The Relation Between the New Corporate Governance Rules and the Likelihood of Financial Statement Fraud

Abstract

This study examines the relation between the likelihood of financial statement fraud and certain corporate governance requirements of the Sarbanes‐Oxley Act and the new rules of the NYSE and the NASDAQ stock markets. Results based upon a logit regression analysis on a sample of 111 fraud firms and 111 matched no‐fraud firms indicate that fraud likelihood is lower when audit committee is comprised solely of independent directors and when audit committee members have smaller number of directorships with other companies. Board of director independence, audit committee expertise and nominating committee independence are not significant variables in reducing fraud likelihood. The study also investigates several other corporate governance variables and finds that fraud likelihood is lower when audit committee has longer tenure and chief executive officer is not chairman of the board. These results highlight two new significant aspects of audit committee: the directorships of its members with other firms and the committee members' tenure. The results have direct implications for further improvement of corporate governance.

The effects of venture capital syndicate diversity on earnings management and performance of IPOs in the US and UK: An institutional perspective

“…Moreover, there is evidence that firms with higher current assets are more likely to experience fraud (Persons, 1993). As such, we control for the Current assets to total asset ratio and expect firms with higher current assets to have more opportunities to use accruals to manage earnings.…”

The Influence of Board of Commissioners and Audit Committee Effectiveness, Ownership Structure, Bank Monitoring, and Firm Life Cycle on Accounting Fraud

“…Leverage is positively correlated with the accounting policy to increase profit. If the management policy of increasing the profit is not sufficient to avoid violation of the debt covenant, manager will tend to be motivated to acknowledge the smaller obligation or to admit larger asset (Persons 2005).…”

“…Similar to the board of commissioner effectiveness, the audit committee effectiveness is also influenced by their characteristics independence, activity, size, and competence (Hermawan 2009). Persons (2005) finds some aspects of the audit committee, such as whether the member of the audit committee is the director of another company and the tenure of this audit committee member, have a direct implication towards the improvement of the corporate governance in the future. Bronson et al (2009) find that the advantage of the independent audit committee can only be achieved when the whole audit committee is really independent (100% independent).…”

Financial Statement Fraud: Some Lessons from US and European Case Studies

“…Brennan and Hennessy (2001, p. 61) point out: "The classification of an action as being fraudulent may depend on the motivation behind it (eg, was it deliberate or accidental?)" Similar to Beasley (1996) and Persons (2005), this research assumes that US firms subject to Securities and Exchange Commission (SEC) enforcement actions under Rule 10(b) have been involved in financial statement fraud in which the acts or omissions resulting in the fraud were intentional. While this is a simplification it is necessary, as intent is difficult to prove.…”