The Influence of Corporate Governance on the Mitigation of Fraudulent Financial Reporting

Abstract

Purpose-This study analyzes the influence of the corporate governance structure in terms of mitigating the likelihood of fraudulent financial reporting (FFR) by firms in Brazil. Design/methodology/approach-For this, we analyze the data of 314 publicly traded companies to estimate the likelihood of bankruptcy and the possibility of earnings manipulation, for subsequent identification of. Findings-Our results show that in 5.5% of cases there is an indication that FFR is likely, bankruptcy is predicted in 16.9% of cases, and the likelihood of earnings manipulation is identified in 17.7%. The corporate governance structure of the firms influences FFR mitigation, either directly or indirectly by reducing the chances of bankruptcy or earnings manipulation. We note that board-related governance practices are more effective against predicted bankruptcy, and auditrelated practices are more related to reducing earnings manipulation. Originality/value-The main contributions of this study lie in it identifying the probabilities of reporting fraud, bankruptcy, and earnings manipulation for companies in Brazil, as well as it verifying that corporate governance has been effective in mitigating these problems, either directly or indirectly. Thus, this information is useful for investors and regulators in this market.

Elucidating corporate governance’s impact and role in countering fraud

“…Alzeban (2019) concludes that companies demonstrating higher internal audit compliance with standards have better financial reporting quality. Martins and Ventura J unior (2020) note that audit-related practices reduce earnings manipulation. Lauck et al (2020) find that external auditors elicit client-employee disclosures of known fraud by actively promoting statutory whistleblower protections.…”

“…Khanna et al (2015) find that connections CEOs develop with top executives and directors through their appointment decisions increase the risk of corporate fraud, decrease the expected costs of fraud by helping conceal fraudulent activity and make CEO dismissal less likely upon discovery. Martins and Ventura Júnior (2020) report that the firms’ corporate governance structure influences fraudulent financial reporting mitigation, either directly or indirectly, by reducing the chances of bankruptcy or earnings manipulation in Brazil. Yang et al (2017) uncover that when firms have less concentrated ownership, dual CEO/chairman of the directorate status, they tend to engage less in financial fraud.…”

Detection of Financial Statement Fraud Using Deep Learning for Sustainable Development of Capital Markets under Information Asymmetry

“…Most of the early studies on the detection of financial statement fraud refer to financial ratios as the research variable. Current research widely uses both financial ratios and non-financial variables (or corporate governance variables), given the advocacy and emphasis of corporate governance by practitioners [6,8,10,28,32,[37][38][39].…”

Factors Affecting Banking Fraud Prevention and Their Impact On The Quality of Financial Statements

“…However the internal control system has no effect on the quality of financial reports (Nurlis & Yudiati, 2017). The effect of applying the principles of good corporate governance on fraud prevention has been studied that good corporate governance helps avoid fraud (Kurniawan & Izzaty, 2019;Martins & Júnior, 2020). Professionalism, transparency, accountability, and responsibility in financial management all contribute to reducing the likelihood of fraud.…”