PROFESSOR KAREN VAN PEURSEM

PHD ( WAI KATO) , CA ( NZ) , CPA ( U. S. )

Who are you looking at?
Department of Accounting, University of Waikato
CAN A CORPORATE GOVERNING
BODY TAKE ACTIONS THAT
MIGHT GIVE THEM A BETTER
CHANCE OF PREVENTING
MATERIAL FINANCIAL FRAUD?
Financial Statement Fraud:
Governing Bodies and the
Auditors
Department of Accounting, University of Waikato
What are their responsibilities?
Governing bodies
Auditors
Department of Accounting, University of Waikato
According to New Zealand Statute
Department of Accounting, University of Waikato
... oversight, providing direction,
conducting practices with due care,
acting in good faith and in the best
interests of the company (NZ
Companies Act, 1993, S131)
According to New Zealand Listing Regulations
Department of Accounting, University of Waikato
keep the market ... informed on matters
that may affect the price of their securities
restricts insider conduct
But may rely on professional or expert
advice given (CA, S138)
In comparison to U.S. Listings Regulation
Department of Accounting, University of Waikato
An emphasis on within-board skills and sub-
committee involvement
Foreign Corrupt Practices Act 1977
Sarbanes-Oxley (2002) : Audit Committee
requirements
Exchange provisions and requirements
The accounting professions and standards
setting bodies may disagree
Department of Accounting, University of Waikato
.... the accounting profession and
standard setters express interest in
ensuring the governing body and
management have a strong role in fraud
prevention
International Standard of Auditing
Department of Accounting, University of Waikato
The primary responsibility for the
prevention and detection of fraud rests
with both those charged with
governance... and management
(ISA (NZ) 240, para 4)
... and
Department of Accounting, University of Waikato
It is important that management... governance,
place a strong emphasis on fraud prevention...
a commitment to creating a culture of honesty
and ethical behaviour ....
... includes considering the potential for override
of controls.. [and] earnings management (p4)
.... And therefore
Department of Accounting, University of Waikato
... identifying fraud within the
organisation is viewed by the
accounting profession as an
important role of the governing body
The auditors role ...
...is to provide reasonable assurance that the
financial statements are True and fair and
that they are free from material
misstatement (ISA (NZ) 240)
Department of Accounting, University of Waikato
The auditor shall identify
and assess the risks of
material misstatement due
to fraud...(ISA (NZ) 240k
p25)
Department of Accounting, University of Waikato
That is, and according to the accounting
profession, the role of the auditor is to
Department of Accounting, University of Waikato
... evaluate fraud potential
.... follow up suspicions of fraud
.... communicate issues appropriately
... A view reluctantly (?) formed over time
Department of Accounting, University of Waikato
1997: no requirement to look other than to take
into consideration risk..., lower level of
assurance on fraud
2003: Follow up suspicions emerging from
normal audit evidence gathering procedures
2007: Plan, consider risks, discuss, design tests
in response to known risks....
This is where the courts step in..
Department of Accounting, University of Waikato
How can a board structure themselves as to best
prevent corporate financial fraud?
Department of Accounting, University of Waikato
NI COLA BURKE,
KAREN VAN PEURSEM,
I AN EGGLETON
Department of Accounting, University of Waikato
Relationships between Corporate
Governance and Fraud in U.S.
Listed Companies
Governance characteristics said to contribute
toward corporate fraud protection...
Department of Accounting, University of Waikato
Independence
Expertise
Communication practices
Their own relationships with the company
By
Board sub-committees
Board member composition
Board communication practices
Shareholder representative characteristics
What was examined
Department of Accounting, University of Waikato
519 U.S. Fraud-committing companies
(2004-2006)
Data from SECs Accounting Enforcement
Releases, official sites, corporate reports
Matched pairs reduces to refined sample
of 152 fraud and no-fraud companies (76
each)
Regression to identify governance
characteristics associated with fraud
Board Sub-Committee Characteristics and
Communication Practices
Department of Accounting, University of Waikato
Audit committee member
numbers
Independence
financial expertise
meeting frequency
average tenure
(other) directorships held
Nominating Committee
Existence
Numbers
Board member composition characteristics
Department of Accounting, University of Waikato
Number of directors
Number of independent directors
Whether the chief executive officer is also a
director
Ownership share by inside (and outside)
directors
Shareholder representative characteristics
Department of Accounting, University of Waikato
Outside blockholder ownership numbers
and proportion *
Auditor
Tenure
International firm (or not)
* External to Board control
Tests applied:
Department of Accounting, University of Waikato
Companies matched by industry, size, leverage, age,
growth...
Univariate matched t-tests
Validating tests
Logistic regression
What governance characteristics accompany the
presence of fraud in these companies?
Findings
Department of Accounting, University of Waikato
5 characteristics significantly associated with
fraudulent corporate financial statements include:
1. Number of directorships held by (AC) directors
2. Smaller proportion of independent directors
3. Companies without a Nominating Committee
4. CEO who is also Chairman
That is.... Independence issues
Surprise finding #5
Department of Accounting, University of Waikato
The only other significant correlation
was between the percentage of
company ownership held by outside
blockholders and the presence of
corporate financial fraud...
Findings as to the auditor?
Department of Accounting, University of Waikato
Neither the size of the firm nor
their tenure proved to be
significant to fraud practice.
Limitation: We only examine select measures of
auditor independence, other auditor independence
studies may identify further issues
Implications
Department of Accounting, University of Waikato
Would be risky for the governing
board to rely on the auditor alone to
pick up instances of corporate fraud.
Ambiguous guidance makes it
difficult to anticipate responsibility,
and the governing board may be in a
stronger position to structure the
company to help prevent corporate
financial fraud
That is, while the auditors have a
growing responsibility to look for
material fraud, our findings suggest that
potential for fraud prevention may lie in
the structure (and independence) of the
board.
Department of Accounting, University of Waikato
Thank you!
Department of Accounting, University of Waikato