Corporate governance and accounting irregularities: Canadian evidence

Abstract

This study examines the extent to which corporate governance acts as an efficient means of protecting investors against accounting irregularities. It is grounded in the literatures on public enforcement of securities laws by market authorities, governance, and fraudulent financial statements. A unique feature of the Canadian tracking and enforcement system for reporting issuers in default is used to refine the definitions of accounting irregularities or fraudulent financial statements used in other studies. We test and find that the governance mechanisms of firms found in default of financial reporting regulations during the first 5 years of existence of the Canadian system are weak compared to a sample of no-default firms. For instance, they have fewer independent and financial expert directors on their boards and audit committees, are more prone to have recently changed auditor and to having their CEO as chair of the board. They also appear to fulfill their financing requirements through private rather than public funds, which is consistent with the fact that default firms are less likely to be in a position to return to the public market to fulfill their needs. This study offers evidence relevant to policy makers and others who are concerned with the potential role of market authorities and governance in protecting investors against accounting irregularities.