Abstract
The failures of corporations such as Enron, WorldCom and HIH Insurance, to name but a few, have heightened investor awareness of the need to not only evaluate company performance, but also to consider the possibility that financial statements may not be a true reflection of company results, as fraudulent activities may have occurred during the reporting period. Since parties who are outside of the firm do not have access to pertinent information, they have to rely upon published financial and non-financial data to form an opinion regarding performance and/or the risk that fraudulent activities may have occurred. The prior literature shows a relationship between weak corporate governance and fraudulent activities, although most if not all of this research relates to Western economies. The differences in institutional setting e.g. cultural values and legal environment in Malaysia would not give the same findings with the study in western economies. Composing of many ethnicities, Malaysia is a multicultural country. With each ethnic group upholding its own culture, values and belief, businesses are conducted according to each ethnic’s culture. The results of this study could shed some light on the influence of institutional setting regarding corporate governance. Companies that were charged with accounting and auditing offences from year 2003 to 2007 were selected as the fraudulent samples. Data was collected from the years these companies were charged with fraud and the year prior to that. Logistic regression analysis was carried out to determine the significant differences between fraudulent and non-fraudulent companies with respect to corporate governance characteristics. The results indicated that the size of the board and the percentage of institutional shareholdings had significant relationships with the likelihood of corporate fraud occurrences consistently across the two-year period studied. The results of this study will assist public, corporate and accounting policy makers in formulating more effective corporate governance mechanisms.
Highlights
A survey conducted by PwC’s (2018) highlighted that fraud and corruption remain pervasive in businesses
The corporate governance variables are the audit committee characteristics which include the independence of the audit committee members (INDAC), the proportion of audit committee members having at least one additional directorship in another company to total number of audit committee member (OUTDIR) and the frequency of audit committee meetings (ACMEET)
The results indicated that a higher number of members on the board reduced the likelihood of corporate fraud
Summary
A survey conducted by PwC’s (2018) highlighted that fraud and corruption remain pervasive in businesses. The reverberations of corporate fraud can be clearly seen in the cases of Enron, Worldcom, Parmalat and many others Among those that suffer from corporate fraud are those that rely on published information to assess company performance and make investment decisions, such as stockholders and the general public. Debates on the integrity of financial reporting have broken out as the number of reported corporate bankruptcy and fraud cases increases (Rezaee, 2005) This has become an issue that concerns regulators as well as users of financial reports (AICPA, 1993; Treadway Commission, 1999). Good and effective governance means good control and monitoring over business activities which is extended towards lowering the risk or likelihood of corporate fraud. Both groups’ data were empirically tested and regressed; to determine the significant relationship between the practices and the likelihood of corporate fraud occurrences
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