Corporate Governance Attributes in Fraud Detterence

Abstract

The failures of corporations such as Enron, WorldCom and HIH Insurance, to name but a few, have heightened investor awareness of the need to not only evaluate company performance, but also to consider the possibility that financial statements may not be a true reflection of company results, as fraudulent activities may have occurred during the reporting period. Since parties who are outside of the firm do not have access to pertinent information, they have to rely upon published financial and non-financial data to form an opinion regarding performance and/or the risk that fraudulent activities may have occurred. The prior literature shows a relationship between weak corporate governance and fraudulent activities, although most if not all of this research relates to Western economies. The differences in institutional setting e.g. cultural values and legal environment in Malaysia would not give the same findings with the study in western economies. Composing of many ethnicities, Malaysia is a multicultural country. With each ethnic group upholding its own culture, values and belief, businesses are conducted according to each ethnic’s culture. The results of this study could shed some light on the influence of institutional setting regarding corporate governance. Companies that were charged with accounting and auditing offences from year 2003 to 2007 were selected as the fraudulent samples. Data was collected from the years these companies were charged with fraud and the year prior to that. Logistic regression analysis was carried out to determine the significant differences between fraudulent and non-fraudulent companies with respect to corporate governance characteristics. The results indicated that the size of the board and the percentage of institutional shareholdings had significant relationships with the likelihood of corporate fraud occurrences consistently across the two-year period studied. The results of this study will assist public, corporate and accounting policy makers in formulating more effective corporate governance mechanisms.

Corporate governance challenges and opportunities in mitigating corporate fraud in Malaysia

“…The probit regression results did not reveal such an impact of the incidences of corporate fraud; thus, H04 is failed to be rejected. This result is consistent with the findings of Chen et al (2006), Shan et al (2013), Salleh and Othman (2016) and Sadique et al (2019). This result indicates that CEO duality may not be a significant factor in influencing corporate fraud.…”

“…The results of the probit regression revealed that COWN and DOWN showed a negative relationship but not significant with fraud occurrences; thus, it failed to reject the null hypotheses proposed. This finding is consistent with Erickson et al (2006), Zam et al (2014) and Sadique et al (2019), who also documented no evidence that equity incentives are associated with corporate fraud. These results imply that directors' or CEO's share ownership does not influence corporate fraud incidences.…”

“…This view suggests that when the value of stock prices increases, the CEO JFC 29,2 will strive to make sure the firm's accounting practices are legitimate to avoid any negative financial news that negatively affects the stock price valuation. Meanwhile, Erickson et al (2006), Zam et al (2014) and Sadique et al (2019) documented no evidence that equity incentives are associated with the fraud. The mixed findings of the past literature suggest that the role of share ownership owned by directors or CEOs in minimizing the likelihood of corporate fraud remains unsolved.…”

“…The latter is particularly relevant in a firm that is likely had engaged in corporate fraud activities. In examining the relationship between the frequency of board meetings and corporate fraud, previous studies such as Chen et al (2006), Shan et al (2013), Salleh and Othman (2016), Pan and Hong (2017), Zhou et al (2018) and Sadique et al (2019) have documented that the number of board meeting has a significant positive relationship with the likelihood of fraud. It indicates that more board meetings imply more JFC 29,2 fraudulent activities in a company.…”

“…As such, past studies on the association between CEO duality and corporate fraud occurrence have provided competing agreement on whether the duality role of CEO is associated with the fraud incidences or not. Chen et al (2006), Shan et al (2013), Salleh and Othman (2016) and Sadique et al (2019) had found that CEO duality has no significant influence on corporate fraud. Meanwhile, Khoufi and Khoufi (2018), Yang et al (2017), Chen and Lin (2007) and Dechow et al (1996) revealed that firms with dual CEO roles are more likely to engage in fraudulent activities and support the notion that duality would give more power and authority to an individual.…”