Purpose – The purpose of this study is to examine whether there is a relation between corporate governance and the publication of corporate accounts that fail to comply with legal and regulatory provisions governing their preparation. Design/methodology/approach – The paper analyses all the Italian listed companies that from 2002 to 2010 were subject to accounting enforcement actions. From the literature review, 11 hypotheses were developed in relation to six issues: CEO Chairman duality, board size, board independence, the presence of an audit committee and its composition, the presence of nomination and remuneration committees and, finally, the presence of a big audit firm. Using non parametric tests, the paper compares the governance characteristics of fraudulent firms with those of a control sample of comparable firms. Findings – It is found that board independence is the sole effective mechanism in detecting financial reporting fraud. The results show that firms committing accounting fraud have a lower percentage of independent directors on the board and fewer non-executive and independent directors on the audit committee than the matched control sample. Research limitations/implications – The main limit of this research is the small number of companies observed, even if this limit reflects the size of the Italian Stock Exchange. Another caveat is the endogeneity problem that impacts much of the board literature. Originality/value – This paper extends the accounting literature related to financial reporting fraud since it analyses the issue for the first time with reference to Italy, one of the most relevant European Union countries.
Corporate governance and accounting enforcement actions in Italy
GUERRINI, Andrea
2012-01-01
Abstract
Purpose – The purpose of this study is to examine whether there is a relation between corporate governance and the publication of corporate accounts that fail to comply with legal and regulatory provisions governing their preparation. Design/methodology/approach – The paper analyses all the Italian listed companies that from 2002 to 2010 were subject to accounting enforcement actions. From the literature review, 11 hypotheses were developed in relation to six issues: CEO Chairman duality, board size, board independence, the presence of an audit committee and its composition, the presence of nomination and remuneration committees and, finally, the presence of a big audit firm. Using non parametric tests, the paper compares the governance characteristics of fraudulent firms with those of a control sample of comparable firms. Findings – It is found that board independence is the sole effective mechanism in detecting financial reporting fraud. The results show that firms committing accounting fraud have a lower percentage of independent directors on the board and fewer non-executive and independent directors on the audit committee than the matched control sample. Research limitations/implications – The main limit of this research is the small number of companies observed, even if this limit reflects the size of the Italian Stock Exchange. Another caveat is the endogeneity problem that impacts much of the board literature. Originality/value – This paper extends the accounting literature related to financial reporting fraud since it analyses the issue for the first time with reference to Italy, one of the most relevant European Union countries.
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