INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)  
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025  
Ownership Concentration and Fraud Risk: The Moderating Role of  
Board Structure – Malaysian Evidence  
Noor Idayu Ismail, Noral Hidayah Alwi, Erna Masfiza Mohamed Ramli  
Faculty of Business and Management, Open University Malaysia  
DOI: https://dx.doi.org/10.47772/IJRISS.2025.910000557  
Received: 28 October 2025; Accepted: 04 November 2025; Published: 18 November 2025  
ABSTRACT  
Fraudulent financial statements remain a critical challenge to investor confidence and financial market integrity,  
particularly in emerging economies such as Malaysia. This study examines the relationship between ownership  
concentration and fraud risk, while analysing the moderating role of board structure. Fraud risk is proxied using  
the Altman Z-score, which captures financial distress, a common precursor to earnings manipulation. Drawing  
on agency theory and network perspectives, this study argues that ownership concentration can strengthen  
monitoring and reduce fraud risk, but its effectiveness may depend on internal governance design, specifically  
board structure. Using a balanced panel of 578 firms listed on Bursa Malaysia, comprising 2,890 firm-year  
observations, the study employs panel least squares regression with cross-section and period fixed effects. The  
findings show that ownership concentration is positively and significantly associated with the Altman Z-score,  
suggesting that concentrated ownership reduces fraud risk. Board structure also shows a positive and significant  
relationship with financial health. However, the interaction between ownership concentration and board structure  
is negative and significant, indicating that large boards weaken the positive monitoring effect of concentrated  
ownership. These results suggest that while ownership concentration enhances monitoring, excessively large  
boards can dilute this benefit. The findings contribute to fraud risk and governance research by highlighting the  
moderating influence of board structure and providing policy insights for regulators and investors to balance  
ownership control with board efficiency to strengthen financial reporting integrity.  
Keywords: ownership concentration, board structure, fraud risk, audit quality, Malaysia  
INTRODUCTION  
Fraudulent financial statements are among the most damaging corporate misconducts, undermining investor trust  
and destabilising financial markets. Although less frequent than operational or asset misappropriation frauds,  
their economic and reputational consequences are profound, including corporate collapse, investor losses, and  
public distrust (ACFE, 2014; ACFE, 2020). In Malaysia, high-profile scandals such as 1Malaysia Development  
Berhad (1MDB) have exposed vulnerabilities in corporate oversight, transparency, and enforcement mechanisms  
(Smaili, Arroyo, & Issa, 2022), underscoring the persistence of fraud risk despite governance reforms. These  
incidents have prompted regulators, investors, and scholars to revisit the effectiveness of existing governance  
mechanisms in detecting and deterring financial misreporting.  
Ownership concentration plays a central role in determining how effectively managers are monitored and  
disciplined. Under agency theory, concentrated ownership can align managerial and shareholder interests,  
enhancing oversight and curbing fraudulent reporting by reducing information asymmetry and strengthening  
direct control over management (Jensen & Meckling, 1976). In such settings, large or institutional shareholders  
often act as active monitors who demand greater transparency and accountability. However, when ownership is  
excessively concentrated, controlling shareholders may exploit their power to influence financial reporting for  
private benefit, engage in tunnelling, or conceal poor performance to protect their interests (Sikka & Stittle,  
2019). This duality improved monitoring versus potential entrenchment and creates an empirical puzzle  
regarding ownership’s true impact on fraud risk, especially in emerging markets where ownership is often  
concentrated within families or state-linked entities.  
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INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)  
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This study examines how ownership concentration influences fraud risk and whether this relationship is  
moderated by board structure. The Altman Z-score is used to measure firms’ financial distress, which serves as  
a proxy for fraud pressure (Altman, 1968; Bhavani & Amponsah, 2017; Kukreja et al., 2020). A higher Z-score  
implies stronger financial health and, consequently, a lower likelihood of fraudulent financial reporting. The Z-  
score is a reliable indicator frequently applied in corporate failure and fraud prediction studies in Malaysia  
(Azhar, Lokman, Alam, & Said, 2021), offering a robust measure of financial stability that reflects  
management’s incentives to manipulate results under distress.  
Board structure, captured through board size, may either reinforce or weaken ownership monitoring. Larger  
boards can enhance decision-making by integrating diverse expertise, broader networks, and multiple viewpoints  
that contribute to stronger strategic and ethical oversight (Gaio & Raposo, 2011). A well-balanced board can  
also impose reputational constraints that deter opportunistic behaviour. Nonetheless, excessively large boards  
may lead to coordination inefficiencies, diffusion of responsibility, and slower responses to managerial  
misconduct (Krause, Semadeni, & Cannella, 2014). Hence, the effectiveness of ownership concentration as a  
governance mechanism may depend significantly on how well board structure complements or constrains it.  
The Malaysian context marked by family-controlled firms, state-linked companies, and high ownership  
concentration provides an ideal setting for examining these relationships. Although the Malaysian Code on  
Corporate Governance (MCCG) has progressively enhanced standards for board independence and  
accountability, enforcement gaps and varying governance quality across firms continue to influence fraud risk  
exposure. The coexistence of formal governance rules and informal relational networks in Malaysian  
corporations further complicates how ownership and board structure interact to influence transparency and  
reporting behaviour.  
This study contributes to the literature in three key ways. First, it empirically tests the relationship between  
ownership concentration and fraud risk within an emerging economy, contributing to the ongoing debate on  
whether concentrated ownership mitigates or exacerbates fraudulent reporting. Second, it introduces board  
structure as a moderating mechanism linking ownership control and fraud risk, providing fresh evidence on how  
internal governance configuration influences monitoring effectiveness. Third, it offers regulatory and policy  
implications by identifying how optimal board composition can balance the benefits of ownership concentration  
with the need for effective, independent oversight to strengthen governance outcomes.  
This study is among the first to examine the moderating role of board structure in the ownership concentration  
and fraud risk relationship using the Altman Z-score within the Malaysian context, providing new empirical  
insights for emerging markets.  
The remainder of this paper is structured as follows. Section 2 reviews the theoretical foundations and develops  
hypotheses. Section 3 outlines the research methodology, including data collection and model specification.  
Section 4 presents the empirical findings and analysis, while Section 5 concludes with implications for policy,  
practice, and future research.  
LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT  
Agency Theory and Ownership Concentration  
Agency theory posits that managers may act in their own self-interest rather than maximising shareholder value,  
leading to agency costs and potential misreporting (Jensen & Meckling, 1976). Concentrated ownership  
mitigates these issues by aligning incentives and empowering major shareholders to exercise closer control and  
oversight over managerial decisions (DeAngelo, 1981; Rahmat et al., 2021). When ownership is concentrated,  
large shareholders possess both the motivation and the capacity to monitor effectively, thereby reducing  
information asymmetry and managerial opportunism.  
However, excessive concentration can have adverse consequences. Dominant shareholders may exploit their  
control to expropriate minority shareholders or obscure weak performance through accounting manipulation  
(Sikka & Stittle, 2019; Smaili et al., 2022). Such behaviour may arise when monitoring shifts from protecting  
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INTERNATIONAL JOURNAL OF RESEARCH AND INNOVATION IN SOCIAL SCIENCE (IJRISS)  
ISSN No. 2454-6186 | DOI: 10.47772/IJRISS | Volume IX Issue X October 2025  
firm value to safeguarding personal or political interests. The net effect of ownership concentration on fraud risk  
therefore depends on the balance between its monitoring benefits and its potential for entrenchment and control  
abuse, a duality that remains empirically contested, particularly in emerging markets.  
Network Theory  
Network theory extends agency perspectives by recognising that corporate actors operate within social and  
professional networks that shape behaviour and reputation. Directors and controlling shareholders embedded in  
prominent, high-reputation networks face social and reputational penalties if misconduct occurs, motivating  
stronger monitoring and a greater commitment to transparency (Rahmat et al., 2021; Rahmat et al., 2024). This  
relational dimension of oversight complements formal governance mechanisms by introducing reputational  
accountability that constrains opportunistic reporting.  
In Malaysia, ownership concentration is commonly held by institutional investors, family owners, and state-  
linked funds that are deeply connected within professional and governmental networks. These network ties create  
relational pressure to uphold credible reporting, as financial scandals involving such entities attract intense public  
and regulatory scrutiny. Hence, ownership concentration linked to these networked actors is expected to exert a  
stronger positive effect on fraud deterrence through reputational discipline and sustained monitoring  
commitment.  
The Moderating Role of Board Structure  
Board structure plays a critical role in determining whether ownership concentration enhances or weakens  
monitoring effectiveness. Board size, in particular, affects how governance decisions are debated, coordinated,  
and enforced. Larger boards can improve oversight by incorporating a variety of expertise, perspectives, and  
professional backgrounds, which enhance the quality of deliberation and the firm’s strategic and ethical  
orientation (Gaio & Raposo, 2011; Pucheta‐Martínez & Gallego‐Álvarez, 2019).  
Nevertheless, overly large boards may suffer from coordination inefficiencies, free-rider behaviour, and slow  
decision-making, limiting their ability to respond quickly to fraudulent behaviour (Krause, Semadeni, &  
Cannella, 2014). In the context of concentrated ownership, board size may either strengthen monitoring by  
improving independence and diversity or dilute control discipline by dispersing accountability. Therefore, the  
interaction between ownership concentration and board structure is expected to determine the overall  
effectiveness of fraud risk mitigation.  
H1: Ownership concentration is positively associated with financial health, indicating lower fraud risk.  
H2: Board structure moderates the relationship between ownership concentration and the risk of fraudulent  
financial statement.  
Research Model  
The study examines firms listed on Bursa Malaysia over a five-year period from 2013 to 2017, encompassing  
2,890 firm-year observations from 578 non-financial companies. Malaysia provides an ideal context for  
analysing fraud risk due to its highly concentrated ownership structures, widespread family-controlled firms,  
and persistent governance weaknesses (Rahmat et al., 2021; Othman et al., 2023). The 1Malaysia Development  
Berhad (1MDB) scandal, in particular, exposed serious deficiencies in corporate oversight and reinforced the  
need to assess the effectiveness of board composition and monitoring mechanisms in preventing fraudulent  
financial reporting.  
The study period was intentionally selected to ensure a consistent regulatory environment. Specifically, it  
excludes the effects of the 2018 revision of the Malaysian Code on Corporate Governance (MCCG), which  
introduced new requirements for board and audit committee composition. By focusing on the years 2013 to 2017,  
the analysis captures governance practices before major reforms, providing a stable institutional backdrop to  
evaluate the roles of ownership concentration and board structure in mitigating fraud risk.  
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Data for this study were obtained from two primary sources. Information on ownership concentration and board  
structure was manually extracted from firms’ annual reports available on Bursa Malaysia’s website, as  
commercial databases often provide limited details on governance characteristics. Financial data, including  
variables used to compute the Altman Z-score, were sourced from the Thomson Reuters DataStream database  
and cross-verified with firms’ annual reports to ensure accuracy and consistency.  
To maintain comparability, financial institutions, closed-end funds, and real estate investment trusts (REITs)  
were excluded due to their distinct regulatory and capital structures. Firms with missing information arising from  
delisting, mergers, or incomplete disclosures were also removed. The final sample of 578 firms and 2,890 firm-  
year observations provides a robust dataset for examining the effects of ownership concentration and board  
structure on the risk of fraudulent financial statements in the Malaysian context.  
Research Model  
To test the hypotheses, this study employs a panel data regression framework with cross-sectional and time-  
period fixed effects. The fixed-effects model was selected based on the Hausman specification test, which  
confirmed its superiority over the random-effects model. This approach effectively controls for unobserved firm-  
specific heterogeneity, while cross-sectional and time-period effects account for structural differences across  
firms and macroeconomic shocks over time. Consequently, the model specification enhances robustness and  
reduces potential bias associated with omitted variables (Wooldridge, 2010). The regression model is formulated  
as follows:  
RFFSi,t = β0 + Β1DOSi,t + β2BODi,t + β3DOS*BODi,t + β4ACINDi,t + β5SIZEi,t  
+ Β6LEVi,t + β7GROWTHi,t + Β8ROAi,t + β9AQi,t + β10Ʃ5 Yeari,t  
i,t  
+ β11Ʃ6 Indi,t + εi,t,  
i,t  
where RFFS denotes the risk of fraudulent financial statements, measured using the Altman Z-score. The Z-  
score has been widely adopted as a reliable proxy for financial distress, which increases the likelihood of earnings  
manipulation and accounting fraud (Altman, 1968; Bhavani & Amponsah, 2017; Kukreja et al., 2020; Azhar et  
al., 2021). Its straightforward linear formulation allows for ease of interpretation, providing a practical and  
consistent method to evaluate firms’ financial stability. Firms facing financial pressure are more likely to commit  
fraud to conceal poor performance, making the Z-score a suitable proxy for assessing fraud risk in this study.  
The key independent variable, DOS, represents direct ownership shareholding, measured by the percentage of  
ownership held by controlling shareholders (Ahmed & Hamdan, 2015). Concentrated ownership can enhance  
monitoring and mitigate fraud risk by aligning the interests of owners and managers, but it may also enable  
controlling shareholders to expropriate minority interests when monitoring power becomes excessive (Rahmat  
et al., 2021; Smaili et al., 2022).  
The moderating variable, BOD, refers to the board size, measured by the total number of directors on the board.  
Larger boards are often associated with broader expertise and improved oversight but may also face coordination  
challenges that limit decision-making efficiency (Krause, Semadeni, & Cannella, 2014; Pucheta‐Martínez &  
Gallego‐Álvarez, 2019). The interaction term (DOS × BOD) captures whether the effect of ownership  
concentration on fraud risk is conditioned by the board’s structural composition.  
The variable ACIND denotes audit committee independence, calculated as the proportion of independent  
directors serving on the audit committee. Greater independence enhances objectivity and strengthens internal  
oversight over financial reporting (Ahmed & Hamdan, 2015; Othman et al., 2023).  
In addition, several control variables are included to account for firm-specific and governance-related attributes.  
SIZE represents firm size, measured as the natural logarithm of total assets. Larger firms tend to be under greater  
public and regulatory scrutiny but may also face more complex audit risks (Rahmat & Ali, 2016). LEV (leverage)  
is the ratio of total debt to total assets, reflecting financial pressure that may motivate earnings manipulation  
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(Hoang & Phung, 2019). GROWTH is measured by the change in revenue from year t−1 to year t (Cesinger et  
al., 2018), and ROA (return on assets) is used to capture profitability, calculated as earnings before interest and  
tax divided by total assets (Ahmed & Hamdan, 2015). Profitable firms typically have lower incentives to engage  
in fraud due to reduced performance pressures (Tahir et al., 2020).  
AQ represents audit quality, proxied by a binary variable that equals 1 if a Big 4 audit firm audits the company  
and 0 otherwise. Big 4 auditors are expected to deliver superior audit quality, thereby enhancing fraud detection  
and financial reporting reliability (Harris & Williams, 2020). Additionally, the differential effect of Year and  
Industry is controlled using the panel least-squares, cross-section, and period fixed effects (Hawtrey and Liang,  
2008). Note that ε is the error term.  
RESULTS  
Table I presents the descriptive statistics for 2,890 firm-year observations of Malaysian non-financial listed  
companies from 2013 to 2017. The mean value of RFFS, measured by the Altman Z-score, is 1.396, ranging  
from –4.29 to 6.53. This wide range suggests substantial variation in firms’ financial stability and exposure to  
financial distress, supporting its role as a proxy for fraudulent financial statement risk.  
The average board size (BOD) is 7.3 directors, with a minimum of 3 and a maximum of 13, indicating that most  
firms comply with Bursa Malaysia’s governance requirements while maintaining moderate board diversity.  
Ownership concentration (DOS) averages 51.3%, reflecting Malaysia’s characteristic pattern of concentrated  
shareholding among controlling owners. The interaction term BOD*DOS, which captures the moderating effect  
of board size on ownership concentration, has a mean value of 378.05 and a large standard deviation (165.59),  
signifying wide dispersion across firms and validating the inclusion of this interaction in testing moderating  
effects on fraud risk.  
The mean value for audit committee independence (ACIND) is 0.889, showing that the majority of firms comply  
with the Malaysian Code on Corporate Governance (MCCG), which requires at least one independent member  
on the audit committee. The control variables also display expected variation: ROA averages 5.6%, indicating  
moderate profitability, while leverage (LEV) averages 18.6%, suggesting that most firms rely on moderate levels  
of debt financing. Firm size (SIZE) has a mean of 5.723, measured as the natural logarithm of total assets,  
implying that the sample includes both medium and large-sized corporations. Firm growth (GROWTH) is  
relatively modest, averaging 0.002, consistent with the steady expansion typical of mature public-listed firms.  
Panel B shows that approximately 50.24% of firms are audited by Big 4 auditors, while the remaining 49.76%  
are audited by non-Big 4 firms. This balanced distribution indicates that Malaysian firms engage both  
international and local audit firms at nearly equal proportions, reflecting competitive dynamics in the country’s  
audit market.  
Overall, the descriptive statistics confirm that Malaysian listed companies operate under a highly concentrated  
ownership structure, with strong governance mechanisms such as independent audit committees and moderate  
board sizes. These characteristics provide an ideal empirical setting to examine how ownership structure and  
board composition interact to influence the risk of fraudulent financial reporting.  
Table I Descriptive Statistics  
Panel A: Continuous variables  
Mean  
1.396  
7.3  
Median  
1.385  
7
Maximum  
6.53  
Minimum  
-4.29  
3
Std. Dev.  
1.092  
RFFS  
BOD  
DOS  
13  
1.815  
51.291  
53.79  
98.014  
16.8  
16.627  
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BOD*DOS  
378.047  
0.889  
0.056  
0.186  
5.723  
0.002  
367.19  
1
1078.154  
1
62.718  
0.4  
165.587  
0.153  
0.096  
0.155  
0.639  
0.028  
ACIND  
ROA  
0.053  
0.16  
0.523  
0.76  
-0.432  
0
LEV  
SIZE  
5.663  
0.003  
7.828  
0.123  
3.869  
-0.119  
GROWTH  
Panel B: Dummy variable  
AQ  
Frequency  
1452  
Percentage  
50.24  
Big 4  
Non Big 4  
n
1438  
49.76  
2890  
100  
Notes: RFFS is a risk of fraudulent financial statements measured by the Z-score value of the Altman Z-score  
formula. BOD is a board of directors measured by the actual number of directors on board. DOS is a direct  
ownership shareholder, measured by the percentage of shares by direct ownership shareholders. BOD*DOS is  
moderating variable. ACIND is an audit committee independence, measured by the proportion of the number  
independent audit committee members divided by the total number of audit committee members. ROA is the return  
on assets measured using earnings before interest and tax divided by total assets. LEV is a company’s leverage  
scaled by total debt ratio over total assets. SIZE is a firm’s size, measured by a natural logarithm of its book value  
of total assets at year-end. GROWTH is measured by revenue at the end of the year t divided by revenue year t-  
1. AQ is a binary variable representing audit quality, with a value equal to “1” if a firm is audited by a Big 4 auditor  
or “0” otherwise.  
Table II presents the Pearson correlation coefficients among all variables used in the study. The results show  
that none of the variables are highly correlated with each other, indicating the absence of serious multicollinearity  
issues. The highest correlation is observed between RFFS and ROA (r = 0.693), suggesting that firms with higher  
profitability tend to exhibit stronger financial stability and a lower likelihood of financial distress or fraudulent  
financial reporting. Other relationships are relatively weak to moderate, with correlations ranging between –  
0.266 and 0.796, all below the threshold of concern (r < 0.80).  
As expected, the correlation between BOD and the interaction term (BOD*DOS) is relatively high (r = 0.796)  
due to the mathematical construction of the moderating variable. However, this does not pose a multicollinearity  
problem, as the interaction term is specifically created to test moderation effects. To further validate this, the  
variance inflation factor (VIF) values were examined for all variables, and each recorded a value well below the  
conservative threshold of 10 (Neter et al., 1983), confirming that multicollinearity is not a concern in the  
regression estimations. Overall, these results suggest that the variables used in the model are distinct and suitable  
for inclusion in the panel regression analysis.  
Table II Correlation Analysis  
RFFS DOS BOD DOS*BOD ACIND SIZE LEV  
GROWTH ROA AQ  
0.179 0.693 0.090  
RFFS  
1.000 0.159 0.123 0.172  
0.009  
0.045  
-
0.266  
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DOS  
1.000 0.119 0.796  
-0.035  
0.162  
-
0.047  
0.142 0.180  
0.052  
BOD  
1.000 0.669  
1.000  
0.049  
-0.002  
1.000  
0.377 0.149 0.050  
0.343 0.059 0.059  
0.124 0.141  
0.166 0.214  
DOS*BOD  
ACIND  
-
0.001 0.023  
-
-
0.072  
0.055 0.135  
SIZE  
LEV  
1.000 0.370 0.060  
1.000 0.021  
0.142 0.410  
-
0.115  
0.124  
GROWTH  
ROA  
1.000  
0.227 0.006  
1.000 0.109  
1.000  
AQ  
Table III Multiple Regression Result  
Coefficient  
0.013  
0.071  
-0.001  
0.2  
t-Statistic  
4.123***  
3.594***  
-3.064**  
3.572**  
DOS  
BOD  
DOS*BOD  
ACIND  
ROA  
4.576  
-1.691  
0.525  
0.152  
0.544  
2890  
17.881***  
-20.109***  
7.104***  
3.784***  
8.701***  
LEV  
SIZE  
AQ  
GROWTH  
n
Adjusted R2  
Durbin-Watson statistic  
F-Statistic  
Prob (F-statistic)  
92.78%  
1.439  
63.97  
0
Notes: Refer to Table I for variable definition and measurement. The model is regressed using panel least-squares  
estimation with cross-section fixed and period effects. We report t-statistics based on White’s (1980) consistent  
estimator. ***Significant level p < 0.01, ** significant level < 0.05, *significant level p < 0.10  
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The fixed effect panel regression model examines the relationship between ownership concentration (DOS),  
board size (BOD), their interaction (DOS*BOD), audit committee independence (ACIND), and the risk of  
fraudulent financial statements (RFFS). The results are presented in Table III. The adjusted R² is 92.78%,  
indicating that the explanatory variables collectively account for a substantial proportion of the variation in fraud  
risk among Malaysian listed companies. The Durbin–Watson statistic (1.439) falls within the acceptable range,  
suggesting that there is no serious issue of autocorrelation.  
As shown in Table III, ownership concentration (DOS) is positively and significantly associated with RFFS (β  
= 0.013, t = 4.123, p < 0.01). This suggests that higher ownership concentration is linked to a stronger financial  
position and reduced likelihood of financial distress, supporting the view that concentrated owners can enhance  
monitoring effectiveness and reduce the risk of fraudulent financial statement. Similarly, board size (BOD) is  
positive and significant (β = 0.071, t = 3.594, p < 0.01), implying that larger boards contribute to improved  
oversight and better control mechanisms, thereby lowering the potential for fraudulent practices.  
The interaction term (DOS*BOD), however, is negative and significant (β = –0.001, t = –3.064, p < 0.05),  
confirming the presence of a moderating effect. This indicates that while both ownership concentration and board  
size individually enhance monitoring, their joint effect may reduce efficiency when concentrated ownership  
exerts excessive influence over board decisions. In other words, as board size increases, the positive impact of  
ownership concentration on fraud risk mitigation may weaken due to potential coordination challenges or  
dominance by controlling shareholders.  
In addition, audit committee independence (ACIND) is positively and significantly associated with the Z-score  
(β = 0.200, t = 3.572, p < 0.05), demonstrating that independent audit committees play an essential role in  
safeguarding financial integrity and preventing fraudulent reporting. Among the control variables, profitability  
(ROA) shows a strong positive association with RFFS (β = 4.576, t = 17.881, p < 0.01), suggesting that more  
profitable firms face lower financial distress and, consequently, reduced fraud risk. Conversely, leverage (LEV)  
is negative and highly significant (β = –1.691, t = –20.109, p < 0.01), indicating that firms with higher debt levels  
are more prone to financial stress and potential manipulation of financial statements.  
Firm size (SIZE) is positively significant (β = 0.525, t = 7.104, p < 0.01), consistent with the notion that larger  
firms are subject to greater scrutiny and better governance structures, thereby reducing fraud likelihood.  
Likewise, audit quality (AQ) is positive and significant (β = 0.152, t = 3.784, p < 0.01), supporting the view that  
Big 4 auditors enhance audit reliability and contribute to fraud prevention. Firm growth (GROWTH) also  
exhibits a positive and significant relationship with RFFS (β = 0.544, t = 8.701, p < 0.01), suggesting that  
growing firms are financially healthier and less likely to engage in fraudulent reporting.  
Taken together, the findings indicate that ownership concentration and board size each play a vital role in  
strengthening governance mechanisms that mitigate the risk of fraudulent financial statements. However, the  
significant negative interaction between DOS and BOD underscores the importance of maintaining a balanced  
governance structure, where increased board size does not dilute the monitoring effectiveness of controlling  
shareholders. The results collectively highlight that strong internal controls, independent oversight, and effective  
monitoring mechanisms are crucial in reducing the risk of financial statement fraud in Malaysian listed  
companies.  
CONCLUSION  
This study examined the impact of ownership concentration on the risk of fraudulent financial statements, with  
board structure tested as a moderating factor. Drawing on agency theory and network theory, the study proposed  
that concentrated ownership can enhance monitoring by aligning the interests of controlling shareholders and  
managers, but that this monitoring effect may depend on how the board is structured. Board size, as an element  
of governance architecture, was expected to either strengthen control through broader expertise or weaken it  
through diffusion of responsibility. The results provide strong evidence that higher ownership concentration is  
positively associated with the Altman Z-score, which reflects stronger financial health and therefore lower fraud  
risk. Board size was also found to be positively related to financial health, indicating that larger boards are linked  
to lower fraud risk. However, the interaction between ownership concentration and board size was negative and  
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significant, suggesting a weakening effect. This implies that while both mechanisms independently reduce fraud  
risk, the fraud-mitigating benefit of concentrated ownership becomes weaker as boards grow larger.  
These findings align well with agency theory, which posits that ownership concentration mitigates agency  
conflicts by empowering large shareholders to monitor management effectively. However, consistent with  
network theory, the results also reveal that governance effectiveness depends on relational dynamics and  
structural design within corporate networks. When boards become excessively large, coordination and  
accountability weaken, reducing the strength of relational monitoring and diluting the efficiency of ownership-  
based oversight. Thus, the study demonstrates that ownership concentration alone is insufficient, its effectiveness  
is conditioned by how well the internal governance network, particularly the board, functions to sustain credible  
monitoring relationships.  
These findings are consistent with real-world governance concerns in Malaysia. The 1MDB scandal highlighted  
how weak oversight and diffuse accountability can allow problematic reporting to persist, even in environments  
with concentrated control. In settings where ownership is highly concentrated, common in Malaysian listed  
firms, including family-controlled and state-linked firms which an effective monitoring cannot rely solely on  
dominant shareholders. Instead, it also depends on a board structure that is capable of acting independently,  
coordinating oversight, and responding quickly to signs of distress.  
From a policy perspective, the findings suggest that regulators, investors, and boards should not assume that  
concentrated ownership alone guarantees lower fraud risk. Instead, attention should be given to the design and  
functionality of the board. In particular, while larger boards may add expertise and legitimacy, excessively large  
boards may dilute accountability and reduce the incremental monitoring value of controlling shareholders. This  
has direct relevance for ongoing refinement of the Malaysian Code on Corporate Governance (MCCG), which  
increasingly emphasises board effectiveness, independence, and clarity of oversight roles.  
This study has several limitations. The analysis focuses on the period 2013 to 2017, which was intentionally  
selected to capture a stable governance environment prior to major regulatory changes after 2018. As such, the  
findings may not fully reflect more recent governance reforms. In addition, the measures of ownership  
concentration and board structure are based on publicly disclosed information and do not capture qualitative  
aspects such as informal influence, director competence, or board dynamics. Finally, the sample is limited to  
Malaysian listed non-financial firms, which may limit the generalisability of the results to jurisdictions with  
more dispersed ownership structures or different enforcement regimes.  
In conclusion, this study provides new evidence that ownership concentration and board structure both play  
important roles in reducing the risk of fraudulent financial statements, but their interaction produces a  
diminishing rather than reinforcing effect. The findings highlight the importance of balancing concentrated  
ownership with an efficient, accountable board structure, consistent with both agency and network perspectives  
to ensure credible financial reporting and protect stakeholders confidence.  
ACKNOWLEDGEMENT  
This research was supported by a grant from Open University Malaysia (OUM) [Grant No. OUM-IRF-2025-  
008]. The authors gratefully acknowledge the institution’s financial assistance and support.  
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