2.6 Hypothesis Development 2.6.1 Board of Directors Independence Hypothesis Both Beasley (1996) and Uzun et al (2004) demonstrated that larger proportion of independent non-executive directors on the board for US listed companies could reduce the likelihood of corporate fraud. These findings indicate that independent directors are more likely to represent shareholders’ interests. Thus, higher proportion of independent non-executive directors on the board could increase board’s effectiveness as a monitoring mechanism over management. On the other hand, there are other evidence which casted doubts on the benefits of an independent board. Persons (2005) found that a board which largely comprised of independent directors has no significant effect on the likelihood of financial statement fraud in the US. Instead, the study highlighted that the likelihood of financial statement fraud is lower when audit committee is comprised solely of independent directors. Despite audit committee is a subset of the main board which depends on the board composition, this finding may indicate the independence of audit committee rather than the board itself is more effective in addressing fraud risk. The contrasting findings appear to show that the impact of independent board on the likelihood of corporate fraud remains indefinite. Nevertheless, the governance principles of UK Code support the view that board independence is an essential factor for effective governance, which in turn could have a significant effect on reducing the likelihood of corporate frauds. UK Corporate Governance Code recommends that at least half of the board for UK listed company (excluding the chairman) should comprise of independent non-executive directors (at least two indep... ... middle of paper ... ...d depth to effectively mitigate bribery and corruption risk. The inclusion of a legal expert within the audit committee could greatly assist the audit committee in their risk oversight responsibilities, including ways in dealing with regulators to minimise the company’s risk exposure. Furthermore, with the combination of financial and legal experts, the diversity of backgrounds and experiences could help the audit committee to foster greater constructive discussion and penetrate deeper into business issues. Therefore, this study predicts that availability of a legal expert in audit committee could enhance the effectiveness of committee’s oversight function which helps to reduce the likelihood of corporate fraud, suggesting the following hypothesis: H4: The likelihood of corporate fraud is lower when the audit committee has at least one member with legal expertise.
When it comes to the audit objectives, the public and the auditing profession maintain varying expectations. The public expects the prevention of fraud to be the auditor’s responsibility. However, the auditors believe that they are responsible for fraud detection, but not obliged to find all of it. In addition, the public views the fraud by the characteristics displayed by management and employees. For example, WoolEx Mills’ management wanted to exude a prevailing financial position and to uphold reputations. By committing financial statement fraud, it made the company look successful even though Sales and cash flows were decreasing. The public would view these particular characteristics as pressures to why the company committed fraud. Greed, recognition, and influences also impacted the public’s view of Wool Ex Mills’ fraud scheme. The CEO used authority to influence employees to take part in the fraud scheme. The public would see that the CEO utilized power to manipulate shareholders, which impacted their trust with WoolEx Mills (Cohen, Ding, Lesage, & Stolowy 2015) (Krishnan & Shah
According to section 301 of the Sarbanes-Oxley act, all the members of the audit committee will be members of the board of directors of the public company and be required to be otherwise independent (AICPA, 2004). In addition to this, Keinath and Walo (2004) state that one member of this committee will need to be an expert in the field of financial management. These requirements are likely to introduce changes in the composition of the audit committees of some public companies. According to a survey conducted by Keinath and Walo, 10% of companies did not have at least one member with expertise in financial management in their audit committees meaning they would have to alter the composition in order to ensure compliance to the Act. In addition to this, some companies made exceptions when it came to ensuring that members of the audit committees were independent (Keinath a...
“The financial crisis and various corporate scandals have caused widespread concern over the way corporations are governed and their responsibilities to stakeholders.” Regulators and academics have emphasised the importance of board diversity in improving the strategic and monitoring role of the board, and preventing further business failures. The discussion has recently concentrated on the poor representation of female members at board level, which seems to be a common problem in most countries, including the United Kingdom. It has been suggested that women can provide boards with “unique qualities and resources that can improve board dynamics, strategic decision-making and firm performance.
Also in an event study the authors show that firms announcing the appointment of multiple directors for the first time experience higher abnormal returns. Beasley (1996) finds that firms whose outside directors hold more board seats are less likely to commit fraud because inclusion of outside members on the board of director increases the board 's effectiveness at monitoring management for the prevention of financial statement fraud. Cotter, Shivdasani, and Zenner (1997) examine the role played by independent outside director during tender offers and they report that target firm with independent boards commands higher merger premium, because the authors find that target shareholder gains are higher in resisted offers also having majority outside directors. Similarly, Brown and Maloney (1999) find higher acquirer returns when directors with multiple board seats serve on the acquirer’s board. These studies all provide ample evidence that outside director has avital role not only in the corporate governance of the firm but also are beneficial for firm
PCAOB members should not consist of all individuals from the investment community as past experience with members of one exclusive community has proved to be ineffective in accurate oversight of business financial practices. The purpose of Public Company Accounting Oversight Board (PCAOB) is to protect investors and the public by ensuring that audit reports of U.S Public companies are independent and accurate. The selection of members must include and assessment of integrity and competency that is scrutinised for the public interest. Part of that scrutiny is the make up of the board members, their professions, experience
In today’s business world, an accountant and business owners should work together in order to become aware of scandals that occur in corporate companies. Since 2008 a series of corporate scandals and collapses have highlighted the importance of effective board oversight. One of the largest scandals in the corporate world was known as the Madoff’s Ponzi scheme. I will discuss the details of how an accountant allowed Maddoff to continue with his involvement in the Ponzi scheme. Since then, the board of accountancy is mandating that all corporate companies have good internal controls and getting more involved managing risks within the organization. This is becoming an essential role in maintaining a good system of internal control.
99, Congress took steps in response to big fraud scandals and passed the Sarbanes-Oxley Act (SOX) in 2002 to restore public confidence in accounting profession. The intention of the new legislation is to “improve the audit effectiveness and the credibility of financial reporting” (Ernst & Young 2012). Generally, the Act focus on strengthening corporate governance, enhancing auditor independence and management accountability for financial disclosures and accuracy. Under Sarbanes-Oxley Act, auditors are prohibited to provide non-audit services for audited firms. In addition, Section 404 of the Act requires auditors to evaluate and issue an opinion regarding the effectiveness of the internal control over financial reporting of the audited firm. The act also requires auditors the audit committee, consisted of independent members, to engage and oversee the external auditors. The implementation of these rules has led to great improvements in audit
Nortel’s board structure is one of the factors that was said to have led to their failures. Stakeholders elect a board of director’s member and their sole job is to look out for the interests of the owners. It has always been advised to have an “Independent board of directors” that have no shares invested in the company as opposed to non-executive board members. Nortel’s board was independent but ran into issues with the number of people on their board, their financial knowledge of the company, and having too many responsibilities for each member.
Even though before this time period a company’s auditors were required to maintain an independent view since they were suppose to act as a protector to all end users it was not always the case. An environment was created with a Utilitarian approach that said company’s can offer package services that offer consulting services why at the same time audit the company’s financial statements. But when issue arose it became difficult to jeopardize the superior revenue that was obtained through consulting
However, in terms of an audit firm, it may not pay much attention to the audit procedures since they are always the same and the firm cooperates with its client for several decades. Subsequently, the firm or auditors may hold their client’s shares so that they would like to make an extra income by creating accounting to enhance the financial statements. Finally, when the firm provides other service like taxation and management consultancy to their clients, the auditors may rely too heavily on the other services income and are reluctant to risk losing a client because of unqualified audit opinion although these services, sometimes facilitate the performance of other work by knowing sufficiently about the operations of their
The effectiveness of non-executive directors is becoming to be seen as critical for the contribution to the effectiveness of corporate governance in providing investor protection.
The audit committee a part of the board of directors plays an important role in preventing fraud. They are directly responsible for overseeing the work of any public accounting firm, such as PwC, employed by the company. They also must preapprove all audit services provided by the auditors.
...r importance in corporate governance. The roles and responsibility of the independent directors shows how they perform their work in the organization and independent directors presence in board of director are very important in the organization and by giving the example of absence of independent director in kingfisher airline tells that they don’t have adequate number of independent directors because their financial crisis and example HCL Infosys shows need of the independent director because they have appoint new IDs in the organization. Despite having such function there is believe that independent directors have been failed. Therefore I have come to the conclusion that independent director plays a crucial role and if they gets good chances to show their skills then their will a phase when every companies will need independent director in their boards.
...g to firms misconduct. The bankruptcy of Enron exposed the matter of lack of independence with the Board and the failure of the independent system in the USA which needed to be reformed; however to maintain such independence can be tricky.
Organizations that only have top management as the board members are more susceptible to accounting malpractices. Members of the board should preferably own shares in the company to ensure diligence when it comes to the interests of the company. Apart from the Board of Governors, there should also be an audit committee in place to oversee the financial dealings of the bank. Members of the board and the audit committee should have basic financial knowledge. Some of the members should also be experts in finances so that they can detect any anomaly that may take place in terms of financial reporting. An overhaul of the regulatory framework is required to empower authorities to intervene immediately, and make improvements. New technology is required. Manual antiquated processes should be eliminated because this causes greater human error and poor