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Article

Investigating the Relationship Between ESG Disclosure Performance and Audit Fees in the Presence of Institutional Ownership: Evidence from Malaysian Listed Firms

by
Yenyen Yip
Faculty of Business, Multimedia University, Jalan Ayer Keroh Lama, Bukit Beruang 75450, Melaka, Malaysia
J. Risk Financial Manag. 2025, 18(12), 688; https://doi.org/10.3390/jrfm18120688 (registering DOI)
Submission received: 22 September 2025 / Revised: 13 November 2025 / Accepted: 20 November 2025 / Published: 3 December 2025
(This article belongs to the Special Issue Emerging Technology, Corporate Governance Disclosure and Corporate Social Responsibility)
Versions Notes

Abstract

Based on the Malaysian market, this study investigates the connection between ESG (environmental, social, and governance) disclosure performance and audit fees and examines whether institutional ownership moderates this relationship. The sample of this study comprises 323 firm-year observations collected from 49 Malaysian publicly listed companies covering 2012 to 2020. Panel data regression is employed to test the hypotheses. The findings indicate a significant positive relationship between ESG disclosure performance and audit fees, suggesting that auditors perceive ESG reporting as increasing audit complexity and risk. Further, institutional ownership strengthens this positive relationship, indicating that sophisticated investors’ monitoring roles lead to more thorough auditing of ESG disclosures. Our primary contribution is resolving mixed findings in prior literature by identifying institutional ownership as a key moderating variable. The findings offer critical insights for Malaysian regulators in designing the ESG verification framework and help companies and investors better understand audit cost drivers. This study highlights the real-world impact of institutional shareholders on corporate governance and raises market awareness of how auditors respond to sustainability disclosures.

1. Introduction

In the previous decade, Friedman (1970) posited that the primary focus of businesses is to expand shareholder value; spending on socially conscious initiatives detracts from this goal. However, concerns about social and environmental issues have recently undergone a paradigm shift. In the most recent KPMG survey conducted in 2022, 96% of the world’s largest 250 companies are now reporting on sustainability, establishing it as a regular business practice (K.P.M.G., 2022).
The increased interest in ESG (environmental, social, and governance) among scholars has inspired the production of academic write-ups assessing the impact of ESG initiatives on business risk reduction. For example, Fransisca et al. (2025) and Bani-Khaled et al. (2025) find that ESG compliance enhances corporate efficiency and reputation, thus lowering loan and equity costs. This implies that ESG compliance helps mitigate business risk, leading creditors and investors to lower their expected returns (Liu & Lee, 2025). Al-Issa et al. (2022) and Chua and Byun (2025) contend that firms with significant ESG engagement establish efficient supply chains and operating models, earning a competitive advantage that translates into greater financial and operational success. This suggests that businesses with appropriate ESG practices have a lower overall risk profile (Amuda & Saka, 2025), which ensures firms’ financial stability, thus making them more attractive to investors (Wedajo et al., 2023). Rong and Kim (2024) argue that ESG disclosure enhances the information environment of businesses by reducing information asymmetry, thereby increasing stock liquidity and boosting investors’ confidence. Huang et al. (2023) and S. Chen et al. (2023) assert that non-financial reporting reduces the likelihood of environmental litigation, making companies less susceptible to litigation risk, particularly with regard to environmental harm. Taken together, recent studies indicate that ESG initiatives play a crucial role in mitigating a firm’s business risks.
Sustainability reporting in Malaysia has undergone a lot of changes since its official establishment. In October 2015, Bursa Malaysia required all listed issuers to report on their sustainability activities in the form of a ‘Sustainability Statement’ in their annual reports under Practice Note 9 (PN9) of the Main Market Listing Requirements. This meant companies had to be accountable for how they manage significant economic, environmental, and social (EES) risks and opportunities. In 2021, Bursa Malaysia released a Sustainability Reporting Guide (Second Edition), along with a comply-or-explain rule for listed issuers to follow a globally recognized sustainability framework (such as the Global Reporting Initiative (GRI) or the Task Force on Climate-related Financial Disclosures (TCFD)), shifting from general disclosure to more standardized and robust reporting. Again, in 2024, the Bursa Malaysia published an expanded sustainability reporting requirement, requiring publicly listed corporations to adhere to IFRS Sustainability Disclosure Standards as the basis for sustainability reporting beginning in 2025. The IFRS Sustainability Disclosure Standards require all listed issuers to include sustainability disclosures in their annual reports. The exchange’s goal is to improve sustainability management responsibility by requiring enterprises to use globally recognized criteria to manage their sustainability-related risks and opportunities (SROs). The amended rules are meant to promote organizational resilience by making it easier for investors to compare sustainability initiatives across organizations. According to KPMG’s 2024 Survey on Sustainability Reporting (K.P.M.G., 2024), all of Malaysia’s top 100 corporations currently disclose their ESG initiatives through sustainability reporting.
A key question in this changing environment is whether the external audit process is affected by a company’s commitment to ESG initiatives. While all listed companies and new applicants are required to obtain an independent auditor to audit their financial statements, the relationship between material sustainability risks and financial audits is a topic that warrants further research in the Malaysian context. Audit fees directly correspond to how the auditor perceives the level of risk involved, as well as the amount of work needed to perform the audit (K. Zhang et al., 2023). According to studies, ESG disclosures can impact audit fees in two ways. On one hand, it can reduce the perceived risk of auditors by lowering information asymmetry, which then decreases audit fees (Yu et al., 2024). On the other hand, it can increase the effort and complexity of the audit, which can increase audit fees, due to additional non-financial information that needs to be assessed and validated (K. Zhang et al., 2023).
Malaysia’s ownership pattern adds a layer of complexity to the market, as it reveals a sizable share of institutional investors holding more than 5%. These influential shareholders are increasingly concerned with ESG disclosure, viewing it as crucial for long-term value creation and risk mitigation (Abdelrahman Adam Abdalla et al., 2024). It remains to be empirically tested if their presence imposes pressure that is translated into stronger audit work for the companies performing sustainability activities, perhaps to protect their investment from ESG-related risks.
The objective of this paper is twofold. First, this study aims to ascertain if audit fees are influenced by the ESG disclosure based on the context of Malaysia. The growing global emphasis on business sustainability has introduced new dimensions to audit risk assessment (K. Zhang et al., 2023). Specifically, studying the relationship between ESG disclosure performance and audit fees provides insights into how auditors perceive and price the risks associated with a client’s ESG activities and disclosure practices (Y. Li & Meng, 2025).
Next, this paper aims to analyze the role played by institutional owners in influencing the nexus between ESG disclosure performance and audit fees. The substantial shareholdings of institutional investors provide both the incentive and the power to demand the quality audit of a non-financial disclosure, which subsequently influences audit complexity and costs.
This study makes several contributions to the literature. Firstly, by examining the Malaysian context, this study provides valuable insights into how auditors in an emerging economy respond to sustainability disclosures.
Secondly, it enriches the literature on ESG reporting by exploring the role of institutional investors. Previous authors, such as Du et al. (2020), García-Sánchez et al. (2020), and Moalla and Dammak (2023), have attempted to establish a connection between ESG disclosure and audit fees and reach different conclusions. The absence of a moderating factor could be one of the contributing factors to the mixed outcomes. The present study introduces institutional ownership as a key moderating variable to resolve these ambiguities.
Thirdly, the capital markets in emerging economies have experienced a substantial increase in institutional ownership. Regulators have urged institutional investors to play an active role in corporate governance. Specifically, institutional investors are urged to take a more proactive and effective stewardship role in shaping, influencing, and advocating for the ESG agenda within the Malaysian capital market by the Malaysian Code of Governance for Institutional Investors 2022 (Lamptey et al., 2023). This study echoes the call to explore the implications of the presence of institutional investors on the audit process of ESG-engaged firms.
Fourthly, this study mainly focuses on the Malaysian environment. As Malaysia is an emerging market, the evidence obtained may be generalized to other emerging economies, such as Indonesia, Thailand, and the Philippines, or other countries that share similar institutional structures. Future researchers can utilize the findings in this study to facilitate their search for new research avenues related to the field of ESG reporting.
The study is organized as follows: Section 2 provides the review of the literature and hypotheses development. Section 3 discusses the research methodology. Section 4 describes the empirical results, while Section 6 wraps up the study.

2. Literature Review and Hypotheses Development

2.1. ESG Disclosure Performance and Audit Fees

The literature presents two competing perspectives on how ESG disclosure affects an auditor’s risk assessment and, consequently, audit fees. Huang et al. (2023), Nirino et al. (2022), and Liao et al. (2019) suggest that managers of socially responsible businesses willing to invest in internal controls and effective internal control mechanisms reduce business risks and enhance the credibility of ESG reporting. Credible ESG reporting tends to reduce the auditor’s information acquisition cost and engagement risks and improve audit efficiency (L. Zhang & Guo, 2024), thereby reducing audit fees. Evidence from Du et al. (2020) and López Puertas-Lamy et al. (2017) indicates that auditors charge lower audit fees to companies that perform better in terms of corporate social responsibility.
The risk-enhancement perspective, conversely, posits that ESG disclosure may increase audit fees due to heightened complexity and verification challenges. Several findings suggest that ESG programmes have been used as a means of “greenwashing” the company’s image or to conceal management’s self-interest. For instance, Cespa and Cestone (2007) argue that entrenched managers may increase job security to fend off dismissal attempts by their firm using ESG programmes. Wang and Sarkis (2017) assert that businesses engage in ESG to win over their stakeholders but never take any concrete initiatives to enhance social and environmental performance. Chintrakarn et al. (2021) suggest that managers may involve themselves in ESG for their own benefit, such as improving their public image by utilizing ESG initiatives to attract media attention. Therefore, the audit fees may increase if auditors think that ESG disclosure is connected to significant agency problems that increase firm risk and potential for accounting manipulation (Lee et al., 2025).
Nevertheless, even for disclosures made in good faith, the complexity of ESG information might raise audit costs. Researchers such as L. Chen et al. (2016) contend that ethical businesses are more inclined to spend money on assurance services to improve stakeholders’ trust in the quality of their annual reports. As a result, audit fees typically rise in tandem with the number of substantive tests that auditors conduct to meet client expectations. Saeed et al. (2020), García-Sánchez et al. (2020) and K. Zhang et al. (2023) agree that firms with relatively good ESG performance tend to request relatively higher quality audits, which translates into higher audit fees, driven by the increased effort required from auditors. Furthermore, as ESG reporting has become a more complicated and subjective process, suitable audit methods and specialized knowledge are necessary for its reporting, which adds to the rise in audit fees. (Lamptey et al., 2023; Christensen et al., 2024; Moussa, 2024; Lu et al., 2025). To add on, the increased complexity of ESG disclosure verification exposes auditors to greater litigation risk, leading to higher audit fees (K. Zhang et al., 2023). Given these competing theoretical predictions, we propose our first hypothesis:
H1. 
There is a positive relationship between the ESG disclosure performance and audit fees in Malaysia.

2.2. The Moderating Role of Institutional Ownership

The relationship between ESG disclosure performance and audit fees is likely influenced by company governance structures, notably institutional ownership. Malaysia’s enterprises are primarily family and government-owned, making them vulnerable to the Type II agency problem (Claessens et al., 2002). The Type II agency problem refers to the conflict of interest between dominant and minority shareholders. An entrenched owner–manager (dominant shareholder) may regard ESG as a cost and have an incentive to exploit ESG reporting as an avenue to portray a sustainable image to the public without making a genuine commitment to sustainable practices. Several studies have shown that an entrenched owner–manager uses an ESG report as a tool for self-promotion to improve the image of both the manager and their firm due to discretionary power vested in the manager’s decision on the non-financial information to be disclosed in the financial report (Alsaadi, 2022; Hsueh, 2018; Stutz et al., 2022). The high subjectivity of such information limits its usefulness to stakeholders and may result in poor decisions (Nekhili et al., 2017; Sumarta et al., 2023).
Corporate monitoring through institutional ownership could be the solution to mitigate the Type II agency problem and encourage firms to be more socially responsible and truthful in their ESG reporting. Institutional investors typically include public or private pension funds, insurance companies, government agencies, and other collective investment vehicles, such as charitable organizations (Velte, 2021). These entities manage funds with the intention of increasing investment opportunities and enhancing returns for their organizations, ultimately benefiting their beneficiaries. Institutional investors often invest large sums of money in a variety of businesses to provide returns for their clients (Ferreira & Matos, 2008). In Malaysia, institutional investors with a share ownership of more than 5% comprise 94% of the Top 100 Malaysian publicly listed firms (ASEAN Development Bank, 2021), giving them significant influence.
This study proposes that institutional ownership strengthens the relationship between the ESG disclosure performance and audit fees through two mechanisms: First, institutional investors, particularly those practising Socially Responsible Investment (SRI), demand higher quality and more verifiable ESG information to evaluate their investments properly (Gibson et al., 2020; Moalla & Dammak, 2023). The demand for credibility leads them to pressure companies for more extensive audits of ESG disclosures. Second, institutional investors require high-quality audit services, as they rely on audited financial statements for informed decision-making, and independent assurance can deter portfolio firms from releasing inaccurate information (Kordsachia et al., 2021).
Empirical evidence supports the monitoring role of institutional owners. According to Z. Li and Wang (2022), audit fees and the demand for audits are higher for firms that have foreign institutional investors. Furthermore, the positive influence is more pronounced for firms involved in a higher degree of earnings management and those with low initial ESG awareness. Findings from García-Sánchez et al. (2020) show the probability of assuring that the ESG report increases in the presence of institutional investors. Therefore, we expect that institutional investors will amplify the relationship between ESG disclosure performance and audit fees as they demand the rigorous verification of sustainability reports. This leads to our second hypothesis:
H2. 
Institutional ownership strengthens the relationship between ESG disclosure performance and audit fees in Malaysia.

3. Research Methodology

3.1. Data

The period of study covers 2012 to 2020. The year 2012 is chosen as the starting point for data collection because it represents the period when ESG data for Malaysian corporations became more systematically available in Bloomberg. The timeframe ends in 2020 to avoid any potential confounding effects of the COVID-19 pandemic, as corporate reporting and audit fees experienced substantial disruptions during the COVID years. After removing entries with missing values and outliers for the variable of interest, the final usable dataset consists of 323 firm-year observations from 49 Malaysian companies. All financial and ESG data are gathered from the Bloomberg database. Table 1 displays the sample composition of this study.

3.2. Variables Description

This study utilizes a thorough set of variables to empirically examine the interplay among ESG disclosure performance, audit fees, and institutional ownership based on the Malaysian environment.

3.2.1. Dependent Variable

The dependent variable, audit fees (AF), is determined by the natural logarithm of total audit fees incurred by sample firms by following Moalla and Dammak (2023).

3.2.2. Independent Variable

The independent variable, ESG disclosure performance, is proxied by ESG disclosure scores (ESG) extracted from Bloomberg, following Shaikh (2022), Lööf et al. (2022), Moalla and Dammak (2023), and Attia and Almoneef (2025). Bloomberg assigns scores that range from 0 to 100 based on more than 120 disclosure-based ESG metrics across the environment, social, and governance pillars. What stands out in this score is that it predominantly assesses disclosure levels of a company’s ESG-reporting policies by considering a firm’s environmental and social responsibility achievements and governance quality rather than more compliance. It is this disclosure aspect that is directly verifiable by auditors and is therefore posited to influence audit effort, complexity, and perceived risk (Y. Li & Meng, 2025), forming the core of our hypothesis.

3.2.3. Moderating Variable

The moderating variable, institutional ownership (INS), is measured as the percentage of shares held by institutional investors. This reflects the level of supervision and control by large and sophisticated investors.

3.2.4. Control Variables

Consistent with the previous literature, this study includes several control variables such as ROA (Return on Asset), LEV (debt to total asset), QUICK (quick ratio), MTB (market-to-book ratio), DIV (dividend per share), and SIZE (natural logarithm of total assets) into the baseline model to account for firm-specific characteristics that may influence audit fees.
Return on Assets (ROA) is expressed as net income divided by total assets. ROA measures operating efficiency. It is independent from a firm’s leverage and financing structure, thus providing a purer gauge of profitability (Nissim & Penman, 2001). Higher ROA indicates a lower risk of financial distress and leads to less audit effort and lower fees (Hay et al., 2006). Alternatively, auditors may charge more to protect against the possibility of inflated earnings in profitable companies (Stanley, 2011).
Leverage (LEV) is represented as total liabilities over total assets. It is a fundamental indicator of financial risk, as highly leveraged firms pose a greater risk of financial distress, which increases auditor engagement risk and is likely to result in higher audit fees (Hay et al., 2006). Alternatively, a distressed company may have fewer complex transactions to audit, hence the lower audit fees (Pratt & Stice, 1994).
Liquidity (quick) is determined by a firm’s quick assets compared to its current liabilities. It measures a firm’s ability to pay its current liabilities with its most liquid assets and is used to assess a firm’s financial health. The lower the ratio, the riskier the firm is deemed to be for an audit, given the increased risk of distress, and thus requires a more extensive audit, which results in higher audit fees (Chan et al., 2016; Saeed et al., 2020). Alternatively, excessive liquidity may be seen as a symptom of deeper difficulties (for example, hoarding cash owing to investment uncertainty), thus requiring an extensive audit and increasing the audit fees (Hogan & Wilkins, 2008).
The market-to-book ratio (MTB) is determined by a firm’s market capitalisation over its book value. It summarizes the expected growth potential of a firm and the associated risk of the investment. High-growth firms are usually more complex to audit, which is likely to increase audit work and fees (Audit Analytics, 2023). However, a firm with a low MTB ratio may imply financial difficulty, thus requiring a thorough audit and increasing audit fees (López & Peters, 2012).
Dividend per share (DIV) signals a firm’s financial stability and maturity. Firms that pay stable dividends are often perceived as less risky and having lower agency costs, which can favourably influence the auditor’s risk assessment and lead to lower audit fees (L. Chen et al., 2016; García-Sánchez et al., 2020). Alternatively, the decision to pay a dividend consumes cash, which could potentially increase financial risk and requires audit scrutiny, thereby increasing audit expenses (Hope & Wang, 2018).
Firm Size (SIZE) is determined by the natural logarithm of total assets. It is one of the most consistent predictors of audit fees. Larger firms tend to have more complex business activities, higher volume of transactions, and a greater level of inherent risk, all of which increase the resources and time required to complete the audit, ultimately leading to higher audit fees (Hay et al., 2006). Alternatively, large organizations might benefit from economies of scale in auditing, where the fee per unit of asset declines (Keefe et al., 1994). Table 2 summarizes the measurement of all variables employed in this study.

3.3. Methodology

To empirically assess the relationship between ESG disclosure performance, audit fees, and institutional ownership, this study employed panel regression techniques for data analysis. The ability of panel data regression techniques to control for unobserved, time-invariant heterogeneity across firms (e.g., corporate culture, management philosophy, or industry-specific factors, etc.), which could otherwise bias the results (Hsiao, 2014), made them an ideal research method for this study. Pooled OLS, random effects, and fixed effects models are conducted to test the hypotheses. The Breusch–Pagan Lagrange Multiplier test was used to assess whether a pooled OLS regression model or a random effects model is the better fit. A p-value < 0.05 indicates rejection of H0, thereby supporting the random effects model. Conversely, if the p-value ≥ 0.05, H0 cannot be rejected, and the pooled OLS is deemed appropriate. The Hausman test is carried out to decide between a random effects model and a fixed effects model. If the p-value < 0.05, H0 is rejected, and the fixed effects model (FEM) is a more appropriate choice. Conversely, if the p-value ≥ 0.05 and H0 is accepted, the random effects model is favoured. Robust standard errors clustered at firm level are employed to rectify heteroskedasticity and the serial correlation problem to improve the validity the empirical outcomes.

3.4. Model Specification

The regression models for this study are specified as follows:
Model 1: Main Effect
AFi,t = α + β1ESGi,t + β2ROAi,t + β3LEVi,t+ β4QUICKi,t + β5MTBi,t + β6DIVi,t + β7SIZEi,t +εi,t
Model 2: Moderating Effect
AFi,t = α + β1ESGi,t + β2INSi,t + β3(ESG xINS)i,t + β4ROAi,t + β5LEVi,t + β6QUICKi,t + β7MTBi,t + β8DIVi,t + β9SIZEi,t + εi,t
where ESG xINS denotes the interaction term. Other variables are as defined earlier.

4. Empirical Findings

Descriptive Statistics and Correlations

The descriptive statistics are shown in Table 3. The sample firms have an average audit fee of RM 3.03 million (approximately USD 0.73 million, using the average MYR/USD exchange rate of 4.15 for the sample period). The mean ESG disclosure score of 29.46 shows that Malaysian firms within the sampling period exhibit a moderate degree of sustainability reporting. The top firm disclosing ESG activities scored 63.64 and belongs to the Food and Beverage sector. This aligns with the global phenomenon trend, as stakeholders such as investors, NGOs and consumers tend to put a lot more scrutiny on the sustainability policies of consumer-facing businesses. In contrast, the lowest scorer is from the Service sector. This is possibly attributed to the perception of the environmental footprint of service firms tending to be lower as compared to the industrial and resource-based sectors, resulting in weaker ESG disclosure frameworks and a lower demand for comprehensive reporting. It is worth mentioning that the highest captured ESG score remains under 100. This correlates with Malaysia’s environment at the time of the sample, where the ESG disclosure was largely governed by voluntary guidelines rather than being mandatory. This ‘soft’ approach on ESG reporting requirements could be the greatest contributory factor to the moderate performance, as firms have less incentives to devote resources to thorough data collection and disclosure for every possible ESG indicator. The percentage of shares held by institutional investors is, on average, 60.11%, indicating that these investors are highly dominant in the Malaysian market. Moreover, the statistics also show that the sample firms can earn RM7.34 for every RM (Ringgit Malaysia) invested in assets (as evidenced by an ROA of 7.34). Furthermore, the sample firms’ average leverage ratio (LEV) is 29.45, suggesting that they use a 29.45% debt to finance their total assets. With an average market-to-book ratio (MTB) of 8.9, investors are willing to pay RM8.9 more than the book value for each share they hold. The sample firms pay an average dividend of RM0.33 per share and have total assets of RM44,288.71 million.
Table 4 exhibits the correlation matrix. From the analysis, the correlations among audit fees, ESG score, percentage of institutional shareholdings, and control variables are less than 0.8, suggesting no evidence of significant multicollinearity (Gujarati, 2003).
As shown in Table 5, the mean of the variance inflation factors (VIFs) is 3.51, far below the threshold of 10, indicating that multicollinearity does not significantly impact the results.

5. Regression Analysis

5.1. ESG Disclosure Performance and Audit Fees

The results of H1, which posits a positive relationship between the ESG disclosure performance and audit fees, are presented in Table 6. Model 1 presents the baseline pooled OLS results. The significant Breusch–Pagan LM test (p < 0.01) indicates the presence of unobserved individual effects, rejecting the pooled OLS model and being in favour of a random effects approach. The subsequent significant Hausman test (p < 0.01) leads to the rejection of the random effects model, establishing the fixed effects model (Model 3) as the most appropriate and efficient estimator for our data. Finally, Model 4 presents the fixed effects estimates with robust standard errors to correct for identified heteroskedasticity and serial correlation (both tests are significant at p < 0.01). We refer to Model 4 for the H1 discussion.
As indicated in Model 4, the coefficient on ESG is 0.0099 and statistically significant (p < 0.01). This result suggests that a one-unit increase in the ESG disclosure score is associated with an approximately 1% increase in audit fees, ceteris paribus. The consistency of this positive relationship across different model specifications (Models 2–4) strengthens the reliability of this finding. Regarding the control variables, our results align with core audit fee theory. Both SIZE and LEV are consistently positive and significant predictors, confirming that larger and riskier firms incur greater audit costs. Other variables, such as ROA, QUICK, MTB, and DIV, while not always statistically significant in our sample, were retained due to their strong theoretical foundation. Their lack of significance may indicate that their influence is captured by other correlated firm characteristics (like size and leverage) in the Malaysian context or that their effect is simply secondary to these dominant drivers. Ultimately, maintaining this established model specification demonstrates that the positive relationship between ESG performance and audit fees is robust and exists independently of these fundamental firm-specific factors.
In short, our findings support H1, as the outcome indicates that firms with higher ESG disclosure scores are associated with higher audit fees. Our evidence contrasts with the results obtained by Du et al. (2020) and López Puertas-Lamy et al. (2017), who found a negative association between audit fees and CSR (corporate social responsibility). The observed phenomenon may be explained by Malaysian companies taking advantage of ESG initiatives to conceal the entrenched behaviour of their managers or by using ESG as a means of “greenwashing” the company’s image (Chintrakarn et al., 2021) or winning over stakeholders (Wang & Sarkis, 2017). Ultimately, ESG may result in higher audit fees, as it raises the risks of auditor engagement (Lee et al., 2025). Alternatively, ethical firms’ commitment to give their stakeholders reliable financial information (García-Sánchez et al., 2020; Saeed et al., 2020; K. Zhang et al., 2023), coupled with an increase in accounting and operating complexity arising from the execution of ESG activities (Christensen et al., 2024; Lamptey et al., 2023; Moussa, 2024; Lu et al., 2025), may be the driving forces behind the positive correlation between ESG disclosure performance and audit fees.

5.2. The Moderating Role of Institutional Ownership

This study intends to impart new knowledge by suggesting that institutional ownership has a moderating effect on the connection between ESG disclosure performance and audit fees (H2). Table 7 displays the regression results for H2. To test H2, several estimating methods have been used, including the pooled OLS (Model 1), random effects (Model 2), and fixed effects (Models 3 and 4). The Breusch–Pagan LM test (p < 0.01) demonstrates that the random effects model is preferable over pooled OLS, whereas the Hausman test (p < 0.01) shows that the fixed effects model is the most appropriate specification. Diagnostic checks further revealed issues with serial correlation and heteroskedasticity. To address these, the regression was re-run with robust standard errors, and the outcomes are shown in Model 4, which serves as the foundation for our discussion of H2.
The interaction term (ESG × INS) is the key variable of interest. Model 4 indicates that this term is positive and statistically significant at the 10% level (coefficient = 0.0008, p < 0.10). This result implies that the presence of institutional ownership strengthens the positive relationship between ESG disclosure performance and audit fees. The significance of this interaction term increases across specifications, from insignificant in the pooled OLS (Model 1) to significant in the robust fixed effect model (Model 4), enhancing our confidence in the outcome.
This moderating effect is observed after controlling for established determinants of audit fees. The control variables in our model generally behave as theory would predict. Most notably, firm SIZE and LEV consistently show a positive and significant association with audit fees across specifications, validating the model’s structure. The persistence of the significant moderating effect of institutional ownership, even after accounting for these fundamental firm-specific characteristics, highlights the robustness of the finding.
In short, the results are consistent with the view that institutional owners demand higher audit quality for ESG-engaged firms (Gibson et al., 2020; Moalla & Dammak, 2023). This demand likely leads to more extensive audit procedures, increasing audit effort and, consequently, audit fees. Thus, H2 is supported.
This study complements and extends the work of García-Sánchez et al. (2020), who found that institutional ownership enhances the likelihood of ESG report assurance. The current study reveals that the monitoring impact extends to financial audit fees as well. Similarly, it is consistent with Z. Li and Wang (2022), who discovered that foreign institutional investors in China drive increased audit fees, particularly in companies with low ESG awareness. The current study verifies this monitoring role in a particular developing market, specifically with regard to ESG disclosure verification.

6. Conclusions

6.1. Summary of Findings

This research examines the relationship between the ESG disclosure performance and audit fees in the Malaysian market, as well as the moderating effect of institutional ownership on this relationship. With the analysis of 323 firm-year observations from the years 2012 to 2020, using the panel data methodology, our study confirms (1) the existence of a positive association between ESG disclosure performance and audit fees, implying that ESG initiatives increase the audit effort; hence, there are higher audit fees, (2) institutional ownership strengthens the positive relationship between ESG performance and audit fees, suggesting that the presence of institutional shareholder demand for quality audits raises the audit fees.

6.2. Theoretical and Practical Implications

This paper offers theoretical and practical implications for multiple stakeholders. For researchers, this study identifies institutional ownership as a critical moderating factor that enhances the association between ESG and audit fees, closing the gap of previous studies. Since Malaysia is an emerging market, the findings could be extended to other developing nations with comparable institutional frameworks, like Indonesia, Thailand, and the Philippines. This study advances the ESG reporting literature by suggesting an additional research avenue for future researchers.
For regulators (including Bursa Malaysia and the Securities Commission), although disclosure mandates enhance transparency, they also add to the costs of compliance, particularly through the increased costs of audits. As such, regulators should consider coming up with additional and specific guidance on ESG verification processes that would help to mitigate these costs.
For companies, the study highlights the cost burden of ESG disclosure, particularly in contexts with high institutional ownership. Firms must recognize such costs as credibility investments rather than simply compliance costs.
For investors, the results show that ownership by institutions acts as a governance tool that improves the credibility of the reporting and thus should be included in the investment decision.
For auditors, this study provides a realistic, evidence-based approach to include ESG disclosure into risk assessments and audit fees. The positive association discovered shows that comprehensive ESG disclosures signify a need for increased auditing work, justifying a fee premium.

6.3. Limitations and Future Research Directions

This study has some limitations that need to be addressed by future research. First, our measure of ESG disclosure performance relies on the Bloomberg score, which, although detailed, may miss some aspects of reporting quality. Subsequent research could implement detailed content analytics on sustainability reports.
Second, this study treats institutional investors as a single group, whereas various kinds of institutional investors (for example, pressure-sensitive and pressure-resistant, domestic and foreign) may define different levels of monitoring intensity. Subsequent research should investigate how these types of investors impact the ESG–audit fee relationship.
Third, given its emerging economy status, Malaysia possesses its own unique characteristics. A cross-country analysis among different emerging markets would enhance the generalization of the findings.
Finally, as Malaysia started to implement the IFRS Sustainability Disclosure Standards on a mandatory basis in 2025, future research could focus on how the regulatory change affects the ESG disclosure–audit fee relationship.

Funding

This research was funded by the 2024 Malaysia-Jordan Matching Grant, grant number SAP ID MMUI/240099 and the APC was funded by Multimedia University, Malaysia.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

Data available upon request from the authors.

Conflicts of Interest

The authors declare no conflicts of interest.

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Table 1. Sample composition. Panel A: distribution of companies by sector; Panel B: observations by year.
Table 1. Sample composition. Panel A: distribution of companies by sector; Panel B: observations by year.
Panel A: Distribution of companies by sector
SectorsNumber of CompaniesPercentage (%)
Service918
Telecommunication510
Plantation510
Oil and gas48
Construction36
Utilities36
Conglomerate24
Transportation24
Healthcare24
Food and beverage36
Manufacturing24
Property24
Tobacco12
Amusement12
Hotel12
Retail12
Real estate12
Vehicle12
Machinery equipment12
Total49100
Panel B: Observations by year
YearNumber of ObservationsPercentage
20123811.76
20134213
20144213
20154213
20164213
201710.31
20184112.69
20194012.38
20203510.84
Total323100
Panel A shows the distribution of companies by sector for this study, with Service (18%), Telecommunication, and Plantation (10%, respectively) being the most represented. Panel B shows the distribution of observations from 2012 to 2020.
Table 2. Variable measurement.
Table 2. Variable measurement.
Variable TypeVariable NameSymbolMeasurement
DependentAudit FeesAFNatural logarithm of total audit fees
IndependentESG DisclosureESGBloomberg ESG disclosure score (0–100)
ModeratingInstitutional OwnershipINSPercentage of shares held by institutional investors
ControlReturn on AssetsROANet income/total assets
LeverageLEVTotal liabilities/total assets
LiquidityQUICK(Current assets − inventory)/current liabilities
Market-to-BookMTBMarket capitalization/book value of equity
Dividend per ShareDIVTotal dividends paid/number of outstanding shares
Firm SizeSIZENatural logarithm of total assets
Table 3. Descriptive statistics.
Table 3. Descriptive statistics.
VariableMeanStd. Dev.MinMax
AF (RM mil)3.033.750.1421.5
ESG29.4613.2810.5363.64
INS60.1125.56095.02
ROA7.349.71075.4
LEV29.4515.580.1368.19
QUICK1.361.230.1514.81
MTB8.9063.2301195.12
DIV0.330.640.016.9767
TOA (RM mil)44,288.7194,949.71660.8996,410
Table 4. Correlation matrix.
Table 4. Correlation matrix.
AFESGINSROALEVQUICKMTBDIVSIZE
AF1
ESG−0.06291
INS0.13630.08911
ROA−0.44510.32180.03081
LEV0.1641−0.0527−0.0591−0.10311
QUICK0.1317−0.138−0.1076−0.19370.05081
MTB−0.12220.13450.05510.28420.09−0.06731
DIV−0.30930.4197−0.05540.537−0.1915−0.13670.17071
SIZE0.7416−0.06940.2551−0.53680.11120.1227−0.199−0.32171
Table 5. Variance inflation factors.
Table 5. Variance inflation factors.
VariableVIF1/VIF
ROA1.910.52386
DIVIDEND1.610.62177
SIZE1.450.68764
ESG1.270.78516
MTB1.110.89705
DTA1.060.94164
QUICK1.050.95413
Mean VIF1.35
Table 6. The effect of ESG performance on audit fees.
Table 6. The effect of ESG performance on audit fees.
Model 1Model 2Model 3Model 4
Constant−5.4010 ***−2.9087 ***−1.6613 ***−1.6613
(0.0000)(0.4392)(0.4746)(0.9939)
ESG 0.00240.0070 ***0.0099 ***0.0099 ***
(0.0033)(0.0021)(0.0021)(0.0034)
ROA−0.0045−0.00510.00040.0006
(0.0053)(0.0045)(0.0048)(0.0051)
LEV0.0047 *0.0081 ***0.0122 ***0.0122 **
(0.0027)(0.0028)(0.0030)(0.0053)
MTB0.0005−0.0001−0.0000−0.0000
(0.0006)(0.0003)(0.0003)(0.0001)
QUICK0.0280−0.0204−0.0139−0.0139
(0.0332)(0.0211)(0.0208)(0.0276)
DIVIDEND−0.1005−0.0242−0.0105−0.0105
(0.0756)(0.0463)(0.0456)(0.0200)
SIZE0.6070 ***0.3222 ***0.1675 ***0.1675
(0.0392)(0.0468)(0.0540)(0.1182)
Breusch–Pagan LM test562.20 ***
(0.0000)
Hausman test 33.99 ***
(0.0000)
Observations323323323323
Heteroskedasticity 0.0001 ***
(chi-square) (0.0000)
Serial correlation 52.255 ***
(F-stat) (0.0000)
Note: Figures in the parentheses are standard errors, except for Breusch–Pagan LM test, Hausman test, heteroskedasticity, and serial correlation tests, which are p-values. Asterisk *, **, and *** indicate the respective 10%, 5%, and 1% significance level.
Table 7. The effect of institutional ownership on the relationship between ESG performance and audit fees.
Table 7. The effect of institutional ownership on the relationship between ESG performance and audit fees.
Model 1Model 2Model 3Model 4
Constant−19.6094 ***−9.7436 ***−6.1364 ***−6.1364
(1.7410)(1.7791)(1.9807)(4.1251)
ESG0.0320−0.0175−0.0211−0.0211
(0.0276)(0.0188)(0.0189)(0.0215)
INS−0.0004−0.0126−0.0182−0.0182
(0.0150)(0.0111)(0.0113)(0.0241)
ESGxINS−0.00050.0006 **0.0008 ***0.0008 *
(0.0004)(0.0003)(0.0003)(0.0005)
ROA0.0670 ***0.00780.00780.0078
(0.0215)(0.0192)(0.0192)(0.0142)
LEV−0.0191 *0.0346 ***0.0543 ***0.0543 **
(0.0105)(0.0110)(0.0121)(0.0212)
MTB0.0031−0.0004−0.0004−0.0004
(0.0024)(0.0012)(0.0011)(0.0004)
QUICK0.4054 ***−0.0732−0.0848−0.08477
(0.1304)(0.0832)(0.0829)(0.0756)
DIVIDEND−0.49470.06460.10860.1086
(0.3107)(0.1831)(0.1811)(0.0788)
SIZE2.3240 ***1.2607 ***0.8306 ***0.8306 *
(0.1616)(0.1801)(0.2130)(0.4495)
Breusch–Pagan LM test534.07 ***
(0.000)
Hausman test 21.10 **
(0.0122)
Observations323323323323
Heteroskedasticity 0.0001 ***
(chi-square) (0.0000)
Serial correlation 52.255 ***
(F-stat) (0.0000)
Note: Figures in the parentheses are standard errors, except for Breusch–Pagan LM test, Hausman test, heteroskedasticity, and serial correlation tests, which are p-values. Asterisk *, **, and *** indicate the respective 10%, 5%, and 1% significance level.
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MDPI and ACS Style

Yip, Y. Investigating the Relationship Between ESG Disclosure Performance and Audit Fees in the Presence of Institutional Ownership: Evidence from Malaysian Listed Firms. J. Risk Financial Manag. 2025, 18, 688. https://doi.org/10.3390/jrfm18120688

AMA Style

Yip Y. Investigating the Relationship Between ESG Disclosure Performance and Audit Fees in the Presence of Institutional Ownership: Evidence from Malaysian Listed Firms. Journal of Risk and Financial Management. 2025; 18(12):688. https://doi.org/10.3390/jrfm18120688

Chicago/Turabian Style

Yip, Yenyen. 2025. "Investigating the Relationship Between ESG Disclosure Performance and Audit Fees in the Presence of Institutional Ownership: Evidence from Malaysian Listed Firms" Journal of Risk and Financial Management 18, no. 12: 688. https://doi.org/10.3390/jrfm18120688

APA Style

Yip, Y. (2025). Investigating the Relationship Between ESG Disclosure Performance and Audit Fees in the Presence of Institutional Ownership: Evidence from Malaysian Listed Firms. Journal of Risk and Financial Management, 18(12), 688. https://doi.org/10.3390/jrfm18120688

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