The Interaction of Power, Tenure, and Financial Fraud in Indonesia

Zainal, Andri; Muhamad, Datin Rusnah
June 2014
Australian Journal of Basic & Applied Sciences;2014 Special, Vol. 8 Issue 8, p115
Academic Journal
Previous studies have underlined that non-compliance with regulations/laws and unethical behaviors from corporate governance actors contribute to the poor corporate governance. However, majority of these studies only highlighting on the effectiveness of board of directors and managers, and very few evidence provided from the developing country(s). This study investigates the relationship between the distributions of power within two major internal corporate governance mechanisms: Chief Executive Officer (CEO) and Board of Directors (BOD) and the likelihood of financial statement fraud in Indonesian Public Listed Companies (PLCs) following allegation from the Indonesian Capital Market and Financial Institution Supervisory Board (ICFISMB) during 2001 to 2012. Our main contribution is visualized by incorporating and typifying the characteristic of power between these two corporate governance mechanisms in one of developing countries. An additional analysis on the individual demographic variables as the moderating effect in this relationship also provides a significant insight to this area. We employ principal component analysis on number of characteristic of power related to CEO and BOD to acquire each of three factors that characterize types of power between these key corporate governance actors. Furthermore, we extend the study by analyzing the dyadic pairing of low and high CEO and BOD power relationships and how they influence the likelihood of financial statement fraud in an emerging market country setting. The overall findings suggest when the BOD expert power increases (and to some extent when the BOD ownership power decreases), the likelihood of financial statement fraud decreases through a consistent monitoring and supervising mechanism. In particular, the individual demographic variable of BOD tenure moderates the influence of the dyadic relationship when CEO and BOD have both high level of power on the likelihood of financial statement fraud in Indonesian PLCs The findings of this study underline the need of the proactive/participatory boards in a company setting to mitigate the likelihood of financial statement fraud. This study supports the calls for maximizing the role of BOD in Indonesian companies comprehensively.


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