Abstract
Purpose – This study analyzes the influence of the corporate governance structure in terms of mitigating the likelihood of f raudulent f inancial r eporting ( FFR ) by firms in Brazil. Design/methodology/approach – For this, we analyze the data of 314 publicly traded companies to estimate the likelihood of bankruptcy and the possibility of earnings man ipulation, for subsequent identification of FFR . Findings – Our results show that in 5.5% of cases there is an indication that FFR is likely , bankruptcy is predicted in 16.9% of cases , and the likelihood of earnings manipulation is identified in 17.7%. The corporate governance structure of the firms influences FFR mitigation, either directly or indirectly by reducing the chances of bankruptcy or earnings manipulation. We note that b oard-related governance practices are more effective against predicted bankruptcy, and a udit-related practices are more related to reducing earnings manipulation. Originality/value – The main contributions of this study lie in it identifying the probabilities of reporting fraud, bankruptcy , and earnings manipulation for companies in Brazil, as well as it verifying that corporate governance has been effective in mitigating these problems, either directly or indirectly. Thus, this information is useful for investors and regulators in this market.
Highlights
The growth of companies and the complexity of corporate environments have fostered the separation between the ownership and control of these companies
Motivated by a history of financial reporting fraud in Brazil and by the unique opportunity that this market offers to study the effects of differentiated levels of corporate governance (DLCG) on fraudulent financial reporting (FFR), this study aims to analyze the influence of the corporate governance structure in terms of mitigating the likelihood of FFR by publicly traded companies in Brazil between 2010 and 2015
The analysis of the results begins with the estimates of the variables of interest of this study, namely: bankruptcy prediction (Z-score), earnings manipulation (M-score), and the likelihood of fraudulent financial reporting (FFR)
Summary
The growth of companies and the complexity of corporate environments have fostered the separation between the ownership and control of these companies With this process, the owners (the principals) began to delegate the management of their properties to third parties (the agents), in the expectation that the latter would act in the best interests of the companies. The owners (the principals) began to delegate the management of their properties to third parties (the agents), in the expectation that the latter would act in the best interests of the companies Because this delegation of power can be supported by imperfect contracts (Jensen & Meckling, 1976), conflicts of interest arise between principals and agents, which allow for information asymmetry to occur. Murcia, Borba, and Schiehll (2008) highlight fraud as one of the consequences of this asymmetry, and it may be linked to misconduct, involving illicit practices and bad faith, as well as being difficult to identify, due to the timing of those who carry it out, with a view to achieving their personal interests, regardless of the damage that such actions will cause to third parties
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