Likelihood Of Financial Fraud Research Articles

ROLE OF INDEPENDENT DIRECTORS IN MITIGATING FINANCIAL STATEMENT FRAUD: INSIGHTS

The role of independent directors has gained increasing attention in corporate governance, particularly in their ability to mitigate financial statement fraud. This study investigates the relationship between board independence and the likelihood of financial fraud within Indian companies, using the Altman Z-score as a measure of financial health. The analysis explores how the proportion of independent directors on corporate boards impacts fraud detection and prevention, alongside other board attributes such as audit committee size, board size, and gender diversity. The findings suggest that a higher proportion of independent directors significantly reduces the likelihood of financial misreporting, enhancing transparency and accountability. The results highlight the critical governance role of independent oversight, emphasizing the need for stringent regulations and best practices to strengthen board independence in safeguarding financial integrity. These insights contribute to ongoing discussions on corporate governance reforms and provide practical recommendations for firms and policymakers to reduce fraud risk in emerging markets like India.

External corporate governance and financial fraud: cognitive evaluation theory insights on agency theory prescriptions

Research summary:Agency theory suggests that external governance mechanisms (e.g., activist owners, the market for corporate control, securities analysts) can deter managers from acting opportunistically. Using cognitive evaluation theory, we argue that powerful expectations imposed by external governance can impinge on top managers' feelings of autonomy and crowd out their intrinsic motivation, potentially leading to financial fraud. Our findings indicate that external pressure from activist owners, the market for corporate control, and securities analysts increases managers' likelihood of financial fraud. Our study considers external governance from a top manager's perspective and questions one of agency theory's foundational tenets: that external pressure imposed on managers reduces the potential for moral hazard.Managerial summary:Many of us are familiar with stories about top managers “cooking the books” in one way or another. As a result, companies and regulatory bodies often implement strict controls to try to prevent financial fraud. However, cognitive evaluation theory describes how those external controls could actually have the opposite of their intended effect because they rob managers of their intrinsic motivation for behaving appropriately. We find this to be the case. When top managers face more stringent external control mechanisms, in the form of activist shareholders, the threat of a takeover, or zealous securities analysts, they are actually more likely to engage in financial misbehavior. Copyright © 2016 John Wiley & Sons, Ltd.

Fraud Triangle Theory and Identification of Financial Fraud From China’s Listed Company

This paper empirically examines the effectiveness of fraud risk factors proposed by Cressey"s fraud triangle theory in order to assess the likelihood of financial fraud in the Chinese stock market. We select potential fraud risk factors which serve as proxies for pressure, opportunity, rationalization, and then test these factors using a Chinese sample of fraud firms and matched non-fraud firms. We identify that three(NP, CR, MOWN) pressure factors, two(PCS, ASM) opportunity factors, and two(AFS, LA) rationalization factors can be applied as significant proxy variables to estimate the likelihood of financial fraud. Especially, our findings suggest that net profit(NP), annual stockholders’ meeting(ASM), audit firm switch(AFS) are negatively related to the likelihood of financial fraud, but level of accurals(LA) is positively related to the likelihood of financial fraud. We also find that our discriminant models have relatively high classification accuracy and provide an important predicting variable in detecting financial fraud.