Determinants of Fraudulent Financial Reporting: Evidence from Malaysia

Suhaily Hasnan, Rashidah Abdul Rahman, Sakthi Mahenthiran

Abstract


ABSTRACT

This study examines two issues relating to fraudulent financial reporting in Malaysia. The first issue examines factors involved with fraudulent financial reporting practices; i.e. predisposition (i.e. related party transactions, history of prior violations, founders on board), motive (i.e. economic factor, ownership factor, political factor) and opportunity (i.e. poor corporate governance). Then, the second issue looks into the relationship between earnings management and the occurrences of fraudulent financial reporting. The study uses a matched sample of 53 firms that were convicted of issuing fraudulent financial statements during the period from 1996 to 2007. Our results show that firms with fewer related party transactions, higher number of prior violations, and higher proportion of founders on board are more likely to “tip” over the edge into fraudulent financial reporting. We also find that the corporate environment most likely to lead to fraudulent financial reporting is characterised by accounting practices that are already “pushing the envelope” on earnings management. Furthermore, we find that firms are embroiled in fraudulent financial reporting when non-family and non-foreigners own the company, and when the level of financial distress is high. As expected, our results also show that firms involved in fraudulent financial reporting have significantly poor corporate governance structures whereby the audit quality is lower and outside directors seem overcommitted. However, we find no evidence that firm’s political connection factor or the level of board independence play a significant role in the potential for fraudulent financial reporting.

Key words: Fraudulent financial reporting; earnings management; corporate governance

ABSTRAK

Kajian ini mengkaji dua isu yang berkaitan dengan penipuan laporan kewangan di Malaysia. Isu pertama mengkaji faktor-faktor yang terlibat dengan amalan penipuan laporan kewangan; iaitu kecenderungan pengurusan (urus niaga pihak berkaitan, sejarah pelanggaran undang-undang terdahulu, kewujudan pengasas di dalam organisasi), motif (faktor ekonomi, faktor saham pemilikan, faktor politik) dan peluang (kelemahan tadbir urus korporat). Kemudian, isu kedua melibatkan hubungan antara pengurusan perolehan (“earnings management”) dan kejadian penipuan laporan kewangan. Kajian ini menggunakan sampel yang dipadankan daripada 53 syarikat yang telah disabitkan dengan penipuan penyata kewangan dalam tempoh dari tahun 1996 hingga 2007. Keputusan kajian menunjukkan bahawa firma-firma yang mempunyai kurang urus niaga pihak berkaitan, lebih tinggi sejarah pelanggaran undang-undang terdahulu, dan lebih tinggi bahagian (“proportion”) pengasas di dalam organisasi adalah lebih cenderung untuk terlibat di dalam penipuan laporan kewangan. Kami juga mendapati bahawa persekitaran korporat yang berkemungkinan membawa kepada penipuan laporan kewangan dicirikan oleh amalan pengurusan pendapatan yang kurang beretika. Tambahan pula, kajian juga mendapati bahawa firma-firma terbabit dalam penipuan laporan kewangan apabila individu bukan keluarga dan individu bukan warga asing yang memiliki saham firma terbabit dan apabila prestasi kewangan berada dalam tahap yang sangat lemah. Seperti yang dijangka, hasil kajian juga menunjukkan bahawa firma yang terlibat dalam penipuan pelaporan kewangan mempunyai struktur tadbir urus korporat yang lemah di mana kualiti audit adalah rendah dan pengarah mempunyai terlalu banyak komitmen dengan firma luar yang lain. Walau bagaimanapun, kami mendapati tiada bukti bahawa faktor berkaitan politik atau kehadiran pengarah bebas memainkan peranan penting dalam penglibatan dalam penipuan laporan kewangan.

Kata kunci: Laporan penipuan kewangan; pengurusan perolehan; tadbir urus korporat


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