Board characteristics and the likelihood of financial statements fraud: empirical evidence from an emerging market

Abstract

AbstractThis study examines the relationship between board characteristics and the likelihood of fraud in financial statements in the Saudi stock exchange as one of the emerging markets. Financial statements of 67 companies listed on the Saudi Stock Exchange have been collected over six years from 2014 to 2019. The modified Beneish M-score model (Beneish in Financ Anal J 55(5):24–36, 1999) has been used to measure fraudulent financial statements. Panel data techniques have been used to examine the relationship between financial statement fraud and four characteristics of the board: independence, size, meetings frequency, and gender diversity. The findings indicate that the likelihood of fraud in financial statements is negatively and significantly related to board independence and it is positively and significantly related to the board size. The results also indicate that the representation of women on the board and the frequency of meetings have no significant relationship with the likelihood of fraud in the financial statements. The results of this study provide insight into the importance of corporate governance mechanisms, including the board of directors, in preventing corporate managers from engaging in fraudulent financial reporting activities. In emerging markets such as the Saudi Stock Exchange, financial statements are the main and almost the only source of information about the company. Therefore, examining the factors that reduce financial statement fraud in these markets is important.