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Advances in Social Sciences Research Journal – Vol. 11, No. 9.2

Publication Date: September 25, 2024

DOI:10.14738/assrj.119.2.17398.

Taib, A., Awang, Y., Said, J., & Akhir, N. E. F. M. (2024). Digital Capabilities and Risk Management Practice in Small Accounting Firms

in Malaysia. Advances in Social Sciences Research Journal, 11(9.2). 42-54.

Services for Science and Education – United Kingdom

Digital Capabilities and Risk Management Practice in Small

Accounting Firms in Malaysia

Azuraidah Taib

Faculty of Accountancy,

Universiti Teknologi MARA, Terengganu, Malaysia

Yunita Awang

Faculty of Accountancy,

Universiti Teknologi MARA, Terengganu, Malaysia

Jamaliah Said

Accounting Research Institute,

Universiti Teknologi MARA, Selangor, Malaysia

Noor Erni Fazlina Mohd Akhir

College of Computing, Informatics and Mathematics,

Universiti Teknologi MARA, Terengganu

ABSTRACT

Today's business environment can be described as extremely turbulent and

unpredictable due to numerous factors such as social, political and technological

changes. Small and medium enterprises (SMEs) are no exception. The situation

requires employers and employees to achieve a certain level of technological

capabilities and innovativeness. Thus, this digital revolution brings about change,

especially in risk management. This study, therefore, seeks to investigate the

relationship between digital capabilities and enterprise risk management practice

(ERMP) among small accounting firm owners in Malaysia. Online questionnaires

were distributed to 341 accounting firm owners and top management who

registered with the Malaysian Institute of Accountants database. 290 small

accounting firm owners participated in this study. The results show that the level of

digital capabilities in small accounting firms is high, indicating that small

accounting firms in Malaysia have paid adequate attention to digitalization. In

addition, a positive moderate relationship among digital capabilities variables

(human, collaborative, innovation and technical capabilities) with the ERMP.

However, only innovation capabilities significantly influence the ERMP in small

accounting firms in Malaysia. The study is subject to limitations as only one sector

of SME from the accounting industry has been examined and only focuses on digital

capabilities as a factor that influences ERMP.

Keywords: SMEs, Small Accounting Firm, Digital Capabilities, Enterprise Risk

Management Practice, Digitalization.

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Taib, A., Awang, Y., Said, J., & Akhir, N. E. F. M. (2024). Digital Capabilities and Risk Management Practice in Small Accounting Firms in Malaysia.

Advances in Social Sciences Research Journal, 11(9.2). 42-54.

URL: http://dx.doi.org/10.14738/assrj.119.2.17398

INTRODUCTION

Small and medium-sized enterprises (SMEs) contribute significantly to economic development

in many countries. In Malaysia, for example, SMEs accounted for 38.2% (RM512.8 billion) of

Malaysia's total gross domestic product (GDP) representing 97.2 per cent of all enterprises in

the year 2020. The largest type of SMEs are micro enterprises at 78.4%, followed by small

enterprises at 20% and the least medium enterprises at 1.6%. Since 2015, the number of SMEs

has increased by 4.9 % annually.

However, numerous SMEs face several obstacles, including subpar operations and slow growth;

about 70% of SMEs shut down before their third year of existence [1]. The survival of this

business organization has been threatened by challenges ranging from internal disturbances to

global calamities [2-4]. Within the current global business environment, every organization

faces different types of risk that can disrupt the flow of an organization's sustainability and

resilience. According to [5], Enterprise risk management practice (ERMP) is a method which

affects anyone in any rank of an organization, regarding strategy setting. The ERMP helps to

identify potential events that could have an impact on the organisation, to manage risk in the

context of risk appetite and to provide appropriate assurances for the achievement of the

organisation's objectives. More or less, the organisation's dependence on the use of digital

technologies entails a certain degree of risk for the company to a greater or lesser extent.

As a result of the advent of the digital era and the digital transformation of society, businesses

today are requesting a higher emphasis on digitalization in general and digitalization

capabilities in particular [6]. Digital Capabilities are the key competencies and skills a company

must possess to transform itself into a sustainable and successful enterprise, with digital

technology serving as an enabler. The high expectations for SME development in the digital age

will almost certainly lead to significant changes in various areas of the business. Previous

studies suggest that the digitalization of SMEs is key to their future viability and has been

accelerated by the pandemic [7, 8]. Furthermore, [9] describes SMEs' desire to explore business

opportunities and incorporate technology into their future growth process, indicating a

dynamic learning approach and adaptation to the crisis scenario. At this stage, the desire to

expand can motivate SMEs to improve their resilience framework and risk assessment strategy.

Risk management is becoming increasingly important in small and medium-sized enterprises

(SMEs) due to the need to understand possible dangers and respond to changing conditions.

This study used the Dynamic Capability Theories (DCT) which focus on the ability of a company

or organization to respond quickly to external challenges [10]. Dynamic capabilities essentially

enable organizations to adapt to a rapidly changing environment by coordinating and

restructuring existing resources and capabilities to better capture and exploit market

opportunities [11].

Thus, the main objective of this study is to deepen the understanding of the relationship

between Digital Capabilities, one of the dynamic capability elements with Enterprise Risk

Management Practice (ERMP) in Malaysian small accounting firms. Specifically, the objectives

are first, to determine the level of digital capabilities in firms’ enterprise risk management

practice capabilities. Second, to determine the relationship of digital capabilities with firms’

enterprise risk management practice capabilities and lastly to determine the most influencing

factor of digital capabilities towards firms’ enterprise risk management practice capabilities.

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Advances in Social Sciences Research Journal (ASSRJ) Vol. 11, Issue 9.2, September-2024

Services for Science and Education – United Kingdom

The next section covers the literature review followed by the research methodology of this

study. The discussion of research findings and conclusion with the identified limitations and

suggestions for future research are presented in the subsequent sections.

LITERATURE REVIEW

Digital Capabilities

Digital capabilities are defined as a collection of capabilities that enhance an organization’s

capacity to develop, mobilize and effectively utilize its organizational resources and processes,

such as customer relationship management, product development, knowledge management

and collaboration, by leveraging digital technologies [12]. It is the skills required to go beyond

just information technology and include specific technologies such as social media or mobile

devices, as well as analytical skills [13]. Similarly, it defines the extent to which an organization

knows and effectively uses information technology to manage information within the

organization [14]. This is critical as small service businesses, including small accounting firms,

must compete in a rapidly changing and dynamic marketplace in the age of the digital economy.

As a result, small service businesses, including in the accounting industry, seek to build their

competitive advantage, improve business performance, and achieve business growth through

digital transformation from IT [15].

However, given the example of the pandemic situation, a risky environment has arisen where

all stakeholders need to change their current face-to-face way of working to working from

home. The situation requires employers and employees to achieve a certain level of

technological innovativeness. Therefore, with the adoption of new digital skills and

technologies, digital transformation is taking place and business resilience is supported by

digital transformation [16]. A sound digitalization strategy is crucial for achieving business

goals, and increasing the competitiveness of SME goods and services and reducing business

risk.

Organizational capabilities are the various skills, processes, technologies, and human

capabilities that make up an organization. They are usually developed internally and are

therefore difficult for others to imitate. [17] extended the traditional concept of organizational

capabilities to the information technology (IT) function of an organization and defined IT

capability as "the ability to mobilize and deploy IT -based resources in combination or jointly

with other resources and capabilities" (p. 171). It is assumed that digital technology promotes

and facilitates service innovation. Since an effective competitive strategy is particularly

important for service firms, they need to align their service innovation strategy with their

business strategy to achieve better business performance. Mobilizing IT thus has significant

implications for the survival of the economy as a whole, forcing firms to modernize and adapt

to new rules of competition.

Four dimensions of digital capabilities namely human, collaborative, technical, and innovation

capabilities received great attention in previous study [18-20]. Further, [18] revealed that

human, technical, and innovation capabilities contribute to market offerings, while human,

collaboration, and technical capabilities contribute to the business process. Human capabilities

are required to integrate organisations' key competitive advantages and knowledge with these

expanded chances to develop successful digital innovations of the business [18]. Meanwhile,

reaching digital innovation involves the development of new skills, and businesses must build