The mediating role of risk management in the relationship between audit committee effectiveness and firm sustainability performance

Abstract

Purpose This study aims to investigate the direct relationship between audit committee effectiveness and sustainability performance and the mediating role of risk management in the relationship between audit committee effectiveness and firm sustainability performance. Design/methodology/approach The Hayes Process regression mediation model was used in this study. The data included 2,590 firm-year observations from 518 publicly non-banking and finance companies on the Indonesia Stock Exchange from 2017 to 2021. Findings This study proves the important role of risk management in mediating the effect of audit committee effectiveness on firm sustainability performance. Audit committee effectiveness was found to positively and significantly affect risk management. However, the effect of audit committee effectiveness on firm sustainability performance was statistically insignificant. The robustness checks and additional tests support all the main regression results. Research limitations/implications Sample firms from Indonesia were used as representatives of developing countries. Further research may use more sample firms from multiple countries or provide a comparative study between firms in different countries. Practical implications The authority must enhance the audit committee’s role in risk management quality due to the indirect effect between the audit committee and sustainability disclosure. It should also expand the audit committee’s role to include sustainability disclosure. Social implications This study could increase community awareness of firm sustainability. Where a company is required to provide more eco-products, stakeholders are, therefore, expected to have more equal concerns. Originality/value To the best of the authors’ knowledge, this study is the first to examine risk management as a mediator of the effect of audit committee effectiveness on firm sustainability performance.