Corporate governance challenges and opportunities in mitigating corporate fraud in Malaysia
| DOI | https://doi.org/10.1108/JFC-02-2021-0045 |
| Published date | 01 July 2021 |
| Date | 01 July 2021 |
| Pages | 620-638 |
| Author | Emelia A. Girau,Imbarine Bujang,Agnes Paulus Jidwin,Jamaliah Said |
Corporate governance challenges
and opportunities in mitigating
corporate fraud in Malaysia
Emelia A. Girau,Imbarine Bujang and Agnes Paulus Jidwin
Universiti Teknologi Mara –Cawangan Sabah Kampus,
Kota Kinabalu, Malaysia, and
Jamaliah Said
Accounting Research Institute, Universiti Teknologi MARA, Shah Alam, Malaysia
Abstract
Purpose –This study aims to examinethe relationship between corporate governance and the likelihoodof
corporatefraud in Malaysia.
Design/methodology/approach –The sample of fraudulent companiesin this study is the public listed
companies that were charged with furnishingfalse statements to the Securities Commission of Malaysiaand
BursaMalaysia SecuritiesBerhad and was listed in theMalaysian SecuritiesCommission Enforcement Release
from the year 2000 to 2016. The non-fraudulent companies, which are the control companies in this study, were
selected from public listed companies listed in Bursa Malaysia, based on their similarity to the fraudulent
companiesin terms of time, size and industrytype. The panel probit regressionanalysis was used to examine
therelationship betweencorporategovernance characteristics andthe occurrenceof corporate fraud.
Findings –The findingsof this study suggest that board size and executive directors’compensationare the
corporate governancecharacteristics that can effectively combat corporatefraud incidences in Malaysia. The
corporate governance features, namely the board of directors’independence, frequency of board meetings,
CEO duality, CEO’s age, and share ownership owned by directors and CEO, do not significantly influence
corporatefraud incidences in Malaysia.
Originality/value –Although previous studies provideinconsistent findings on the association between
board size and corporate fraud incidences, this study contributes to the existing literature by providing
empiricalevidence that smaller board sizes providemore effective monitoring functionsto minimize corporate
fraud incidences in the Malaysian context. The empirical evidence also supports the agency theory
proposition where managers with high compensation will act in the best interest of shareholders and less
likely to focuson their interests, thus deterring themfrom committing fraudulent acts.
Keywords Corporate governance, Corporate fraud, Panel logistic
Paper type Research paper
1. Introduction
The corporate fraud of large companies around the world has attracted significant critical
attention to the business players on the need to have effective corporate governance
mechanisms in monitoring and controlling their business operation. The need to address
the corporate fraud issue is crucial, as its negative impacts threatened the interest and
wealth of shareholders and the stability of society as a whole. The Association of Certified
Fraud Examiners (2018) report revealed that the global financial loss due to fraud
The authors would like to express their gratitude to The Accounting Research Institute and
Universiti Teknologi MARA for funding and facilitating this research project.
JFC
29,2
620
Journalof Financial Crime
Vol.29 No. 2, 2022
pp. 620-638
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2021-0045
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
cases in 2017 was nearly US$4tn. Meanwhile, in Malaysia, the survey conducted by
PricewaterhouseCoopers(2018) revealed that the number of Malaysian organizations’fraud
victims who reported losses exceeding US$1m had increased to 22% during the year 2018
compared to 13% in the year 2016. Apart from that,it also led to adverse social impacts on
employee morale, negative business relationships and damaging an organization’s image,
value and reputation (PricewaterhouseCoopers, 2018).
Corporate fraud can be described as an intentional misrepresentation of a company’s
financial information and corporate activities by management, employees or third parties, on or
against a company with the intention to mislead the public and gain advantages over others
(Chartered Institute of ManagementAccountant, 2009). Policymakers and regulators around the
world have put a great effort to combat fraud. For instance, since the collapse of Enron
Corporation in 2001 and WorldCom in 2002, the United States Congress approved the Sarbanes-
Oxley Act, which created the Public Accounting Oversight Board with the purpose to monitor
public accountants, make amendments in auditing rules and permit the intensification in
criminal penalties for white-collar crime. However, despite ma ny improvements in governance
and the establishment of new laws and regulations to combat corporate fraud, the number of
corporate fraud cases continue to rise. The Global Economic Crime and Fraud Survey conducted
by PricewaterhouseCoopers (2018) reported that economic crime and fraud have increased from
36% in 2016 to 49% in the year 2018 globally. Similarly, the gr owing concern over the increase
in fraud cases in Malaysia also has been documented by Omar et al. (2016) and
PricewaterhouseCoopers (2018). The survey by PricewaterhouseCoopers(2018) reported that the
detected and reported fraud cases in Malaysia has increased from 28 % to 41% from the year
2016 to 2018. The survey also highlighted that the increase in the number of fraud cases in
Malaysia is due to companies’failure to carry out fraud risk assessments, thus making them
failed to assess the risk of evolving corporate fraud that continues to grow over time.
The agency theory states that the separation of ownership and control in managing a
corporation raises the conflictof interest between the principal and agent(Fama and Jensen,
1983), which is the significant area of corporategovernance effort. Corporate governance is
an essential tool in the capital market to strengthen the investors’confidence that the
business is being run properly and will continue to succeed. The theory argues that this
principal–agent problem increases the need to have effective corporate governance to
monitor and control management activities (Shleifer and Vishny, 1997). The growing
number of corporate fraud cases shows that this principal–agent problem is still prevalent
in many organizations. Managers work in contradiction with the organization’s ethical
standard, directors failed to carry out their regulatory roles and oversight responsibilities
are among the reasons discussed in the literature. Consequently, the principal must find
solutions by understandingthe mechanisms that cause corporate frauds and,hence, develop
better corporate policyand governance.
In understanding the corporate fraud phenomenon, it is crucial to study the motivating
factors to commit corporate fraud to implement preventive measures. The fraud triangle
theory by Donald Cressy (1953)explains that:
perceived opportunity;
perceived incentive or pressure; and
perceived rationalization are the three conditions that are commonly found when
fraud happens.
Weak corporate governance is oftenrecognized as a perceived opportunity that may permit
corporate fraud (Beasley, 1996;Beasley et al., 2000). Ineffective monitoring due to poor
Corporate
governance
621
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