The relation between corporate governance strength and fraudulent financial reporting

This dissertation investigates and empirically tests the relation between corporate governance strength and corporate governance effectiveness. Despite concerns about the strength of the corporate governance structure and its effectiveness in ensuring the integrity of financial reporting, the relation between corporate governance strength and corporate governance effectiveness is not well developed empirically. Agency theory and recommendations of several prescriptive studies provide a basis for the ex ante measurement of corporate governance strength. Effectiveness is defined ex post as the absence of an enforcement action from the Securities and Exchange Commission (SEC) for fraudulent financial reporting violations. A three-stage project is used to examine the empirical relation between corporate governance strength and corporate governance effectiveness. First, SEC enforcement releases from 1982--1997 are reviewed. This analysis provides insight into the timing and trends in SEC enforcement during the period, and identifies a portion of the sample to be tested in the remainder of the study.; Stage two uses the financial reporting violation cases identified in stage one, and examines various aspects of the corporate governance structures that were in place during the violation period. Specifically, a matched-pairs sample of 138 fraud companies and 138 nofraud companies is examined, and the differences in five categories of corporate governance (board of directors, committees, audit committee, ownership structure, audit) are examined. Paired comparison tests and logistic regression are used to evaluate these differences. The findings indicate that several hypothesized strength factors in the corporate structure are associated with an effective governance structure.; Stage three of the study examines the changes that occurred in corporate governance structures in the period after SEC enforcement. Paired comparison tests were used to study these changes for the 49 stage two pairs that survived the enforcement period. The results suggest that surviving fraud companies significantly strengthen their corporate governance structures during the post-enforcement period.; These results provide empirical support for many of the suggestions set forth in the prescriptive corporate governance literature. Additionally, these results suggest that numerous corporate governance variables that have received little attention until now are worthy of future investigation.