The Effect of Governance Reforms 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
Journal of Law, Finance & Accounting, Forthcoming
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.
Number of Pages in PDF File: 66
Keywords: Fraud, Sarbanes-Oxley, Corporate Governance, Board Independence
JEL Classification: K22, K41, M41
Date posted: August 29, 2012 ; Last revised: February 15, 2016