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The Role of Ethical Leadership and Governance Mechanisms in Preventing Corporate Financial Crime: The Mediating Effect of Organizational Integrity

Author

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  • Wan Nailah Abdullah

    (Faculty of Accountancy, university Technology MARA Cawangan Kedah, Kampus Sungai Petani, Merbok, Kedah, Malaysia)

  • Hasnisah Hassan

    (Faculty of Accountancy, university Technology MARA Cawangan Kedah, Kampus Sungai Petani, Merbok, Kedah, Malaysia)

  • Sahubar Ibrahim Ismail Gani

    (Seksyen Regulatori Penerbitan, Bahagian Penguatkuasaan dan Kawalan, Kementerian Dalam Negeri, Wilayah Persekutuan Putrajaya, Malaysia)

Abstract

Corporate financial crime remains a pervasive threat to global economic stability, eroding stakeholder trust and incurring trillions in annual losses. While governance mechanisms like internal audit are widely implemented, their effectiveness is often undermined by a lack of ethical leadership and a weak organizational culture. This conceptual paper argues that the prevention of corporate financial crime is not merely a function of control systems but is fundamentally mediated by organizational integrity, the collective commitment to ethical principles and honest conduct. We propose that ethical leadership sets the moral tone and provides the necessary legitimacy for governance mechanisms, particularly internal audit, to function effectively. In turn, these empowered mechanisms foster an environment of organizational integrity, which acts as the critical buffer against financial misconduct. Drawing on agency theory, institutional theory, and social learning theory, this paper develops a novel framework positioning organizational integrity as the central mediator between leadership/governance inputs and crime prevention outcomes. The study contributes theoretically by integrating micro-level leadership behaviours with meso-level control systems and macro-level cultural outcomes. Practically, it offers guidance for boards and executives on cultivating integrity as a strategic asset, moving beyond compliance to create a genuinely ethical organizational ecosystem. Future research should empirically test this model across diverse cultural and regulatory contexts. Future research should empirically test this model using mixed-methods approaches, including employee and auditor survey data analyzed via structural equation modeling (SEM), and comparative case studies of firms with exemplary vs. deficient integrity cultures (e.g., comparing post-scandal recoveries of firms like Siemens vs. persistently fraudulent entities).

Suggested Citation

  • Wan Nailah Abdullah & Hasnisah Hassan & Sahubar Ibrahim Ismail Gani, 2025. "The Role of Ethical Leadership and Governance Mechanisms in Preventing Corporate Financial Crime: The Mediating Effect of Organizational Integrity," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 9(9), pages 6823-6831, September.
    • Handle: RePEc:bcp:journl:v:9:y:2025:issue-9:p:6823-6831
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    References listed on IDEAS

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    1. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    2. Shamas-ur-Rehman Toor & George Ofori, 2009. "Ethical Leadership: Examining the Relationships with Full Range Leadership Model, Employee Outcomes, and Organizational Culture," Journal of Business Ethics, Springer, vol. 90(4), pages 533-547, December.
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