Corporate governance and fraudulent financial reporting

Abstract

Purpose

This study aims to trace the impact of corporate governance and its mechanisms in preventing companies from turning to fraudulent financial reporting.

Design/methodology/approach

For this purpose, using the systematic elimination pattern, the information of 187 listed companies on the Tehran Stock Exchange over six years from 2013 to 2019 were collected, and the hypotheses were examined using a linear regression model. To measure fraudulent financial reporting, the adjusted model of Beneish (1999) was used to evaluate corporate governance. Its mechanisms based on nine corporate governance mechanisms, including board independence, board remuneration, CEO financial expertise, expertise in CEO industry, board financial expertise, board industry expertise, board effort, CEO duality and managerial ownership, have been examined. These mechanisms are calculated as a combined index of corporate governance.

Findings

The findings indicate that robust corporate governance significantly reduces companies’ intention toward fraudulent financial reporting. In the same way, a negative and significant relationship was observed between each of the nine corporate governance mechanisms, except for board compensation and fraudulent financial reporting.

Originality/value

This study’s findings provide valuable insight into the importance of strengthening companies to prevent companies’ managers from engaging in fraudulent financial reporting activities. Hence, it is suggested that professional references bodies more seriously follow the rules to dictate to companies for using and empowering their corporate governance.

Citation

Rostami, V. and Rezaei, L. (2022), "Corporate governance and fraudulent financial reporting", Journal of Financial Crime, Vol. 29 No. 3, pp. 1009-1026. https://doi.org/10.1108/JFC-07-2021-0160