Can Corporate Governance Mechanism Prevent Corporate Fraud?

2996 Words Jan 20th, 2013 12 Pages
CORPORATE GOVERNANCE ESSAY
Can Corporate Governance Mechanism Prevent Corporate Fraud?

Executive Summary
This paper will reviews the extent to which corporate governance acts as efficient tool to protect investors against corporate fraud, thus contributing to summarize the literatures on role of corporate governance on preventing occurrence of corporate fraud. In a more recent study, corporate fraud is part of earnings manipulation done outside the law and standards. Whereas, the activities covered by the terms earnings management (such as income smoothing and big bath) and creative accounting (or window dressing) normally remain within the regulations. In this regard, corporate governance mechanism, particularly effective boards,
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For instance, Enron that recorded as the seventh largest corporation by its market capitalization in US, averaging $90 per share and worth US$70 billion in 2000, was suddenly collapsed in late 2001. Morrison (2004) asserts that the cause of the collapse is the largest corporate fraud and audit failure. Then, it can be understood that the massive corporate fraud caused by fraudulent financial reporting have contributed to a very sharp decline in the US stock market.

Many of these corporate scandals include such as action of account manipulation, earnings management, restatement and other failing to report the significant events to investing public. Then, what corporate fraud does really mean? One of the answers, corporate fraud is defined as an intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements (National Comission on Fraudulent Financial Reporting of the United States, 1987). Many prior studies (Persons, 2006; Bédard, Chtourou & Courteau 2004; Uzun, Szewczyk & Varma, 2004; Abbott, Parker & Peters, 2000; Beasley, 1996) have found that corporate fraud generally involves the accounting irregularities notion, such as:

* Manipulation, falsification or alteration of accounting records or supporting documents from which financial statements are

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