The Effect of Board Independence and Non-Audit Services on Financial Reporting Fraud
Dain C. Donelson
University of Texas at Austin - McCombs School of Business
John M. McInnis
University of Texas at Austin - Department of Accounting
Richard Mergenthaler Jr.
University of Iowa - Henry B. Tippie College of Business
August 29, 2012
Reforms surrounding the Sarbanes Oxley Act of 2002 mandated increases in board and audit committee independence and banned most non-audit services. We exploit these exogenous shocks to examine whether increased board independence and decreased non-audit fees reduce financial reporting fraud. Comparing firms forced to comply with the reforms to those already in compliance, we find that mandated increases in overall board independence significantly reduced the rate of fraud, while mandating a fully independent audit committee had a weaker effect. Further, we find that banning non-audit services had no effect in reducing the fraud rate.
Number of Pages in PDF File: 47
Keywords: Sarbanes-Oxley Act, SOX, Corporate Governance, Fraud
JEL Classification: K22, M41, M48
Date posted: August 29, 2012 ; Last revised: August 29, 2013
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