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 (1979).

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Table 3
Model parameters of Beneish (1999).

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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 (1992), Vafeas (2005), Alzoubi and Selamat (2012), and Razali and Arshad (2014)
Board Independence (Bind)	-	Xie, Davidson, and Dadalt (2003), Siladi (2006), and Razali and Arshad (2014)
Women on the Board (Bwom)	-	Boulouta (2013)
Non-duality of CEO and Chairman (Ndual)	-	Bebchuk and Fried (2004) and Chhaochharia and Grinstein (2009)
Board Compensation (Bcom)	-	Oliva e Albuquerque (2007) and Hermalin and Weisbach (2012)
External Audit Compensation (EAcom)	-	DeAngelo (1981), Francis (1984), and Santana et al. (2014)
Audit Committee Size (ACsize)	-	Coram, Ferguson, and Moroney (2006) and Law (2011)
New Market Listing (NMlist)	-	Moreira et al. (2012), Piccoli et al. (2014), and Martins and Paulo (2014)

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

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

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

[TFN1] Note: FFR is the likelihood of fraudulent financial reporting; Z-score is the bankruptcy prediction; M-score is the earnings manipulation; Bsize is the size of the board of directors; Bind is the percentage of independent directors on this board; Bwom is the percentage of women on the board; Ndual is the absence of duality of CEO and Chairman positions; Bcom is the total compensation of directors; EAcom is the compensation paid to independent auditing firms; ACsize is the size of the audit committee; NMlistit is a listing in the New Market segment; and SIZEit is the firm’s size.

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)

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

Abstract