2

2.0INTRODUCTION
This chapter will briefly explain about the literature review and demonstrate the relevant theories and concept related to the study. Besides, this section also outlines the theoretical framework and schematic diagram of the study. Developed hypotheses are provided in this section.

2.1OVERALL ENVIRONMENTAL DISCLOSURE QUALITY.

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The environment issue nowadays has made mindfulness among the naturalist, government and society. The different partner to be specific clients, governments and administrative bodies, non-legislative associations (NGO), neighborhood networks, speculators, monetary organizations and foundations, workers and society as entire gave careful consideration to the ecological effects of firms particularly with respect that it will give the negatively affect for organizations’ business and condition as entirety. In all actuality, the partner weight the businesses to be more in charge of their move and make into thought with respect to natural and manageability improvement issues in for doing decision making.

The main purpose for conducting this research is to investigate whether there is any significant relationship between the audit committee characteristics and environmental disclosure quality among Malaysian Environmental Sensitive Industries. Furthermore, there is specific objectives that can be identified: to determine the characteristics of the audit committee and the influenced of environmental disclosure quality among environmental sensitive industries. The purpose of the research can steady the organization’s environmental policy and the intended outcomes of an environmental management system for the improvement in the environmental reporting performance and accomplish the environmental objectives.

In this sense, it is not surprising that corporate environmental disclosure has attracted substantial development in consideration from academic researchers CITATION Hal16 l 17417 (Akbas, 2016). Despite a developing body of literature on corporate environmental disclosure, the greater part of the previous studies has explored possible determinants or motivations of environmental disclosure, especially concentrating on corporate qualities, for example, budgetary execution, estimate, age, industry participation, firm notoriety, advertise response or nation of source. CITATION Eme17 l 17417 (Emerald Edem Welbeck, Determinants of Environmental Disclosures of Listed Firms in Ghana , 2017)Moreover, one of the system that implemented in Malaysia for the environmental disclosure quality is ISO. ISO is the standard and guideline for company and firm to follow as a standard procedure. ISO 19011 or Guidelines for Auditing Management Systems is the system that refer to the International Standard that can assist an association with enhancing its environmental performance and empowers the components of the environmental management system to be coordinated into its center business process. Furthermore, there is also ISO 14001 or Environmental Management System (EMS) where it is the direction on auditing management systems, including the standards of auditing, dealing with an audit programmed and conducting management system audits, and in addition direction on the assessment of capability of people associated with the review procedure. Moreover, EMS also help an association to accomplish the planned results of its environmental management system, which offer some incentive for the environment, the organization itself and invested individuals.
2.2ENVIRONMENTALLY SENSITIVE INDUSTRIES
Environmentally Sensitive Industries are companies which classified as environmentally sensitive which pose to the greatest potential threat to the natural environment. There are eight environmentally sensitive industries were identified which are industrial products, consumer products, plantation, property, trading and services, construction, mining and infrastructure industries. These sectors are regarded as highly environmentally sensitive. There were also studies that focus on companies that belong to an environmentally sensitive industries, classified as: Chemical, Mining, Petroleum, Energy, Utilities and Resource companies. Due to their environmentally sensitive nature, it is assumed that these industries tend to disclose more environmental information in their annual reports and their peers in other industries.CITATION Nor14 l 17417 (Nor Ain A. Manaf, 2014). Thus, the more environmentally sensitive an industry is the more likely are its shareholders concerned about environmental information, thus the more significant its environmental reporting decision.
Where environmentally sensitive industries refer to industries whose activities affect environment directly. Previous research suggests that disclosure levels reflect the type of industry while CITATION Car09 l 17417 (Reverte, 2009) cite “mining, oil, and chemical industries as emphasizing information regarding environmental, health and safety issues” as opposed to finance and insurance companies. This make such companies more environmentally sensitive. These disclosures are more aligned to companies whose activities affect the environment significantly. First of all, firms in sensitive industries comply with strict environmental regulations due to the emission effect of their activities and therefore should disclose their environmental concerns, otherwise stakeholders and especially investors may assume the worst. CITATION Eme11 l 17417 (Emerald Edem Welbeck G. M., 2017)The study focuses only on the quality of environmental disclosure in Malaysia. More quality environmental information implies that corporations are participating in environmentally related activities and contributing efforts to preserve the environment. Given the government’s initiatives to promote green technology across all sectors, one would expect companies to be more proactive towards environmental conservation. These initiatives towards environmental protection should be disclosed by PLCs, as corporate environmental disclosure can potentially have economic significance, especially when investors are increasingly more interested in companies which are more socially responsible.
Moreover, environmentally sensitive industries face a greater social pressure because they are more likely to be associated with visible environmental concerns, like pollution and risk of environmental disasters. If these firms fail to disclose their environmental performance where environmental pressure groups, NGO’s, government and the general public may give pressure on them. CITATION Sco87 l 17417 (Scott S. Cowen, 1987) cited that industries that are consumer-oriented tend to disclose more as a public relation tool, while CITATION Den92 l 17417 (Patten, 1992) suggest that industries that tend to affect the environment most are afraid of reactions from the community and pressure groups and hence are likely to disclose more. CITATION TEC92 l 17417 (Cooke, 1992) studied manufacturing and non-manufacturing firms in Japan, concluding that manufacturing firms disclose more environmental information. CITATION Eme11 l 17417 (Emerald Edem Welbeck G. M., 2017)2.3PREVIOUS LITERATURE
From the previous literature, Environmental disclosure quality is where the shareholder would require environmental disclosures to be audited in order to ensure their reliability and hold managers accountable for the environmental impact of their decision. Companies would be inclined to provide accurate and reliable disclosure to avoid negative audit report and disappointing or attracting investors or attracting authorities’ attention. CITATION Geo13 l 17417 (Iatridis, 2013). The environmental disclosure literature indicates that the firms are inclined to report good news, while they discouraged to disclose bad news. Indeed, these firm can restore to earnings management or earning smoothing to mitigate the adverse impact of bad news. CITATION Ali17 l 17417 (Bouri, 2017).

Furthermore, environmental disclosure is usually viewed as means by which to mitigate stakeholder environmental pressure in advance of stricter environmental regulations or legislation in the future. CITATION Che10 l 17417 (Cheng-Li Huang, 2010). International studies on environmental disclosure tend to relate a disclosure index to a set of explanatory variables. CITATION Eug16 l 17417 (Eugenio D’Amico, 2016). Environmental disclosure is a process by which business divulge their impact on the environment, and manner by and completeness with which they do so make them accountable to society. CITATION Fab18 l 17417 (Fabricia Silva da Rosa, 2018). Environmental disclosure is a set of information items that relate to firm’s past, present, and future environmental management and performance. Through disclosure mechanisms, a firm’s environmental information can be conveyed to stakeholders. CITATION Lop13 l 17417 (Lopin Kuo, 2013). Other than that, environmental disclosure is also defined as ‘a set of information items that relate to firm’s past current, and future environmental management activities and performance. CITATION Abd16 l 17417 (Abdullah Hamoud Ismail, 2016). The environmental disclosure is based on the document analysis. CITATION Fra14 l 17417 (Francisco Carreira, 2014)2.4LEGITIMACY THEORY & AGENCY THEORY
The legitimacy theory is a structure that provide a relevant theory for a research study that support the case. By reviewing and monitoring all companies’ policies, including those dealing with environmental issues, the audit committee can help companies build and maintain their legitimacy in the eyes of external resource providers. Based on legitimacy theory, this study explores whether the audit committee characteristics are used to indicate an effective commitment to environmental reporting.

In this study, we used legitimacy theory to help clarify how external and internal organizational factors may influence audit committee to disclose more environmental reporting. In other words, the legitimacy of the organization is judged according to the standards of the society. This theory also used to explain environmental disclosure quality, and often to explain changing patterns of disclosure.
Agency theory is a theory that explains the relationship between principals (shareholders) and agents in business. Moreover, agency theory used to examine the effect of audit committee on the environmental disclosure quality for environmentally sensitive industries. Drawing on agency theory, the study develops hypotheses about relationships between audit committee characteristics and environmental disclosure quality such as independence of audit committee, financial literacy of audit committee, legal qualification of audit committee, tenure of audit committee members, size of audit committee, and the numbers of audit committee meetings.
However, agency problem may occur in which there are potential conflicts of interest exist between the two groups since the separation of duties and ownership existed. From the agency theory perspective, a greater number of AC may contribute to its monitoring effectiveness, since larger ACs provide diversity in terms of expertise and more capacity for monitoring and improving auditing process and performance of environmental reporting process including environmental disclosure quality. CITATION Sof10 l 17417 (Vafeas, 2010)2.5THE CHARACTERISTICS OF AUDIT COMMITTEE
The previous studies are about the different characteristics of an AC that will affect to the environmental disclosure quality. AC is an oversight committee under the main board of directors. The board of directors has deputed the responsibility of financial reporting process and disclosure to the AC CITATION Jin121 l 17417 (Jing Li R. P., 2012). The characteristic of an AC will affect auditing process and performance of corporate governance responsibilities. In this study, to examine whether size, independence, financial literacy, legal qualification of audit committee, tenure of audit committee members, and numbers of audit committee meetings are effective in terms of the environmental disclosure quality. However, in Malaysia, all top 800 listed companies must have ACs and specified AC characteristics such as size, independence, financial legacy, legal qualification of audit committee, tenure of audit committee members, and numbers of audit committee meetings. AC are monitoring and improving auditing process and performance of corporate governance responsibilities including environmental disclosure quality.

2.6THEORETICAL FRAMEWORK
Theoretical framework is the structure that can support a theory of a research study, gives justification of variables and develops hypothesis. It is logically developed, described, and elaborated network of associations among the variables deemed relevant to the problem situation and identified through such process as interviews, observations and literature review. After reviewing the literature, this study has proposed a theoretical model to show the relationship between environmental disclosure quality and audit committee characteristics.

SCHEMATIC DIAGRAM
Independent Variables Dependent Variables
149352026987500left12700Size of audit committee
Size of audit committee

1493520280035left1905Independence of Audit committee
Independence of Audit committee

1485900101282514859001005205001493520100520514859006470654229100525145Environmental Disclosure Quality
00Environmental Disclosure Quality
left2521585Legal background of audit committee

meetings
Legal background of audit committee

meetings
left1805305Financial expertise of AC’s committee
Financial expertise of AC’s committee
left1089025Tenure of AC’s members
Tenure of AC’s members
left365760 Frequency of AC meeting
Frequency of AC meeting

2.7HYPOTHESES DEVELOPMENT
2.7.1Size of The Audit Committee
Size of Audit Committee theory that give more prominent assets and expert to successfully do their obligations CITATION His14 l 17417 (Hisham Kamel Madia, 2014). More directors on AC will probably bring assorted variety of perspectives, mastery, experiences and abilities to guarantee compelling observing CITATION Bed10 l 17417 (Bedard ; Gendron, 2010). Consequently, a higher number of AC members is probably going to assist such panel with uncovering and resolve potential issues in corporate detailing process. CITATION Ran171 l 17417 (Ranjith Appuhami, The Impact of Audit Committee Characteristics on CSR Disclosure: An Analysis of Australian Firms, 2017) This demonstrates, AC measurement is a fundamental factor for AC to enough supervise the corporate disclosure practices. Previous research has discovered experimental confirmation that numerous executives on AC seem to upgrade the level of environmental disclosure.

The Malaysian Code on Corporate Governance (2007) states that each audit committee should consists of at least 3 members. A larger size of audit committee generally carries more expertise and experience, and thus is able to raise more insights during meetings. CITATION Apr00 l 17417 (Klein, 2000) stated that if a firm’s board size is limited, the number of directors available to be appointed to serve on the audit committee will be restricted as well. When choices are limited, the skills set brought to the audit committee will be limited and hence the function of audit committee can be adversely affected. Size of the Audit Committee also can be viewed as a corporate governance mechanism that may impact the level of corporate voluntary disclosure, including environmental disclosure. Then, with the hypothetical and observational writing give conflicting clarifications in regards to the connection between size of the audit committee and environmental disclosure.

H1: There is a relationship between size of audit committee and the environmental disclosure quality.

2.7.2Independence of Audit Committee
Audit committee independence is important for the committee to discharge their duties effectively. The Malaysian Code of Corporate Governance (2007) states that the board of a company should establish an audit committee comprising of at least three members and a majority of whom should be independent. Furthermore, all the members should be non-executive directors. An independent non- executive director is one who has no family relations to other directors of the company and is not involved in the operations or management of the company. CITATION Ong131 l 17417 (Yew, Audit Committee Characacteristics and Earnings Management: A Malaysian Context, 2013) The independence of an audit committee has been specified in the past investigations. The Audit Committee should to comprise just of non- executive directors, the larger part of whom ought to be independent directors. Director independence is perceived universally as an important characteristic for ACs in monitoring managers activities also, improving the level financial and non-financial disclosures. That are the key trademark of an audit committee which is typically connected with audit committee effectiveness. CITATION Law04 l 17417 (Lawrence J. Abbott, 2004) found that the independence of an audit committee is adversely related to misstatements.
However, they further clarified that the span of the committee and financial expertise of the audit committee members give huge negative relationship CITATION Kha15 l 17417 (Khamsi Che Abdul Hamida, 2015), additionally found that audit committee independence and number of audit committee meetings are adversely identified with had negatively in term of the fraudulent at the financial reporting. Also, different investigations identified with independence on audit committee give experimental confirmation that independence can be imperative properties for financial reporting. CITATION Fer11 l 17417 (Ferdinand Siagian, 2011). In order to determine whether there is any association between independence of audit committee and environmental disclosure quality towards Malaysian environmentally sensitive industries (ESI), this study tests the hypothesis H2.

H2: That have positive relationship between independent audit committee and environmental disclosure.

2.7.3Frequency of Audit Committee Meeting
Frequency of audit committee refer to the number of meetings that held by the audit committee per financial year. This meeting should be conducted at least once in every three month, with a maximum interval of 120 days between any two meeting such that at least four meeting are held in each year. According to ASX guideline, the audit committee should meet often enough to undertake its role effectively. From previous studies CITATION Ran172 l 17417 (Ranjith Appuhami, The Impact of Audit Committee Characteristics on CSR Disclosure: An Analysis of Australian Firms, 2017) also notes that formal meeting of the audit committee is the heart of its work and sufficient times should be allowed to enable the audit committee to undertake as full a discussion on the environmental disclosure quality. Previous studies CITATION Ngo13 l 17417 (Ngoc Bich Tao, 2013) stated that frequent meeting improve the effectiveness of environmental disclosure quality. Meanwhile, CITATION Mai17 l 17417 (Maizatulakma Abdullah, 2017) stated that frequent audit committee meeting show that audit committee is active in monitoring the company environmental reporting.

Moreover, audit committee responsible for ensuring that the implementation of company’s policies is in congruence with stakeholder’s interest and social contracts. Therefore, the environmental disclosure is to extent, influenced the effectiveness of audit committees CITATION Ani171 l 17417 (Anis Chariri, 2017). In the other hand, the audit committee activities are reflected by the frequency of the audit committee meeting during one year which might give impact towards the environmental disclosure quality. However, in Malaysia, there is no regulatory requirement to mandate the minimum number of audit committee meeting to be held each year CITATION Pua09 l 17417 (Yatim, 2009). The Malaysian code on corporate governance encourages that such meeting to be held as frequent as possible so that there will be improvement in the environmental reporting. Therefore, this study assumes frequent audit committee meetings will improve into a better environmental reporting in environmentally sensitive industries. Thus, this study investigates, the relationship between the frequency of audit committee meeting and environmental disclosure quality. Therefore, the hypothesis is:
H3: There is a positive relationship between the frequency of audit committee meeting and environmental disclosure quality.

2.7.4.Tenure of Audit Committee Members
Consistent with the prior literature, this study uses tenure of audit committee members as a proxy for the experience of audit committee members on boards. CITATION Nig15 l 17417 (Sultana N. , 2015) Audit committee members with longer tenure gather higher experience and knowledge about firm, which enables them to monitor environmental disclosure quality in industries. Independent directors who had served on the committee for a longer period of time may develop better governance competencies as well as provide additional knowledge and expertise to the firm, thus are more capable of minoring management performance. A longer serving director will better understand the systems and operations within the industries. CITATION Ong13 l 17417 (Yew, Audit Committee Characteristics and Earnings Management: A Malaysian Context, 2013) Years of experience serving as a board member provides an opportunity for the member to understand the company. This experience would help them developing better governance CITATION Yun04 l 17417 (Yun W. Park, 2004)
However, in our study experience is measured according to director’s experience about the firm and directors experience in accounting and finance field. This measure is used because directors with experience about the firm and some accounting knowledge may have a better understanding on the implication of environmental disclosure quality among environmental sensitive industries in Malaysia. Finally, CITATION Ant13 l 17417 (Anthony Moung Yin Chan, 2013) argued that experienced audit committee members have greater expertise, reputation, commitment and willingness to perform better monitoring roles and found that firms with long tenured audit committee members pay lower audit fees. With respect to environmental disclosure, it is expected based on related theoretical arguments and empirical findings associated with the experience of a committee members that more experienced audit committee members will be effective in ensuring that firms adopt appropriate environmental disclosure quality practices relative to less experienced audit committee members. To examine the relationship, this study will test the hypothesis H4.

H4: There is a positive relationship between tenure of independent non-executive director in audit committee and environmental disclosure quality.

2.7.5 Financial Expertise of Audit Committee
Audit committee financial knowledge has been given considerable attention in the prior research. This characteristic is also linked to the environmental disclosure quality towards Malaysian Environmental Sensitive Industries. The audit committee financial expertise is depending on the proportion of members who have accounting or finance expertise. According to the ASX guidelines, audit committees should include at least one member with relevant accounting or finance qualification and expertise to discharge their role effectively. CITATION Ran17 l 17417 (Ranjith Appuhami, The Impact of Audit Committee Characteristics on CSR Disclosure: An Analysis of Australian Firms, 2017) Based on agency theory, in order to supervise managers and the reporting process effectively, the board of directors and in particular, ACs require essential knowledge and expertise. CITATION Sha14 l 17417 (Tashakor, 2014). CITATION Mic93 l 17417 (Jensen, 1993) notes, “The board requires to provide input into the financial aspects of planning especially in forming the corporate objective and determining the factors which effect corporate value”. Audit committee members could also use such knowledge to determine the level environmental disclosure in their annual reports CITATION Jin12 l 17417 (Jing Li M. M., 2012). Possessing some level of financial and industry expertise enhances the ability of question asking of AC members and so the effectiveness of their role (Levitt, 2000).
Empirical findings of previous studies also indicate a positive association between the financial expertise of audit committees and disclosure. For example, CITATION Mus05 l 17417 (Pike, 2005), using data collected from 262 UK companies, find that there is a positive relationship between AC financial expertise and the level of interim disclosure. Further, using data drawn from a sample of 256 UK firms, CITATION Mus07 l 17417 (Musa Mangena, 2007) find that compliance with disclosure requirements is positively related to AC’s with financial expertise. Another study focuses on audit committee oversight function, where the study suggests that firms with an accounting expert on the audit committee can increase the level of environmental disclosure quality. In this regard, current study argues that well educated and expert audit committee members are better prepared for their monitoring roles. Hence, in line with agency theory and legitimacy theory, and consistent with prior studies, this study hypothesises that:
H5: There is a positive association between the percentage of AC members with financial expertise and environmental disclosure quality.
2.7.6Legal Background of Audit Committee
The audit committee expertise is also determining by the legal background that they have. Moreover, the person can be said that they have legal background when they have academic or professional qualification pertaining legal studies. Legal background of audit committee can be defined as a legal expert as on who pursue a law school degree or working experience as a lawyer who can also consider about the environmental disclosure quality. The number of legal expert on corporate board has increased in the wake of SOX.CITATION yua11 l 17417 (Yuan wen, 2011). The audit committee member with the legal experience can be beneficial as a practitioner and also profession. This is because they understand the legal implication and the impact when breach of any duties under the environmental disclosure quality.
The environmentally sensitive industries also can hire the audit committee with the legal expertise to counter litigation risk and to deal with specific legal issues relating to mining, construction and any issues that related to environmental and improve the environmental disclosure quality. However, from the perception of CITATION yua11 l 17417 (Yuan wen, 2011), the audit committee with legal expertise understand legal liability that can arise from poor quality information, we except that their ‘natural attention and interest will be to attend to legal risk, giving more support to compliance and internal controls’. In fact, CITATION Ste06 l 17417 (Schwarcz, 2006) concluded that there is a strong public perception that lawyer, to certain extent, have responsibilities to prevent environmental reporting failure. This public perception possibly explains the reason why audit committee with more expert such as legal knowledge will attract greater stock market returns CITATION Placeholder1 l 17417 (Yew, Audit committee charcteristic and earning managment:A Malaysian Context, 2013). However, the lawyer on the audit committee is independent of the firm and is likely to be a better monitor than the corporate lawyer who is the employee of the firm. Thus, this study investigates, the relationship between the legal background of audit committee and environmental disclosure quality. Therefore, the hypothesis is:
H6: There is a relationship between the legal background of audit committee and environmental disclosure quality.

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