The Influence of Corporate Governance on the Mitigation of Fraudulent Financial Reporting

Martins, Orleans Silva; Ventura Júnior, Raul

doi:10.7819/rbgn.v22i1.4039

Orleans Silva Martins

Federal University of Paraíba, Department of Finance and Accounting, João Pessoa/PB, Brazil

https://orcid.org/0000-0002-4966-0347

Raul Ventura Júnior

Federal University of Campina Grande, Academic Unit of Accounting, Sousa/PB, Brazil

https://orcid.org/0000-0003-0095-216X

1.
Orleans Silva Martins, P.h.D in Controllership and Accounting, University of São Paulo, Faculty of Economics, Administration and Accounting, São Paulo, Brazil. E-mail: orleansmartins@ccsa.ufpb.br

2.
Raul Ventura Júnior, Master of Accounting, Federal University of Paraíba, Department of Finance and Accounting, Paraíba, Brazil. E-mail: rjventura@yahoo.com.br

Responsible editor:

Prof. Dr. Ivam Ricardo Peleias

Contribution of each author

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Contribution Orleans Martins Raul Ventura 1. Definition of research problem √ √ 2. Development of hypotheses or research questions (empirical studies) √ √ 3. Development of theoretical propositions (theoretical work) √ √ 4. Theoretical foundation / Literature review √ √ 5. Definition of methodological procedures √ √ 6. Data collection √ √ 7. Statistical analysis √ √ 8. Analysis and interpretation of data √ √ 9. Critical revision of the manuscript √ √ 10. Manuscript writing √ √ 11. Other (please specify which)

Figures (1)
Tables (6)

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Figure 1
Identification of likelihood of Fraudulent Financial Reporting (FFR)

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Contribution Orleans Martins Raul Ventura 1. Definition of research problem √ √ 2. Development of hypotheses or research questions (empirical studies) √ √ 3. Development of theoretical propositions (theoretical work) √ √ 4. Theoretical foundation / Literature review √ √ 5. Definition of methodological procedures √ √ 6. Data collection √ √ 7. Statistical analysis √ √ 8. Analysis and interpretation of data √ √ 9. Critical revision of the manuscript √ √ 10. Manuscript writing √ √ 11. Other (please specify which)

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Table 1
Expected influences of the corporate governance structure variables.

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Table 2
Model paraeters of Altman, Baydia, and Dias (1979Altman, E. I., Baydia, T. K. N., & Dias, L. M. R. (1979). Previsão de problemas financeiros em empresas. Revista de Administração de Empresas, 19(1), 17-28.).

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Table 3
Model parameters of Beneish (1999Beneish, M. D. (1999). The detection of earnings manipulation. Financial Analysts Journal, 55(5), 24-36.).

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Table 4
Descriptive statistics of the variables studied. 2010-2015.

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Table 5
Relationship between the variables of interest and corporate governance structure. 2010-2015.

Variable	Expected influence	Reference
Board Size (Bsize)	-	Lipton and Lorsch (1992Lipton, M., & Lorsch, J. W. (1992). A modest proposal for improved corporate governance. The Business Lawyer, 48(1), 59-77.), Vafeas (2005Vafeas, N. (2005). Audit committees, boards, and the quality of reported earnings. Contemporary Accounting Research, 22(4), 1093-1122.), Alzoubi and Selamat (2012Alzoubi, E. S. S., & Selamat, M. H. (2012). The effectiveness of corporate governance mechanisms on constraining earning management: literature review and proposed framework. International Journal of Global Business, 5(1), 17-35.), and Razali and Arshad (2014Razali, W. A. A. W. M., & Arshad, R. (2014). Disclosure of corporate governance structure and the likelihood of fraudulent financial reporting. Procedia-Social and Behavioral Sciences, 145(25), 243-253.)
Board Independence (Bind)	-	Xie, Davidson, and Dadalt (2003Xie, B., Davidson, W. N., & Dadalt, P. J. (2003). Earnings management and corporate governance: the role of the board and the audit committee. Journal of Corporate Finance, 9(3), 295-316.), Siladi (2006Siladi, B. (2006). The role of non-executive directors in corporate governance: An evaluation. Faculty of Business and Enterprise, Swinburne University of Technology.), and Razali and Arshad (2014Razali, W. A. A. W. M., & Arshad, R. (2014). Disclosure of corporate governance structure and the likelihood of fraudulent financial reporting. Procedia-Social and Behavioral Sciences, 145(25), 243-253.)
Women on the Board (Bwom)	-	Boulouta (2013Boulouta, I. (2013). Hidden connections: The link between board gender diversity and corporate social performance. Journal of Business Ethics, 113(2), 185-197.)
Non-duality of CEO and Chairman (Ndual)	-	Bebchuk and Fried (2004Bebchuk, L. A., & Fried, J. M. (2004). Pay without performance: the unfulfilled promise of executive compensation. Cambridge: Harvard University, 2004.) and Chhaochharia and Grinstein (2009Chhaochharia, V., & Grinstein, Y. (2009). CEO compensation and board structure. The Journal of Finance, 64(1), 231-261.)
Board Compensation (Bcom)	-	Oliva e Albuquerque (2007Oliva, E. D. C., & Albuquerque, L. G. (2007). Sistema de remuneração de executivos e conselheiros como suporte à estrutura de governança corporativa. Revista Base, 4(1), 61-73.) and Hermalin and Weisbach (2012Hermalin, B. E., & Weisbach, M. S. (2012). Information disclosure and corporate governance. The Journal of Finance, 67(1), 195-233.)
External Audit Compensation (EAcom)	-	DeAngelo (1981DeAngelo, L. E. (1981). Auditor size and audit quality. Journal of Accounting and Economics, 3(3), 183-199.), Francis (1984Francis, J. R. (1984) The effect of audit firm size on audit prices. Journal of Accounting and Economics, 6, 133-151.), and *Santana et al.* (2014**Santana, A. G., Bezerra, F. A., Teixeira, S. A., Cunha, P. R. (2014). Auditoria independente e a qualidade da informação na divulgação das demonstrações contábeis: estudo comparativo entre empresas brasileiras auditadas pelas Big Four e Não Big Four. Revista de Contabilidade do Mestrado em Ciências Contábeis da UERJ, 19(3), 70-87.)
Audit Committee Size (ACsize)	-	Coram, Ferguson, and Moroney (2006Coram, P., Ferguson, C., & Moroney, R. (2006). The value of internal audit in fraud detection. Department of Accounting and Business Information Systems, 3010, 1-32.) and Law (2011Law, P. (2011). Corporate governance and no fraud occurrence in organizations: Hong Kong evidence. Managerial Auditing Journal, 26(6), 501-518.)
New Market Listing (NMlist)	-	Moreira et al. (2012), *Piccoli et al.* (2014Piccoli, P. G. R., Souza, A., & Silva, W. V. (2014). As práticas de governança corporativa diminuem o gerenciamento de resultados? Evidências a partir da aversão na divulgação de prejuízos e de queda nos lucros. Revista Contemporânea de Contabilidade, 11(22), 141-162.), and Martins and Paulo (2014**Martins, O. S., & Paulo, E. (2014). Assimetria de informação na negociação de ações, características econômico-financeiras e governança corporativa no mercado acionário brasileiro. Revista Contabilidade & Finanças, 25(64), 33-45.)

$X_{1} = \frac{(C u r r e n t A s s e t s_{i t} - C u r r e n t L i a b i l i t i e s_{i t})}{T o t a l A s s e t s_{i t}}$	$X_{4} = \frac{M a r k e t V a l u e_{i t}}{T o t a l L i a b i l i t i e s_{i t}}$
$X_{3} = \frac{E a r n i n g s B e f o r e I n t e r e s t a n d T a x e s_{i t}}{T o t a l A s s e t s_{i t}}$	$X_{5} = \frac{S a l e s_{i t}}{T o t a l A s s e t s_{i t}}$

$A R S I = \frac{(Re c e i v a b l e s_{i t} / S a l e s_{i t})}{(Re c e i v a b l e s_{i t - 1} / S a l e s_{i t - 1})}$	$G M I = \frac{G r o s s M \arg i n_{i t}}{G r o s s M \arg i n_{i t - 1}}$
$A Q I = \frac{1 - ((C u r r e n t A s s e t s_{i t} + P P & E_{i t}) / T o t a l A s s e t s_{i t})}{1 - ((C u r r e n t A s s e t s_{i t - 1} + P P & E_{i t - 1}) / T o t a l A s s e t s_{i t - 1})}$	$S G I = \frac{S a l e s_{i t}}{S a l e s_{i t - 1}}$
$D E P I = \frac{{(Depreciation}_{i t} / ({Depreciation}_{i t} + P P & E_{i t})}{{(Depreciation}_{i t}_{- 1} / ({Depreciation}_{i t - 1} + P P & E_{i t - 1})}$	$L V G I = \frac{T o t a l L i a b i l i t i e s_{i t} / T o t a l A s s e t s_{i t}}{T o t a l L i a b i l i t i e s_{i t - 1} / T o t a l A s s e t s_{i t - 1}}$
$S G A I = \frac{S a l e s, g e n e r a l, a n d a d \min i s t r a t i v e \exp e n s e s_{i t} / s a l e s_{i t}}{S a l e s, g e n e r a l, a n d a d \min i s t r a t i v e \exp e n s e s_{i t - 1} / S a l e s_{i t - 1}}$
$T A T A = \frac{(N e t I n c o m e_{i t} - O p e r a t i o n a l C a s h F l o w_{i t}) / T o t a l A s s e t s_{i t}}{(N e t I n c o m e_{i t - 1} - O p e r a t i o n a l C a s h F l o w_{i t - 1}) / T o t a l A s s e t s_{i t - 1}}$

Variable	Mean	Median	Standard Deviation	Minimum	Maximum
	0.0550	-	-	-	-
Z-score	0.1691	-	-	-	-
M-score	0.1773	-	-	-	-
	7.0487	7.0000	2.7430	1.0000	24.0000
	0.1845	0.1428	0.2059	0.0000	1.0000
	0.0806	0.0625	0.0857	0.0000	0.6666
	0.7808	1.0000	0.4137	0.0000	1.0000
	0.0171	0.0009	0.1447	0.0000	5.1470
	0.1101	0.0138	1.0132	0.0000	30.1156
	0.8336	0.0009	1.4723	0.0000	7.0000
	0.3947	0.0000	0.4889	0.0000	1.0000
	21.4907	21.6926	2.2252	10.8159	29.3852

Variable	FFR		Bankruptcy		Manipulation
Variable	Coefficient	Z Statistic	Coefficient	Z Statistic	Coefficient	Z Statistic
Constant	3.239	-1.39	5.876	-5.27***	-3.791	-3.44***
Bsize	-0.087	-1.54	-0.056	-1.83*	0.021	-0.77
Bind	-0.056	-3.24***	0.001	-0.19	-0.001	-0.06
Bwom	-0.043	-2.52**	-0.037	-4.44***	-0.004	-0.57
Ndual	-0.347	-1.46	-0.448	-3.51***	0.049	-0.43
Bcom	-24.829	-2.71***	-4.644	-0.98	-9.101	-2.02**
EAcom	2.573	-0.61	-1.872	-0.87	3.109	-1.56
ACsize	-0.336	-1.90*	0.030	-0.52	-0.085	-1.77**
NMlist	-4.609	-0.02	0.047	-0.28	-0.332	-2.28**
SIZE	-0.132	-1.28	-0.268	-5.02***	0.103	-1.99**
Dummies-year	Yes		Yes		Yes
Dummies-Sector	Yes		Yes		Yes
R²	0.550		0.396		0.163
Log Likelihood	-86.574		-292.824		-404.540
Chi square	211.830***		384.250***		157.630***
Nº Firms	96		187		160
Nº Observations	540		1.054		897

[1] 1.
Orleans Silva Martins, P.h.D in Controllership and Accounting, University of São Paulo, Faculty of Economics, Administration and Accounting, São Paulo, Brazil. E-mail: orleansmartins@ccsa.ufpb.br

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The Influence of Corporate Governance on the Mitigation of Fraudulent Financial Reporting

Abstract

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Contribution	Orleans Martins	Raul Ventura
1. Definition of research problem	√	√
2. Development of hypotheses or research questions (empirical studies)	√	√
3. Development of theoretical propositions (theoretical work)	√	√
4. Theoretical foundation / Literature review	√	√
5. Definition of methodological procedures	√	√
6. Data collection	√	√
7. Statistical analysis	√	√
8. Analysis and interpretation of data	√	√
9. Critical revision of the manuscript	√	√
10. Manuscript writing	√	√
11. Other (please specify which)