Investigating the Effect of Enforcement & Corporate Governance on Internal Control Disclosure in Pakistan (Comparison of Non-financial vs. Financial Sector)

This study investigates internal control disclosure practices of financial and non-financial sector companies which are listed on Pakistan Stock Exchange (PSX) over three years period (2012-2014) and also to analyze how audit committee characteristics, board composition, industry type and enforcement influence internal control disclosure practices of these companies. We select 207 companies from non-financial sector and 65 from financial sector on sample basis. The internal control disclosure was measured using seven scale items whereas audit committee characteristics were represented through audit committee size, meetings, independence, audit committee shareholdings and financial experts on audit committee. Finally board composition was measured through variables such as board size and non executive director as chairman. The data related to all desired variables has been collected from annual reports. Results of descriptive statistics show that overall level of internal control disclosure has been very low in Pakistan consistently over three year’s period. However financial companies tend to disclose much more information on internal control as compared to non-financial companies in terms of mean value of internal control disclosure index as well as individual items of internal control disclosure. Multiple regression analysis results show that board composition such as board size and non executive director as chairman have significant positive influence on overall internal control disclosure index as well as individual categories of internal control disclosure index. Among ownership structure variables, holdings by financial institutions have been found to have significantly positive influence only on disclosure of risks assessment & control assessment procedures. In case of industry type, it has been found that companies from financial sectors have been disclosing significantly more internal control information as compared to companies from non financial sector. However testing the enforcement effect, it has been found that companies from banking sector have been disclosing significantly less internal control information as compared to companies from other sectors. The implication for this study is that financial sector in Pakistan has been strictly regulated by State bank of Pakistan in terms of submission of internal control information on annual basis. In addition to this, audit committees in financial sector companies have much more independent members as compared to non-financial companies. Finally majority companies from financial sector have appointed non executive director as chairman. The presence of regulatory authority like SBP coupled with strong internal governance mechanism is the reason for greater amount of internal control disclosure in financial sector. The level of internal control disclosure can be improved in case of non-financial companies through hiring more independent members on audit committee and performing vigilant role by regulatory authorities i.e. Securities & Exchange Commission of Pakistan (SECP). Keywords: Internal control disclosure, board composition, audit committee, enforcement, Pakistan etc.