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The Effect of Governance Reforms on Financial Reporting Fraud

66 Pages Posted: 29 Aug 2012 Last revised: 15 Feb 2016

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

Date Written: August 2015

Abstract

In response to financial reporting scandals, Congress and the securities exchanges mandated increases in board and audit committee independence and banned most non-audit services. We exploit these exogenous shocks to examine whether these governance reforms reduced financial reporting fraud. Comparing firms forced to comply with the reforms to firms 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, banning non-audit services did not reduce the incidence of fraud.

Keywords: Fraud, Sarbanes-Oxley, Corporate Governance, Board Independence

JEL Classification: K22, K41, M41

Suggested Citation

Donelson, Dain C. and McInnis, John M. and Mergenthaler, Richard, The Effect of Governance Reforms on Financial Reporting Fraud (August 2015). Journal of Law, Finance & Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2138348 or http://dx.doi.org/10.2139/ssrn.2138348

Dain C. Donelson

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

Richard Dean Mergenthaler Jr. (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-0848 (Phone)

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