Journal of Law, Finance, and Accounting > Vol 1 > Issue 2

The Effect of Governance Reforms on Financial Reporting Fraud

Dain C. Donelson, McCombs School of Business, University of Texas at Austin, USA, dain.donelson@mccombs.utexas.edu , John McInnis, McCombs School of Business, University of Texas at Austin, USA, john.mcinnis@mccombs.utexas.edu , Richard D. Mergenthaler, Henry B. Tippie College of Business, University of Iowa, USA, rick-mergenthaler@uiowa.edu
 
Suggested Citation
Dain C. Donelson, John McInnis and Richard D. Mergenthaler (2016), "The Effect of Governance Reforms on Financial Reporting Fraud", Journal of Law, Finance, and Accounting: Vol. 1: No. 2, pp 235-274. http://dx.doi.org/10.1561/108.00000005

Publication Date: 21 Dec 2016
© 2016 D. C. Donelson, J. McInnis, and R. D. Mergenthaler
 
Subjects
 
Keywords
K22K41M41
Fraudsarbanes-oxleycorporate governanceboard independence
 

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In this article:
1. Introduction 
2. Prior Literature and Background 
3. Sample and Primary Empirical Tests 
4. Additional Analysis - Full Board Independence Tests 
5. Consumers with limited rationality 
6. Conclusion 
A. Appendix: Primary Variable Definitions 
References 

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.

DOI:10.1561/108.00000005