Universal Journal of and Finance 9(3): 388-395, 2021 http://www.hrpub.org DOI: 10.13189/ujaf.2021.090313

Risk Management Committee Attributes: A Review of the Literature and Future Directions

Abdessetar Bensaid*, Suhaimi bin Ishak, Ifa Rizad binti Mustapa

Tunku Intan Safinaz School of Accountancy, Universiti Utara Malaysia, Malaysia

Received March 24, 2021; Revised May 13, 2021; Accepted June 6, 2021

Cite This Paper in the following Citation Styles (a): [1] Abdessetar Bensaid, Suhaimi bin Ishak, Ifa Rizad binti Mustapa, "Risk Management Committee Attributes: A Review of the Literature and Future Directions," Universal Journal of Accounting and Finance, Vol. 9, No. 3, pp. 388 - 395, 2021. DOI: 10.13189/ujaf.2021.090313. (b): Abdessetar Bensaid, Suhaimi bin Ishak, Ifa Rizad binti Mustapa (2021). Risk Management Committee Attributes: A Review of the Literature and Future Directions. Universal Journal of Accounting and Finance, 9(3), 388 - 395. DOI: 10.13189/ujaf.2021.090313. Copyright©2021 by authors, all rights reserved. Authors agree that this article remains permanently open access under the terms of the Creative Commons Attribution License 4.0 International License

Abstract The aim of this paper is to review existing literature related to the risk management committee attributes (RMC) that can facilitate transactions between board committees and add value to corporations. The 1. Introduction emphasis of this study is on RMC as it has become a crucial element, especially after the collapse of large corporations. Risk Management Committee (RMC) has become one RMCs have attracted the attention of academics and of the crucial players in the current corporations’ era. Being become one of the important factors that enhance the part of the board of directors, this sub-committee is companies’ performance as well as the quality of financial expected to provide adequate resources to the board and reporting (FRQ), and its demographic attributes are assist the company in monitoring the management’s expected to play an important role in corporations. activities which enhance the performance of firms and However, prior studies on the area have found inconclusive minimize the propensity of earnings manipulations (EM) results and provide several gaps in the literature due to the [1]. According to a study done by [2], RMC pursues a vital mixed findings. In addition, prior studies highlight the role in reducing the operational risks and enhancing RMCs attributes that affect corporate’s performance and performance by ensuring that the management avoids risky also the reporting quality and provide an urge to conduct projects and invests in profitable ones. In the same vein, more researches in related fields. Taking the period from according to [3] “establishing a standalone RMC can 2003 to 2021, this paper reviews previous studies and gives enhance the effectiveness of the risk-assessment process, a better understanding of RMC's role and future research and in parallel to that, reduce financial risks (e.g., financial directions. In addition, this study provides crime prevention)”. recommendations to the policymakers, regarding the In other words, RMCs play pivotal roles for the firms’ success or failure. However, in most countries around the demographic attributes of RMCs that can influence world, risk supervision traditionally has been one of the corporate performance and its FRQ. Finally, this review responsibilities of the committee and board of demonstrates that businesses should concentrate on these directors, which has resulted in some confusion. According mechanisms to strengthen their performance and their to [4], the audit committee in such a situation will be given reporting quality. more responsibilities because the risks related to operations Keywords Risk Management Committee Attributes, are diverse and broad, including “both financial and Financial Reporting Quality, Board Committees, non-financial risks”, which is not under the control of the Corporate Financial Performance audit-committee. Previous researches by Yatim [5], Brown, Universal Journal of Accounting and Finance 9(3): 388-395, 2021 389

et al. [6], and Kallamu [7] have backed up this claim, et al. [1] studied the stand-alone RMCs’, the governance concluding that in today's dynamic and high-risk corporate practice, and financial reporting quality; Ng, et al. [4] environment, ACs are not sufficient for monitoring the studied the RMC role in firms’ underwritten risk that has financial and non-financial risks. Furthermore, the AC's a relationship with the going concern. Abdullah, et al. [14] dual role, its complex functions, the expanded studied the RMC and hedging activities as well as the responsibilities, and the lack of resources such as expertise information disclosure. Wu, et al. [15] show that the RMC and time required to monitor the organizational risks, have of listed companies in Malaysia influences the efficiency highlighted the need for the formation of separate RMCs. level of the firms. Terjesen, et al. [16] claimed that the RMCs have been identified as key factors that influence burden of risk oversight has been carried out by the AC. a corporations’ success according to several studies. The Therefore, the presence of an RMC is anticipated to attributes of the RMC are likely to have a major effect on influence the role of risk oversight functions positively a corporate's performance [8, 9]. This paper focuses on which will result in improving the corporate’ performance RMC attributes since it has become an important and market value. Kallamu [7] studied the risk component of the hierarchy of management. Thus, the management committee and the market and current review sheds light on RMC's attributes and their accounting return. Jia [17] studied the effects of RMC impacts on businesses. It is therefore important that this diversity gender on a corporate’s probability of having review helps and guides researchers to better understand financial distress. the roles and functions of RMCs in businesses. The Several RMC attributes have been identified in the organization of this paper will be as follows: the first previous researches, such as separate RMC, size, meetings, section provides a review of previous researches on RMC independence, expertise, and overlap, that impact different attributes. The second section contains crucial information firms’ results. In addition, the RMCs have been identified regarding the demographic attributes of RMCs and their as committees that have a substantial degree of control influence on corporate performance. The third section over the quality of reporting. Previous empirical studies looks at the existence of RMC and its influence on FRQ. have confirmed these allegations [7, 18]. Recently, The methodology is seen in the fourth section and at the Bhuiyan, et al. [19] using Australian firms from 2001 end of this review, the discussion and conclusion are through 2013, studied the relationship between separate presented. RMC in a corporation and the quality of financial reporting. Their study found that the presence of an RMC is more likely to reduce the discretionary ; which 2. Literature Review indicates that the quality of earnings information improves when RMCs are in operation. The study has also indicated Risk Management Committee Studies: that the RMC existence increases the company's audit fees. Taken together, this river of research highlights how the The theory of corporate risk management was RMCs influence the corporations and provide motivation previously presented by Stulz [10], who claims that the for conducting further researches in related area. major purpose of risk-management oversight is to protect the corporations from potential costly situations that may potentially cause financial distress. To look at it another 2.1. Risk Management Committee and Corporate way, risk management oversight was created and designed Financial Performance to mitigate the potential of dealing with financial challenges while maximizing and exploiting competitive Corporate performance is one of the primary advantages. Alles, et al. [11] posit under the agency theory considerations that are used to attract the investors’ that a separated RMC is expected to strengthen the attention to a business. The financial performance of the organization board monitoring and deter managers from company is often used to measure the management’s engaging in non-ethical practices. Likewise, according to policies effectiveness of the management’s activities and the resources dependency theory, the RMC as a board its information is also used by the stakeholders in the sub-committee is expected to provide additional resources financial reporting circle to make several economic and skills to minimize the possible agency problems and decisions [20]. By concentrating on significant risks, improving the reporting earnings [12]. challenging risk management assumptions, and guiding There has been an increase in the researches on risk the board on levels of the risk appetite & tolerance, the management topics as seen in the last decade. Arévalo [13] risk management committee ensures that risk oversight is claimed that corporations should introduce a mechanism aligned with the organization's strategy [21]. Boards of to control financial risks so that these corporations do not directors need to create a formalized risk management experience excessive indebtedness correlated to economic system within organizations, as a more recent growth. Prior studies have found that the RMCs influence development, that would complement the board of the decision-making process. For instance, Subramaniam, directors' oversight responsibilities [22].

390 Risk Management Committee Attributes: A Review of the Literature and Future Directions

2.1.1. The RMC Independence and Corporate Financial members who have at least two functions on different Performance board committees such as the remunerations committee or The independent RMC members are expected to secure audit committee. According to Faleye, et al. [28] all the necessary information and withstand any pressure overlapped and independent members on the board can from managers to control the company risk which will use further information to achieve a better understanding result in enhancing firm performance [23]. Many codes of of the company, which leads to better performance. Hines, around the world require firms to et al. [29] argue that corporations with overlapping constitute their RMCs with a majority of independent directors sitting in different board sub-committees report a directors to carry out their functions independently. This higher quality of accounting information and bear lower agrees with the agency theory proposition that outside audit fees. Consistently, Coles, et al. [30] provided an directors can monitor and detect any personal-gain actions empirical evidence on the overlapping of board members by management and reduce the agency costs. Kallamu [7] and their effects on the firm value. The study utilizes a used data of Malaysian listed-firms for a period of five data of 1500 US listed-firms the period of 1996-2014 and years and questions “whether RMC attributes have an questions “do overlapped directors influence the firm impact on corporate performance measured by ROA and value”. Their findings indicate that the overlapped Tobin’s Q”. His findings indicate that the existence of directors have a positive influence on the firm value in RMCs that have majority of independent non-executive complex firms and teamwork. members has a significant positive impact on corporate performance and market valuation. Another study done by 2.1.4. The RMC Qualification and Corporate Financial Wu, et al. [15] examined the effects of RMC Performance characteristics including independence on corporate The competence of a director, in addition to the factors efficiency using data consist of 34 insurance companies, mentioned above, is also a significant factor in ensuring the study findings suggest that the proportion of that the board and its sub-committees work effectively. independent members in the RMCs has significantly and Given the resource dependency theory, directors with positively affected the efficiency of firms. Similarly, higher experiences, and more skills can help in Kantudu and Samaila [24] examine the effect of corporate constraining earnings management practices [31]. One of governance characteristics on FRQ (measured by EM) by the indicators of the competence of the director is his using a sample of Nigerian oil firms. The study finds that qualifications and experiences. In addition, the investors independent directors can reduce the occurrence of tend to invest in businesses that have a large number of earnings manipulations practices. trained and qualified board members. In the case of RMCs, members equipped with the appropriate qualifications and 2.1.2. The RMC Diligence and Corporate Financial experiences are capable of identifying and addressing the Performance corporation’s problems and challenges. A study conducted In accordance with resource dependence theory, by Al-Hadi, et al. [18] used a sample of 677 observations frequent board meetings bring outside resources, through from gulf council cooperation from 2007 to 2011. The which, during the meeting discussion, the directors bring study question “whether the existence of a separated RMC their expertise and knowledge as important resources, with qualified members is associated with market risk which contribute to efficient decision-making. Zaman, et disclosures and firm life cycle stages”. The study found al. [25] argue that the Frequency of meetings is linked to that competent and qualified members sitting in the RMC higher effectiveness while a lower frequency of meetings can participate in adding value to the business by indicates lower effectiveness. Besides resource mitigating uncertainties and taking responsible actions in dependence theory, the agency theory argues that the gap managing the business’s challenges and problems. and conflicts between the principals and agents (Agency Aldhamari, et al. [8] examine the effects of the RMCs conflicts type I) can be resolved via the frequency of effectiveness (using qualified directors as one of the RMC meetings held during the year. It is established that factors) and corporate financial performance using a the more meetings an RMC holds during the year, the sample of financial firms listed in the Malaysian market better the communication between the parties involved in from 2004 to 2018. The results indicated that qualified risk oversight. According to the studies of [26, 27] a RMC members have a significant positive impact on sufficient number of meetings will allow for an in-depth corporate performance. discussion of key risk-management issues such as “risk appetite, risk avoidance, and risk awareness”. therefore, 2.2. Risk Management Committee and Financial the frequency of meetings reflects the diligence of the Reporting Quality RMCs. Previous researchers have documented that RMCs play 2.1.3. The RMC Overlap and Corporate Financial important roles in the effectiveness of corporations Performance because as board-level committees, they are at the top RMC overlapping refers to the proportion of the RMC level of management. Recent global financial scandals

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have shed light upon the important role of risk has a relationship with the going concern. Abdullah, et al. management in efficient corporate governance in various [14] provide evidence that the RMC has a fundamental markets around the world. Spira and Page [32] have role in influencing the level of hedging activities and suggested a reinvention in the firms’ risk management information disclosure which consequently can reduce the efforts since internal control and play a vital management's desire to use hedging to manipulate role in strategies for risk management. This study has earnings. Kallamu [7] uses sample data of 37 firms listed turned into a review of the previous researches on the in the Malaysian stock market from 2007 to 2011, the demographic attributes of RMC and its effects on the study indicated that the existence of a separate RMC has quality of financial reporting. positively influenced market valuation as well as Subramaniam, et al. [1] use the sample of 200 top accounting return. According to the study done by Wu, et ASX-listed companies in the year 2005, to examine how al. [15] the RMCs of listed companies in Malaysia the RMC functions. The authors observe that having a influence the efficiency level of the firms. More recently, stand-alone RMC that is separated from the AC is more Mohd-Sanusi, et al. [33] conclude that the existence of an likely to enhance the governance practice and financial RMC enhances the awareness of enterprise risk reporting quality. Ng, et al. [4] analysed the data obtained management (ERM) within corporations which will as a from 329 Malaysian firms using the period 2003-2011. result increase their market value. The evidence presented The central focus of the study was “to what extent the is in line with the idea that a company that has poor-risk RMC can monitor and influence the underwriting risk of oversight is more likely to have a loss in the shareholders’ the firms”. The study concluded that RMC plays a fund. significant negative role in firms’ underwritten risk that

Table 1. Summary of Empirical Studies on Risk Management Committee Attributes.

Author Country-scope Dependent variable Independent variable Results Ames, Hines, Sankara, -A.M. Best’s Financial US (2007-2013). Existence of board RMC Positive-significant & Policy, (2018) [36] Strength Ratings.

Abdullah, Ismail, and - Malaysia (2013) RMC Effectiveness Non-significant Izah (2016) [37] Practices

Subramaniam, Australia (ASX for -Governance practices Positive-significant Stand-alone RMC McManus (2009) [1] the year 2005) -Financial reporting quality Positive-significant

Bhuiyan,Salma, Australia (ASX -Financial reporting quality Positive-significant Roudaki, & Tavite, Existence RMC 2001–2013) -Audit pricing. Positive-significant (2020) [19]

Malaysia -Firm market valuation Positive-significant Kallamu (2015) [7] RMC independent (2007-2011) -ROA Negative-significant

Australian stock Jia, (2019) [17] exchange -Financial distress RMC gender Negative-significant (2007-2014)

Abdullah and Said -The prevention of Malaysia, Separated RMC Positive-significant (2019) [3] corporate financial crime (2002-2014

Ali, Besar, and Mastuki Malaysia -Financial restatement (2017) Existence of RMC Negative-significant (2005-2015) practices [38]

Tao, Hutchinson, Australia -Information asymmetry RMC overlap Negative-significant (2013) [39] (2006-2008)

-Distress probability. Negative significant Jia & Bradbury, (2020) Australia -Growth options. Existence of RMC Positive significant [40] (2007-2014) -ROA. Positive significant

-RMC-size Negative significant Malik, Shafie, Ku Malaysia -Tobin’s Q (Market -RMC Independent Negative significant ismail (2021) (2015-2017) performance). -RMC Expertise Positive significant [41] -RMC Gender Negative significant

392 Risk Management Committee Attributes: A Review of the Literature and Future Directions

Furthermore, Sani, et al. [34] in the context of Nigeria committees. As a result of the importance of this topic, the use data of 400 firm-year observations covering the period aim of the current paper is to determine to which extent of 2012- 2016 to determine the influence of RMC on sales the RMC and its attributes influence corporate manipulation (a real earnings management practice). The performance and FRQ. The paper concentrates primarily findings indicate that the presence of an RMC reduces on the RMC demographic attributes to limit the scope of management's desire to engage in manipulating the the review. In order to guide the literature search, we reported earnings through. Abdullah and Said [3] used data established some criteria for the articles to be reviewed: (i) of financial crime cases reported by Malaysian SC for the online peer-reviewed, research papers or dissertations period of 2002-2014, and question “whether there is an published in international conferences and journals, and association between the presence of a stand-alone RMC international venues. (ii) research papers that focused and corporate financial crimes”, the study concluded that mainly on any of the RMC attributes and its influence on the RMC mechanism has significantly and negatively financial reporting quality or firm performance. (iii) influenced the cases of corporate financial crimes. The research papers that described the procedures and interpretation from this result is that the formation of an methodologies utilized to conduct the studies (e.g., RMC will assist the firms in meeting their targets, secure quantitative or qualitative approaches). (iv) this review their reputation, and improve their FRQ. A study excluded theoretical discussions that concentrated on conducted by [17] examined the influence of RMC RMC attributes without empirical evidence. In addition, diversity on a corporate’s probability of getting financial relevant studies for this paper were found by searching distresses using a sample of top 300 ASX listed companies online databases including “Science Direct, Google the period of 2007-2014. The researchers revealed that the Scholar, Scopus, ProQuest, EBSCOhost explores, and presence of RMC’s female members enhanced the Emerald Insight”. The literature search was performed monitoring of the risk management function and reduced using the following keywords: “RMC characteristics”, the excessive risk-taking behaviours of companies which, “RMC demographics characteristics”, “RMC features”, in turn, reduce the probability of getting financial distresses. “firm performance”, “RMC attributes”, “financial More recently, a study done by [35] recommends that reporting fraud”, “earnings management”, “corporate additional attention must be given to governance financial performance” and “financial reporting quality”. mechanisms, including the function of risk committees, to The criteria mentioned above resulted in 128 research reduce manipulation of earnings and improve reporting papers in the first mining. out of these 128, the review quality. identified 38 articles that dealt with the impact of RMC attributes on FP and FRQ, which have been published from 2003 to 2021 in leading and prominent journals and 3. Research Methodology conferences in the areas of accounting, management, business, and finance. The articles have been searched and RMC attributes are a very important topic since the sorted based on the RMC's attributes and its relation to RMC is one of the influential board committees, the “corporate financial performance and financial reporting committee is able to perform the oversight of the quality”. Figure 1 shows a graphic representation of the corporate’s risk management framework and policies and methodology review for this paper. enhance the information transactions between board

Figure 1. Reviewing the methodology

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4. Discussion and Conclusion The literature examination regarding the effects of RMC attributes on corporate performance and reporting The primary objective of this paper has been to review quality has shown some promising directions and research existing empirical studies that _examined the impacts of opportunities for future studies even though the review RMC demographic attributes on both corporate outcomes need to be interpreted meticulously. In addition, performance and FRQ measurements. Therefore, the the relationships between RMC attributes and corporate review is anticipated to promote the understanding of performance are not decisive. researchers in the future researchers and policymakers concerning the functions of may take into consideration the findings of this review RMC mechanisms. Overall, the outcomes of this review and examine further the roles of RMC attributes on FRQ demonstrate that the roles of RMC attributes have by using different measurements of the latter, including influences on the corporation’s financial performance as “earnings smoothing, volume estimation of pension well as on its reporting quality. obligation discount rates, financial restatements, financial Based on reviewing the RMC empirical studies, it is irregularities, earnings persistence, and earnings evinced that RMC attributes, such as: “the existence of the forecasts”. Although some improvement has been RMC itself, the financial expertise of its members, as well achieved to better understand the relationship between as its committee size and the presence of independent RMC attributes and corporate results, further research on members” are able to contribute to high-quality financial such a ripe area is needed. information and corporate financial performance. Hence, Furthermore, a review of the prior empirical studies it is worth noting that such experience may positively help cited here indicates that the results on the impacts of RMC in strengthening the performance of corporations and attributes on lower FRQ are still inconclusive. Some enhancing their financial reporting process, which can researchers found a positive association such as [17, 39], also reduce the irregularity of information between the although others found no association at all [37]. The corporation and its stakeholders. Besides, the mixed and inconclusive findings of previous studies independence of RMC members is expected to withstand perhaps owing to the differences in the measurements any pressure and obtain the necessary information from used in these studies or the timeframe they choose. As a managers to control the risks which will result in result, the relationship between financial reporting quality enhancing corporate performance, in addition to and RMC attributes remains unclear. In addition, more enhancing the capabilities of board members. Furthermore, this review reveals that the RMC research is needed to see whether RMC attributes are overlapped members that have membership in other associated with fraudulent financial statements, or committees can improve the company’s performance and whether RMC attributes influence the corporate's mitigate potential risks. Likewise, the study indicates that long-term sustainability. While this area is critical to the RMC members that are equipped with adequate body of knowledge as well as policy setters especially knowledge can understand, and handle the challenges and after the fraud cases that happened in different countries problems the businesses may face. However, the results of in previous years, it could be considered as a new topic for all the aforementioned studies were mixed and researches in the future due to the lack of studies to date. inconclusive which created a research gap, especially in Other attributes that would influence the FRQ and this area. Based on the review, several gaps in the corporate performance, such as: RMC interlocking, RMC literature have also been identified as a result of the certification, RMC risk-expertise, and RMC training, may inconsistent findings of prior researches. Subsequently, in be considered in future studies. hence, as will be shown in order to fill these gaps, the following suggestions are Table1, the current review presents a variety of questions, presented for future research. that in our view, need further investigations in the future.

394 Risk Management Committee Attributes: A Review of the Literature and Future Directions

Table 2. Recommendations for RMC Attributes Future Directions No Research Questions RMC Attributes and Corporate Financial Performance R.Qeustion1 How do RMC attributes important to corporate financial performance? R.Qeustion2 How do risk management committee attributes (RMC interlocking, RMC qualification, RMC risk-expertise, and RMC training) affect corporate financial performance? RMC Attributes and Financial reporting quality How does the RMC attributes influence the financial reporting quality “earnings smoothing, R.Qeustion3 discount rates, financial restatement, financial irregularities, earnings persistence, and earnings forecasts”? R.Qeustion4 How do risk management committee attributes (RMC interlocking, RMC qualification, RMC risk-expertise, and RMC training) influence financial reporting quality? R.Qeustion5 Do RMC attributes influence Real Earnings Manipulations? RMC Attributes and Fraudulent Financial Statements R.Qeustion6 How do RMC attributes influence fraudulent financial statements? R.Qeustion7 How does RMC deal with fraudulent financial statements? RMC Attributes and Corporate Sustainability R.Qeustion8 How do RMC attributes influence the corporate’s sustainability? R.Qeustion9 What are the important RMC attributes that may influence the corporate’s sustainability?

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