Fraudulent Financial Reporting: Consideration of Industry Traits and Corporate Governance Mechanisms

Abstract

This paper provides insight into financial statement fraud instances investigated during the late 1980s through the 1990s within three volatile industries—technology, health care, and financial services—and highlights important corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis. The fraud techniques used vary substantially across industries, with revenue frauds most common in technology companies and asset frauds and misappropriations most common in financial-services firms. For each of these three industries, the sample fraud companies have very weak governance mechanisms relative to no-fraud industry benchmarks. Consistent with prior research, the fraud companies in the technology and financial-services industries have fewer audit committees, while fraud companies in all three industries have less independent audit committees and less independent boards. In addition, this study provides initial evidence that the fraud companies in the technology and health-care industries have fewer audit committee meetings, and fraud companies in all three industries have less internal audit support. This study of more current financial statement fraud instances contributes by updating our understanding of fraud techniques and risk factors in three key industries. Auditors should consider the industry context as they evaluate the risk of financial fraud, and they should compare clients' governance mechanisms to relevant no-fraud industry benchmarks.

Board Characteristics and Firm Performance: Case of Saudi Arabia

“…Likewise, Abbott, Parker, and Peters (2004) find that ACs consisting of all independent members and with at least one member with accounting or related expertise is negatively associated with financial restatements. Beasley, Carcello, Hermanson, and Lapides (2000) find firms that commit fraud are likely to have less independent ACs. Moreover, Chen and Jaggi (2000) and Erickson et al, (2005) provide a positive relationship between the proportion of independent AC members serving in the board and the comprehensive of financial disclosure.…”

Corporate Governance and Accountability

“…Between 1997 and 2002, 10 percent of all listed companies restated their financial reports, indicating widespread audit failures (Klein and Coffee 2004). The number of SEC fraud enforcement actions also rose dramatically in this period (Beasley, Carcello, and Hermanson 1999). After a series of major audit failures, including at Enron and WorldCom, public officials grew wary of the auditing profession's ability to maintain proper auditing standards and oversee its members' compliance with such standards.…”

Corporate governance mechanisms and extent of disclosure: Evidence from listed companies in Malaysia

“…Therefore, the audited financial statements comprise a crucial part of the financial reporting system that is required for effective corporate governance. Further, Beasley et al (2000) have suggested the need for auditors to acknowledge weak governance mechanisms that are related to financial fraud across a number of time periods and industries.…”