THE ASSOCIATION BETWEEN MANAGEMENT PERPETRATED FRAUD AND CORPORATE GOVERNANCE DEFICIENCIES

This paper presents empirical evidence on the relationship between corporate governance deficiencies and the incidence of management perpetrated fraud. Based on a sample of Australian public companies that had encountered management perpetrated fraud during the period 1991 to 2006, it was found that inadequate corporate governance was associated with the likelihood of a firm experiencing management perpetrated fraud. The key finding was that as the proportion of independent directors on the board increased the likelihood of a company experiencing management perpetrated fraud decreased substantially. Notably none of the other possible corporate governance mechanisms were found to substantially decrease management perpetrated fraud. In aggregate, these results offer further support to the agency theory assertion that the appointment of independent directors to the board is an effective control over agency conflict. Therefore, the empirical evidence of the paper is supportive of the appointment of mandatory levels of independent directors to the boards of public companies.