Summary of Selected Literature on Corporate Governance Structures and Financial Statement Fraud
Studies Country Purpose of Study Data and Method Findings
Beasley (1996) US Examines the relation between board of director composition and the occurrence of financial statement fraud
75 fraud, 75 non-fraud firms 1982-1991
Logit regression
High outside directorship reduce likelihood of financial statement fraud.
Insiders on the board do not give effect to the occurrence of financial statement fraud.
Dechow et al. (1996)
US Explore the relationships between financial statement fraud and internal governance structure.
92 fraud firms 1982 and 1992 Regression analysis
Firms with board members that are highly dominated by insiders will increase the risks of financial statement fraud.
Firms which employ same person for both Chairman and CEO position are more likely to manipulate earnings. Moyes and
Hasan (1996)
US Investigate the importance of having experience auditor to have the ability to detect financial statement fraud.
Survey on 357 auditors Logit regression
Experienced auditors are able to detect fraud better than inexperienced auditor.
Summers and Sweeney (1998)
US Investigate the relationship between insider trading and fraud
51 fraud firms and 51 non-fraud
1980-1987 Logit regression
Insider will sell shareholdings in the occurrence of fraudulent activities.
Beasley et al. (1999)
US Provide an extensive updated analysis of financial statement fraud occurrences
200 fraud firms 1987 to 1997 Literature reviews
Financial statement fraud firm consists of low board independence.
In most financial statement fraud cases, the CEO is found to be functioning as the Chairman of the firm.
Less frequent audit committee meeting is conducted in firms that are involved with fraudulent financial reporting.
Vafeas (1999) US Examine the board meeting frequency and firm performance
307 firms 1990-1994
Multiple regression
Beasley et al. (2000)
US Investigate the corporate governance differences between fraud companies and no-fraud benchmarks on an industry-by-industry basis
66 firms from technology, health care and financial service industry
1987 to 1997 Univariate test
Low independence of the board’s composition in an event of fraudulent financial reporting.
All three industries show low levels of independence in audit committee composition, which turns to be one of the factors of the high number of financial statement fraud in this three particular industries.
Financial statement fraud firms a more likely to implement a poor internal audit function in the firm.
Nieschwietz et al. (2000)
Previews literatures on the external auditors’ relations in detecting financial statement fraud
Literature reviews Well-equipped knowledge of the handled-firms helps external auditors to understand the client strategic plans. In advantage, this relation will create threats and barriers to fraudulent financial reporting possibilities.
Coles et al. (2001)
US Draw together the corporate governance structures that have been examined in the extensive literature
144 firms 1986 to 1887 Multiple regression
Incentive to monitor managers’ behaviour will increase with management tasks given to board members.
Abbott et al. (2002)
US Investigate the impact of certain audit committee characteristics that effect the likelihood of financial misstatement
41 fraud, 41 non fraud firms 1991 to 1999
Logit regression
Higher level of audit committee independence and higher level of financial expertise on audit committee reduces the likelihood of financial statement fraud.
A minimum of four times audit meeting in a year reduces financial misstatement risk.
Carcello et al. (2002)
US Examine the board characteristics and audit fees
Fortune 1000 companies 1992-1993
Multiple regression
High frequencies of board meeting demonstrate board members are diligent in delivering their responsibilities. If the board demand higher audit assurance, audit fees will be higher because more audit work is required.
Cohen et al. (2002)
US Assess the impact of corporate governance mechanisms in the audit process
Fan and Wong (2002)
East Asian Examine the relationship between having insiders on the board and the level of information delivered in the accounting report
977 firms 1991-1995
Multiple regression
Fails to verify the effect of inside directors practiced with the accounting quality, probably due to the differences in the proportion of inside directors among the analyzed countries. External auditor plays an important role in assisting
corporate governance through assurance of reducing accounting manipulation by the audited firm.
Geiger and Rama (2003)
US Examine the association between the magnitude of audit and non-audit fees and auditor report modification decisions for financially stressed manufacturing firms
66 firms Year 2001 Logit regression
High amount of audit fees may influence audit judgment because conflict of interest between audit firm and the firm become present, resulting a possibility of failing to notice financial statement fraud.
James (2003) US Inspects whether internal audit reporting structure and internal audit sourcing arrangement affect financial statement users' perceptions of ability of the internal audit function to prevent financial statement fraud
63 respondents Survey
ANOVA
Outsourced internal audit function has less knowledge about the audited firm compared to in-house internal audit
function.
Xie et al. (2003)
US Examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management
282 firms-year observation 1992, 1994 and 1996 Multiple regression
Sharma (2004) Australia Investigate the relationship between the directors’ independence and duality with the occurrence of financial statement fraud.
31 fraud, 31 non-fraud firms 1988 to 2000
Logit regression
As the percentage of independent directors on the board increase, firms are less likely to be involved in financial statement fraud.
The importance of enhancing corporate governance through independence level of directors on the board and duality practices is similar among the countries.
Dunn (2004) US Determine the impact on insiders’ power on fraudulent financial reporting
103 fraud firms 1992 to 1996 Logit regression
Financial statement fraud is more likely to occur in the presence of higher insiders on the board.
Guerrero (2004)
US Identify the causes of board of directors’ involvement in fraudulent financial reporting
Survey Executives use their power to override the normal process and demonstrate unreal progressive achievements to maintain or increase current remuneration received.
Uzun et al. (2004)
US Examine how characteristics of the board of directors and other governance features affected the corporate fraud
133 fraud, 133 non-fraud firms 1978 to 2001
Logit regression
Fails to prove CEO duality will affect the effectiveness of fraud monitoring.
Agrawal and Chadha (2005)
US Examine whether certain corporate governance mechanisms are related to the probability of accounting scandals
159 fraud , 159 non-fraud firms 2001 and 2002
Logit regression
Presence of financial expertise on the board reduces the likelihood of accounting scandals.
Persons (2005) US Explores the relation between financial statement fraud and certain corporate governance requirements of the SOX and the new rules of the NYSE and the NASDAQ stock markets
111 fraud, 111 non-fraud firms 1999 to 2003
Logit regression
Auditors’ independence is more profound than directors’ independence in minimizing financial statement fraud.
Saleh et al. (2005)
Malaysia Assess the effectiveness of some board characteristics to monitor management behaviour with respect to their
incentives to manage earnings
561firms Year 2001
Multiple regression
Presence of independent directorship does not limit dishonest actions by duality positions.
Zulkafli et al. (2005)
Malaysia Examine corporate governance in Malaysia
Literature reviews
Numbers of board meeting advocate the presence of financial statement fraud and demonstrate poor firm’s performance.
Abdullah
directors on the firm financial distressed status
1999-2001 Logit regression
financial reporting quality.
Chen et al. (2006)
China Investigate whether inside directors and boardroom characteristics have an effect on corporate financial fraud
169 fraud,169 non-fraud firms 1999 to 2003
Probit regression
Fraud occurrence can be minimised by increasing the proportion of outside directors.
If the Chairman and CEO position is filled by the same person, it may decrease the quality of top management. Higher number of board meetings is a signal of fraud, due to corporate governance practitioners sensing the presence of fraud to be discussed.
External audit prestige is ignored in China because they are selected by the corporate governance, a mechanism that is not yet welcomed in China.
Coram et al. (2006)
Australia & New Zealand
Examine the occurrence of misappropriation-type fraud
KPMG Fraud Survey (2004) Important for a firm to have their own internal audit function. When a firm uses an outsourced internal audit, they increase the risks of financial statement fraud.
Yatim et al. (2006)
Malaysia Examine the association between external audit fees, and board and audit committee characteristics
736 listed firms 2003
Multiple regression
Bumiputera controlled firms have better governance. High audit fees may indicate that the audited firm is being more cautious as they sense presence of accounting manipulation.
Abbott et al. (2007)
US Investigate the internal audit outsourcing to the external auditor
287 questionnaires Year 2000
Logit regression
Effective audit committee is less likely to outsource internal audit service.
Crutchley et al. (2007)
US Investigate the corporate governance mechanisms that affect the accounting practices that may lead to accounting fraud.
97 firms 1990 and 2003 Logit regression
Small portion of outsiders on the audit committee are more likely to involve in accounting fraud.
Fich and Shivdasani (2007)
US Investigate the reputational impact of financial statement fraud for outside directors based on a sample of firms facing shareholder class action lawsuits
580 firms 1998 to 2002
Binary and multinomial logit regression
If a director has ever misused its position through affiliation with financial statement fraud matters, the directors will lose his/ her current position because the committee members and stakeholders (especially investors) lose their confidence. Failure of detecting financial statement fraud will damage auditors’ reputation.
Srinidhi and Gul (2007)
US Inspect linkages between the audit and non-audit fees and accruals quality
4282 firms 2000-2001
Multiple regression firm income.
Caramanis and Lennox (2008)
Greece Test the effect of audit efforts on accounting manipulation
9738 audit work 1994-2002
Multiple regression
Audit firms feel unmotivated when being underpaid and therefore exert less effort.
Gao and Kling (2008)
China Analyse asset appropriation by principal shareholders
4559 observations 1998-2002
Multiple regression
Positive relation between number of meetings and financial statement fraud occurrence.
Huang and Liang (2008)
China Exploratory study of corporate governance and corporate fraud in China
30 fraud and 39 non-fraud firms 1997-2002
Logit regression
Find no evidence that board remuneration value is a factor for financial statement fraud. The result is likely driven by other corporate governance structures.
Glover et al. (2008)
US Examine the effects of internal audit sourcing arrangement on the external auditor's reliance decision in the presence of different levels of inherent risk and task subjectivity
127 external auditors Experimental studies
Firms tend to have more confidence with outsource internal audit function in terms of minimizing the inherent risks, or the manageable risk.
Chapple et al. (2009)
Australia & New Zealand
Examine the occurrence of misappropriation-type fraud
KPMG Fraud Survey (2004) Financial statement fraud can be reduced by increasing the number of independent directors.
Positive relationship between financial statement fraud and having duality position on the board. Firms that meet the strict separations of Chairman and CEO positions are able to improve monitoring expect and consequently minimise financial statement fraud.
Owens-Jacksons et al. (2009)
US Assess the relation between audit committee structure and the likelihood of fraudulent financial reporting
50 fraud and 50 non-frauds 1994 to 2001
Logit regression
Audit committee independence is negatively associated with financial statement fraud.
Frequency of audit committee meeting is negatively associated with financial statement fraud.
Persons (2009) US Examines the Audit committee characteristics and earlier voluntary ethics disclosure among fraud and non-fraud firms
77 fraud, 77non-fraud firms 1999 to 2003
Logit regression
Audit committee independence is significant in reducing the likelihood of fraud occurrence.
suggest that the firms are more likely to engage in financial statement fraud.
Smaili and Labelle (2009)
Australia Determine the corporate governance factors that help to prevent and detect accounting irregularities
107 fraud, 107 non-fraud firms 2001 to 2005
Multinomial logit regression
Competence of the board is negatively associated with accounting irregularities.
Asare et al. (2010)
US Explore internal auditors’ fraud risk decisions in response to variations in audit committee quality and
management performance incentive
60 auditors
Experimental studies
Regardless of the management performances and intention to manipulate financial statement, a high quality internal audit that effectively deliver monitoring and oversight over the financial reports will likely reduce the opportunities of financial statement fraud
Bedard and Gendron (2010)
Review literature on the effectiveness of the audit committee, and to identify research opportunities
Paper reviews 1994-2008
Audit independence ensures a certain financial reporting quality level.
Audit committee meetings should be conducted privately between external and internal auditor. Intervention by the board and management in the meeting will affect the quality of audit results.
Lennox and Pittman (2010)
US Determine the relative performance of the Big 5 and non-Big 5 audit firms in preventing companies from engaging in financial statement fraud
1109 firms 1981-2001 Probit regression
Firms that appoint Big 5 audit firms is less likely involve in financial statement fraud
Majdi and Rahman (2010)
Malaysia Examine the remuneration value of the board after firms are convicted of financial statement fraud
68 fraud, 68 non-fraud firms 2001-2006
Univariate test
Fraud firms reduce the remuneration value in the second year after conviction
Nor et al. (2010)
Malaysia Assess fraudulent financial reporting and firms' characteristics
396 unlisted firms Year 2004
Multiple regression
