Corporate Governance and Fraudulent Financial Reporting: The Audit Committee Characteristics' Paradigm

Abstract

The study interrogated the effect of audit committee characteristics, as a sub-system of the corporate governance framework, on fruadulent financial reporting. This was premised on the need to contribute to the ongoing debate on the influence of CG on the operational effeciency of the firm and assuring the broader perpective of stakeholders' confidence in the capital market paradigm. The study obtained data from the Accounting and Auditing Enforcement Releases (AAERs) issued by the US Security and Exchange Commission (SEC). A matched case-control research design was employed to gather and analyse relevant data using the OLS platform. From the analysis, the study observed that; the audit committee of fraud entities were less likely to have members with financial expertise than their no-fraud counterparts, the audit committee of no-fraud firms meet more frequently than those of the fraud firms, financial statement fraud was less likely to occur as the proportion of independent directors on the audit committee increases, and the size of the audit committee increases the chances of the occurrence of financial statement fraud. The study therefore concludes that a well-constituted audit committee is less likely to lead to financial statement fraud, by implication audit committee characteristics affects the incidence and extent of fraudulent financial reporting. It was therefore recommended that: audit committee membership criteria should include financial expertise as a primary requirement, membership of the audit committee should be dominated by more independent directors, and the size of the audit committee should not be bloated. A minimum of three and maximum of five, but not four or two, to allow for majority opinion in case of variation in judgement.