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The Effect of Governance Reforms on Financial Reporting Fraud

Author

Listed:
  • Donelson, Dain C.
  • McInnis, John
  • Mergenthaler, Richard D.

Abstract

In response to financial reporting scandals, Congress and the securities exchanges mandated increases in board and audit committee independence and banned most non-audit services. We exploit these exogenous shocks to examine whether these governance reforms reduced financial reporting fraud. Comparing firms forced to comply with the reforms to firms already in compliance, we find that mandated increases in overall board independence significantly reduced the rate of fraud, while mandating a fully independent audit committee had a weaker effect. Further, banning non-audit services did not reduce the incidence of fraud.

Suggested Citation

  • Donelson, Dain C. & McInnis, John & Mergenthaler, Richard D., 2016. "The Effect of Governance Reforms on Financial Reporting Fraud," Journal of Law, Finance, and Accounting, now publishers, vol. 1(2), pages 235-274, December.
    • Handle: RePEc:now:jnllfa:108.00000005
    DOI: 10.1561/108.00000005
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    Citations

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    Cited by:

    1. Vladimir Atanasov & Bernard Black, 2021. "The Trouble with Instruments: The Need for Pretreatment Balance in Shock-Based Instrumental Variable Designs," Management Science, INFORMS, vol. 67(2), pages 1270-1302, February.
    2. Khaldoon Aldaoud, 2019. "The Impact of Board Independence, Women on Board and Auditor Independence on the Fraud: Evidence from Jordanian Firms," Proceedings of International Academic Conferences 9710771, International Institute of Social and Economic Sciences.
    3. Anwer S. Ahmed & Yiwen Li & Nina Xu, 2020. "Tick Size and Financial Reporting Quality in Small‐Cap Firms: Evidence from a Natural Experiment," Journal of Accounting Research, Wiley Blackwell, vol. 58(4), pages 869-914, September.

    More about this item

    Keywords

    Fraud; sarbanes-oxley; corporate governance; board independence;
    All these keywords.

    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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