operations in foreign currencies. In
the latter case, risk management tools in the form of hedging using forward options,
futures and swap contracts is the most often mentioned. Trailing behind financial risk is
credit risk followed by market risk, which deals with companies’ reaction to competition.
The study also found that the disclosures are almost always qualitative in nature and
lacking in specificity and depth.
Beretta and Bozzolan (2004) studied the quality of risk disclosure of 85 Italian Stock
Exchange companies by focusing on the MDA section only. Even though they
identified 75 different risk items being disclosed in the MDA, they found that
companies in general avoid communicating the expected impact in quantitative terms
of these risks and the economic direction of the firms. The firms are also reluctant to
indicate whether the future risks disclosed will impact them, either positively or
negatively. They are more inclined to report past and present risks.
Another study using content analysis was conducted in the UK context by Linsley
and Shrives (2005). A total of 6,168 risk sentences were identified and consistent with
the above study by Lajili and Zeghal, financial risk is the most frequent type of
disclosure found within the sample. This is followed by strategic risk and integrity
risk. Most of the disclosure is qualitative in nature which is again consistent with the
Lajili and Zegal findings.
From the above discussion, financial risk appears to be the most frequently
disclosed type of risk. It is also apparent that disclosures in the main lack specificity
and are predominantly qualitative. This paper is expected to add to the above literature
by providing insight from the perspective of a developing country.

Factors that influence risk disclosure

On the factors that influence the extent of risk disclosure, there are very few studies done.
Beretta and Bozzolan (2004) tested company size and industry in relation to risk disclosure
but failed to conclusively prove the association between these variables. Hence, they
concluded that the two variables have no influence on the extent of disclosure. Another
notable study was conducted by Linsley and Shrives (2006) who examined the
relationship between company size and level of risk and the extent of risk disclosure. Their
findings suggest that there is a positive correlation between size and disclosure but no
correlation between level of risk and risk disclosure. Hence, Linsley and Shrives (2006)
concluded that stakeholders are not given enough information by higher risk companies.
MAJ The most recent study on factors that influence risk disclosure was conducted by
24,1 Abraham and Cox (2007). This study examined the relationship of ownership,
governance and US listing characteristics to the amount of risk disclosure. The study
found a negative relationship between institutional ownership and extent of disclosure,
suggesting that institutional investors react negatively to risk disclosure. In terms of
governance, two variables, namely, the number of executive directors and independent
44 directors, were found to impact the extent of risk disclosure. In addition, the study found
that UK companies which are listed in the US listing exchange tend to disclose more.
The above discussion provides an overview of the variables used to test their
relationship with risk disclosure. It is important to note that it is not within the purview
of this research to examine all the above variables, since this study is only an
exploratory study of risk disclosure reported by Malaysian companies.

Theoretical framework and hypothesis development

This study employs stakeholder theory in developing the hypotheses to be tested. This
theory was chosen on account of its strength in explaining the interrelatedness of a
company and its stakeholders. Moreover, the theory had also been widely used in
other disclosure studies, such as, in corporate social and environmental disclosure
(Amran, 2006).
Freeman (1984) defines the stakeholder as any group or individual who affects or is
affected by the achievement of the firm’s objectives.
Gray et al. (1995a, p. 53) assert that:
[. . .] for the corporation, continued existence requires the support of the stakeholders and
their approval must be sought and the activities of the corporation adjusted to gain that
approval. The more powerful the stakeholder, the more the company must adapt. Social
disclosure is thus seen as part of the dialogue between the company and its stakeholder.
Essentially, stakeholder theory is about the dynamic and complex relationship
between the organization and its surroundings (Gray et al., 1996). A major task of the
company is to attain the ability to balance the conflicting demands of various
stakeholders of the firm (Roberts, 1992).
Information is a key element in any decision-making. A stakeholder, such as an
Investor, would exert his/her position to gather as much information on risks as required
from the company in order to make informed decisions. Risk disclosure is often associated
with the practice done in developed countries, since the governments there have defined
regulations that make risk disclosure mandatory for the benefit of stakeholders. For this
exploratory study, we will examine the relationship of company diversification strategy,
leverage, size and industry to Malaysian companies’ willingness to disclose risks.

Level of risk and risk disclosure

According to Frenkel et al. (2000), diversification is one of the main measures open to
the company in confronting risks. It includes product and regional diversification.
Referred to as “risk defusing operators” (Huber et al., 2001), such measures transform
the gross risk of an alternative into net risk. Notwithstanding the popularity of
diversification, most companies struggle to gain profitability through this measure
(Bishop, 1995). Zook (2001) found that 90 percent of diversification efforts over the past
decade have failed. One of the main reasons for this situation is the use of poor
diversification strategies. Many companies found to their dismay that diversification Risk reporting
often contributes to poor outcomes, such as reduced organizational fit, inconsistencies,
loss of focus and ultimately lower profitability (Zook, 2001; Zook and Allen, 2001).
Given this scenario, companies that plan to proceed with diversification are expected to
explain the potential attendant risks to the stakeholders. Such information is important
in order to convince existing and potential stakeholders to cooperate with their
diversification plan. Based on this reasoning, the following hypotheses are developed: 45
H1. Ceteris Paribus, there is a positive relationship between product
diversification and risk disclosure.
H2. Ceteris Paribus, there is a positive relationship between geographical
diversification and risk disclosure.

Size
Many studies have managed to prove an association between company size and
voluntary disclosure level (Shrives and Linsley, 2003; Thompson and Zakaria, 2004;
Amran, 2006). Beretta and Bozzolan (2004), however, reported a non-significant
relationship between the two variables in their study. Size is also included in almost
every disclosure study, either as a variable of interest or as a control variable (Ahn and
Lee, 2004). As the company becomes bigger, the number of stakeholders involved will
also increase. With this increase, the burden of disclosure becomes heavier for the
company since it has to cater to the needs of a bigger group of people. Based on the
above argument, the following hypothesis is developed:
H3. Ceteris Paribus, there is a positive relationship between size of the company
and risk disclosure.

Industry
Previous studies have shown that the nature of a company does affect its disclosure
(Thompson and Zakaria, 2004, Amran, 2006). Companies which operate in different
industries are expected to experience different kinds of risk. An industry may be
subjected to special regulations due to its nature, thus increasing the risk exposure of
companies aligned to it:
H4. Ceteris Paribus, there is an association between industry membership and risk
disclosure.

Leverage
Leverage has been used as a proxy for risk in many disclosure related studies and the
findings show mixed results (Ahn and Lee, 2004). Based on stakeholder theory, the
company is expected to undertake more risk disclosure in order to provide justification
and explanation for what is happening in the company. Ahn and Lee (2004) stated that
when a company has a disproportionately higher level of debt in its capital structure,
the creditors may be in a bargaining position to force the company to disclose more
information. Based on this reasoning, the following hypothesis is developed:
H5. Ceteris Paribus, there is positive relationship between company’s leverage
and risk disclosure.
MAJ Methodology
24,1 Unit of analysis for this study is the annual report of the public listed company on the
Bursa Malaysia. The sample of companies was drawn from the annual reports of listed
companies on the Main and Second Board of Bursa Malaysia for the year 2005. A total
of 100 companies were selected randomly, which comprise 70 from the main board and
30 from the second board. Refer to Appendix 3 for the list of companies.
46
Method of analysis
The method used in this study to analyze risk disclosure is content analysis. It is
chosen since the study focuses on the extent or amount and not the quality of the risk
disclosures. Content analysis is also the most common and widely used method in
assessing disclosure (Gray et al., 1995a,b; Hackston and Milne, 1996; Haniffa and
Cooke, 2002; Raar, 2002; Amran, 2006). Weber (1990) defines content analysis as a
research method that uses a set of procedures to make valid inferences from text.
Weber added that the rule of this inferential process varies based on the interest of the
investigator. This research technique enables a replicable and valid inference from
data according to the context (Krippendorff, 1980). In order to ensure the replicable
manner of inference, a set of interrogation instrument, checklist and decision rules is
developed. The checklist and decision rules used in this study are the those developed
by Linsley and Shrives (2006) (Appendix 1 and 2). The same method is replicated in
order to classify whether the information in the annual report is about risk or not.
As highlighted in the earlier section, this study focuses only on the non-financial
section or the narrative part of the annual report. The range of risks examined in this
study is based on Linsley and Shrives’ model (2006) who proposed six types of major
risk areas. They include financial risk, operation risk, empowerment risk, information
processing and technology risk, integrity risk and strategic risk.
To ensure reliability of the coded output, the coder underwent a short period of
training to master the checklist and the decision rules. The coder was also exposed to
different examples of the various types of risk information. Later, the coder’s
understanding and skill was tested by using the inter-rater or inter-observer method,
where two coders are involved in analyzing the same set of material. In this case,
the two persons involved are the coder and the researcher and they analyzed five sets
of annual report. The results of the content analysis done by both coders were than
correlated to determine the extent of agreement. The result showed that there were no
significant differences between the scores.
Gray et al. (1995b) raised a major concern on the unit of analysis used to determine
the amount of disclosure. Milne and Adler (1999) proposed the use of “sentence” as a
basis for coding which is far more reliable than other units of analysis. Further,
although most of the studies use sentences for coding, the use of word or area of page
(e.g. tenths or one hundredths) to measure the disclosure amount is common. Using
word or areas of page as a basis to measure disclosures complicates reliability. Milne
and Adler (1999) and Linsley and Shrives (2006) criticized the use of words since,
by themselves, words do not convey any meaning unless referred to the sentences for
their proper contexts. Moreover, it is difficult to decide which words are considered as
risk disclosure (Linsley and Shrives, 2006).
Likewise, using a plastic grid sheet over a body of text and trying to code the
contents of each square would also result in meaningless measures. This method may
have the advantage of including charts or graphs into the analysis but it is also Risk reporting
exposed to much introduced when unnecessary pictures or different fonts, column or
page sizes are used in the annual report. Hackston and Milne (1996) made use of all
three measures and found that they produced the same results – significant correlation
between the three measures. Hence, based on the above argument, it appears that using
sentences as a basis to code and count the content of risk disclosure could serve the
purpose of this study. The same method had also been employed by Linsley and 47
Shrives (2006).
The measurement for the other variables used in this study can be found in Table I.

Data analysis
This study uses multiple regressions in assessing the variability of the extent of risk
disclosure. This statistical method has been widely used in previous research
(Hackston and Milne, 1996; Cooke, 1998; Haniffa and Cooke, 2002 and Amran, 2006).
Based on the above discussion of dependent and independent variables, the following
regression model was developed:
Risk management disclosure ¼ a0 2 b1 DIPROD þ b2 DISEG þ b3 SIZE þ b4 LEV

þ b5 CONS þ b6 TRAD þ b7 HOTEL þ b8 INFRA

þ b9 PROP þ b10 TECH þ b11 TRAD=SERV þ 1

where a0, intercept; DIPROD, product diversification; DISEG, geographical segment
diversification; SIZE, company’s size; LEV, company’s leverage; CONS, construction
sector; TRAD, trading sector; HOTEL, hotel sector; INFRA, infrastructure sector;
PROP, property sector; TECH, technology sector; TRAD/SERV, trading/service sector;
1, error term.
The correlation matrix was reviewed and the variance inflation factors computed to
detect whether there was multicollinearity problem. Further analysis to see whether

Variables Acronym Measurement

Total sentences TSENT Total number of sentences

Diversification of product DIPROD Total number of products or services produced by
the company
Diversification of market DISEG Total number of countries the company penetrated
Firm size SIZE Revenue for the year
Leverage LEV Total liabilities divided by the total assets
Industry type-based on Industry classified per Bursa Malaysia sectors
Bursa Malaysia classification classification:
CONS Consumer sector
TRAD Trading sector
HOTEL Hotel sector
INFRA Infrastructure sector
PROP Property sector Table I.
TECH Technology sector Operationalisation of the
TRAD/SERV Trading/services sector research variables
MAJ the multiple regression assumptions have been violated was also carried out.
24,1 The normality, linearity and homoscedasticity assumptions were determined based on
the analysis of residuals, plots of the studentized residuals against predicted values,
and Q-Q plot.
The above analyses showed that the untransformed data violated the multiple
regression assumption on normality, linearity and homoscedasticity and none on
48 multicollinearity effects. In addressing the above violation and in order to ensure the
rigorousness of the regression test, the data was then transformed into normal data
and re-checked for violation. The problem was then eliminated.

Results
Overall, practices
In sum, the analysis of the narrative section of annual reports belonging to 100 selected
companies reveals that risk management disclosure is being prac tised by Malaysian
companies. Of the risk types being disclosed, the most reported is strategic risk where
97 percent of the companies selected disclosed some kind of discussion on this particular risk
type. This is followed by operation risk at 96 percent and empowerment risk (82 percent).
The rest of the information is available in Table II. Gleaning through the narrative section,
this study sensed that Malaysian companies mainly discuss risks associated with the
industry and competitors. They also dwell on their plans and performances.
Further investigation on the number of sentences also yielded consistent results
with the findings discussed above. Strategic risk came top with 647 sentences as
opposed to 613 sentences identified for operation risk. Both risk types contribute
significantly to the tally of sentences on risk management – calculated to be
2,023 sentences. In comparison with the other risk types, it is evident from the big gap
that separates them that Malaysian companies choose to concentrate their disclosure
on these two types of risk. This is not altogether a big surprise given the requirement
of the Bursa Malaysia for companies to discuss industry trends, development, group
performance and the material factors underlying results and financial position. Even
though there is no explicit requirement for companies to discuss risks, most of the
sentences identified fall under the risk categories of the checklist.
Findings on the location (or titles) where risk disclosures are made are presented in
Figure 1. The bulk of the risk management disclosure can be found in the chairman’s
statement, per the listing requirement of the Bursa Malaysia. Some risk management
disclosures are presented under the “operation review” title. It is important to note that

Number of companies Number of companies not

Type of risk disclose (percent) disclose (percent)

Financial risk 64 36
Operation risk 96 4
Table II. Empowerment risk 82 18
Number of companies Information and technology risk 50 50
disclose vs non-disclose Integrity risk 58 42
on each type of risk Strategic risk 97 3
 700 Risk reporting
600

500

49
400

300

200

100
Figure 1.
Number of sentences
0 disclosed for each
Financial Operation Empowerment Information and Integrity Strategic types of risk
risk risk risk technology risk risk risk

this is the main title used (with some companies having sub-titles to address the
different risk types). Of the selected companies, only one used Management,
discussion, and analysis as the main heading in the narrative part of the annual report
where most of the risk management disclosures are located (Figure 2).

Multivariate analysis
Table III provides descriptive statistics of the total sentences of risk management
disclosure and the continuous independent variables. It is noticeable that total

Operation Review
34%

Chairman Figure 2.
Statement Management, Location of risk disclosure
65% Discussion and reported in the annual
Analysis report
1%

Variables Max Mean SD Skewness Kurtosis

Product segment 9 2.67 1.68 0.96 0.98 Table III.

Geographical segment 9 2.18 1.66 1.69 2.75 Descriptive statistics of
Size 18,978 1613.45 3545.84 3.32 11.73 total sentences and
Leverage 94 43.12 23.49 0.02 0.85 continuous independent
Total sentences disclosed 78 20.22 16.36 1.61 2.43 variables
MAJ sentences for risk management disclosure ranges from the minimum of three sentences
24,1 to the maximum of 78 sentences. On average, an annual report has 20 sentences
devoted to the discussion of risk. The minimum of three pages are attributed mainly to
the Second Board companies. On average, a company spends only one page in their
annual report as depicted by the mean. The measure of dependent variables was found
not to be normally distributed as indicated by the standard test on skewness and
50 kurtosis[1]. Similarly, the continuous independent variables were found not to be
normally distributed. As such, the dependent and continuous independent variables
were transformed to normal scores before conducting the regression analysis.
The next test conducted in order to ensure the rigorousness of the regression was
the multicollinearity, homoscedasticity and linearity tests (Haniffa and Cooke, 2005).
Table IV presents the correlation matrix for the dependent variable and continuous
independent variables. The table provides strong justifications that multicollinerity is
not a problem[2] and neither are the homoscedasticity and linearity.
Table V summarizes the results of the multivariate regression model using normal
scores. The adjusted R 2 for the regression model was 0.433. This implies that the
amount of variability in CSR disclosure explained by the variable chosen in this study
is quite large. None of the diversification variables were found to be significant.
However, the relationship existing between the variables are positively correlated,
which is consistent with the hypothesis. Size variable was found significant at the

DIPROD DISEG SIZE LEV TSENT

DIPROD 1
DISEG 0.234 * 1
SIZE 0.067 0.188 1
LEV 0.105 2 0.117 0.125 1
TSENT 0.123 0.241 * 0.516 * * 0.155 1
Table IV.
Correlation matrix Notes: *and * * correlation is significant at the 0.05 and 0.01 levels, respectively

R2 0.501
Adjusted R 2 0.433
SE 0.724
F-value 7.291 (p ¼ 0.00)
Product segment 0.090 (1.018)
Geographical segment 0.113 (1.288)
Size 0.632 (7.354) *
Leverage 0.066 (0.818)
Construction 0.031 (0.375)
Consumer 0.050 (0.555)
Hotel 0.087 (1.118)
Infrastructure 0.266 (3.314) *
Plantation 0.024 (0.252)
Properties 0.044 (0.544)
Technology 0.170 (2.106) *
Trading/services 0.063 (0.668)
Table V.
Regression results Note: *Significant at the 0.05 level
5 percent level. The result is expected, as it is consistent with Linsley and Shrives Risk reporting
(2006) and most of the other disclosure based studies conducted in the Malaysian
context (Thompson and Zakaria, 2004, Amran, 2006). Leverage, which is the popular
proxy for risk was found to be not significant. However, the positive correlation
between the two variables is consistent with the hypothesis. Two out eight industry
variables were found significant at 5 percent level. The nature of both industries,
namely, infrastructure and technology industries perhaps influences the companies to 51
have more risk information disclosed.

Conclusion
The purpose of this study is to investigate the status of risk disclosure practices among
Malaysian companies. In this endeavor, it focuses on the narrative part of the annual
report since indications from an earlier study have shown that most of the disclosures
are qualitative in nature and concentrated in the chairman’s statement (Amran, 2006).
As confirmed by the descriptive analysis discussed above, the majority of the
companies chosen for this study do disclose their risk information in the chairman’s
statement. This is in compliance with the ruling of the Bursa Malaysia alluded to
earlier. However, this study also found some indications of extra effort in providing
separate sections entitled Management, discussion, and analysis and operation review
to discuss risk management.
The total number of sentences dedicated for discussion of risk information by the
sampled Malaysian companies is very much less when compared to the study done by
Linsley and Shrives, 2006. This is not altogether unexpected since disclosure reporting
by Malaysian companies is still at the infancy stage – a fact that has also been
confirmed by other disclosure studies, such as Amran’s (2006) Corporate Social
Reporting. Due to the increasing importance of the risk management information, the
Malaysian government, through various relevant parties, should devise the means to
enhance companies’ involvement in risk disclosure.
Size does matter and is proven significant by the regression results. This finding is
expected and explainable from stakeholder theory. As the company grows bigger, it
will have a larger pool of stakeholders who would be interested to know the affairs of
the company. The nature of the industry is also found to influence the extent of risk
disclosure. Industries with greater exposure to risks, such as the infrastructure
industry, would have many more things to discuss.
In summary, this research contributes by providing an initial understanding of risk
management disclosure practices in Malaysia. It contributes to the literature particularly
in Malaysia context where risk disclosure practice is still in infancy stage. This research is
not without limitations. This research based purely on the Linsley and Shrives (2006)
checklist as it may not reflect local stakeholders demand. The variables used is also limited
to only few variables. Future research is encouraged to look deeper into the different
variables that may be involved. The development of a local risk measurement checklist
will help researchers to better reflect on the findings in the local context.

Notes
1. The skewness value provides an indication of the symmetry of distribution. Kurtosis, on the
other hand, provides information on the “peakedness” of the distribution. If the distribution
is perfectly normal, the skewness and kurtosis value is “0” (Pallant, 2001).
MAJ 2. The rule of thumb for checking problems of multicollinearity is when the correlation is
. 0.800 (Gujarati, 2003; Haniffa and Cooke, 2005).
24,1
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Appendix 1. Types of risk in each category

(1) Financial risk:
.
Interest risk
.
Exchange risk.
.
Commodity.
.
Liquidity.
.
Credit
(2) Operations risk:
.
Customer satisfaction.
.
Products development.
MAJ .
Efficiency and performance.
24,1 .
Sourcing.
.
Stock obsolescence and shrinking.
.
Product and service failure.
.
Environment.
54 .
Health and safety.
.
Brand name erosion
(3) Empowerment risk:
.
Leadership and management.
.
Outsourcing.
.
Performance incentives.
.
Change readiness.
.
Communications
(4) Information processing and technology risk:
.
Integrity.
.
Access.
.
Availability.
.
Infrastructure
(5) Integrity risk:
.
Management and employee fraud.
.
Illegal acts.
.
Reputation
(6) Strategic risk:
.
Environmental scan.
.
Industry.
.
Business portfolio.
.
Competitors.
.
Pricing.
.
Valuation.
.
Planning.
.
Life cycle.
.
Performance measurement.
.
Regulatory.
.
Sovereign and political.

Appendix 2. Decision rules for risk disclosures

(1) To identify risk disclosures, a broad definition of risk is to be adopted as explained below.
(2) Sentences are to be coded as risk disclosures if the reader is informed of any opportunity
or prospect, or of any hazard, danger, harm, threat or exposure, that has already
impacted upon the company or may impact upon the company in the future or of the
management of any such opportunity, prospect, hazard, harm, threat or exposure.
 (3) The risk definition just stated shall be interpreted such that “good” or “bad” “risk” and Risk reporting
uncertainties will be deemed to be contained within the definition.
(4) The type of risk disclosure shall be classified according to Appendix 1.
(5) If a sentence has more than one possible classification, the information will be classified
into the category that is most emphasized within the sentences.
(6) Tables (quantitative and qualitative) that provide risk information should be interpreted
as one line equals one sentence and classified accordingly. 55
(7) Any disclosure that is repeated shall be recorded as a risk disclosure sentence each time
it is discussed.
(8) If a disclosure is too vague in its reference to risk, then it shall not be recorded as risk
disclosure.

Appendix 3
Listed companies selected for study in the main board
(1) DKLS Industries Berhad
(2) IJM Corporation Berhad
(3) Malaysian Resources Corporation Berhad
(4) MudaJaya Group Berhad
(5) UEM World Berhad
(6) Ajinomoto Malaysia Berhad
(7) British American Tobacco (Malaysia) Berhad
(8) Bonia Corporation Berhad
(9) Cosway Corporation Berhad
(10) G.A Blue International Berhad
(11) I Berhad
(12) Kenmark Intustrial Co (M) Berhad
(13) Malayan Floor Mills Berhad
(14) Padini Holdings Berhad
(15) UMW Holdings Berhad
(16) Xian Leng Holdings Berhad
(17) Yeoh Hap Seng (Malaysia) Berhad
(18) Shangri-La Hotels (Malaysia) Berhad
(19) AMSteel Corporation Berhad
(20) Can One Berhad
(21) DRB-Hicom Berhad
(22) Esso Malaysia Berhad
(23) Leader Universal Holdings Berhad
(24) Melewar Industrial Group Berhad
(25) Malaysian Smelding Corporation Berhad
(26) Octagon Consolidated Berhad
(27) Scomi Group Berhad
MAJ (28) Shell Refining Company
24,1 (29) Sitt Tatt Berhad
(30) Southern Steel Berhad
(31) Titan Chemicals Corporation Berhad
(32) Tasek Corporation Berhad
56 (33) Tenggara Oil Berhad
(34) Wijaya Baru Global Berhad
(35) Whitehorse Berhad
(36) Yi Lai Berhad
(37) YTL Cement Berhad
(38) KL Infrastructure Group Berhad
(39) Puncak Niaga Holdings Berhad
(40) Time dotcom Berhad
(41) Golden Hope Plantation Berhad
(42) IOI Corporation Berhad
(43) Kulim (Malaysia) Berhad
(44) TH Group Berhad
(45) Farlim Group (Malaysia) Berhad
(46) IGB Corporation Berhad
(47) Johor Land Berhad
(48) M K Land Hholdings Berhad
(49) Negara Properties (Malaysia) Berhad
(50) Sunrise Berhad
(51) UDA Holdings Berhad
(52) United Malaysia Land Berhad
(53) LKT Industrial Berhad
(54) Patimas Computers Berhad
(55) Unisem (M) Berhad
(56) Air Asia Berhad
(57) Astro All Asia Networks Plc
(58) Courts Mammoth Berhad
(59) Edaran Ottomobil Nasional Berhad
(60) Genting Berhad
(61) KUB Malasia Berhad
(62) Malaysian Airline System Berhad
(63) Maxis Communication Berhad
(64) Measat Global Berhad
(65) Plus Expressways Berhad
(66) Sime Darby Berhad
 (67) Telekom Malaysia Berhad Risk reporting
(68) Tenaga Nasional Berhad
(69) Time Engineering Berhad
(70) Utusan Melayu (Malaysia) Berhad

Listed companies selected for study in the second board

(1) Gadang Holdings Berhad
57
(2) Zecon Engineering Berhad
(3) Baswell Resources Berhad
(4) Farm Best Berhad
(5) Hunza Consolidation Berhad
(6) Kawan Food Berhad
(7) Khind Holdings Berhad
(8) Paragon Union Berhad
(9) Takaso Resources Berhad
(10) Widetech (Malaysia) Berhad
(11) A-Rank Berhad
(12) Axis Incorporation Berhad
(13) Bright Packaging Industry Berhad
(14) Denko Industrial Corporation Berhad
(15) EG Industries Berhad
(16) GE-Shen Corporation Berhad
(17) Jasa Kita Berhad
(18) Mercury Industries Berhad
(19) Pensonic Holdings Berhad
(20) Rapid Synergy Berhad
(21) Stone Master Corporation Berhad
(22) Woodland Holdings Berhad
(23) Amtel Holdings Berhad
(24) Comintel Corporation Berhad
(25) Eden Enterprises (M) Berhad
(26) Hexagon Holdings Berhad
(27) Lion Forest Industries Berhad
(28) Rhythm Consolidation Berhad
(29) See Hup Consolidated Berhad
(30) Yin Son Holdings Berhad

Corresponding author
Azlan Amran can be contacted at: [email protected]

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