Item

Corporate fraud: an empirical analysis of corporate governance and earnings management in Malaysia

Mohamed Sadique, Raziah Bi
Date
2016
Type
Thesis
Fields of Research
ANZSRC::150103 Financial Accounting , ANZSRC::150102 Auditing and Accountability
Abstract
The recent 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 external to the firm do not have access to pertinent information, they have to rely upon published financial and non-financial data in order to form an opinion regarding performance and/or the risk that fraudulent activities may have occurred. The objective of this study is to determine if published information contains critical factors that could indicate if a company is at risk of fraud. The prior literature shows a relationship between weak corporate governance and the occurrence of earnings management and/or 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 ethnic, Malaysian is a multicultural country. With each ethnic group upholding its own culture, values and belief, business are conducted according each ethnic’s culture. The results of this study could shed some light on the influence of institutional setting on corporate governance and earnings management practices. There is not much research on corporate fraud in Malaysia; therefore, this study will focus on the Malaysian economy and examine the relationship between corporate governance, earnings management and corporate fraud. Companies that were charged with accounting and auditing offences from year 2003 to 2007 were selected as the fraudulent sample. Data were collected for the year companies were charged with fraud and the year prior to that. Both univariate analysis and logistic regression analysis were carried out to determine the significant differences between fraudulent and non-fraudulent companies with respect to corporate governance characteristics and earnings management indices. 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 on earnings management showed only that the gross margin index had a significant relationship with the likelihood of corporate fraud consistently over the five-year period studied. The study also found that fraudulent companies adopted income increasing method in time of difficulty which is consistent with past study in other countries for gross margin (lower gross margin index). The results of this study will assist public, corporate and accounting policy makers in formulating more effective corporate governance mechanisms and financial reporting systems.
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Rights
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Attribution-NonCommercial-NoDerivatives 4.0 International
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