Risk Management practices and potential fraudulent financial reporting: evidence from Malaysia

Abstract

Purpose – This paper investigates the relationship between risk management practices and potential fraudulent financial reporting in Malaysia by considering recent regulatory reforms of the Malaysian government on risk management practices. Design/methodology/approach – The sample of this study was based on 257 firm-year observations during the 2012–2017 period. This study employed panel-least square regressions with period fixed effects. Findings – This study found a significant association between risk management activities in the disclosure and potential fraudulent financial reporting. Nevertheless, this study found there is insignificant effect of the risk-management committee in reducing potential of fraudulent financial reporting. Originality/value – This study is a pioneer research that relates firms’ risk management practices with potential fraudulent financial reporting measured by F-score. Thus, this study provides an insight to regulators on the extent of risk-management practices in deterring potential fraudulent financial reporting which can be used as an input for greater enforcement of risk-management regulations.

Keywords

• Risk management
• Fraudulent financial reporting
• F-score
• Corporate governance