Fraudulent financial reporting and company characteristics: tax audit evidence

Abstract

PurposeThe purpose of this paper is to examine the relationship between fraudulent financial reporting and firms' characteristics, i.e. size, type of ownership and audit quality in companies audited by the Inland Revenue Board of Malaysia (IRBM) after the implementation of a self assessment system in Malaysia.Design/methodology/approachThe paper employs an empirical research design, using data on companies audited by IRBM. The hypotheses of the study are tested using both univariate and multivariate statistical methods.FindingsIt was found that company size and audit quality have significant negative relationships with fraudulent financial reporting.Research limitations/implicationsThe sample of companies used in this study is unlisted companies and the results are not generalisable to listed companies. Listed companies may have more stringent rules for listing and have better corporate governance mechanisms within the company as control.Practical implicationsThe paper's findings may assist IRBM in identifying possible cases for audit in the future.Originality/valueThe paper describes the first empirical study that uses real tax cases where the non‐compliance with the Malaysian statues and tax laws are used as the measurement of the fraudulent financial reporting.