Corporate governance and no fraud occurrence in organizations

Abstract

Purpose – The purpose of this study is to examine empirically the organizational factors that are associated with the absence of fraud. Design/methodology/approach – Factor analysis using principal component extraction was first employed. Logistic regression was then performed to analyze the survey responses of 253 chief financial officers (CFOs) in Hong Kong. A total of 20 semi-structured interviews were also carried out with CFOs to supplement the research results. Findings – The results indicate that audit committee effectiveness, internal audit effectiveness, the tone at the top managerial level, and ethical guidelines and policies are positively associated with a lack of fraud within organizations. Neither auditors' prior success in fraud detection nor the type of auditor employed is an influential factor in the absence of fraud. These results are interesting and counter those of earlier studies conducted in the USA. Also contradicting prior research, the receipt of unqualified audit reports was not found to be significant in this study. Practical implications – The lack of significance for certain variables, and the counterintuitive nature of some of the results offers opportunities for further research. The results provide auditors with practical insights that will prove useful in the course of their work. Originality/value – This is the first empirical study of its nature to be conducted in Hong Kong, and its results will make an important contribution to the corporate governance and auditing literature, particularly that focused on the Asia-Pacific region. These results also have important implications for the accounting profession and for the corporate governance process within organizations.