BOARD CHARACTERISTICS AND THE LIKELIHOOD OF FINANCIAL STATEMENT FRAUD
DOI:
https://doi.org/10.12775/CJFA.2020.003Keywords
board independence, expertise, diligence, financial fraud, likelihoodAbstract
The study examines the effect of board characteristics on financial statement fraud likelihood of quoted manufacturing firms in Nigeria. The scope of the study covers board attributes such as board independence, board expertise and board diligence; and the beneish M-score was used as the measure of fraud likelihood. This study utilized a quantitative research design. The sample covered 39 manufacturing companies in the Nigerian Stock Exchange (NSE) as at 2019. Secondary data was utilized for this study and the data were extracted from the annual reports of corporate organizations for the period 2013-2019 financial years. The binary logit regression was employed as the method of data analysis in the study. The findings reveal that the odd ratio of board independence, board expertise and board diligence negatively and significantly reduce the log odds of financial statement fraud in manufacturing firms in Nigeria. The study concludes that there is a need for boards to be more effective in their monitoring roles to reduce the occurrence of fraud.References
Abbott, L.J., Parker, S., & Peters, G.F. (2004). Audit committee characteristics and restatements. Auditing: Journal of Practice and Theory, 23(1), 69-89. https://dx.doi.org/10.2308/aud.2004.23.1.69.
Agrawal, A., & Chadha, S. (2005). Corporate governance and accounting scandals. Journal of Law and Economics, 48(2), 371-406. https://dx.doi.org/10.1086/430808.
Aifuwa, H.O., & Embele, K. (2019). Board characteristics and financial reporting quality. Journal of Accounting and Financial Management, 5(1), 30-49.
Aifuwa, H.O., & Okojie, P.I. (2015). Materials and methods: SPSS demystified. Unpublished manuscript, Samuel Adegboyega University, Ogwa, Nigeria.
Aifuwa, H.O., Saidu, M., Enehizena, O.C., & Osazevbaru, A. (2019). Accounting information and lending decisions: does sustainability disclosure matter? Copernican Journalof Finance & Accounting, 8(4), 61-89. http://dx.doi.org/10.12775/CJFA.2019.018.
Aifuwa, H.O., Embele, K., & Saidu, M. (2018). Ethical accounting practices and financialreporting quality. EPRA International Journal of Multidisciplinary Research, 4(12),31-44.
Albrecht, S.W., Albrecht, O.C., Albrecht, C.C., & Zimbelman, F.M. (2012). Fraud Examinantion. Mason, OH: South-Western, Cengage Learning.
Albretch, S.W., & Hoopes, L. J (2014). Real examples of why financial statement audit cannot detect all fraud: Insight from an expert witness in major fraud cases. https://dx.doi.org/10.2139/ssrn.1019354.
Andrews, D.W. (1988a). Chi-square diagnostics test for econometric models: Theory. Econometrica, 56(6), 1419-1453.https:/dx.doi.org/10.2307/1913105.
Andrews, D.W. (1988b). Chi-square diagnostics test for econometric models: introductionand applications. Journal of Econometrics, 37(1), 135-156. https://dx.doi.org/10.1016/0304-4076(88)90079-6.
Anichebe, A.S., Agbomah, D.J., & Agbagbara, E.O. (2019). Determinants of FinancialStatement Fraud Likelihood in Listed Firms. Journal of Accounting and Financial Management, 5(2), 1-9.
Aris, A.N., Othman, R., Arif, M.M.S., Malek, A.A.M., & Omar, N. (2013). Fraud detection: Benford’s law vs Beneish model. In 2013 IEEE Symposium on Humanities, Science and Engineering Research (SHUSER), 726-731.
Baba, B.U., & Abdul-Manaf, K.B. (2017). Board Governance Mechanisms and Sustainability Disclosure: A Moderating Role of Intellectual Capital. Asian Journal of Multidisciplinary Studies, 5(10), 163-189.
Beneish, M. (1999). The detection of earnings manipulation. Financial Analysts Journal,6(1), 24-36. https://dx.doi.org/10.2469/faj.v55.n5.2296.
Bhavani, G., & Amponsah, T.C. (2017). M-score and Z-score for detection of accounting fraud. Accountancy Business and the Public Interest, 68-86.
Bishop, C.C., Dezoort, F.T., & Hermanson, R.D. (2017). Review on recent literature on pressure on CEO’s to manipulate financial reports. Journal of Journal of Forensic and Investigative Accounting, 9(1), 577-589.
Brennan, M.N., & McGrath, M. (2007). Financial statement fraud: Lesson from US and European case studies. Australian Accounting Review, 17(42), 49-61. https://dx.doi.org/10.1111/j.1835-2561.2007.tb00443.x.
Carcello, J., Hollingsworth, C., Klein, A., & Neal, T. (2006). Audit committee financial expertise, competing governance mechanisms, and earnings management. Working Paper University of Tennessee. https://dx.doi.org/10.2139/ssrn.887512.
Dalnial, H., Kamaluddin, A., Sanusi, M.Z., & Khairuddin, S.K. (2014). Detecting fraudulent reporting through financial statement analysis. Journal of Advanced Management Science, 2(1), 17-22. https://dx.doi.org/10.12720/joams.2.1.17-22.
Eneh, O. (2018). Board Attributes and Financial Fraud Likelihood In Nigeria. IDOSR Journal of Humanities and Social Sciences, 3(2), 89-99.
Fama, E.F., & Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301-325. https://dx.doi.org/10.1086/467037.
Freeman, R.E. (1984). Strategic Management: A Stakeholder Approach. London: Pitman.
Greene, W. (2008). Econometric analysis. Upper Saddle River, New Jersey: Prentice-Hall.
Gupta, R., & Gill, S.N. (2012). Prevention and detection of financial statement fraud – Animplementation of data mining framework. International Journal of Advanced Computer Science and Application, 3(8), 150-156.
Hesselink, K. (2017). Board composition and corporate sustainability reporting quality. MSc thesis. Netherlands: Nijmegen School of Management, Radbound University.
Hogan, E.C., Rezaee, Z., Riley, A.R., & Velury, K.U. (2008). Financial statement fraud: Insights from academic literature. American Accounting Association, 27(2), 231-252. https://dx.doi.org/10.2308/aud.2008.27.231.
Hosmer, D.W., & Lemeshow, S. (1989). Applied logistic regression. New York: John Wiley& Sons.
Ilaboya, J.O., & Lodikero, O. (2017). Board independence and financial statement fraud:A moderating effect of female gender diversity. Accounting and Taxation Review,1(1), 196-221.
Jensen, M., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency costsand ownership structure. Journal of Financial Economics 3(4), 305-360. https://dx.doi.org/10.1016/0304-405X(76)90026-X.
Kankanamage, C.A. (2015). The relationship between board characteristics and earningsmanagement: Evidence from Sri Lankan listed companies. Kelaniya Journal of Management, 4(2), 36-43. https://dx.doi.org/10.4038/kjm.v4i2.7499.
Klein, A. (2002). Audit Committee, Board of Director Characteristics and Earnings Management. Journal of Accounting and Economics, 33(3), 375-400. https://dx.doi.org/10.1016/S0165-4101(02)00059-9.
Kozlov, M., Hurtado-Guarin, J., & Trakulhoon, P. (2018). Forensic accounting: Detecting financial fraud. World Quant Perspective. https://www.weareworldquant.com/en/thought-leadership/forensic-accounting-detecting-financial-fraud (accessed:29.12.2019).
Lipton, M., & Lorsch, J.W. (1992). A modest proposal for improved corporate governance. The Business Lawyer, 48(1), 59-77.
Lotfi, N., & Chadegani, A.A. (2017). Detecting corporate financial fraud using Beneish Mscoremodel. International Journal of Finance and Managerial Accounting, 2(8), 29-34.
Mahama, M. (2015). Detecting corporate fraud and financial distress using the Atmanand Beneish models. International Journal Economics, Commerce and Management,3(1), 1-18.
Mahdi, O., Qingfei, M., Vahab, M., & Muhammad, P. (2019). The efficacy of predictive methods in financial statement. Discrete Dynamics in Nature Society, 1-12. https://dx.doi.org/10.1155/2019/4989140.
Ofoegbu, G.N., Odoemelam, N., & Okafor, R.G. (2018). Corporate board characteristics and environmental disclosure quantity: Evidence from South Africa (integrated reporting) and Nigeria (traditional reporting). Cogent Business & Management, 5, 3-27. https://dx.doi.org/10.1080/23311975.2018.1551510.
Omoye, S.A., & Eragbhe, S. (2014). Accounting ratios and false financial statement detection:Evidence from Nigerian quoted companies. International Journal of Business and Social Science, 5(7), 206-215.
Onourah, A.C., & Imene, O.F. (2016). Corporate Governance and Financial Reporting Quality in Selected Nigerian Company. International Journal of Management Science and Business Administration, 2(3), 7-16.
Park, Y., & Shin, H.(2004). Board composition and earnings management in Canada. Journal of Corporate Finance, 10(3), 431-457.
Peasnell, K.V., Pope, P.F., & Young, S. (2000). Accrual management to meet earning targets:UK evidence Pre- and Post-Cadbury. British Accounting Review, 32(4), 415-445. https://dx.doi.org/10.1006/bare.2000.0134.
Pfeffer, J., & Salancik, G.R. (1978). The external control of organizations: A resource dependence perspective. New York: Harper & Row.
Popoola, J.M.O., Che-Ahmad, A., & Samsudin, S.R. (2014). Task performance fraud risk assessment on forensic accountant and auditor knowledge and mindset in Nigerian public sector. Risk, Governance and Control: Fianancial Markets & Institutions, 4(3),84-90. https://dx.doi.org/10.22495/rgcv4i3clart2.
Rezaee, Z., Crumbley, D.L., & Elmore, R.C. (2010). Forensic accounting education: A survey of academicians and practitioners. Advances in Accounting Education, Forthcoming.
Rodríguez-Ariza, L., García-Sánchez, I., & Frías-Aceituno, J. (2012). The role of theboard in achieving integrated financial and sustainability reporting. XV encuentroAECA,Ofir-Esposende, 4h, 1-22.
Saidu, M., & Aifuwa, H.O. (2020). Board characteristics and audit quality: The moderating role of gender diversity. International Journal of Business & Law Research, 8(1),144-155. https://dx.doi.org/10.2139/ssrn.3544733.
Saunders, M., Lewis, P., & Thornhill, A. (2016). Research methods for business students. Essex, England: Pearson Education Limited.
Supri, Z., Rura, Y., & Pontoh, T.G. (2018). Detection of fraudulent financial statements with fraud diamond. Journal of Research in Business and Management, 6(5), 39-45.
Tangod, K. & Kulkarni, G. (2015). Detection of financial statement fraud using datamining techniques and performance analysis. International Journal of Advanced Research in Computer Communication Engineering, 4(7), 549-555. https://dx.doi.org/10.17148/IJARCCE.2015.47124.
Unegbu, O.A., & Tasie, O.G. (2011). Identification of false financial statements: A pre-antetool for investment decisions, solvency analysis and bankruptcy predictions. African Journal of Business Management, 5(10), 3813-3827. https://dx.doi.org/10.5897/AJBM10.419.
Vafeas, N. (1999). Board Meeting Frequency and Firm Performance – An Empirical Analysis. Journal of Financial Economics, 53(1), 113-142.
Wang, D. (2006). Founding family ownership and earnings quality. Journal of Accounting Research, 44(3), 619-656. https://dx.doi.org/10.1111/j.1475-679X.2006.00213.x.
West, J., & Bhattacharya, M. (2015). Mining financial statement fraud – an analysisof some experimental issues. In 2015 IEEE 10th Conference on Industrial Electronics and Applications. Auckland: Institution of Electrical and Electronic Engineers. https://dx.doi.org/10.1109/ICIEA.2015.7334157.
Wooldridge, J. (2013). Introductory econometrics: A modern approach. Cincinnati, OH:South-Western College.
Yamane, T. (1967). Statistics: An Introductory Analysis (2nd Edition). New York: Harperand Row.
Yang, D., & Buckland, R. (2010). Fraudulent financial reporting in China: Considerationof timing traits and corporate governance mechanisms. In China Journal of AccountingResearch2010 Conference. Guangzhou, China: Sun Yat-sen University.
Zainal, A., Rahmadana, M.F., & Zain, K.N. (2013). Power and likelihood of financial statements fraud: Evidence from Indonesia. Journal of Advanced Management Science,1(4), 410-415. https://dx.doi.org/10.12720/joams.1.4.410-415.
Downloads
Published
How to Cite
Issue
Section
Stats
Number of views and downloads: 1925
Number of citations: 0
