Corporate Governance: Fraudulent Financial Statements

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Introduction

The key purpose of this paper is to investigate the relationship between corporate governance mechanisms and the fraudulent financial statements or misappropriation of assets through an in-depth analysis of the existing studies on the relevant field. To carry out this investigation, ten prominent peer-reviewed articles have been precisely summarised. The summaries include a succinct analysis of the relevant research problems, research questions, and results and implications of the conducted studies.

Article 1

In his article ‘Corporate governance and financial reporting in the Nigerian banking sector: an empirical study’ Imeokparia (2013) broadly analyses the relationship between corporate governance mechanisms and the fraudulent financial statements or misappropriation of assets – the research problem, research questions, results, and implications of his study have been summarised in the following table:

Research problem	Since the 1990s, debates on corporate governance spread across the world, and issues of financial reporting and disclosure got significant spotlight due to the collapse of numerous sophisticated corporations, such as WorldCom, BCCI, Lehman Brothers, and Enron
	Also, multiple Nigerian businesses faced complex corporate governance challenges
	As a result, the researchers wanted to identify the link between poor corporate governance and fraudulent financial statements, whilst clarifying the need for a reliable and decent corporate governance and financial reporting system
Research questions	What are the moral issues in corporate governance
	To what extent does the issues of transparency influence financial reporting in Nigeria
	To what extent do the challenges of corporate governance generate from the fraudulent financial statements and inappropriate disclosures
Results and implications of the study	The practices of unethical financial reporting in Nigerian banks created extensive challenges for corporate governance; as a result, regulatory compliance in case of disclosures considerably lowered the problem

Article 2

In ‘The role of corporate governance in fraud reduction – a perception study in the Saudi Arabia business environment’, In’airat (2015) pointed out the significance and the effectiveness of corporate governance in controlling fraudulent financial statements and reducing misappropriation of assets:

Research problem	The occurrences of financial reporting frauds are growing and have remained the fundamental reason behind the financial scandals in recent years, but the problem is that the numbers of reported frauds are much lesser than the actual number of occurrences – this indicates a major underlying problem: ‘not all fraud is discovered and not all uncovered fraud is reported’ (In’airat, 2015)
Research questions	Whether there is a connection between corporate governance mechanisms and the fraudulent financial statements, and whether proper implementations of strict corporate governance policies can reduce the level of fraud
Results and implications of the study	An interview of 160 executives yielding a response rate of 43 percent was used, and the main findings of the examination indicated that amongst the three corporate governance components, the internal audit had the most significant role in reducing fraud levels; moreover, in-depth investigation of ‘components’ dimensions’ indicated that the ‘effectiveness’ dimension is the most imperative in reducing the fraud levels

Article 3

‘Corporate governance and the financial reporting process’ is another great article that explains the relationship between corporate governance systems and the misleading financial statements or frauds relating to assets:

Research problem	The listed companies of the Bucharest Stock Exchange suffered from numerous regulatory and false disclosure issues; as a result, the author of this article attempted to focus on the root causes of these problems by developing an empirical analysis on the proposed question (Matiş, Mănoiu, & Bonaci, 2012)
Research questions	Following the global financial crisis, a lot of alterations have been brought in the existing corporate laws all over the world to lower the incidences like high remunerations of the executive directors; the research question is whether these alterations have helped in the transformation process of the corporate governance codes to make it even more pragmatic and dynamic
Results and implications of the study	The findings and results of the study point to the fact that a well regulated corporate governance mechanism, combined with apt disclosures (overseen by external auditors and non-executive directors), brought major improvements in the sample companies’ finances and basic charts in certain cases (Matiş et al., 2012).

Article 4

In their article ‘Corporate governance consequences of accounting scandals: evidence from top management, CFO and auditor turnover’, Agrawal and Cooper (2016) focused on the deep-rooted problems of conflicts of interest between the top-level employees of the businesses and the ordinary shareholders by explaining why the managers and executive-directors generate misleading financial statements, whilst the shareholders crave for appropriate disclosures:

Research problem	Consequences of accounting manipulations and corporate fraud, financial misstatements, and earnings mismanagement in the stock markets of the United States
Research questions	In what ways a binding corporate governance code can be established in the companies, and whether such a code can control and diminish the illegitimate practices like manipulations, corporate fraud, financial misstatements, and earnings mismanagement
Results and implications of the study	At least 518 US companies with ‘weak corporate governance policies’ were used as a sample; their earnings were continuously decreasing: using logistic regressions that control other determinants of management turnover, the authors found ‘strong evidence’ of extremely high remunerations of CEOs, top management, and CFOs in those companies in comparison with firms where the corporate governance was binding

Article 5

In the ‘Effective corporate governance and financial reporting in Japan’, Rahman and Bremer (2016) put forward the following analysis:

Research problem	Misleading financial reporting led to governance failures in some Japanese companies
Research questions	Whether the adoption of good corporate governance mechanisms would help the Japanese companies to overcome the financial reporting frauds
Results and implications of the study	The key to good governance is correct financial reporting; nevertheless, the authors argued that a majority of the problems and weak points in the corporate governance of the Japanese companies can be alleviated through effective functioning in the annual general meetings and accurate financial reports from the auditors

Article 6

In ‘the influence of corporate governance on corporate performance among manufacturing firms in Kenya: a theoretical model’, Wagana and Karanja (2015) examines the relationship between corporate governance mechanisms and corporate performance (in terms of misappropriation of assets) of the manufacturing firms in Kenya:

Research problem	Kenyan firms are becoming more and more stagnant due to poor corporate governance mechanisms
Research questions	Whether corporate performance of the Kenyan firms can be enhanced and misappropriation of assets can be reduced with the implementation of proper disclosure measures
Results and implications of the study	Evaluation of several sample firms in Kenya (where there were strict implementation and proper observance of corporate governance codes) suggested that the overall financial performances of these firms were highly stable when contrasted with non-compliant firms

Article 7

In ‘Detecting asset misappropriation: a framework for external auditors’, Kassem (2014) provided the following:

Research problem	Asset misappropriation is the foremost concern for shareholders, regulators, and external auditors
Research questions	How concerns for asset misappropriation can be addressed and mitigated
Results and implications of the study	Enhancing audit standards, ensuring accurate disclosures, and responding to internal issues will reduce the chances of misstatements

Article 8

Kehinde (2015) in ‘Asset protection and financial statement fraud: the audit and management function in Nigeria business organization’ discussed the following:

Research problem	The reductions in the recorded profit margins due to auditing manipulations
Research questions	What are the consequences of internal auditing on accurate financial disclosures and corporate assets
Results and implications of the study	Efficient governance can lessen premeditated errors and irregularities

Article 9

According to Eyisi and Agbaeze (2014) in ‘The impact of forensic auditors in corporate governance’:

Research problem	Persistent pecuniary swindles cause a rise in bankruptcies and failures of statutory audit
Research questions	Whether forensic auditors have a role in fighting against the deceptive activities
Results and implications of the study	Forensic auditors can enhance management accountability and governance, lowering corporate failure rates

Article 10

In ‘The role of auditing in the management of corporate fraud’, Omoteso and Obalola (2014) assessed the following:

Research problem	Assets misappropriation, fraudulent credit approvals, unauthorized purchases, and low employee compensation due to poor governance
Research questions	How the existing governance laws can be applied to reduce the frauds
Results and implications of the study	The present governance rules not just lower disclosure-related frauds, but also ensure better wages for low-level workers

Conclusion

There is a direct relationship between corporate governance mechanisms and fraudulent financial statements or misappropriation of assets, and the reinforcement of the governance codes can significantly diminish such frauds.

References

Agrawal, A. & Cooper, T. (2016). Corporate governance consequences of accounting scandals: evidence from top management, CFO and auditor turnover. Quarterly Journal of Finance, 7(1), 1-47.

Eyisi, A. S. & Agbaeze, E. K. (2014). The impact of forensic auditors in corporate governance. International Journal of Development and Sustainability, 3(2), 404-417.

Imeokparia, L. (2013). Corporate governance and financial reporting in the Nigerian banking sector: an empirical study. Asian Economic and Financial Review, 3(8), 1083-1095.

In’airat, M. (2015). The role of corporate governance in fraud reduction – a perception study in the Saudi Arabia business environment. Journal of Accounting and Finance, 15(2), 119-128.

Kassem, R. (2014). Detecting asset misappropriation: a framework for external auditors. International Journal of Accounting, Auditing and Performance Evaluation, 10(1), 1-42.

Kehinde, J. S. (2015). Asset protection and financial statement fraud: the audit and management function in Nigeria business organisation. Journal of Policy and Development Studies, 9(3), 166-175.

Matiş, D., Mănoiu, S. M., & Bonaci, C. G. (2012). Corporate governance and the financial reporting process. Annales Universitatis Apulensis Series Oeconomica, 14(2), 415-426.

Omoteso, K. & Obalola, M. (2014). The role of auditing in the management of corporate fraud. Emerald Group Publishing Limited, 6(1), 129-151.

Rahman, K. M. & Bremer, M. (2016). Effective corporate governance and financial reporting in Japan. Asian Academy of Management Journal of Accounting and Finance, 12(1), 93-122.

Wagana, D. & Karanja, K. (2015). The influence of corporate governance on corporate performance among manufacturing firms in Kenya: a theoretical model. International Journal of Academic Research in Business and Social Sciences, 5(4), 258-272.

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