Publication: The Association Between Financial Performance, Environmental Characteristics, Corporate Governance Mechanism And Fraudulent Financial Reporting: Evidence From Malaysian Listed Companies
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Date
2014-03
Authors
Mahanum, Sulaiman
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Abstract
The collapse of a number of companies as a result of accounting
manipulation by managers has raised serious questions about the effectiveness of the
monitoring mechanism to protect investors’ interests and control managerial
opportunistic behavior. This study examines financial performance, environmental
characteristics and governance mechanisms on fraudulent financial reporting in
Malaysia. Logit regression was performed on a sample of 36 fraud firms and 46 nofraud
firms for the period of 2001 to 2009. The predictive accuracy of the logistic
regression model is 66.1 percent. This study found that the greater the direct shares
of the company owned by the board of director, the lesser would be the likelihood of
fraudulent financial reporting. High stock ownership of board of director will
increase the firm value, thus eliminating some of the inherent agency conflicts
between the management and shareholders which is related to managers making
decisions to benefit themselves rather than the shareholders. This study also found
that the shorter the tenure of the CEO, the greater the tendency of the company to be
involved in fraudulent financial reporting. Even though the internal control quality
was found not to contribute significantly to fraudulent financial reporting, it was
found that fraud companies, have lesser voluntary disclosure of internal control
system compared to no-fraud companies. It is suggested that the Securities
Commission and the Malaysian Institute of Accountants should encourage a greater
level of voluntary disclosure of internal control system by all public listed companies,
board of director to own greater number of shares in companies and CEO is
encouraged to have a longer tenureship. Length of CEO tenureship is recommended
to be 9 years or more as findings have shown that CEO with 9 years or more tenure
is found to commit less in fraudulent financial reporting. This can also be included in
Bursa Malaysia Listing Requirement (BMLR).
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Keywords
Financial Performance , Listed Companies