Management Predisposition, Motive, Opportunity, and Earnings Management for Fraudulent Financial Reporting in Malaysia

49 Pages Posted: 23 Jan 2009 Last revised: 29 Jan 2009

Suhaily Hasnan

affiliation not provided to SSRN

Rashidah Abdul Rahman

Universiti Teknologi MARA (UiTM) - Bureau of Research and Consultancy (BRC)

Sakthi Mahenthrian

Butler University

Date Written: December 15, 2008

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 47 firms that were convicted of issuing fraudulent financial statements during the period from 1996 to 2006. 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 characterized 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.

Keywords: Fradulent Financial Reporting, Earnings Management, Corporte Governance

JEL Classification: G30, J33

Suggested Citation

Hasnan, Suhaily and Abdul Rahman, Rashidah and Mahenthrian, Sakthi, Management Predisposition, Motive, Opportunity, and Earnings Management for Fraudulent Financial Reporting in Malaysia (December 15, 2008). Available at SSRN: https://ssrn.com/abstract=1321455 or http://dx.doi.org/10.2139/ssrn.1321455

Suhaily Hasnan

affiliation not provided to SSRN

Rashidah Abdul Rahman

Universiti Teknologi MARA (UiTM) - Bureau of Research and Consultancy (BRC) ( email )

40450 Shah Alam
Malaysia
+03 55442090 (Phone)

Sakthi Mahenthrian (Contact Author)

Butler University ( email )

4600 Sunset Avenue
Indianapolis, IN 46208
United States

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