Go Before the Whistle Blows: An Empirical Analysis of Director Turnover and Financial Fraud

Gao, Yanmin; Kim, Jeong‐Bon; Tsang, Desmond; Wu, Haibin

doi:10.2139/ssrn.2197414

Cited by 8 publications

(13 citation statements)

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“…The first test is based on whether directors resigned preemptively from the fraud company. The rationale behind this test is that directors who resign are likely those who are most concerned about reputation and career, as suggested by prior literature (e.g., Fahlenbrach et al, 2017;Gao et al, 2017). If a client-side mechanism is in place, we expect that audit fees increase more when the interlocking directors preemptively resign.…”

Section: Introductionmentioning

confidence: 93%

“…We utilize preemptive resignations of directors, that is, cases where the interlocking director serves on the boards of both firms when the bad act occurs but resigns from the board of the fraudulent firm before the bad act is publicly revealed, to indirectly test the client-driven effect. Prior research (e.g., Dou, 2017;Fahlenbrach et al, 2017;Gao et al, 2017) indicates that independent directors resign in anticipation of negative events such as restatements to protect their reputational capital. Drawing on prior literature, we propose that leaving the board of the fraudulent firm before the bad act is publicly disclosed serves as an indication of strong reputation and career concerns and an effort to mitigate reputational damage by disassociating from the fraudulent firm.…”

Section: Additional Analysesmentioning

confidence: 99%

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The Effects of Board Interlocks With an Allegedly Fraudulent Company on Audit Fees

Ivanova

Prencipe

2020

Journal of Accounting, Auditing & Finance

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Drawing on prior literature on audit fees, client reputation, and corporate governance, we posit that a material adverse event at a firm, such as a financial fraud allegation, leads to an increase in the audit fees of firms connected to the former by a board interlock. We propose two possible mechanisms to explain the upward pressure on audit fees: a client-side effect, where the client demands additional audit services, and an auditor-side effect, where the auditor raises its audit fees due to a perceived increase in audit engagement risk. The results indicate an average marginal increase of 12.86% in audit fees in the year following the public revelation of financial fraud. Additional analyses suggest that an auditor-side effect is in place, while we cannot find clear evidence supporting the client-side effect. Furthermore, we document that the positive effect on audit fees persists for up to at least 2 years after public disclosure of the event when the interlocked director serves as a member of the audit committee. JEL Descriptors: G34, M40, M42

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Section: Introductionmentioning

confidence: 93%

Section: Additional Analysesmentioning

confidence: 99%

The Effects of Board Interlocks With an Allegedly Fraudulent Company on Audit Fees

Ivanova

Prencipe

2020

Journal of Accounting, Auditing & Finance

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“…Gao et al. () examine whether outside directors are aware of fraud, and whether they leave the firm before the fraud is discovered and disclosed. Results show abnormal levels of independent director departures in the fraud period, which is consistent with directors’ concerns about reputational damage.…”

Section: Literature and Hypothesesmentioning

confidence: 99%

Board Turnover and Reorganisation Outcomes: Evidence from Voluntary Administration

Chapple

Routledge

2018

Australian Accounting Review

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This paper examines the relation between board turnover and the likelihood that a company that enters voluntary administration will conclude a deed of company arrangement with its creditors, which provides stakeholders with a better outcome than would be achieved by liquidation. We examine director turnover generally, as well as turnover of specific board personnel including the CEO or managing director and the board chairperson. A significant positive relation is found between a deed outcome and the percentage of director turnover and turnover of a CEO or managing director. We interact board turnover variables and company size and find that the turnover benefit is reduced as company size increases and the complexity of the administration becomes greater. The results inform a controversial and largely unanswered question as to whether board turnover leads to better outcomes for insolvent companies. Moreover, the results have implications for the Australian voluntary administration legislation because they suggest that there are difficulties applying it to large and complex corporate insolvencies.

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“…documents the troubling finding that, in order to avoid the reputational penalty associated with poor performance, directors voluntarily leave firms prior to its disclosure (Fahlenbrach et al, 2017;Gao et al, 2017). 1 We have two main goals in this paper.…”

mentioning

confidence: 99%

“…Second, we examine the motivation behind the voluntary departures of directors. 2 Both Fahlenbrach et al (2017) and Gao et al (2017) reason that the early departures are aimed to preserve the directors' reputation in the labor market. There are other potential reasons for voluntary departures by directors.…”

mentioning

confidence: 99%

Board committees and director departures

Jagannathan

Krishnamurthy

Spizman

2021

The Financial Review

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We examine whether directors utilize private information obtained through their committee memberships to depart from firms prior to the revelation of their poor performance.Such departures raise the concern that directors leave the firm when they are most needed. Utilizing private information to make decisions in their personal interest may also violate the directors' fiduciary duties. We focus on departures of audit committee members since information regarding earnings quality should be available to them prior to public release. The departure of audit committee members who serve on multiple boards is coincident with a deterioration in earnings quality. Other directors do not appear to time their departure based on declines in earnings quality. Results from examining the reasons behind this finding are consistent with the director's preference to lead a "quiet life" and a desire to lower their exposure to litigation risk rather than to protect their reputation in the director market.

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Go Before the Whistle Blows: An Empirical Analysis of Director Turnover and Financial Fraud

Cited by 8 publications

References 0 publications

The Effects of Board Interlocks With an Allegedly Fraudulent Company on Audit Fees

The Effects of Board Interlocks With an Allegedly Fraudulent Company on Audit Fees

Board Turnover and Reorganisation Outcomes: Evidence from Voluntary Administration

Board committees and director departures

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